Exhibit 13
Company Profile
InterTAN, Inc., headquartered in Fort Worth, Texas, is an international
consumer electronics retailer with approximately 1,800 company-operated retail
stores and dealer outlets in Canada, the United Kingdom and Australia.
InterTAN's retail operations are conducted under trade names licensed from Tandy
Corporation: "RadioShack" in Canada, "Tandy" in the United Kingdom and "Tandy
Electronics" in Australia.
InterTAN carries a broad range of private label and brand name consumer
electronics products, including audio and video, communication products,
telephones, cellular equipment, computers, personal electronics, batteries and
parts and accessories. InterTAN is committed to providing consumers with high
quality merchandise, convenient locations and excellent service from friendly,
knowledgeable sales associates.
InterTAN's common shares are traded on the New York Stock Exchange under the
symbol "ITN" and the Toronto Stock Exchange under the symbol "ITA."
[Three images (all being photographs) appear in the foregoing text and are
described as follows: 1) a caller-ID telephone device; 2) a personal computer
consisting of a CPU, monitor with built-in speakers, keyboard and mouse; and 3)
an assortment of batteries for general consumer usage.]
Financial Highlights
(In thousands, except percent, per
share data, Year ended June 30 number
of sales outlets and number of employees) 1996 1995 1994 1993/3/ 1992/3/
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Operating Results:
Net sales $506,445 $491,751 $465,766 $641,966 $681,440
Gross profit percent 44.3 43.2 44.3 43.0 48.7
Operating income 11,629 13,861/1/ 16,851/1/ (93,155)/1/ (49,554)/1/
Net income (loss) (2,241) 8,123 9,649 (109,060) (45,892)
Primary net income (loss) per average common share (0.21) .81 2.09 (12.20) (5.15)
Fully diluted net income (loss) per average common share (0.21) .65 1.50 (12.20) (5.15)
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Financial Position at Year End:
Total assets 261,633 262,039 258,591 240,534 361,422
Net working capital 145,471 157,582 148,108 40,989 160,141
Long-term debt 64,730 83,555 89,831 40,000/2/ 40,000
Stockholders' equity 119,512 113,326 101,513 82,179 201,025
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Other Information at Year End:
Number of sales outlets 1,780 1,839 1,817 2,136 2,341
Retail square feet (Company-operated stores) 1,707 1,780 1,821 2,272 2,648
Number of employees 4,343 4,217 4,220 5,662 6,200
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/1/ Fiscal years 1995, 1994, 1993 and 1992 include provisions (credits) of
($1,600,000), ($3,612,000), $77,400,000 and $49,754,000, respectively,
relating to business restructuring.
/2/ Classified as current in 1993 and included in debt to be refinanced on the
balance sheet. If the long-term debt had not been reclassified, net working
capital would have been $80,989,000.
/3/ Amounts for 1993 and 1992 include results for the Company's former
operations in continental Europe which have been closed.
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INTERTAN, INC.
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Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 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.
Results of Operations
Overview
InterTAN is engaged in the sale of consumer electronics products through
company-operated retail stores and dealer outlets in Canada, the United Kingdom
and Australia. The Company's ongoing 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. All of these
trade names are used under license from Tandy Corporation ("Tandy") of Fort
Worth, Texas.
The geographic distribution of the Company's sales outlets is summarized in the
following table:
Sales Outlets
Fiscal Year 1996 June 30
Ending Opened Closed 1995 1994
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Canada
Company-operated 450 9 5 446 451
Dealer 402 21 48 429 425
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852 30 53 875 876
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Australia
Company-operated 210 9 4 205 210
Dealer 202 23 81 260 266
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412 32 85 465 476
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United Kingdom
Company-operated 345 14 4 335 334
Dealer 171 17 10 164 131
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516 31 14 499 465
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Total
Company-operated 1,005 32 13 986 995
Dealer 775 61 139 853 822
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1,780 93 152 1,839 1,817
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INTERTAN, INC.
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The dealers included in the preceding table are independent retail businesses
which operate under their own trade names but are permitted, under dealer
agreements, to purchase any of the products sold by InterTAN company stores.
The dealer agreements contain a license permitting the dealer to designate the
consumer electronics department of the dealer's business as a "RadioShack
Dealer," a "Tandy Dealer," or a "Tandy Electronics Dealer," as applicable.
Sales to dealers accounted for approximately 9% of total sales during fiscal
year 1996.
InterTAN's business is seasonal; sales peak in the November-December Christmas
selling season. The Company's cash flow requirements are also seasonal since
inventories build prior to the Christmas selling season. Significant inventory
growth for all operations typically begins to build in late summer and peaks in
November.
The Company's fiscal year ends June 30. Historically, units operating outside
North America reported on a May 31 fiscal year end. Effective with fiscal year
1995, the Company's subsidiaries in Australia and the United Kingdom changed
their fiscal year end to June 30 to coincide with that of the parent Company,
thus eliminating the historical one-month lag in reporting. As a consequence of
this change, losses incurred in Australia and the United Kingdom during the
month of June, 1994, aggregating $1,740,000, have been charged directly to
retained earnings. In order to facilitate the comparison of results for fiscal
year 1995 with those of fiscal year 1994, management has revised the 1994
results to show what they would have been had this change in reporting been
given retroactive effect. The table which follows presents a statement of
operations which compares results for the current year with results for fiscal
years 1995 and 1994, as revised and as reported:
Year ended June 30
1996 1995 1994 1994
(In thousands, except per share data) (Revised) (As Reported)
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Net sales and operating revenues $506,445 $491,751 $467,629 $465,766
Other income 902 1,217 713 771
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507,347 492,968 468,342 466,537
Operating costs and expenses:
Cost of products sold 282,052 279,436 261,449 259,338
Selling, general and administrative expenses 205,694 193,767 186,221 186,017
Depreciation and amortization 7,972 7,504 7,951 7,943
Provision for business restructuring -- (1,600) (3,612) (3,612)
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495,718 479,107 452,009 449,686
Operating income 11,629 13,861 16,333 16,851
Foreign currency transaction (gains) losses (338) 314 (2,207) (1,472)
Interest expense, net 6,709 7,462 8,459 8,351
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Income before income taxes 5,258 6,085 10,081 9,972
Provision (benefit) for income taxes 7,499 (2,038) (9,677) (9,677)
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Net income (loss) $(2,241) $8,123 $19,758 $19,649
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Primary net income (loss) per average common share $(0.21) $0.81 $2.10 $2.09
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Fully diluted net income (loss) per average common share $(0.21) $0.65 $1.50 $1.50
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Average common shares outstanding 10,901 10,043 9,422 9,422
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Average common shares outstanding assuming full dilution 10,901 17,186 13,639 13,639
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In the discussion of Results of Operations which follows, when comparisons are
made between fiscal years 1995 and 1994, comparisons will be made, in all cases,
with the results as revised. Management believes that these revised results
provide the most meaningful basis of comparison.
Since the impact of the fluctuations of local country currencies against the
U.S. dollar can be significant, the following analysis of the income and expense
categories is based both on amounts expressed in U.S. dollars and as a percent
of sales. Profit and loss accounts, including sales, are generally translated
from local currency values to U.S. dollars at the monthly average exchange
rates.
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INTERTAN, INC.
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During fiscal year 1996, the U.S. dollar was weaker against the Canadian and
Australian dollars than in fiscal year 1995. As a result, the same local
currency amounts translate into more U.S. dollars as compared with the prior
year. For example, if local currency sales of the Canadian operation in fiscal
1996 were equal to those in fiscal 1995, the fiscal 1996 income statement would
reflect a 1.4% increase in sales when reported in U.S. dollars. On the other
hand, during fiscal year 1996 the U.S. dollar strengthened against the pound
sterling. Consequently, in the United Kingdom, the same local currency amounts
would translate into less U.S. dollars in fiscal year 1996 as compared with
fiscal year 1995. The table below outlines the percentage change of the
weighted average exchange rates as compared to the prior year:
1996 1995 1994
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Canada 1.4 (3.1) (6.4)
Australia 2.1 8.3 (3.2)
United Kingdom (1.9) 5.6 (8.9)
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Net Sales and Operating Revenues
Net sales and operating revenues ("sales") in U.S. dollars increased by
$14,694,000 in fiscal year 1996, an increase of 3.0% over fiscal year 1995. The
impact on sales of stronger Australian and Canadian dollars was partially
offset by a weaker pound sterling. On a net basis, foreign exchange effects
accounted for $1,450,000 of the increase. In constant dollars, therefore, sales
increased by $13,244,000, or 2.7%. This increase in sales, measured at
comparable exchange rates, was attributable, in part, to an increase in the
number of company-operated stores. During fiscal year 1996, the Company opened
32 new company-operated stores while closing 13 stores for a net increase of 19
company-operated stores. In fiscal years 1995 and 1994, the Company reduced the
number of stores by 9 and 33, respectively. The Company is actively seeking
viable new and replacement locations, particularly in the United Kingdom, where
management believes prospects for increasing sales are greatest. Net additions
are planned for fiscal year 1997 in all three countries, aggregating
approximately 15 company-operated stores, with about one-half of those in the
United Kingdom. The Company's strategy of reviewing and closing certain
marginal locations, where appropriate, will also continue.
The decrease in the number of dealers is primarily attributable to programs in
Canada and Australia designed to eliminate dealers that were not purchasing
product in sufficient quantities to make them profitable to the Company. The
reduction in the number of dealers is not expected to have a material effect on
sales. The Company intends to continue to explore opportunities to expand its
dealer base to produce sales from communities too small to support company-
operated stores.
The following table illustrates the total percentage sales increase (decrease)
by geographic area as measured in U.S. dollars and local currencies:
Sales Increase (Decrease)
U.S. dollars
Year ended June 30
(Percent change) 1996 1995 1994
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Canada 2.2 2.0 (6.4)
Australia 12.1 7.8 (3.1)
United Kingdom (0.6) 8.8 1.2
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Local Currencies
Year ended June 30
1996 1995 1994
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Canada 1.0 5.3 0
Australia 10.3 (0.1) (0.5)
United Kingdom 1.3 3.2 10.9
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The following table illustrates comparative company-operated store sales
measured in comparable exchange rates:
Comparative Company-Operated Store Sales/1/
U.S. dollars
Year ended June 30
(Percent change) 1996 1995 1994
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Canada 0.6 6.5 1.7
Australia 10.7 2.5 4.0
United Kingdom (0.7) 4.1 11.0
/1/ Derived from the accumulation of each store's monthly sales in local
currency for those months in which it was open both in the current and
preceding year.
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Comparative stores sales increased during fiscal year 1996 as a whole by 1.9%.
The effect of a difficult fiscal 1996 Christmas quarter partially offset gains
made during the other periods of the year. While comparative store sales
increased by 0.3%, 6.4% and 5.1% in the September, March and June quarters,
respectively, a comparative store sales loss of 3.6% occurred in December
quarter. Management believes that certain steps taken to refocus the Company
into its market niche, including the decision to de-emphasize the video game
business, had a temporary unfavorable impact on sales. For example, reduced
video game sales depressed overall sales by 2.1%, requiring improvements in
other product categories just to stay even with the prior year.
During fiscal year 1996, the Company implemented a number of new service
initiatives and advertising programs made available to it under an advertising
agreement concluded with Tandy late in fiscal year 1995. These included the
positioning statement, "You've got questions. We've got answers." and the new
service initiative, "The Repair Shop at RadioShack." The Company is also in the
early stages of implementing the service initiative, "RadioShack Unlimited."
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INTERTAN, INC.
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The steps taken to refocus the Company into its niche market together with the
introduction of these and other new service initiatives had an overall positive
impact on sales during fiscal year 1996 and management believes that sales will
continue to benefit from this strategy during fiscal year 1997.
Net sales increased by $24,122,000 in fiscal year 1995. A stronger Australian
dollar and pound sterling accounted for $7,034,000 of the increase. Sales at
comparable exchange rates increased by 3.6% in fiscal year 1995. This increase
in sales was achieved despite a net reduction of nine company-operated stores.
Comparative store sales increased by 4.9% during fiscal year 1995.
Net sales decreased by $176,200,000 during fiscal year 1994. Elimination of
sales in continental Europe following the closure of European operations
accounted for $157,175,000 of this decline. A stronger U.S. dollar explains a
further reduction in sales of $28,423,000. When both of these factors are
removed, sales in the Company's ongoing markets measured at comparable exchange
rates increased by 2.4% in fiscal year 1994. The closure of a net 33 stores
during the year had a negative impact on sales. Comparative store sales for the
year increased by 5.1%.
Gross Profit
Gross profit in fiscal year 1996 was $12,078,000 higher than in fiscal 1995,
primarily due to an increase in sales and an improvement in the gross margin
percentage. The following analysis summarizes the components of the increase in
gross profit over that experienced in fiscal year 1995 (in thousands):
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Higher gross margin percentage $5,488
Higher sales 5,725
Stronger foreign currencies 865
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$12,078
The following table illustrates gross profit as a percentage of sales, by
geographic area:
(As a percent of sales) 1996 1995 1994
(Revised)
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Canada 45.6 45.1 46.8
Australia 45.5 43.8 43.1
United Kingdom 41.6 39.9 40.3
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Consolidated 44.3 43.2 44.1
The gross profit percentage for fiscal year 1996 rose from 43.2% a year ago to
44.3%, an increase of 1.1 percentage points. Management's overall objective for
the year had been to improve margins by a full percentage point. This objective
was achieved as margins increased in all markets. This improvement results
primarily from a merchandising strategy which places greater emphasis on the
Company's higher margin core categories, including parts and accessories and
private label goods. Increased cellular phone revenues, emphasis on the sale of
extended warranty contracts and tighter controls over inventories also had a
positive effect on margins.
Management believes that the steps taken to refocus the Company in its niche
market as well as the benefits of current and planned service and other
initiatives will continue to make a positive contribution to margins in fiscal
year 1997. However, it may be unrealistic to expect that improvement will
continue at the pace experienced in fiscal 1996.
In fiscal year 1995, the gross margin percentage declined by 0.9 percentage
points. Much of this decline occurred in Canada and was due to a swing in the
sales mix away from private label goods towards branded product, in particular
computers. Management addressed this issue by better managing the percentage of
computers in the product mix. The effect of the decline in Canadian margins was
partially offset by an improvement in the gross margin percentage in Australia
following the installation of an electronic point-of-sale system in that
operation.
In fiscal year 1994, the gross margin percentage improved by 0.9 percentage
points. In fiscal year 1993, however, margins had been depressed by the low
margin on sales in continental Europe. The margin percentage in the Company's
core markets of Canada, Australia and the United Kingdom actually declined by
1.8 percentage points. Reductions in margin percentages in Australia and the
United Kingdom were partially offset by an improvement in Canada. These
reductions were attributable to competitive pricing pressure and to the
introduction of lower margin branded products in Australia.
Selling, General and Administrative Expenses
Selling, general and administrative expense ("SG&A"), as a percentage of
sales, increased from 39.4% in fiscal year 1995 to 40.6% in the current year.
The following chart illustrates SG&A expense as a percentage of sales by
geographic area:
SG&A Expense by Geographic Area
(As a percent of sales) 1996 1995 1994
(Revised)
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Canada 35.6 34.5 36.2
Australia 41.6 41.9 41.6
United Kingdom 45.0 42.1 42.0
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Consolidated 40.6 39.4 39.8
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INTERTAN, INC.
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The following table provides a breakdown of SG&A expense by major category (in
thousands):
SG&A Expense by Category
1996 1995 1994
(Revised)
Dollars % of Sales Dollars % of Sales Dollars % of Sales
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Payroll $83,507 16.5 $78,359 15.9 $75,469 16.1
Advertising 26,045 5.1 24,638 5.0 24,880 5.3
Rent 40,918 8.1 39,423 8.0 38,845 8.3
Taxes (other than income taxes) 16,942 3.3 16,160 3.3 15,593 3.3
Telephone, telex and utilities 6,865 1.4 6,669 1.4 6,863 1.5
Other 31,417 6.2 28,518 5.8 24,571 5.3
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$205,694 40.6 $193,767 39.4 $186,221 39.8
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Foreign exchange rate effects did not have a material effect on the increase in
SG&A expenses during fiscal year 1996.
Implementing a strategy of growing the business by refocusing the Company in
its niche market, introducing new service and other initiatives and expanding in
selected markets of necessity required some increase in SG&A spending. The
increase in the number of stores resulted in higher rent and increased store
payroll costs. Payroll costs also increased as a result of the "Repair Shop at
RadioShack" initiative as well as the strengthening of the management teams in
all three countries. Management information systems were also improved,
particularly in the United Kingdom.
Management's objective had been to keep SG&A expense as a rate to sales flat
with the prior year. This objective proved to be unattainable, primarily as a
result of sales in the December quarter which did not meet expectations.
Management will continue to focus its attention on controlling costs, with an
overall strategy of reducing SG&A as a percentage of sales during fiscal 1997,
after excluding the scheduled 0.25 percentage point increase in the royalty
payable to Tandy.
In fiscal year 1995, SG&A expense increased by $7,546,000. After the effects
of foreign exchange rate fluctuations are eliminated, the increase, measured at
constant exchange rates was $4,544,000. SG&A spending in fiscal year 1995 was
heavily affected by the decision to refocus the Company in its niche market.
This action resulted in one-time costs incurred in the process of restructuring
the business, including the severance of two senior executives and the
retirement of a third as well as the relocation of the corporate headquarters
from Toronto to Fort Worth. These one-time costs totaled approximately
$1,500,000.
In fiscal year 1994, SG&A expense was reduced by $96,320,000. After the
effects of foreign exchange and the impact of the closure of the Company's
operation in continental Europe are eliminated, SG&A in the Company's core
markets, measured at constant exchange rates, declined by $9,848,000. Almost 60%
of this reduction was in payroll. These savings resulted from management's focus
on managing payroll at the store level and eliminating certain functions in
central units and corporate headquarters.
Depreciation and Amortization
Depreciation and amortization expense increased modestly in fiscal year 1996
by $468,000, primarily as a result of increased capital spending on store
renovations, new stores and investments in management information systems.
Depreciation and amortization expense had decreased by $477,000 during fiscal
year 1995, primarily as a result of reduced capital spending during the period
of the Company's financial restructuring. In fiscal year 1994, depreciation and
amortization expense fell by $5,570,000. Most of this reduction was attributable
to the closure of operations in continental Europe. Management anticipates that
depreciation and amortization expense will increase in future periods as capital
spending increases to renew assets and in response to growth in the business.
Most of this spending will be on store expansion, remodeling and upgrading.
Provision for Business Restructuring
In May, 1993, the Board of Directors approved management's plan to discontinue
the Company's continental European retail operations. The Company recorded a
pre-tax charge in the fourth quarter of fiscal 1993 in the amount of $77,400,000
in connection with the shutdown to provide for management's best estimate of the
costs of inventory liquidation, lease commitments, payroll and severance, other
operating costs during the shutdown period, and losses on the disposal of fixed
assets and leaseholds. At June 30, 1994, all inventory and assets had been
sold, all significant leases had been canceled and all employees had been
terminated.
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INTERTAN, INC.
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The credit of $3,612,000 to the business restructuring provision in fiscal
1994 represents the cumulative translation adjustment effects of liquidating the
European business entities. During the fourth quarter of fiscal 1995, certain
European claims and contingencies were settled for amounts less than originally
estimated. As a result of these settlements and certain other developments,
management reduced the accrual by $1,600,000.
Management believes the remaining restructuring reserve at June 30, 1996 of
$2,630,000 is adequate to provide for the Company's remaining obligations in
Europe including those arising from legal actions brought against the Company by
former employees, dealers and franchisees.
Foreign Currency Transaction (Gains)/Losses
A foreign currency transaction gain of $338,000 arose during fiscal year 1996
compared to a foreign currency loss of $314,000 in fiscal year 1995. These
gains and losses resulted from a variety of factors, including the effect of
fluctuating foreign currency values on inter-company debt and regular trade
payables denominated in currencies other than the functional currency of the
debtor. The Company's major exposure to foreign currency risks are the Canadian
dollar denominated subordinated convertible debentures (the "Debentures")
carried on the books of the Company and the U.S. dollar denominated notes due to
Tandy which are recorded in the Canadian subsidiary. Historically, these two
debts provided a natural hedge, as the related foreign currency risks were
largely offsetting. The risk with respect to these two debts will increase with
time as the notes payable to Tandy are paid down. In fiscal year 1994, a
foreign currency transaction gain of $1,472,000 was experienced. This gain was
attributable primarily to a gain on the repayment of a loan owing by the
Canadian subsidiary to the Company.
Net Interest Expense
Interest expense, net of interest income, was $6,709,000, $7,462,000 and
$8,351,000 for fiscal years 1996, 1995 and 1994, respectively.
The reduction in net interest expense in fiscal year 1996 results from reduced
interest bearing debt as a consequence of principal repayments on the notes
payable to Tandy as well as the voluntary conversion of a portion of the
Debentures by the holders thereof. In addition, the amortization of a
significant portion of the Company's bank financing costs had been completed in
fiscal 1995. The reduction in net interest expense during fiscal year 1995 is
attributable to lower average net debt, primarily because of the fact that
during part of fiscal year 1994, interest was being paid to Tandy on short-term
debt which had accumulated during the period of the Company's financial
restructuring. The effect of this reduction in net debt was partially offset by
an increase in the amortization of financing charges. The increase in net
interest expense in fiscal year 1994 was due to a combination of higher rates,
the amortization of financing costs and increased average borrowings.
Income Taxes
In assessing the required valuation allowance against the deferred tax assets
at June 30, 1994, the Company concluded that it was more likely than not that a
portion of the deferred tax assets of the Canadian subsidiary would be used to
offset future tax. This conclusion was primarily influenced by the successful
completion of new financing arrangements in the form of bank loans and the
Debentures, negotiation of its loan and merchandising agreements with Tandy and
the closure of its European operations. Accordingly, during fiscal year 1994,
the Company recognized a deferred tax benefit in the amount of $12,325,000. This
deferred tax benefit was partially offset by current tax expenses related to
U.S. taxes on foreign interest income and certain Canadian federal and
provincial taxes, resulting in a net tax benefit of $9,677,000.
During fiscal 1995, management reviewed the realization of its remaining
deferred tax assets. Based on the operating performance of the Canadian
subsidiary, particularly in the first two quarters, management concluded that
the valuation allowance should be further reduced by approximately $9,100,000
and the Company recognized a deferred tax benefit of that amount. The Company
also recorded a current tax benefit of $1,000,000 relating to the parent
Company. These tax benefits were partially offset by a provision for Canadian
federal and provincial income taxes on the profits of the Canadian subsidiary,
resulting in a net tax benefit for the year of $2,038,000.
The provision for taxes for fiscal year 1996 of $7,499,000 primarily
represents a provision for Canadian federal and provincial taxes on the profits
of the Canadian subsidiary.
At June 30, 1996, the Company had deferred tax assets in all three countries
aggregating $36,684,000 against which a valuation allowance has been recorded in
the amount of $30,461,000. Approximately $20,500,000 of the valuation allowance
relates to loss carryforwards in Australia and the United Kingdom. The
potential realization of the deferred tax assets will be reviewed on a regular
basis.
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.
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INTERTAN, INC.
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Depending on the ultimate resolution of these issues, the Company could
potentially have an additional liability in the range of $0 to $10,700,000. The
Company believes it has meritorious arguments in defense of a number 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. In order for the Company to succeed
in appealing certain aspects of these reassessments, it must succeed in
defending the possible reassessments discussed immediately below.
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 in fiscal year 1987. Management
disagrees with Revenue Canada's views on these issues and will vigorously defend
the Company's position should Revenue Canada pursue these issues. Management
believes it has meritorious arguments supporting its stance and, accordingly, no
additional provision has been recorded for these possible reassessments. Tax
reassessments related to these issues, if successfully pursued, could
potentially range from $14,000,000 to $20,000,000. As required by Canadian law,
the Company would be required to post a deposit of one-half of the tax in
dispute, including interest, in order to appeal any reassessment.
An audit of the Canadian income tax returns of the Canadian subsidiary for the
1990 to 1993 taxation years was commenced during the 1995 fiscal year. While to
date no reassessments have been issued by Revenue Canada arising from this
audit, 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. Management estimates that the possible range of
loss should Revenue Canada ultimately prevail in these matters, after all
appeals have been unsuccessfully pursued by the Company, could range from
$18,000,000 to $25,000,000. Assuming Revenue Canada pursues these issues, in
order for the Company to proceed with such appeals, the Company would be
required to post a deposit equal to one-half of the 1990-1993 tax in dispute,
together with interest, which management estimates should not exceed $9,000,000.
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 is prepared to vigorously defend its position should the Canadian tax
authorities proceed with such a challenge. Accordingly, it is management's
assessment that no provision need be recorded for these possible claims.
Net Income per Average Common Share
The primary net loss and fully diluted loss per average common share were both
$0.21 for fiscal year 1996 as the effect of the Debentures was anti-dilutive.
For fiscal years 1995 and 1994, primary net income per average common share and
fully diluted net income per average common share were $0.81 and $0.65, and
$2.09 and $1.50, respectively. In each of those periods, the difference between
primary and fully diluted net income per average common share was due primarily
to the dilutive effect of the Debentures, which are convertible into 7,123,860
common shares. Because the Debentures were anti-dilutive during one or more
quarters of fiscal years 1996 and 1995, fully diluted net income (loss) per
average common share during the four quarters of those fiscal years do not total
fully diluted net income per average common share for those fiscal years as a
whole. The dilutive effect of this instrument will likely continue in future
periods and exchange rate impacts on the Debentures may increase or decrease
their dilutive effects.
The Company has outstanding warrants exercisable for 1,449,007 common shares
at an exercise price of $6.618 per share. Also, in fiscal years 1996, 1995 and
1994, the Company's directors and employees held options to purchase 650,833,
650,000 and 707,499 common shares, respectively, at exercise prices ranging from
$5.31 to $8.1875, $5.31 to $8.125 and $5.31 to $7.125, respectively. The
outstanding warrants and options were also considered in determining primary and
fully diluted net income per average common share.
19
INTERTAN, INC.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's principal sources of outside financing are its loan from Tandy,
the Debentures and bank facilities.
On August 5, 1993, Tandy, through its wholly-owned subsidiary, Trans World
Electronics, Inc., acquired the debt then outstanding under the Company's
Revolving Credit and Term Loan Agreement of $41,748,000. This debt was then
restructured as a term loan facility ("Series A Note") bearing interest at
8.64%. It is payable semi-annually over a six year period commencing February
25, 1995. In addition, Tandy provided the Company with a $10,113,000 three-year
loan ("Series B Note") which bears interest at 8.11% and was due on August 25,
1996. The agreement governing these loans is herein referred to as the "Tandy
Loan Agreement." During fiscal year 1996, the Company made scheduled repayments
on the Series A Note aggregating $6,958,000. In addition, the Series B Note was
retired early in May, 1996.
As part of the financial restructuring indicated above, the Company entered
into a Merchandise Agreement with Tandy which requires the Company to use
Tandy's export unit as its exclusive exporter of products from the Far East
through the term of the Merchandise Agreement. The Merchandise Agreement
requires the Company to support a percentage of the total cost of purchase
orders placed with Far Eastern suppliers with either letters of credit or cash
deposits. The percentage ranges from a low of 60% in the December to April
period to a high of 90% in August. In October, 1995, agreement was reached to
lower the letter of credit posting requirement on Canadian purchases. The
Company has reached agreement with Tandy whereby the same reduced letter of
credit requirements have been extended to the Company's other subsidiaries.
On May 6, 1994, InterTAN Canada Ltd., InterTAN, Inc., and InterTAN U.K.
Limited entered into a one-year credit agreement ("Syndicated Loan Agreement")
with a syndicate of banks. This agreement has been renewed and now extends
through mid-August, 1997. This facility is used primarily to provide letters of
credit in support of purchase orders. At June 30, 1996, there were borrowings
against the credit facility aggregating $975,000. In addition, $29,279,000 was
committed in support of letters of credit and a further $399,000 was committed
in support of foreign exchange contracts. At June 30, 1996, $13,345,000 of
credit was available for use.
Both the Tandy Loan Agreement and the Syndicated Loan Agreement preclude the
Company from paying dividends on its common stock. In addition, the Tandy Loan
Agreement and the Syndicated Loan Agreement contain covenants which require the
Company to maintain tangible net worth at a specified minimum level and which
limit the level of debt due both to Tandy as well as other parties, capital
spending, lease commitments, store openings and require the Company to maintain
debt to equity and working capital ratios at agreed levels. These loan
agreements also require the Company to meet certain interest coverage ratios.
During fiscal year 1996, the Company was in compliance with all of these
requirements except for the interest coverage ratio tests under the Syndicated
Loan Agreement at December 31, 1995 and under the Tandy Loan Agreement at June
30, 1996. All members of the bank syndicate and Tandy have waived these events
of non-compliance.
During fiscal year 1994, the Company closed a private placement of
Cdn$60,000,000 of 9% subordinated convertible debentures which will mature on
August 30, 2000. Interest on the Debentures is payable semi-annually, at the end
of February and August. At June 30, 1996, Cdn$56,812,000 ($41,660,000 at the
June 30, 1996 exchange rate) of Debentures were outstanding. The conversion rate
is 118.7310 common shares for each Cdn$1,000 face amount of Debentures,
equivalent to a conversion price of approximately Cdn$8.42, or $6.17 per share
at the June 30, 1996 exchange rate. The Debentures are subordinated to all
senior indebtedness of the Company, including the Company's revolving bank
facility and the Tandy Loan Agreement.
Operating activities generated $12,185,000 in cash during fiscal year 1996, an
increase of $4,155,000 over the cash generated during fiscal year 1995.
Increases in inventories consumed $13,698,000 in cash during fiscal year 1996,
while reductions in inventories had generated $1,687,000 in cash a year ago.
The increase in the Company's inventory levels in fiscal year 1996 results from
a merchandising strategy which places greater emphasis on higher margin private
label goods. These products require larger order sizes and longer lead times.
An improvement in the Company's in-stock position and a wider product assortment
also contributed to the increase. The effect of this reduction in cash was
partially offset by an increase in accounts payable which preserved $9,960,000
in cash compared to $834,000 in fiscal 1995. Net income, adjusted to reconcile
net income to cash, generated $15,418,000 in cash, $1,634,000 more than in
fiscal year 1995. Operating activities resulted in an inflow of cash of
$8,030,000 during fiscal year 1995, compared to an outflow of $24,788,000 during
fiscal year 1994. Net income in fiscal year 1995, adjusted to reconcile net
income to cash, generated only $1,357,000 more cash than in fiscal year 1994.
However, significant cash outflows had occurred in fiscal 1994 as the European
restructuring reserve was reduced and amounts owing to Tandy and other creditors
which had accumulated during the period of the Company's financial restructuring
were liquidated. These outflows were partially offset by tax refunds of
approximately $14,000,000.
20
INTERTAN, INC.
- --------------------------------------------------------------------------------
Investing activities consumed $9,961,000 in cash in fiscal year 1996 compared
to $5,773,000 in fiscal year 1995. This change results primarily from an
increase in additions to property and equipment as the Company proceeds with a
plan to open new stores and renovate existing stores. In fiscal year 1994,
investing activities generated cash of $9,013,000 as the proceeds from the
liquidation of assets in continental Europe significantly exceeded routine
additions to property and equipment.
In fiscal year 1996, financing activities consumed $13,895,000 in cash. The
effects of scheduled repayments on the Series A Note payable to Tandy as well as
the early retirement of the Series B Note were partially offset by short-term
borrowings and cash generated from the sale of stock to employee plans. In
fiscal year 1995, financing activities consumed $1,658,000 in cash. Cash
consumed by the principal payment of debt to Tandy was partially offset by the
proceeds from the sale of common stock to employee plans. In fiscal year 1994,
cash generated by the sale of stock to employee plans together with the net
proceeds from long-term borrowings contributed $47,095,000 in cash.
The Company's primary uses of liquidity in fiscal year 1997 will include the
building of inventory levels for the 1996 Christmas selling season, the funding
of capital additions and the servicing of debt. The Company anticipates that
capital additions will approximate $12,000,000 in fiscal year 1997, mainly
related to store expansion, remodeling and upgrading. The Company's debt
servicing requirements in fiscal year 1997 are estimated to be $13,300,000 and
include principal payments on the Tandy Loan of $6,958,000. In addition, as
previously described, the Company believes that it could possibly receive
additional reassessments of tax from Revenue Canada. See "Income Taxes."
The Company's primary sources of liquidity in fiscal year 1997 will be its
cash and short-term investments on hand, cash generated from operations and the
syndicated credit facility. In addition, the Company has recently concluded an
agreement with an Australian bank which would provide a further credit facility
to the Australian subsidiary in the amount of A$12,000,000 ($9,450,000 at the
June 30, 1996 rate of exchange). While the Syndicated Loan Agreement together
with the new Australian facility will be used primarily to support letters of
credit issued in accordance with the Merchandise Agreement, management believes
that it will be necessary to borrow against these facilities as inventories are
built for the 1996 Christmas selling season. Borrowings against the Syndicated
Loan Agreement will also be required from time to time to fund operations,
primarily in the United Kingdom. Management believes these facilities will be
adequate to provide letters of credit to the level required by peak outstanding
orders.
Management believes that the Company's cash and short-term investments on hand
and its cash flow from operations coupled with the Syndicated Loan Agreement and
the new credit facility in Australia will provide the Company with sufficient
liquidity to meet its planned requirements through fiscal year 1997, provided
the amount of any additional tax deposits were not at the upper end of the
ranges described above under "Income Taxes." If this were the case, the Company
would be required to seek additional sources of liquidity. Management is
currently in the process of studying additional funding alternatives. However,
there can be no assurance that additional funding would be available, if
required.
21
INTERTAN, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
Year ended June 30
(In thousands, except per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Net sales and operating revenues $506,445 $491,751 $465,766
Other income 902 1,217 771
- ------------------------------------------------------------------------------------------------------
507,347 492,968 466,537
- ------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of products sold (including purchases from
Tandy Corporation of $86,366, $69,091, and $94,604, respectively) 282,052 279,436 259,338
Selling, general and administrative expenses 205,694 193,767 186,017
Depreciation and amortization 7,972 7,504 7,943
Provision for business restructuring -- (1,600) (3,612)
- ------------------------------------------------------------------------------------------------------
495,718 479,107 449,686
- ------------------------------------------------------------------------------------------------------
Operating income 11,629 13,861 16,851
Foreign currency transaction (gains) losses (338) 314 (1,472)
Interest expense, net 6,709 7,462 8,351
- ------------------------------------------------------------------------------------------------------
Income before income taxes 5,258 6,085 9,972
Provision (benefit) for income taxes 7,499 (2,038) (9,677)
- ------------------------------------------------------------------------------------------------------
Net income (loss) $(2,241) $8,123 $19,649
- ------------------------------------------------------------------------------------------------------
Primary net income (loss) per average common share $(0.21) $0.81 $2.09
- ------------------------------------------------------------------------------------------------------
Fully diluted net income (loss) per average common share $(0.21) $0.65 $1.50
- ------------------------------------------------------------------------------------------------------
Average common shares outstanding 10,901 10,043 9,422
- ------------------------------------------------------------------------------------------------------
Average common shares outstanding assuming full dilution 10,901 17,186 13,639
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
22
INTERTAN, INC.
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, June 30,
(In thousands, except share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and short-term investments $ 34,096 $ 45,260
Accounts receivable, less allowance for doubtful accounts 9,422 8,710
Inventories 162,207 146,184
Other current assets 7,628 9,377
Deferred income taxes 3,831 8,484
- ----------------------------------------------------------------------------------------------
Total current assets 217,184 218,015
Property and equipment, less accumulated depreciation and amortization 39,129 34,996
Other assets 2,928 4,117
Deferred income taxes 2,392 4,911
- ----------------------------------------------------------------------------------------------
$261,633 $262,039
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings $ 975 $ --
Current maturities of notes payable to Tandy Corporation 6,958 6,958
Accounts payable 24,082 14,039
Accounts payable to Tandy Corporation 894 429
Accrued expenses 25,833 25,104
Income taxes payable 12,971 13,903
- ----------------------------------------------------------------------------------------------
Total current liabilities 71,713 60,433
Long-term notes payable to Tandy Corporation, less current maturities 23,070 39,833
9% convertible subordinated debentures 41,660 43,722
Other liabilities 5,678 4,725
- ----------------------------------------------------------------------------------------------
142,121 148,713
- ----------------------------------------------------------------------------------------------
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,
11,172,506 and 10,192,767 issued and outstanding 11,173 10,193
Additional paid-in capital 111,678 106,376
Retained earnings 19,132 21,373
Foreign currency translation effects (22,471) (24,616)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 119,512 113,326
- ----------------------------------------------------------------------------------------------
Commitments and contingent liabilities
$261,633 $262,039
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
INTERTAN, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Year ended June 30
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (2,241) $ 8,123 $ 19,649
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Results from the Australia and the U.K. transitional
month (see Note 1) -- (1,740) --
Depreciation and amortization 7,972 9,444 8,840
Deferred income taxes 7,172 (1,392) (12,325)
Foreign currency transaction gains, unrealized (100) (170) (89)
Provision for business restructuring -- (1,600) (3,612)
Other 2,615 1,119 (36)
Cash provided by (used for) current assets and liabilities:
Receivables (674) (1,517) (816)
Inventories (13,698) 1,687 3,441
Other current assets 1,298 (1,480) (661)
Accounts payable 9,960 834 (5,819)
Accounts and short-term notes payable to Tandy Corporation 449 (851) (10,320)
Accrued expenses 452 (3,667) (39,201)
Income taxes payable (1,020) (760) 16,161
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 12,185 8,030 (24,788)
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (12,119) (7,530) (7,011)
Proceeds from sales of property and equipment 331 1,538 18,227
Other investment activities 1,827 219 (2,203)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (9,961) (5,773) 9,013
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Changes in short-term borrowings, net 972 -- --
Proceeds from issuance of common stock to employee plans 1,484 1,809 3,103
Proceeds from exercise of stock options 760 12 --
Proceeds from long-term borrowings -- -- 55,137
Principal repayments on long-term borrowings (17,111) (3,479) (11,145)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (13,895) (1,658) 47,095
- --------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 507 395 (1,150)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and short-term investments (11,164) 994 30,170
Cash and short-term investments, beginning of year 45,260 44,266 14,096
- --------------------------------------------------------------------------------------------------
Cash and short-term investments, end of year $34,096 $45,260 $44,266
- --------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest $7,976 $8,616 $6,338
Income taxes $967 $271 $(13,288)
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
24
INTERTAN, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
Foreign
Retained Currency
Common Stock Additional Earnings Translation
(In thousands) Shares Amount Paid-In Capital (Deficit) Effects
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 9,201 $9,201 $98,855 $(4,659) $(21,218)
Net foreign currency translation adjustments -- -- -- -- (5,573)
Issuance of warrants to purchase common stock -- -- 2,155 -- --
Issuance of common stock to employee plans 514 514 2,589 -- --
Net income -- -- -- 19,649 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 9,715 9,715 103,599 14,990 (26,791)
Net foreign currency translation adjustments -- -- -- -- 2,175
Issuance of common stock to employee plans 476 476 2,767 -- --
Issuance of common stock under stock option plans 2 2 10 -- --
Results from Australia and the U.K. transitional month
(see Note 1) -- -- -- (1,740) --
Net income -- -- -- 8,123 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 10,193 10,193 106,376 21,373 (24,616)
Net foreign currency translation adjustments -- -- -- -- 2,145
Issuance of common stock to employee plans 483 483 2,805 -- --
Issuance of common stock under stock option plans 118 118 642 -- --
Conversion of subordinated debentures to
common stock 379 379 1,855 -- --
Net loss -- -- -- (2,241) --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 11,173 11,173 $111,678 $19,132 $(22,471)
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 Summary Of Significant
Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company operates consumer electronic retail stores in
Canada, Australia, and the United Kingdom. The Company's operations in
continental Europe (Belgium and France) were closed during fiscal year 1994.
All material intercompany transactions, balances and profits have been
eliminated. The Company's fiscal year ends June 30. For fiscal years 1994 and
prior, units operating outside North America reported on a May 31 fiscal year
end. Effective with fiscal year 1995, the Company's subsidiaries in Australia
and the United Kingdom changed their fiscal year end to June 30 to coincide with
that of the parent company. This change did not have a material impact on the
comparability of the Company's consolidated financial statements for the year as
a whole. Losses for the month of June, 1994, in Australia and the United
Kingdom, which totaled $1,740,000, were charged directly to retained earnings.
Cash and Short-Term Investments
Cash in stores, deposits in banks and short-term investments with original
maturities of three months or less are considered as cash and cash equivalents.
Inventory
Inventories are comprised primarily of finished merchandise and are stated at
the lower of cost, based on the average cost method, or market value.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. Estimated useful
lives range from 25 to 40 years for buildings, 2 to 8 years for fixtures and
equipment and 25 years for lease premiums. Leasehold improvements are amortized
over the life of the lease or the useful life of the asset, whichever is
shorter.
Maintenance and repairs are charged to expense as incurred. Renewals and
improvements which materially prolong the useful lives of the assets are
capitalized. The cost and related accumulated depreciation of property retired
or sold are removed from the accounts, and gains or losses are recognized in the
income statement.
Net Sales and Operating Revenues
Net sales and operating revenues include items related to normal business
operations, including service contract and repair income. Service contract
revenue, net of direct selling expenses, is recognized over the life of the
contract.
Translation of Foreign Currencies
The local currencies of the Company's foreign entities are the functional
currencies of those entities. For reporting purposes, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the balance
sheet date; income and expense items are translated using monthly average
exchange rates. The effects of exchange rate changes on net assets located
outside the United States are recorded in a separate account in equity. Gains
and losses from foreign currency transactions are included in the operations of
each period.
Contract Management
At June 30, 1996, InterTAN Australia had 210 company-operated stores, of which
146 were operated under "contract management" arrangements. Under the typical
contract management arrangement, the store manager is not employed by InterTAN
Australia, but is under contract to operate the store on behalf of the Company.
InterTAN Australia selects and supplies the store location (including lease
payments and other fixed location charges) and also supplies leasehold
improvements, fixtures and store inventory. InterTAN Australia is also
committed to provide service back-up, including advertising and training. The
contract manager is responsible for providing the labor and overhead necessary
to operate the store (i.e., labor, store utility and other operating costs).
The contract manager may be required to provide a cash deposit. In return for
the service of operating the store, the contract manager receives compensation
equal to one-half of the store's gross profit.
The revenue, as well as the expenses paid by the Company, related to contract
management stores are included in the consolidated statement of operations. The
contract manager's compensation is included in selling, general and
administrative expenses. Contract managers' deposits are included in the "Other
liabilities" section of the consolidated balance sheet and amounted to
$3,145,000 and $2,044,000 at June 30, 1996 and June 30, 1995, respectively.
Capitalized Financing Costs
Costs incurred in connection with the issuance of debt are capitalized and are
amortized over the term of the respective debt. These costs, which include
underwriting, bank, legal and accounting fees totaled $4,198,000. Amortization
for fiscal years 1996, 1995 and 1994 was $608,000, $1,199,000 and $640,000,
respectively. Unamortized balances at June 30, 1996 and June 30, 1995 were
$1,805,000 and $2,392,000, respectively.
Advertising Costs
Advertising costs are expensed the first time the related advertising occurs.
During fiscal years 1996, 1995 and 1994, advertising expense was $26,045,000,
$24,419,000 and $24,898,000, respectively.
26
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Income Taxes
The Company records deferred income taxes under the asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
book amounts and tax basis of assets and liabilities. However, deferred tax
assets can be recognized only to the extent that it is more likely than not that
the Company will realize the benefits of that deferred tax asset.
InterTAN considers the earnings of its foreign subsidiaries to be permanently
reinvested for use in those operations and, consequently, deferred federal
income taxes, net of applicable foreign tax credits, are not provided on the
undistributed earnings of foreign subsidiaries. If the earnings of those
subsidiaries as of June 30, 1996 were remitted to the parent, approximately
$16,207,000, subject to adjustment for deemed foreign taxes paid, would be
included in the taxable income of the parent. By operation of tax statutes
currently in effect, the Company would incur certain U.S. income taxes,
including alternative minimum tax. Such remittances may also be subject to
certain foreign withholding taxes (presently rates range from 0% to 15%) for
which there would likely be no U.S. tax relief.
Forward Exchange Contracts
Gains and losses on contracts entered to hedge open inventory purchase orders
are included in the cost of the merchandise purchased. Gains and losses on
contracts intended to mitigate the effects of exchange rate fluctuations on
payables and debt denominated in currencies other than the functional currency
of the debtor are included in income in the periods the exchange rates change.
Earnings per Share
The Company computes primary net income (loss) per average common share by
dividing net income by the sum of the weighted average number of common shares
outstanding and dilutive common stock equivalents as determined using the
treasury stock method. Dilutive common stock equivalents consist of outstanding
stock options and warrants. Fully diluted net income per average common share
assumes conversion of the 9% subordinated convertible debentures ("Debentures")
into common stock, whereby the related interest expense and foreign currency
transaction (gains) losses, net of tax, are added back to net income.
New Accounting Standards
In March 1995, the FASB issued FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which is effective for fiscal years beginning after December 15, 1995.
Effective July 1, 1996, the Company will adopt SFAS 121 which requires that
long-lived assets (i.e. property, plant and equipment and goodwill) held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the asset
is less than the net book value of the asset. The amount of the impairment loss
will generally be measured as the difference between the net book value of the
assets and the estimated fair value of the related assets. The adoption of SFAS
121 in the first quarter of fiscal 1997 is not expected to have a material
effect on the Company's consolidated financial statements.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal years beginning after
December 15, 1995. Effective July 1, 1996, the Company will adopt SFAS 123
which establishes financial accounting and reporting standards for stock-based
employee compensation plans. The pronouncement defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock option compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting as prescribed by Accounting Principles Board Option
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Entities
electing to remain with the accounting in APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in SFAS 123 had been applied. The Company will continue to
account for stock-based employee compensation plans under the intrinsic method
pursuant to APB 25 and will make the disclosures in the fiscal 1997 financial
statements as required by SFAS 123.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues and
expenses, and disclosure of gain and loss contingencies at the date of the
financial statements. Actual results could differ from those estimates.
Classification
Certain prior year balances have been reclassified to conform with the current
year presentation.
Note 2 Bank Debt
On May 6, 1994, InterTAN Canada Ltd., InterTAN Inc., and InterTAN U.K. Limited
entered into a one-year credit agreement ("Syndicated Loan Agreement") with a
syndicate of
27
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
banks (the "Bank Syndicate"). The Syndicated Loan Agreement is used primarily
to provide letters of credit in support of the Company's inventory purchases.
This agreement established a one year revolving facility in an amount which is
determined using an inventory level calculation not to exceed Cdn$60,000,000
($43,998,000 at June 30, 1996 exchange rates). The interest rate under the
credit facility is Canadian prime rate plus 1% on loans to InterTAN Canada Ltd.
and the U.K. base rate plus 2% for loans to InterTAN U.K. Limited. In addition,
a standby fee of 0.25% per annum is payable on unused credit facilities. The
credit agreement is secured principally by an inventory repurchase agreement
among the syndicated agent, the Company and Tandy Corporation ("Tandy"), the
Company's principal supplier. This Syndicated Loan Agreement has been renewed
and now extends through mid-August, 1997.
The Syndicated Loan Agreement requires the Company to maintain tangible net
worth greater than $80,000,000 before considering the effects of foreign
currency translation. The Company must also maintain net capital expenditures
at or below $12,000,000 per annum in fiscal year 1996 and $13,000,000
thereafter, maintain a consolidated working capital ratio above 2.0:1 and a debt
to equity ratio, as defined, below 0.75:1. The Syndicated Loan Agreement also
requires the Company to maintain earnings before depreciation and amortization,
interest and taxes less capital expenditures of at least 1.50 times net finance
charges for each twelve month period ending September 30, 1995 and December 31,
1995, 1.05 times net finance charges for the twelve month period ended March 31,
1996, 1.25 times net finance charges for the twelve month period ended June 30,
1996 and 1.5 times net finance charges for each twelve month period ending
September, December, March, and June thereafter. In September, 1996, the cash
interest coverage ratio for the twelve month period ended September 30, 1996 was
amended from 1.5 times net finance charges to 0.9 times net finance charges.
The Company has met all of its covenants throughout fiscal year 1996, except the
cash interest coverage ratio at December 31, 1995. However, each member of the
Bank Syndicate has waived such non-compliance. The Syndicated Loan Agreement
also precludes the Company from paying dividends.
At June 30, 1996, there were borrowings against the credit facility
aggregating $975,000. In addition, $29,279,000 was committed in support of
letters of credit issued primarily to secure product purchases from Far Eastern
suppliers and a further $399,000 was committed in support of foreign exchange
contracts. $13,345,000 of credit was available for use at June 30, 1996.
One of the Company's directors also serves as a director of the agent bank of
the Bank Syndicate.
Note 3 Restructuring of Debt
and Merchandise Agreement
with Tandy
On August 5, 1993, Tandy, through its wholly-owned subsidiary, Trans World
Electronics, Inc., acquired the debt then outstanding under the Company's
Revolving Credit and Term Loan Agreement of $41,748,000. This debt was then
restructured as a term loan facility ("Series A Note") bearing interest at
8.64%. It is payable semi-annually over a six year period commencing February
25, 1995. In addition, Tandy provided the Company with a $10,113,000 three year
loan ("Series B Note") which bears interest at 8.11% and was due on August 25,
1996. The Series B Note was repaid in May, 1996.
Since October 15, 1993, the Company's purchase orders with Tandy have been
supported, based on a formula agreed with Tandy, by letters of credit issued by
banks on behalf of InterTAN or backed by cash deposits.
Under the terms of the agreement concerning the Series A Note ("Tandy Loan
Agreement"), the Company has granted Tandy a first priority lien over all of the
assets of the Company and its subsidiaries. In addition, InterTAN has pledged
the shares of each of its subsidiaries to Tandy. The Tandy Loan Agreement
allows new revolving credit facility lenders to participate in the security
granted to Tandy. The Series A Note can be repaid at any time without penalty.
The Tandy Loan Agreement requires the Company to maintain tangible net worth
greater than $80,000,000 before considering the effects of foreign currency
translation. Total debt due to Tandy, including long-term notes payable under
the Tandy Loan Agreement, accounts payable, and open inventory purchase orders
placed with Tandy which are not supported by letters of credit, is limited to
$60,000,000. In addition, total debt due to parties other than Tandy, excluding
the Debentures and trade payables, is limited to $50,000,000. The Tandy Loan
Agreement also requires the Company to maintain earnings before interest, taxes
and unrealized foreign currency transaction gains or losses of at least 2.0
times finance charges for each six and twelve month period ending December 31
and June 30, respectively. In addition, the Company is required to maintain
capital expenditures below agreed levels during each six month period throughout
the term of the loan. The Company has met all of those covenants except for the
financial charge ratio which was 1.9 at June 30, 1996; Tandy has waived such
non-compliance. The Tandy Loan Agreement also precludes the Company from paying
dividends.
28
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The Series A Note matures as follows (in thousands):
For Years ending June 30
- -------------------------------------
1997 $6,958
1998 6,958
1999 6,958
2000 6,958
2001 and thereafter 3,479
- -------------------------------------
$31,311
- -------------------------------------
In consideration for Tandy's extension of credit, InterTAN agreed to issue to
Tandy five-year warrants to purchase 1,449,007 shares of the Company's common
stock exercisable beginning August 5, 1993 at an exercise price of $6.618, which
was the market price of the Company's common stock at the date of issuance.
These warrants were valued at $2,155,000 and this amount was recorded as a
discount against the Series A and B Notes. The discount is being amortized over
the term of the notes. Amortization during fiscal years 1996, 1995 and 1994 was
$308,000, $308,000 and $257,000, respectively.
In October and November, 1993, the Company and Tandy entered into a new
Merchandise Agreement and a series of license agreements. These license
agreements permit InterTAN to use, in designated countries, the "Tandy," "Tandy
Electronics" and "RadioShack" trade names until June 30, 2000. Effective July
1, 1996, these license agreements were extended to June 30, 2006, with automatic
annual extensions to June 30, 2010. The license agreements may be terminated
with five years prior written notice by either party. In consideration for
these licenses, the Company is obliged to pay a royalty of 0.25% of consolidated
sales beginning in fiscal year 1996. This royalty will increase by up to 0.25
percentage points each fiscal year until it reaches a maximum of up to 1.0% in
fiscal 1999. During fiscal year 1996, the Company paid Tandy royalties totaling
$1,260,000. The Company is obliged to use Tandy's export unit, A & A
International, Inc. ("A & A"), as its exclusive exporter of products from the
Far East under the terms of the Merchandise Agreement. In such connection, the
Company must pay a purchasing agent/exporter fee to A & A calculated by adding
0.2% of consolidated sales in excess of $500,000,000 to the base amount of
$1,000,000 and deducting from this certain credits the Company earns by
purchasing products from Tandy and A & A. The Company paid A & A fees totaling
$785,000, $810,000, $829,000 in 1996, 1995 and 1994, respectively, under the
current and previous arrangements. In the event a change in control of InterTAN
or any of its subsidiaries occurs, Tandy may revoke such agreements.
Note 4 Debentures
During fiscal year 1994, the Company closed a private placement of
Cdn$60,000,000 ($43,998,000 at June 30, 1996 exchange rates) of 9% subordinated
convertible debentures which will mature on August 30, 2000. The Debentures are
convertible, at the option of the holder, at any time at a conversion rate of
118.7310 common shares for each Cdn$1,000 face amount of Debentures, equivalent
to a conversion price of approximately Cdn$8.42, or $6.17 per share at the June
30, 1996 exchange rate. The Debentures are subordinated to all senior
indebtedness of the Company, including the Syndicated Loan Agreement and the
Tandy Loan Agreement.
The Debentures are not redeemable by the Company until August 30, 1996.
Thereafter, the Debentures are redeemable, in whole or in part, on a pro rata
basis, upon 30 business days notice at a redemption price equal to the principal
amount thereof, plus accrued and unpaid interest, if any, provided that the
current market price of the Company's common shares as of the date of such
notice is not less than 125% of the conversion price. After August 30, 1999,
the Debentures will be redeemable upon 30 business days notice at a redemption
price equal to the principal amount thereof plus accrued and unpaid interest, if
any, regardless of the current market price of the Company's common shares.
After February 28, 2000, the Company may redeem the Debentures by issuing and
delivering to the holders that number of the Company's common shares obtained by
dividing the principal amount of the Debentures by 95% of the market price of
the Company's common stock at the date of redemption.
Note 5 Business Restructuring
In May, 1993, the Board of Directors approved management's plan to discontinue
the Company's continental European retail operations. The Company recorded a
pre-tax charge in the fourth quarter of fiscal 1993 in the amount of $77,400,000
in connection with the shutdown to provide for management's best estimate of the
costs of inventory liquidation, lease commitments, payroll and severance, other
operating costs during the shut down period, and losses on the disposal of fixed
assets and leaseholds. At June 30, 1994, all inventory and assets had been
sold, all significant leases had been canceled and all employees had been
terminated.
The credit of $3,612,000 to the business restructuring provision in fiscal
1994 represents the cumulative translation adjustment effects of liquidating the
European business entities. During the fourth quarter of fiscal 1995, certain
European claims and contingencies were settled for amounts less than originally
estimated. As a result of these settlements and certain other developments,
management reduced the accrual by $1,600,000.
29
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Management believes the remaining restructuring reserve at June 30, 1996 of
$2,630,000 is adequate to provide for the Company's remaining obligations in
Europe including those arising from legal actions brought against the Company by
former employees, dealers and franchisees.
Note 6 Property and Equipment
Property and equipment at June 30, 1996 and June 30, 1995 are summarized as
follows (in thousands):
1996 1995
- -------------------------------------------------------
Land $ 1,137 $ 1,086
Buildings 10,218 9,849
Equipment, furniture and fixtures 40,477 34,041
Leasehold improvements 40,189 35,123
Leasehold premiums 8,664 9,003
- -------------------------------------------------------
100,685 89,102
Less accumulated depreciation
and amortization 61,556 54,106
- -------------------------------------------------------
Property and equipment, net $39,129 $34,996
- -------------------------------------------------------
During fiscal year 1995, the Company retired certain fully depreciated assets
consisting primarily of furniture and fixtures and leasehold improvements.
Note 7 Accrued Expenses
The following is a summary of accrued expenses at June 30, 1996 and June 30,
1995 (in thousands):
1996 1995
- ------------------------------------------------------
Restructuring costs $ 2,630 $ 2,610
Payroll and bonuses 7,227 6,949
Taxes (other than income taxes) 2,554 2,887
Deferred service contract income 4,121 2,247
Other 9,301 10,411
- ------------------------------------------------------
$25,833 $25,104
- ------------------------------------------------------
Note 8 Income Taxes
The components of the provisions for domestic and foreign income taxes are
shown below (in thousands):
Year ended June 30
1996 1995 1994
- ---------------------------------------------------
Current
United States $ (374) $(1,178) $ 1,965
Foreign 701 532 683
- ---------------------------------------------------
327 (646) 2,648
Deferred
Foreign 7,172 (1,392) (12,325)
- ---------------------------------------------------
Total income tax
expense (benefit) $7,499 $(2,038) $(9,677)
- ---------------------------------------------------
30
(1 of 2)
INTERTAN, INC.
- --------------------------------------------------------------------------------
Components of the difference between income tax expense and the amount
calculated by applying the U.S. statutory rate of 35% to income before income
taxes are as follows (in thousands):
Year ended June 30
1996 1995 1994
- -----------------------------------------------------
Components of
pre-tax income (loss):
United States $(1,872) $(3,578) $2,105
Foreign 7,130 9,663 7,867
- --------------------------------------------------------
Income before income taxes 5,258 6,085 9,972
Statutory U.S. tax rate 35% 35% 35%
- --------------------------------------------------------
Federal income tax
expense at statutory rate 1,840 2,130 3,490
Foreign tax rate
differentials 887 927 369
Provincial income
taxes, less foreign
federal income
tax benefit 1,433 900 569
U.S. tax on foreign
dividends and interest -- -- 1,500
Book losses for which no
tax benefit was recognized 3,610 3,427 1,811
Adjustment to valuation
allowance for deferred
tax assets (329) (9,100) (17,828)
Other, net 58 (322) 412
- ---------------------------------------------------------
Total income tax
expense (benefit) $7,499 $(2,038) $(9,677)
- ---------------------------------------------------------
Deferred tax assets are comprised of the following at June 30 (in thousands):
June 30, June 30,
1996 1995
- ---------------------------------------------------
Deferred Tax Assets
Depreciation $ 2,045 $ 2,133
Deferred service contracts 1,454 895
Reserves for business
restructuring 835 1,224
Loss carryforwards 28,157 34,283
Other 4,193 2,967
- ----------------------------------------------------
36,684 41,502
Valuation allowance (30,461) (28,107)
- ----------------------------------------------------
Deferred tax asset $ 6,223 $ 13,395
- ----------------------------------------------------
At the time of adoption of SFAS 109 in July, 1993, the Company had net
deferred tax assets, before considering the valuation allowance, in the amount
of $54,987,000. In assessing the future benefit, if any, which might be derived
from these deferred tax assets, the Company considered its recent operating
history and financial condition. At that time, the Company was in default under
its financing and merchandising arrangements and had incurred operating losses
in fiscal
30
(2 of 2)
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
1993. New financing and merchandising arrangements were under negotiation, but
nothing had been finalized and arrangements under consideration were all
contingent on the Company's significantly improved performance during fiscal
year 1994. Under these circumstances, the Company believed it was necessary to
record a valuation allowance equal to the entire net deferred tax asset balance.
During fiscal year 1994, the Company successfully negotiated new financing
agreements, obtained additional financing through bank loans and convertible
debentures and renegotiated its merchandising agreements with Tandy. In
assessing the required valuation allowance against the deferred tax assets at
June 30, 1994, the Company concluded that it was more likely than not that a
portion of the deferred tax assets of the Canadian subsidiary would be used to
offset future tax. Accordingly, the Company recognized a deferred tax benefit
in the amount of $12,325,000. In addition, during fiscal year 1994, the Company
realized the benefit of certain deferred tax assets in connection with reserves
for business restructuring. As a consequence, the valuation allowance was
further reduced by $5,503,000.
During fiscal 1995, management reviewed the realization of its remaining
deferred tax assets. Based on the operating performance of the Canadian
subsidiary, particularly in the first two quarters, management concluded that
the valuation allowance should be further reduced by $9,100,000 and the Company
recognized a deferred tax benefit of that amount.
For Canadian tax purposes, the Company has net operating loss carryforwards of
approximately $17,546,000 which can be used to offset future taxable income in
Canada. These loss carryforwards will expire in 2001. The Company also has net
operating loss carryforwards for tax purposes of approximately $56,871,000 and
$4,812,000 in the United Kingdom and Australia, respectively. These losses can
be carried forward indefinitely in both jurisdictions. Certain restrictions may
apply to the use of these loss carryforwards in the event of a change in control
of the Company.
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 $10,700,000. The
Company believes it has meritorious arguments in defense of a number 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. In order for the Company to succeed
in appealing certain aspects of these reassessments, it must succeed in
defending the possible reassessments discussed immediately below.
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 in fiscal year 1987. Management
disagrees with Revenue Canada's views on these issues and will vigorously defend
the Company's position should Revenue Canada pursue these issues. Management
believes it has meritorious arguments supporting its stance and, accordingly, no
additional provision has been recorded for these possible reassessments. Tax
assessments related to these issues, if successfully pursued, could potentially
range from $14,000,000 to $20,000,000. As required by Canadian law, the Company
would be required to post a deposit of one-half of the tax in dispute, including
interest, in order to appeal any reassessment.
An audit of the Canadian income tax returns of the Canadian subsidiary for the
1990 to 1993 taxation years was commenced during the 1995 fiscal year. While to
date no reassessments have been issued by Revenue Canada arising from this
audit, 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. Management estimates that the possible range of
loss should Revenue Canada ultimately prevail in these matters, after all
appeals have been unsuccessfully pursued by the Company, could range from
$18,000,000 to $25,000,000. Assuming Revenue Canada pursues these issues, in
order for the Company to proceed with such appeals, the Company would be
required to post a deposit equal to one-half of the 1990-1993 tax in dispute,
together with interest, which management estimates should not exceed $9,000,000.
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 is prepared to vigorously defend its position should the Canadian tax
authorities proceed with such a challenge. Accordingly, it is management's
assessment that no provision need be recorded for these possible claims.
31
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
An audit of the former French branch of the Canadian subsidiary was also
completed by the French tax authorities for the 1988 through 1990 taxation
years. An assessment of approximately $2,000,000 has been issued. The Company
has appealed this assessment. It is management's view that the Company will be
successful in its appeal process. Accordingly, no provision has been made in
the accounts for this assessment. In order to avoid having to pay this tax
while the appeal proceeds, the Company has provided the French tax authorities
with a letter of guarantee for the amount in dispute.
Note 9 Commitments and Contingencies
The Company leases virtually all of its retail space under operating leases
with terms ranging from three to twenty-five years. Canadian leases are normally
based on a minimum rental plus a percentage of store sales in excess of a
stipulated base. The remainder of InterTAN's store leases generally provide for
fixed monthly rent adjusted periodically using inflation indices and rent
reviews.
In fiscal years 1996, 1995, and 1994, minimum rents, including immaterial
contingent rents and sublease rental income, were $34,033,000, $32,585,000 and
$31,985,000, respectively. Future minimum rent commitments at June 30, 1996 for
all long-term non-cancelable leases (net of immaterial sublease rent income) are
as follows (in thousands):
- --------------------------------
1997 $ 31,700
1998 29,289
1999 26,015
2000 21,333
2001 16,250
2002 and thereafter 123,391
- --------------------------------
A claim has been made by a former employee for damages for wrongful dismissal
totaling $880,000. The Company is vigorously defending this action. The
Company believes that the possible range of loss in this matter is substantially
less than the amount claimed by this former employee, and the Company has
recorded a provision representing its best estimate of any liability which may
ultimately arise from this matter.
Apart from this matter and those described in Notes 5 and 8, there are no
material pending legal proceedings or claims other than routine litigation
incidental to the Company's business to which the Company or any of its
subsidiaries is a party or to which any of their property is subject.
Note 10 Financial Instruments
Other than long-term debt instruments, management believes that the book value
of the Company's financial instruments recorded on the balance sheet is a
reasonable estimate of their fair value based on their nature and generally
short maturity; such instruments include cash and short-term investments,
accounts receivable, short-term bank borrowings, accounts payable and accrued
expenses. The estimated fair values of the Company's long-term debt instruments
are shown in the table below (in thousands).
June 30, 1996 June 30, 1995
Book Estimated Book Estimated
value fair value value fair value
- --------------------------------------------------------------------
Notes payable
to Tandy $31,311 $31,397 $48,382 $48,514
Discount on
Tandy notes (1,283) -- (1,590) --
- --------------------------------------------------------------------
Carrying value of
notes payable
to Tandy $30,028 $31,397 $46,792 $48,514
- --------------------------------------------------------------------
9% convertible
subordinated
debentures $41,660 $44,785 $43,722 $54,727
- --------------------------------------------------------------------
The estimated fair value of the note payable to Tandy has been determined by
discounting the related cash flows using management's estimate of the Company's
incremental borrowing rate for similar issues. The estimated fair value of the
Debentures is based on market values.
The Company enters into foreign exchange contracts to hedge against exchange
rate fluctuations on certain debts, payables and open inventory purchase orders
denominated in currencies other than the functional currency of the issuing
entity.
All forward exchange contracts are written with international financial
institutions. The Company's risk in those transactions is limited to the cost
of replacing the contracts at current market rates in the event of
nonperformance by the counterparties. The Company believes its risk of
counterparty nonperformance is remote, and any losses incurred would not be
material. At June 30, 1996 and 1995, the Company had approximately $25,795,000
and $9,050,000, respectively, of forward exchange contracts outstanding with a
market value of approximately $17,000 and $91,000, respectively. Maturity on
these contracts outstanding at June 30, 1996 and 1995 ranged from one to six
months from fiscal year-end.
32
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 Stock Purchase and Savings Plans
The Company's Stock Purchase Program is available to most employees. Each
participant may contribute from 1% to 10% of annual compensation. The Company
matches from 40% to 80% of the employee's contribution depending on the length
of the employee's participation in the program. Shares are provided to the plan
either by periodic purchases on the open market or by the Company issuing new
shares.
Under the InterTAN Canada Ltd. Employee Savings Plan (the "Savings Plan"), a
participating employee may contribute 5% of annual compensation into the plan.
The Canadian subsidiary matches 80% of the employee's contribution. The Savings
Plan is available to most Canadian employees who have been employed at least two
years. An employee may also elect to contribute an additional 5% of annual
compensation to the plan which is not matched by the employer. The Canadian
subsidiary's contributions are fully vested at the end of each calendar quarter.
An Administrative Committee appointed by the Company's Board of Directors
directs the investment of the plan's assets; a significant portion of which are
invested in InterTAN common stock.
Effective October 1, 1995, the InterTAN Employee Deferred Salary and
Investment Plan was amended and restated as the InterTAN, Inc. 401(k) Plan. This
plan is available to all U.S. employees who have completed at least two months
service with the Company. Eligible employees may contribute, subject to
statutory limits, up to 14% of their salary to the plan. The Company matches the
employee contributions, subject to statutory limits, to a maximum of 4% of
salary. Fifty percent of the Company's contributions vest in the first year with
full vesting after an employee has completed two years of service with the
Company. Employees have a number of investment options available to them within
the plan, one of which is InterTAN common stock.
The aggregate cost of these plans included in other selling, general and
administration expense totaled $1,811,000, $1,563,000 and $1,682,000 in 1996,
1995 and 1994, respectively.
Note 12 Stock Option Plans
In 1986, the Company adopted the InterTAN, Inc. 1986 Stock Option Plan (the
"1986 Stock Option Plan") under which the Organization and Compensation
Committee of the Board of Directors may grant options to key management
employees to purchase up to an aggregate of 800,000 shares of the Company's
common stock. Incentive options granted under this plan are exercisable on a
cumulative basis equal to one-third for each year outstanding; unless otherwise
specified by the Committee, nonstatutory options issued under the plan are
exercisable on a cumulative basis equal to 20% for each year outstanding. Upon
death or disability of an optionee, all options then held become immediately
exercisable for one year, and upon retirement, at age 50 or older, the Committee
may accelerate the dates at which the outstanding options may be exercised.
Options under this plan generally expire ten years after the date of grant. The
exercise price of the options granted is determined by the Committee, but cannot
be less than 100% of the market price at the date of grant; accordingly, no
compensation is charged against earnings.
In May, 1996, the Board of Directors unanimously approved the InterTAN, Inc.
1996 Stock Option Plan (the "1996 Stock Option Plan"). Subject to shareholder
approval, under the terms of the 1996 Stock Option Plan the Committee may grant
options to key management employees to purchase up to an aggregate of 1,500,000
shares of the Company's common stock. The terms and conditions of the 1996
Stock Option Plan are substantially similar to those of the 1986 Stock Option
Plan. Options outstanding under the 1986 Stock Option Plan will remain in force
until they are exercised, canceled or expire.
At June 30, 1996, options to purchase 500,833 shares were outstanding under
the 1986 Stock Option Plan, at prices ranging from $5.31 to $8.1875 per share;
153,167 options were exercisable at that date. Under the 1986 Stock Option Plan,
there were options to purchase 89,695 and 208,528 shares of common stock
available for future grant at the end of fiscal 1996 and 1995, respectively. No
options have been issued under the 1996 Stock Option Plan.
In 1991, the Company adopted the Non-Employee Director Stock Option Plan
("Director Plan") under which each director was granted an option, exercisable
immediately, to purchase 25,000 shares of the Company's common stock. Upon
election, all new non-employee directors are granted an option to purchase
25,000 shares of the Company's common stock. Options granted under the Director
Plan are exercisable at a price equal to 100% of the market price at the date of
grant. The options generally expire ten years after the date of grant unless
the optionee ceases to be a non-employee director, in which case the options
expire one year after the date of cessation. Common stock issued under the
Director Plan cannot exceed 200,000 shares.
At June 30, 1996, options to purchase 150,000 shares were outstanding under
the Director Plan at a price of $7.125 per share for a total option price of
$1,069,000. At that date, 150,000 options were exercisable. As of June 30, 1996
and 1995, options to purchase 50,000 shares of stock were available for future
grant under the Director Plan.
33
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
A summary of transactions relating to these stock option plans is as follows:
Number Total
of Shares Share Price
- ------------------------------------------------------------------
Outstanding at June 30, 1995 650,000 $4,531,000
Granted ($6.69 to $7.88 per share) 210,000 1,585,000
Expired/canceled ($5.31 to
$7.94 per share) (91,167) (623,000)
Exercised ($5.31 to $6.75 per share) (118,000) (760,000)
- ------------------------------------------------------------------
Outstanding at June 30, 1996 650,833 $4,733,000
- ------------------------------------------------------------------
Note 13 Preferred Stock Purchase Rights
In December, 1986, the Board of Directors adopted a shareholder rights plan,
which expires in September, 1999, and declared a dividend of one right for each
outstanding share of InterTAN common stock. The plan was amended in October,
1987 and September, 1989. The rights are represented by the Company's common
stock certificates; and if they become exercisable, will entitle holders to
purchase one one-hundredth of a share of InterTAN Series A Junior Participating
Preferred Stock for a purchase price of $175 (subject to adjustment). The
rights become exercisable and will trade separately from the common stock only
upon the date of a public announcement that a person, entity or group ("person")
has acquired 20% or more of InterTAN's outstanding common stock without the
prior approval of the Company ("Acquiring Person"), or, 10 days after the
commencement or the public announcement of an offer which would result in any
person becoming an Acquiring Person. In the event that an Acquiring Person
becomes the beneficial owner of 20% or more of the common stock of the Company,
the rights will be exercisable for InterTAN equity securities with a fair market
value (as determined under the rights plan) equal to $350. In accordance with
the terms of the rights plan, the rights are redeemable at a price of $0.03 per
right.
Note 14 Geographic Areas
The Company operates in one industry segment: consumer electronics retailing.
The principal geographic areas of InterTAN's operations are Canada, Australia,
the United Kingdom and, previously, continental Europe.
As previously discussed in Note 5, the Company has closed all company-operated
outlets in continental Europe and recorded a $77,400,000 restructuring charge in
fiscal year 1993. Credit provisions of $1,600,000 and $3,612,000 have been
recorded in continental European income for 1995 and 1994, respectively.
Transfers between geographic areas were immaterial.
The following table shows net sales, operating profit and identifiable assets
by geographic area for fiscal 1996, 1995 and 1994 (in thousands):
34
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
United Continental
Canada Australia Kingdom Europe Total
- ----------------------------------------------------------------------------------------------------------------------
June 30, 1996
Net sales and operating revenues $249,413 $93,896 $163,136 $ -- $506,445
Other income 41 426 435 -- 902
- ----------------------------------------------------------------------------------------------------------------------
Net sales and other income $249,454 $94,322 $163,571 $ -- $507,347
- ----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 21,274 $2,777 $ (7,807) $ -- $ 16,244
General corporate expenses (4,615)
Foreign currency transaction gains 338
Interest expense, net (6,709)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 5,258
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $124,404 $48,839 $ 75,948 $ 2,111 $251,302
Corporate assets 10,331
- ----------------------------------------------------------------------------------------------------------------------
Total assets $261,633
- ----------------------------------------------------------------------------------------------------------------------
June 30, 1995
Net sales and operating revenues $243,949 $83,724 $164,078 $ -- $491,751
Other income 413 362 442 -- 1,217
- ----------------------------------------------------------------------------------------------------------------------
Net sales and other income $244,362 $84,086 $164,520 $ -- $492,968
- ----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 22,820 $ 534 $ (5,954) $ 1,600 $ 19,000
General corporate expenses (5,139)
Foreign currency transaction losses (314)
Interest expense, net (7,462)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 6,085
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $128,214 $41,837 $ 67,105 $ 2,427 $239,583
Corporate assets 22,456
- ----------------------------------------------------------------------------------------------------------------------
Total assets $262,039
- ----------------------------------------------------------------------------------------------------------------------
June 30, 1994
Net sales and operating revenues $239,106 $76,486 $150,174 $ -- $465,766
Other income (62) 301 532 -- 771
- ----------------------------------------------------------------------------------------------------------------------
Net sales and other income $239,044 $76,787 $150,706 $ -- $466,537
- ----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 21,927 $ 304 $ (5,017) $ 3,612 $ 20,826
General corporate expenses (3,975)
Foreign currency transaction gains 1,472
Interest expense, net (8,351)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 9,972
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $116,478 $42,683 $ 71,576 $ 3,190 $233,927
Corporate assets 24,664
- ----------------------------------------------------------------------------------------------------------------------
Total assets $258,591
- ----------------------------------------------------------------------------------------------------------------------
35
INTERTAN, INC.
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 15 Quarterly Data (Unaudited)
Quarter ended
September 30
(In thousands, except per share data) 1995 1994
- ----------------------------------------------------------------------------
Net sales and operating revenues $113,672 $111,799
Other income 203 104
- ----------------------------------------------------------------------------
113,875 111,903
Operating costs and expenses:
Cost of products sold 63,463 64,402
Selling, general and administrative expenses 48,247 45,429
Depreciation and amortization 1,832 2,027
Provision for business restructuring -- --
- ----------------------------------------------------------------------------
113,542 111,858
- ----------------------------------------------------------------------------
Operating income (loss) 333 45
Foreign currency transaction (gains) losses (148) (303)
Interest expense, net 1,738 2,133
- ----------------------------------------------------------------------------
Income (loss) before income taxes (1,257) (1,785)
Provision (benefit) for income taxes 948 (34)
- ----------------------------------------------------------------------------
Net income (loss) $(2,205) $(1,751)
- ----------------------------------------------------------------------------
Primary net income (loss) per average common share $(0.21) $(0.18)
Fully diluted net income (loss) per average
common share(1) $(0.21) $(0.18)
- ----------------------------------------------------------------------------
Average common shares outstanding 10,453 9,794
Average common shares outstanding assuming
full dilution 10,453 9,794
- ----------------------------------------------------------------------------
(1) The sum of fully-diluted earnings per share for the four quarters ending
June 30, 1996 and 1995 do not approximate the fully diluted earnings per
share as reported for the respective years primarily because the Company's
convertible debentures were dilutive in the second quarter, but anti-
dilutive in all other quarters and for each year as a whole.
36
INTERTAN, INC.
- --------------------------------------------------------------------------------
Quarter ended Quarter ended Quarter ended
December 31 March 31 June 30
1995 1994 1996 1995 1996 1995
- --------------------------------------------------------------------------------
$ 181,411 $183,684 $108,757 $101,001 $102,605 $95,267
298 862 196 217 205 34
- --------------------------------------------------------------------------------
181,709 184,546 108,953 101,218 102,810 95,301
103,788 105,989 59,410 56,344 55,391 52,701
59,667 57,124 48,840 45,678 48,940 45,536
1,981 1,969 2,014 1,865 2,145 1,643
-- -- -- -- -- (1,600)
- --------------------------------------------------------------------------------
165,436 165,082 110,264 103,887 106,476 98,280
- --------------------------------------------------------------------------------
16,273 19,464 (1,311) (2,669) (3,666) (2,979)
(44) 72 (69) 85 (77) 460
1,909 2,278 1,516 1,631 1,546 1,420
- --------------------------------------------------------------------------------
14,408 17,114 (2,758) (4,385) (5,135) (4,859)
4,071 (2,341) 1,350 737 1,130 (400)
- --------------------------------------------------------------------------------
$ 10,337 $ 19,455 $ (4,108) $ (5,122) $ (6,265) $ (4,459)
- --------------------------------------------------------------------------------
$ 0.93 $ 1.90 $ (0.38) $ (0.51) $ (0.57) $ (0.44)
$ 0.58 $ 1.06 $ (0.38) $ (0.51) $ (0.57) $ (0.44)
- --------------------------------------------------------------------------------
11,148 10,225 10,943 10,026 11,069 10,134
17,893 17,425 10,943 10,026 11,069 10,134
- --------------------------------------------------------------------------------
37
INTERTAN, INC.
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Stockholders
of InterTAN, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of InterTAN,
Inc. and its subsidiaries at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which required that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
Fort Worth, Texas
September 18, 1996
Market Price and Related Matters
The high and low closing prices in U.S. dollars of InterTAN's common stock on
the New York Stock Exchange for each full quarterly period within the two most
recent fiscal years are as set out below:
Quarter ended High Low
- ------------------------------------
June 1996 6 7/8 5 1/4
March 1996 6 1/2 4 5/8
December 1995 9 3/8 7 1/8
September 1995 10 7 1/4
June 1995 7 7/8 6 5/8
March 1995 8 7/8 6 3/4
December 1994 8 3/4 6 3/4
September 1994 7 3/8 5 1/2
- ------------------------------------
As of August 31, 1996 there were approximately 11,700 recordholders of
InterTAN's common stock.
InterTAN has never declared cash dividends. Based upon InterTAN's long-term
growth opportunities, in the opinion of management, the stockholders are best
served by reinvesting all profits. Further, InterTAN is currently precluded
from paying dividends under the Tandy Loan Agreement and Syndicated Loan
Agreement.
38