<PAGE>
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1998 or
-----------------
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _________
Commission file number 1-10062
-------
InterTAN, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2130875
------------------------------ ----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 Main Street, Suite 1805
Fort Worth, Texas 76102
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 348-9701
--------------
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 January 31, 1999, 12,905,421 shares of the registrant's common stock, par
value $1.00 per share, were outstanding.
1
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
<S> <C>
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 14
PART II
ITEM 1 - Legal Proceedings 26
ITEM 4 - Submission of Matters to a Vote of Security Holders 26
ITEM 6 - Exhibits and Reports on Form 8-K 26
OTHER
Signatures 28
</TABLE>
2
<PAGE>
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.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERTAN, INC.
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
December 31 DECEMBER 31
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales and operating revenues........... $198,379 $192,559 $320,223 $314,268
Other income............................... 50 259 129 351
-------- -------- -------- --------
198,429 192,818 320,352 314,619
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold................... 112,633 110,586 181,509 178,405
Selling, general and administrative
expenses.............................. 60,307 62,701 108,154 114,061
Depreciation and amortization........... 1,830 1,873 3,620 3,792
Initial costs of disposition of
United Kingdom subsidiary............. 376 - 376 -
-------- -------- -------- --------
175,146 175,160 293,659 296,258
-------- -------- -------- --------
Operating income........................... 23,283 17,658 26,693 18,361
Foreign currency transaction gains......... (43) (658) (455) (738)
Interest expense, net...................... 1,633 1,893 2,746 3,536
-------- -------- -------- --------
Income before income taxes................. 21,693 16,423 24,402 15,563
Provision for income taxes................. 7,929 5,076 10,933 7,125
-------- -------- -------- --------
Net income................................. $ 13,764 $ 11,347 $ 13,469 $ 8,438
======== ======== ======== ========
Basic net income per
average common share.................. $ 1.08 $ 0.94 $ 1.07 $ 0.70
Diluted net income per
average common share.................. $ 0.76 $ 0.55 $ 0.96 $ 0.58
Average common shares outstanding.......... 12,749 12,024 12,636 11,995
Average common shares outstanding
assuming dilution..................... 19,461 19,814 15,992 15,891
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CONSOLIDATED BALANCE SHEETS
INTERTAN, INC.
- --------------------------------------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 June 30 December 31
1998 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash and short-term investments.................. $ 48,817 $ 32,811 $ 26,025
Accounts receivable, less allowance
for doubtful accounts............................ 16,370 8,539 16,742
Inventories...................................... 158,779 148,198 169,512
Other current assets............................. 8,426 6,690 9,126
Deferred income taxes............................ 365 369 -
----------------------------------------------
Total current assets............................. 232,757 196,607 221,405
Property and equipment, less accumulated
depreciation and amortization.................... 26,253 26,228 26,777
Other assets.......................................... 551 712 1,172
----------------------------------------------
$259,561 $223,547 $249,354
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings....................... $ 11,617 $ 9,172 $ 966
Accounts payable................................. 33,987 24,274 39,621
Accrued expenses................................. 48,430 38,505 37,255
Income taxes payable............................. 21,889 20,955 18,226
----------------------------------------------
Total current liabilities........................ 115,923 92,906 96,068
9% convertible subordinated debentures................ 36,894 38,706 39,723
Other liabilities..................................... 7,088 5,945 6,152
----------------------------------------------
159,905 137,557 141,943
----------------------------------------------
Stockholders' Equity:
Preferred stock, no par value, 1,000,000
shares authorized, none issued or
outstanding...................................... - - -
Common stock, $1 par value, 40,000,000
shares authorized, 12,848,973, 12,474,077
and 12,130,270 issued and outstanding............ 12,849 12,474 12,130
Additional paid-in capital....................... 117,391 115,980 114,429
Retained earnings (deficit)...................... 3,221 (10,250) 10,961
Foreign currency translation effects............. (33,805) (32,214) (30,109)
----------------------------------------------
Total stockholders' equity....................... 99,656 85,990 107,411
----------------------------------------------
Commitments and contingent liabilities................
$259,561 $223,547 $249,354
==============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERTAN, INC.
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) SIX MONTHS ENDED
DECEMBER 31
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 13,469 $ 8,438
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization......................................... 3,620 3,792
Deferred income taxes................................................. - 594
Foreign currency transaction gains, unrealized........................ (326) (1,397)
Other................................................................. 1,086 1,071
Cash provided by (used in) current assets and liabilities:
Accounts receivable................................................... (8,133) (7,680)
Inventories........................................................... (13,643) (6,975)
Other current assets.................................................. (2,257) (2,622)
Accounts payable...................................................... 10,289 13,022
Accrued expenses...................................................... 10,688 11,671
Income taxes payable.................................................. 1,805 6,065
-----------------------------------
Net cash provided by operating activities............................. 16,598 25,979
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................................... (4,440) (3,279)
Proceeds from sales of property and equipment............................. 73 28
Other investing activities................................................ 1,373 2,091
-----------------------------------
Net cash provided by investing activities............................... (2,994) (1,160)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term bank borrowings, net................................ 2,512 (8,768)
Proceeds from issuance of common stock to
employee plans....................................................... 916 725
Principal repayments on long-term borrowings.............................. - (24,353)
-----------------------------------
Net cash provided by (used in) financing activities..................... 3,428 (32,396)
-----------------------------------
Effect of exchange rate changes on cash....................................... (1,026) (1,124)
-----------------------------------
Net increase (decrease) in cash and short-term investments.................... 16,006 (8,701)
Cash and short-term investments, beginning of period.......................... 32,811 34,726
-----------------------------------
Cash and short-term investments, end of period................................ $ 48,817 $ 26,025
===================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
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 December 31, 1998 and
1997 and the results of its operations for the three and six months ended
December 31, 1998 and 1997 and its cash flows for the six months ended December
31, 1998 and 1997. Such adjustments are of a normal and recurring nature.
Operating results for the three and six months ended December 31, 1998 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 NET INCOME 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.
Basic and diluted net income per average common share and a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation is set out below:
7
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except THREE MONTHS ENDED
for per
share data)
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- -------------- ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $13,764 $11,347
============= ==============
BASIC EPS
Income available to
common stockholders $13,764 12,749 $1.08 $11,347 12,024 $ 0.94
============= ========
EFFECT OF DILUTIVE
SECURITIES
9% convertible debentures 978(1) 6,703 (451) 7,779
Stock options - 9 - 11
------------- -------------- -------------- ----------------
DILUTED EPS
Income available to
common
stockholders including
assumed conversions $14,742 19,461 $0.76 $10,896 19,814 $ 0.55
============= ============== ============= ============== ================ ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except SIX MONTHS ENDED
for per
share data)
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $13,469 $8,438
=========== ===============
BASIC EPS
Income available to
common stockholders $13,469 12,636 $1.07 $8,438 11,995 $ 0.70
=========== =========
EFFECT OF DILUTIVE
SECURITIES
9% convertible debentures 1,863/(1)/ 3,352 731/(1)/ 3,890/(2)/
Stock options - 4 - 6
----------- ------------- --------------- ---------
DILUTED EPS
Income available to
common
stockholders including
assumed conversions $15,332 15,992 $0.96 $9,169 15,891/(2)/ $0.58/(2)/
=========== ============= ========== =============== ======= =========
</TABLE>
/(1)/ The adjustments relating to the 9% convertible debentures include interest
expense, amortization of financing costs and, for the three and six month
periods ended December 31, 1997, foreign currency transaction gains and losses.
/(2)/ The adjustment to the average number of shares outstanding for purposes of
computing diluted net income per average common share and the computed diluted
net income per average common share for the six-month period ended December 31,
1997 have been restated to correct an error in the share adjustment. The share
adjustment (in thousands) as originally reported was 7,779. The diluted net
income per average common share and the average common shares outstanding
assuming dilution as originally reported for the six months ended December 31,
1997 were $0.46 and 19,780, respectively.
The Company's dilutive instruments included its 9% convertible subordinated
debentures ("the Debentures"). Under their terms of issuance, the Debentures are
convertible into common stock at the rate of 118.731 shares for each Cdn$1,000
face amount of Debentures held, equivalent at December 31, 1998 to about
6,703,000 shares in the aggregate. 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
8
<PAGE>
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. FAS 128 requires that such
higher amount, where applicable, be used in calculating diluted EPS. Based on
the fair market value of the Company's common stock at December 31, 1998 and
1997, 6,703,000 and 7,779,000 shares, respectively, would have been issued on
assumed conversion on those dates. The Debentures were anti-dilutive during the
second quarter of fiscal year 1999. The adjustment to shares in the computation
of diluted EPS for the three and six-month periods ended December 31, 1998 and
1997 also included the effects of options to purchase 30,000 and 244,000 shares,
respectively, held by directors and employees of the Company at prices ranging
from $3.50 to $3.71875 and $3.50 to $5.50 per share, respectively. Directors and
employees of the Company held further options to purchase shares aggregating
1,261,000 and 731,000 shares at December 31, 1998 and 1997, respectively, at
prices ranging from $5.31 to $8.1875 and $6.00 to $8.1875, respectively. These
options were not included in the computation of diluted EPS because the options'
exercise price was more that the average price of the Company's common stock
during the respective periods.
NOTE 3 UNITED KINGDOM RESTRUCTURING PLAN
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. See the Company's 1998 Annual Report on
Form 10-K for a further discussion of this plan. Revenue and operating income
(loss) associated with these stores are shown below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
- ---------------------------------------------- ------------------------------
Revenues $ - $ 10,832 $- $16,411
- ---------------------------------------------- ------------------------------
Operating income (loss) $- $ 341 $- $ (964)
- ---------------------------------------------- ------------------------------
9
<PAGE>
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 six-month period ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 30 FOREIGN CURRENCY DECEMBER 31
1998 PAID RATE EFFECTS 1998
------------ ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Lease disposal costs $ 8,639 $(2,995) $(33) $ 5,611
Severance costs 250 (105) (1) 144
Other exit costs 527 (268) (2) 257
------------ ------------- ---------------- -----------
$ 9,416 $(3,368) $(36) $ 6,012
============ ============= ================ ===========
</TABLE>
A national firm of real estate brokers was engaged to assist in arranging for
the assignment or sublet of the leases associated with these stores. As of
December 31, 1998, the Company had disposed of approximately 70% of the 69
locations, either by expiry of the lease or by assignment or sublet, including
pending transactions, to third parties. Provision has been made for management's
best estimate of the costs of disposing of these leases. The overall economy and
other factors affecting the property market in the United Kingdom could cause
the actual lease disposal costs to differ from management's current estimates
and result in future adjustments.
While the above described 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 grow 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 (Pounds)1,500,000 (or approximately $2,500,000 at
December 31, 1998 exchange rates), net of estimated selling costs. The sale
included all assets, liabilities and other obligations of the United Kingdom
subsidiary, including (Pounds)7,000,000 (approximately $11,600,000 at December
31, 1998 exchange rates) of bank debt outstanding under InterTAN U.K. Limited's
portion of the Company's syndicated loan agreement. Coincident with the sale,
the Company's syndicated loan facility was reduced from $75,000,000 to
$50,000,000.
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. 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 commitments and contingencies to the extent adequate
provision was not made for such items in the accounts of InterTAN U.K. Limited
as of the date of the sale. While management believes that adequate provision
has been made for such accrued liabilities and allowances, such balances are
based on estimates and the actual results could differ from those estimates,
subjecting the Company to the indemnification provisions. Furthermore, the
Company remains contingently liable for certain store lease agreements of
InterTAN U.K. Limited. The purchaser has indemnified the Company up to
(Pounds)8,000,000 (or approximately $13,300,000 at December 31, 1998 exchange
rates) for any claims against the Company under these leases. The amount
subject to this indemnification declines to zero over seven years, as the amount
subject to the contingent liability declines. Costs, if any, resulting from
these commitments will be recorded as incurred, or become probable and
estimable.
Management estimates that the loss on the sale of InterTAN U.K. Limited will
approximate $33,000,000 to 37,000,000 and will be 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 as of December 31, 1998 were
expensed as incurred.
NOTE 4 COMPREHENSIVE INCOME
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
10
<PAGE>
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 income for the three months ended December 31, 1998
and 1997 was $14,210,000 and $6,001,000, respectively. For the six-month period
ended December 31, 1998 and 1997, comprehensive income was $11,878,000 and
$841,000, respectively.
NOTE 5 INCOME TAXES
The provisions for domestic and foreign income taxes for the three-month periods
ended December 31, 1998 and 1997 were $7,929,000 and $5,076,000, respectively.
For the six-month period ended December 31, 1998, an income tax provision of
$10,933,000 was recorded, compared with $7,125,000 in the first six months of
the prior year. The Company's income tax expense primarily represents Canadian
and Australian income tax on the profits earned by its subsidiaries in those
countries. No tax is currently payable in the United Kingdom, nor has any
benefit been recognized for the accumulated losses in that country.
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,
approximately $6,600,000. 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.
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 tax will be imposed on the Company.
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 has been advised that Revenue Canada is challenging certain interest
deductions relating to the Canadian subsidiary's former operations in
continental Europe and is proposing to tax certain foreign exchange gains
related to such operations. Depending on the ultimate resolution of these
issues, the Company could potentially have an additional liability in the range
of $0 to $21,000,000. As a consequence of ongoing discussions with Revenue
Canada, the upper end of this range has declined from previous estimates. In
order for the Company to appeal any reassessments with respect to these matters,
the Company would likely be required to post a cash deposit or letters of credit
equal to one-half of the 1990-1993 tax in dispute, together with interest.
Notwithstanding that the Company is still in discussions with Revenue Canada
regarding these issues, Revenue Canada and certain provincial jurisdictions were
required to issue protective reassessments for one of the years because the time
period during which such reassessment could legally be issued was about to
expire. The amount of these reassessments, including interest, is approximately
11
<PAGE>
$15,300,000. These amounts relate to the 1992 taxation year only and are
reflected in the range described immediately above. The Company has appealed
these reassessments and, as indicated above, would normally be required to post
a cash deposit equal to one-half of the reassessments, pending the outcome of
such appeal. However, Revenue Canada has agreed to defer the posting of such
deposit pending the outcome of ongoing discussions on this particular issue.
Revenue Canada has further agreed to accept a letter of credit in lieu of a cash
deposit should it be necessary for the Company to actively proceed with its
appeal. The Company has requested a similar deferral from the relevant
provincial authorities and reasonably expects that such deferral will be
approved. The Company believes that reassessments of the remaining years under
review could be received during fiscal year 1999. Management believes it has
meritorious arguments in support of the deductibility of such interest and in
support of its treatment of the foreign exchange gains and will continue to
vigorously defend its position. Accordingly, it is management's assessment that
no additional provision need be recorded for these possible claims.
It is not practical for management to make any reasonable determination of when
the remaining outstanding Canadian tax issues will ultimately be resolved.
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.
12
<PAGE>
NOTE 6 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 and identifiable assets for the Company's segments.
Consolidated operating income is reconciled to the Company's income before
income taxes (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales and operating revenues
Canada $102,585 $ 95,736 $168,507 $158,889
Australia 32,078 30,357 54,575 53,689
United Kingdom 63,716 66,466 97,141 101,690
--------------------------------------------------------------------
$198,379 $192,559 $320,223 $314,268
====================================================================
Operating income
Canada $ 16,109 $ 11,331 $ 22,410 $ 16,286
Australia 3,324 2,881 4,328 3,709
United Kingdom 5,393 4,428 2,989 574
--------------------------------------------------------------------
24,826 18,640 29,727 20,569
General corporate expenses 1,543 982 3,034 2,208
--------------------------------------------------------------------
Operating income 23,283 17,658 26,693 18,361
Foreign currency transaction gains (43) (658) (455) (738)
Interest expense, net 1,633 1,893 2,746 3,536
--------------------------------------------------------------------
Income before income taxes $ 21,693 $ 16,423 $ 24,402 $15,563
====================================================================
</TABLE>
IDENTIFIABLE ASSETS BY SEGMENT
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30 DECEMBER 31
1998 1998 1997
<S> <C> <C> <C>
Canada $125,068 $111,496 $117,782
Australia 51,933 45,675 46,920
United Kingdom 79,554 64,246 81,537
Corporate assets 3,006 2,130 3,115
------------------------------------------
$259,561 $223,547 $249,354
==========================================
</TABLE>
13
<PAGE>
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, the United
Kingdom and Australia. The Company's retail operations are conducted through
three wholly-owned subsidiaries: InterTAN Australia Ltd., which operates in
Australia under the trade name "Tandy Electronics"; InterTAN Canada Ltd., which
operates in Canada under the trade name "RadioShack"; and InterTAN U.K. Limited,
which operates in the United Kingdom under the "Tandy" trade name. Effective
January 1999, the Company's subsidiary in the United Kingdom was sold. See Note
3 to the Consolidated Financial Statements and "United Kingdom Restructuring
Plan". 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 December 31, 1998,
46 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. The Tandy U.K. segment, in the prior year information, includes the 69
stores closed pursuant to a restructuring plan announced in January, 1998. See
"United Kingdom Restructuring Plan" below.
UNITED KINGDOM RESTRUCTURING PLAN
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. See the Company's 1998 Annual Report on
Form 10-K for a further discussion of this plan. Revenue and operating income
associated with these stores are shown below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
- ------------------------------------------- -------------------------------
Revenues $ - $ 10,832 $- $16,411
- ------------------------------------------- -------------------------------
Operating income (loss) $- $ 341 $- $ (964)
- ------------------------------------------- -------------------------------
14
<PAGE>
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 six-month period ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 30 FOREIGN CURRENCY DECEMBER 31
1998 PAID RATE EFFECTS 1998
--------- -------- ---------------- -----------
<S> <C> <C> <C> <C>
Lease disposal costs $ 8,639 $ (2,995) $ (33) $ 5,611
Severance costs 250 (105) (1) 144
Other exit costs 527 (268) (2) 257
--------- -------- ----------- ----------
$ 9,416 $ (3,368) $ (36) $ 6,012
========= ======== =========== ==========
</TABLE>
A national firm of real estate brokers was engaged to assist in arranging for
the assignment or sublet of the leases associated with these stores. As of
December 31, 1998, the Company had disposed of approximately 70% of the 69
locations, either by expiry of the lease or by assignment or sublet, including
pending transactions, to third parties. Provision has been made for
management's best estimate of the costs of disposing of these leases. The
overall economy and other factors affecting the property market in the United
Kingdom could cause the actual lease disposal costs to differ from management's
current estimates and result in future adjustments.
While the above described 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 grow 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 (Pounds)1,500,000 (or approximately $2,500,000 at
December 31, 1998 exchange rates), net of estimated selling costs. The sale
included all assets, liabilities and other obligations of the United Kingdom
subsidiary, including (Pounds)7,000,000 (approximately $11,600,000 at December
31, 1998 exchange rates) of bank debt outstanding under InterTAN U.K. Limited's
portion of the Company's syndicated loan agreement. Coincident with the sale,
the Company's syndicated loan facility was reduced from $75,000,000 to
$50,000,000.
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. 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 commitments and contingencies to the extent adequate
provision was not made for such items in the accounts of InterTAN U.K. Limited
as of the date of the sale. While management believes that adequate provision
has been made for such accrued liabilities and allowances, such balances are
based on estimates and the actual results could differ from those estimates,
subjecting the Company to the indemnification provisions. Furthermore, the
Company remains contingently liable for certain store lease agreements of
InterTAN U.K. Limited. The purchaser has indemnified the Company up to
(Pounds)8,000,000 (or approximately $13,300,000 at December 31, 1998 exchange
rates) for any claims against the Company under these leases. The amount
subject to this indemnification declines to zero over seven years, as the amount
subject to the contingent liability declines. Costs, if any, resulting from
these commitments will be recorded as incurred, or become probable and
estimable.
Management estimates that the loss on the sale of InterTAN U.K. Limited will
approximate $33,000,000 to 37,000,000 and will be 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 as of December 31, 1998 were
expensed as incurred.
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 second
quarter of fiscal year 1999, the U.S. dollar strengthened against the Canadian
and Australian dollars relative to the comparable values during the second
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 second quarter of fiscal year 1999
were the same as those in the second
15
<PAGE>
quarter of the prior year, the fiscal year 1999 income statement would reflect a
9.1% decrease in sales when reported in U.S. dollars. On the other hand, the
U.S. dollar was weaker against the pound sterling during the three-month period
ended December 31, 1998 than during the same three-month period a year ago.
Consequently, in the United Kingdom, the same local currency amounts translated
into 0.7% more U.S. dollars in the second quarter of fiscal year 1999 compared
to the prior fiscal year's second quarter.
The following table outlines, for the three-month period ending December 31,
1998, 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 (8.3)%
Australia (9.1)%
United Kingdom 0.7%
___________________________________
SALES OUTLETS
The number of company-operated stores and dealers at December 31, 1998 and 1997,
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- -----------------------------
ENDING OPENED CLOSED ENDING OPENED CLOSED
<S> <C> <C> <C> <C> <C> <C>
CANADA
Company-operated 452* 6 4 461* 12 1
Dealers 332 4 3 386 1 8
------------------------- -------------------------
784 10 7 847 13 9
========================= =========================
Australia
Company-operated 222 6 1 217 - -
Dealers 125 1 2 142 2 -
------------------------- -------------------------
347 7 3 359 2 -
========================= =========================
United Kingdom**
Company-operated 269 1 2 338 - 1
Dealers 108 2 1 130 3 1
------------------------- -------------------------
377 3 3 468 3 2
========================= =========================
TOTAL
Company-operated 943 13 7 1,016 12 2
Dealers 565 7 6 658 6 9
------------------------- -------------------------
1,508 20 13 1,674 18 11
========================= =========================
</TABLE>
*At December 31, 1998 and 1997, the Company operated 46 and 55 stores,
respectively, on behalf of Cantel. At December 31, 1998, 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
"United Kingdom Restructuring Plan".
16
<PAGE>
NET SALES
Net sales for the quarter ended December 31, 1998 were $198,379,000, an increase
of 3.0% over the net sales for the same quarter in the prior year of
$192,559,000. Foreign currency effects had a significant impact on this
comparison. When the impact of fluctuations in the value of the U.S. dollar in
relation to the currencies of the countries in which the Company operates is
removed, the sales gain over the same quarter last year increases to 8.8%.
Comparative store sales, measured at the same exchange rate, increased by 15.4%
from the same quarter in the prior year. Year-to-date, sales have increased by
1.9% and 8.6% in U.S. dollar and local currency, respectively. Comparative
store sales for the six-month period ended December 31, 1998 have increased
15.5% over the same period a year ago. The difference between the local
currency and comparative store sales results for both the three and six-month
periods ended December 31, 1998 is attributable to the store closure program in
the Untied Kingdom. See "United Kingdom Restructuring Plan".
The table which follows shows by country the percentage changes in net sales for
the quarter and six months ended December 31, 1998, compared to the
corresponding period in the prior year. Changes are presented in both U.S.
dollars and local currencies to illustrate the effects of exchange rate
fluctuations. The change in comparative store sales, measured at the same
exchange rates, is also shown:
NET SALES
---------
PERCENTAGE INCREASE (DECREASE)
------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
LOCAL COMPARATIVE LOCAL COMPARATIVE
CURRENCY US$ STORE CURRENCY US$ STORE
-------- -------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Canada 16.9 % 7.2 % 16.9% 15.9 % 6.1 % 16.5%
Australia 16.2 % 5.7 % 15.6% 17.1 % 1.7 % 16.8%
United Kingdom (4.8)% (4.1)% 13.1% (5.5)% (4.5)% 13.3%
----------------------------------- ------------------------------------
Consolidated 8.8 % 3.0 % 15.4% 8.6 % 1.9 % 15.5%
=================================== ====================================
</TABLE>
The sales growth in both Canada and Australia continues to be broadly based with
sales gains experienced in almost all major product categories. The sales of
personal computers and related accessories were particularly strong in both
countries. In Canada, the emphasis placed on the sale of telephones and
wireless products, including air time cards for the recently introduced prepaid
airtime models, continued to produce positive results. Canadian sales of
batteries and of products in the personal electronics category were also strong,
as were sales of direct-to-home satellite dishes. The sale of telephones and
batteries were also an important part of the sales performance in Australia.
The overall sales reduction in local currency in the United Kingdom reflected a
reduction in the number of stores following the restructuring plan implemented
in the third quarter of fiscal year 1998. See "United Kingdom Restructuring
Plan". However, business in the continuing stores was good, as evidenced by a
comparative store sales gain of 13.1% for the second quarter of fiscal year
1999. However, unlike Canada and Australia, sales growth in the United Kingdom
was narrowly focused, with only a single product category - wireless
communications showing
17
<PAGE>
meaningful improvement. Importantly, growth in that category was focused in the
U.K. on prepaid air time models. These products are under particularly intense
price competition and, therefore, carry declining margins. 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 six-month periods ended December 31, 1998
and 1997.
GROSS MARGIN AND COST OF PRODUCTS SOLD
The gross margin percentage for the quarter increased by 60 basis points to
43.2% of consolidated sales, up from 42.6% in the second quarter of the prior
year. This increase was more than attributable to the Company's Canadian
subsidiary where the gross margin percentage increased 1.9 percentage points.
In Australia and the United Kingdom the gross margin percentage for the quarter
fell by 1.2 percentage points and 0.6 percentage points, respectively. Much of
the Company's sales growth in all three geographic segments continues to come
from aggressively pursuing growth opportunities in certain key product
categories which have high consumer demand and are consistent with the Company's
market niche. These products include wireless products, telephones, computers
and, in Canada, direct-to-home satellite systems. While these products present
sales growth opportunities, they tend to carry lower than average gross margin
percentages, leading to reductions in the gross margin percentage. In Canada,
the effects of this pressure on the margin percentage were mitigated by a volume
rebate from the Company's cellular partner in Canada, Cantel. The sales
threshold the Company needed to attain to earn this rebate was an ambitious one
and was only achieved through an aggressive marketing campaign combined with
focused effort in the stores. There can be no assurance that the Company will
earn this volume rebate next year. The following is a comparison of the gross
margin percentages for the quarter and year-to-date with the prior year for all
three countries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canada 43.8% 41.9% 43.7% 42.8%
Australia 46.3% 47.5% 46.0% 47.3%
United Kingdom 40.7% 41.3% 41.2% 41.7%
- ----------------------------------------------------------------------------
Consolidated 43.2% 42.6% 43.3% 43.2%
============================================================================
</TABLE>
Management continues to actively pursue a number of initiatives intended to have
a positive impact on the gross margin percentage. These include an ongoing
emphasis on the sale of
18
<PAGE>
electronic accessories and broadening the range in this important category,
developing strategic relationships with suppliers offering a stream of residual
income associated with the sale of a particular product or service and
aggressively pursuing opportunities to grow sales of extended warranty programs.
However, as explained above, management believes that future sales growth
opportunities will continue to come primarily from categories with lower than
the Company's average margins. While this trend will continue to put pressure on
the Company's margin percentage, management's objective is to turn these
opportunities for sales growth into an increase in gross margin dollars which
outpaces the growth in expenses.
The positive impact of increased sales and an improvement in the gross margin
percentage was partially offset by the effect of weaker currencies in Canada and
Australia. Overall, gross margin dollars for the quarter increased by
$3,773,000:
Increase in sales $ 6,851,000
Increase in margin percentage 1,398,000
Foreign exchange rate effects (4,476,000)
------------
$ 3,773,000
============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general, and administrative expenses ("SG&A expenses") for the
three months ended December 31, 1998 were $60,307,000 compared to $62,701,000 in
the second quarter of the prior year, a decrease of $2,394,000. Year-to-date,
SG&A expenses have decreased from $114,061,000 for the six months ended December
31, 1997 to $108,154,000 a reduction of $5,907,000. The following table,
broken-down by segment, shows that this reduction in total SG&A expenses was
more than attributable to foreign currency effects (in thousands):
<TABLE>
<CAPTION>
FOREIGN INCREASE (DECREASE)
SIX MONTHS ENDED CURRENCY MEASURED AT SIX MONTHS ENDED
DECEMBER 31, 1997 EFFECTS SAME EXCHANGE RATES DECEMBER 31, 1998
----------------- -------- ------------------- -----------------
<S> <C> <C> <C> <C>
Canada $ 49,375 $(4,215) $ 3,851 $ 49,011
Australia 21,239 (2,918) 1,974 20,295
United Kingdom 41,265 492 (5,884) 35,873
Corporate
Headquarters 2,182 - 793 2,975
----------- ---------- -------------- --------------
$114,061 $(6,641) $ 734 $ 108,154
=========== ========== ============== ==============
</TABLE>
The increases in SG&A spending, measured at constant exchange rates, in Canada
and Australia result from a number of sales-sensitive factors, including store
payroll and the royalty payable to Tandy. The scheduled increase in the rate of
the royalty payable to Tandy and increases in rents, following scheduled
reviews, were also factors. The increase in SG&A expenses at Corporate
Headquarters resulted from temporarily higher compensation costs and various
professional fees. The reduction in SG&A expenses in the United Kingdom
resulted primarily from a planned reduction in advertising expense, reflecting a
more focused strategy, and the restructuring plan undertaken last year partially
offset by the write-off of costs incurred to December 31, 1998 in connection
with the sale of the Company's United Kingdom subsidiary. See "United Kingdom
Restructuring Plan".
19
<PAGE>
While SG&A expense increased, measured at the same exchange rates, in certain of
the Company's segments, these increases were generally less than the rate of
sales growth. Consequently, consolidated SG&A expenses, as a percentage of
sales, declined to 30.4% for the three-month period ended December 31, 1998 from
32.6% for the same period in the prior year, an improvement of 2.2 percentage
points. Year-to-date, the consolidated SG&A percentage was 33.8%, down 2.5
percentage points from the corresponding amount for the six-month period ended
December 31, 1997. The following table compares the SG&A percentage for the
quarter and year-to-date with the corresponding amount for the prior year for
each of the Company's operating segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
- ------------------------------------------------------------------------------ --------------------
<S> <C> <C> <C> <C>
Canada 27.1% 28.8% 29.1% 31.1%
Australia 35.1% 37.4% 37.2% 39.6%
United Kingdom 31.0% 34.3% 36.9% 40.6%
- ------------------------------------------------------------------------------ --------------------
</TABLE>
FOREIGN CURRENCY TRANSACTION GAINS
Foreign currency transactions gains were $43,000 during the second quarter of
fiscal year 1999 compared with gains of $658,000 for the comparable quarter last
year. Last year, an unrealized gain arose due to the effects of a weakening
Canadian dollar on the Debentures. With the repayment of the Company's U.S.
dollar-denominated indebtedness to Tandy a year ago, the Debentures were
designated as a hedge against the Company's investment in its Canadian
subsidiary.
NET INTEREST EXPENSE
Net interest expense was $1,633,000 for the three months ended December 31, 1998
compared with $1,893,000 for the same quarter last year. The reduction in net
interest expense over the second quarter of the prior year results from the
effects of the repayment of the note payable to Tandy in December, 1997 and the
benefits of the Company's new revolving credit facility. See "Liquidity and
Capital Resources". As the Company has now enjoyed the benefits of its new
credit facility for a full twelve months, significant reductions in interest
expense in future periods should not be expected. Some reductions should,
however, occur as there will be no borrowing costs associated with the Company's
former subsidiary in the United Kingdom.
PROVISION FOR INCOME TAXES
An income tax provision of $7,929,000 was recorded during the quarter compared
with a provision of $5,076,000 recorded in the second quarter of fiscal year
1998. This increase primarily reflects higher profits in Canada and Australia.
The increase in the effective rate of tax this year is due to the fact that the
rate of tax in Australia last year was unusually low as a result of the use of
the balance of the Company's loss carryforwards.
20
<PAGE>
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 December 31, 1998, in exchange rates as measured against
the U.S. dollar:
FOREIGN EXCHANGE RATE FLUCTUATIONS
----------------------------------
<TABLE>
<CAPTION>
% INCREASE % INCREASE
(DECREASE) (DECREASE)
FROM DECEMBER 31, 1997 FROM JUNE 30, 1998
----------------------- -------------------
<S> <C> <C>
Canada (6.5) (4.1)
Australia (5.8) (1.2)
United Kingdom 0.5 (0.5)
</TABLE>
INVENTORIES
Inventories at December 31, 1998 were $158,779,000 compared to $169,512,000 at
December 31, 1997, a reduction of $10,733,000. This decrease is in part
attributable to the foreign currency effects and in part to the store closure
program and other initiatives to reduce inventory levels in the United Kingdom.
Measured at the same exchange rates, inventories have increased year-on-year in
Canada and Australia by about 7% in support of higher sales. Inventories at
June 30, 1998 were $148,198,000. The increase from this level is explained by
higher inventories in Canada and Australia in support of higher sales, partially
offset by foreign currency effects.
ACCOUNTS RECEIVABLE
Accounts receivable were $16,370,000 at December 31, 1998, up from $8,539,000 at
June 30, 1998. This increase is attributable to increased purchases by and
deferred terms given to dealers as they purchase inventories for the Christmas
selling season. Accounts receivables at December 31, 1997 were $16,742,000.
ACCOUNTS PAYABLE
Accounts payable at December 31, 1998 were $33,987,000, compared to $24,274,000
at June 30, 1998. This increase relates to the financing of inventories for the
Christmas selling period. Accounts payable at December 31, 1997 were
$39,621,000.
ACCRUED EXPENSES
Accrued expenses at December 31, 1998 were $48,430,000 up from $38,505,000 and
$37,255,000 at June 30, 1998 and December 31, 1997, respectively. The increase
from June 30, 1998 results from seasonal increases in sales related accruals,
including commissions, bonuses and sales taxes. The increase from the December
31, 1997 level is attributable primarily to the restructuring reserve in the
United Kingdom in the third quarter of fiscal year 1998. See "United Kingdom
Restructuring Plan".
Income Taxes Payable
Income taxes payable were $21,889,000 at December 31, 1998 compared to balances
at June 30, 1998 and December 31, 1997 of $20,955,000 and $18,226,000,
respectively.
21
<PAGE>
The increase from June 30 to December 31, 1998 represents the impact of the
provision for taxes for the two quarters of fiscal year 1999, partially offset
by the payment of the final balance of Canadian and Australian taxes for fiscal
year 1998. The increase from December 31, 1997 represents an increase in the
level of the provision for taxes in Canada and Australia as a result of improved
profitability in those countries, partially offset by foreign currency effects.
The Company's Canadian subsidiary has a number of issues in dispute with the
Canadian tax authorities, including:
(i) Reassessments arising from an audit of RadioShack Canada's income tax
returns for the 1987 to 1989 taxation years; and,
(ii) Actual and possible reassessments relating to the deductibility of
certain interest expense and the treatment of certain foreign exchange
gains related to the Company's former operations in continental Europe
during the 1990 to 1993 taxation years.
Depending on the ultimate outcome of each of these matters, the Company could
have additional liabilities in the range of $0 to $11,700,000 and $0 to
$21,000,000, respectively. 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 and
possible reassessments. In order to pursue an appeal of any reassessments
issued under item (ii) above, the Company would be required to post a cash
deposit or, in certain cases, post letters of credit, equal to one-half of the
tax under dispute. It is not possible for management to make any reasonable
determination of when any of the above issues will ultimately be resolved. See
Note 5 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
-------------------------------
Operating activities generated $16,598,000 in cash during the six-month period
ended December 31, 1998 compared to $25,979,000 in the corresponding period last
year. Net income, adjusted to reconcile net income to cash, generated
$17,849,000 in cash compared to $12,498,000 last year. This increase was,
however, more than offset by the increase in inventory levels needed to support
higher sales which consumed $13,643,000 in cash compared to $6,975,000 in the
first six months of fiscal year 1998. The deferral of income tax installments
also preserved $1,805,000 in cash compared to $6,065,000 a year ago, as both
Canada and Australia paid the final balance owing on income taxes in respect to
fiscal year 1998.
Cash flow from investing activities consumed $2,994,000 in cash during the six-
month period ended December 31, 1998, while consuming $1,160,000 in cash a year
ago. This change results from a planned increase in capital spending as well as
a reduction in the liquidation of certain other assets.
Financing activities provided $3,428,000 in cash during the six months ended
December 31, 1998 while consuming $32,396,000 during the same period last year.
Last year, the payment of term debt owing to Tandy consumed $24,353,000 in cash.
In addition, during the first six
22
<PAGE>
months of fiscal year 1999, short-term borrowings in the United Kingdom
generated $2,512,000 in cash. In the same period a year ago, short-term
borrowings in the United Kingdom were paid down, consuming $8,768,000 in cash.
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. 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. and InterTAN U.K. Limited (the "Borrowers"). The amount of
available credit is then reduced by the amount of trade accounts payable of the
Borrowers then outstanding as well as certain other reserves. With the sale of
InterTAN U.K. Limited in January, 1999, the facility has been reduced to
$50,000,000.
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 December 31, 1998, there were borrowings against the Syndicated
Loan Agreement aggregating $11,617,000 and $3,277,000 was committed in support
of letters of credit. There was $30,640,000 of credit available for use at
December 31, 1998. As part of the transaction involving the sale of InterTAN
U.K. Limited, the purchaser repaid the amount owing under the facility and
arranged for replacement of the letters of credit relating to the United Kingdom
($1,430,000 at December 31, 1998). The maximum amount of credit available under
the Syndicated Loan Agreement was then reduced to $50,000,000. 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 $15,000,000. 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 ($7,348,000 at December 31, 1998 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 ($3,062,000 at December 31, 1998 exchange rates)
may be used in support of short-term borrowings. At December 31, 1998, 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 payment of tax deposits or amounts 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 are estimated to be approximately $1,700,000, primarily
representing interest payments on the Debentures. In addition, management
expects to receive additional reassessments during fiscal year 1999 relating to
its dispute with Revenue Canada in respect of the 1990-1993 taxation years. See
"Income Taxes Payable" and Note 5 to the Company's
23
<PAGE>
Consolidated Financial Statements which is included in Item 1 of this Report on
Form 10-Q and is incorporated herein by reference. The Company plans to appeal
such reassessments; however, in order to do so it will be required to post a
cash deposit or letters of credit in an amount equal to one-half of the amount
reassessed. While the exact amount of such deposits or payments on reassessments
will not be known until discussions with Revenue Canada, the Company and its
advisors have been concluded, management anticipates that the deposit required
will be approximately $8,000,000 to $11,000,000.
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 fiscal year 1999, including
any tax deposits pursuant to the possible 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:
. Its store operating systems;
. Its so-called "back end" merchandising and inventory systems,
including purchasing, receiving and warehousing, perpetual
inventories and store replenishment; and,
. 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. Both systems are currently in testing, with testing of the accounting
system substantially complete. 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 evaluating various options
to replace the existing back end
24
<PAGE>
inventory and accounting systems. It is anticipated that new systems will be in
place by the end of fiscal year 1999.
The Company's current projection is that Year 2000 compliance costs will not
exceed $1,000,000.
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 June 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. 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 the end of fiscal year 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 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 "United Kingdom Restructuring
Plan", "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.
25
<PAGE>
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 25 of this Form
10-Q are incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on November 11,
1997, the following persons were elected to the Board of Directors:
William C. Bousquette
John A. Capstick
Brian E. Levy
In such connection, Messrs. Bousquette, Capstick and Levy received
10,155,883, 10,156,013 and 10,157,085 votes, respectively, "for"
election and 52,927, 52,797 and 51,725 votes, respectively, were
withheld. In total, 12,622,642 shares were authorized to vote.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
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 on 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
26
<PAGE>
(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 hereby 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).
*27 Article 5, Financial Data Schedule.
___________________
* Filed herewith
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December
31, 1998.
27
<PAGE>
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: February 16, 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)
28
<PAGE>
Index to Exhibits
InterTAN, Inc. Form 10-Q
Exhibit No. Description
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 InterTANAEs 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 SeriesaA 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 on 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
Reporton 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 InterTANAEs
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 InterTANAEs Annual Report on Form 10-K for
fiscal year ended June 30, 1996 and incorporated hereby
reference).
<PAGE>
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).
*27 Article 5, Financial Data Schedule.
___________________
* Filed herewith
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 99,656
<SALES> 320,223
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