UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
________________________________________________________________________________
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1996 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _________
Commission file number 1-10062
-------
InterTAN, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-130875
- ------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
201 Main Street, Suite 1805
Fort Worth, Texas 76102
- ------------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 348-9701
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
-----
At October 31, 1996, 11,349,297 shares of the registrant's common stock, par
value $1.00 per share, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
The Registrant's financial statements at and for the quarter ended September 30,
1996, providing the information required by Rule 10-01 of Regulation S-X, are
included herewith as Exhibit A.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information required by Item 303 of Regulation S-K is included herewith as
Exhibit B.
2
EXHIBIT A - FINANCIAL STATEMENTS AT AND FOR THE QUARTER ENDED SEPTEMBER 30,
1996.
3
Consolidated Statements of Operations
InterTAN, Inc.
- -------------------------------------------------------------------------------
(In thousands, except per share data)
Three Months Ended
September 30
-------------------------------
1996 1995
------------ ------------
Net sales and operating revenues...................................... $ 112,287 $ 113,672
Other income.......................................................... 141 203
-------------------------------
112,428 113,875
-------------------------------
Operating costs and expenses:
Cost of products sold......................................... 61,557 63,463
Selling, general and administrative expenses.................. 50,847 48,247
Depreciation and amortization................................. 2,217 1,832
-------------------------------
114,621 113,542
-------------------------------
Operating income (loss)............................................... (2,193) 333
Foreign currency transaction gains.................................... (195) (148)
Interest expense, net................................................. 1,597 1,738
-------------------------------
Loss before income taxes.............................................. (3,595) (1,257)
Provision for income taxes............................................ 1,012 948
-------------------------------
Net loss.............................................................. $ (4,607) $ (2,205)
===============================
Primary net loss per average common share............................. $ (0.41) $ (0.21)
Fully diluted net loss per average common share....................... $ (0.41) $ (0.21)
Average common shares outstanding..................................... 11,231 10,453
Average common shares outstanding assuming full dilution.............. 11,231 10,453
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
4
Consolidated Balance Sheets
InterTAN, Inc.
- --------------------------------------------------------------------------------
(In thousands, except share data)
September 30 June 30 September 30
1996 1996 1995
-----------------------------------------------------
Assets
Current Assets:
Cash and short-term investments................................... $ 17,482 $ 34,096 $ 13,392
Accounts receivable, less allowance for doubtful accounts......... 14,975 9,422 15,193
Inventories....................................................... 183,014 162,207 175,295
Other current assets.............................................. 8,357 7,628 9,151
Deferred income taxes............................................. 3,012 3,831 7,124
-----------------------------------------------------
Total current assets......................................... 226,840 217,184 220,155
Property and equipment, less accumulated depreciation
and amortization.................................................. 38,623 39,129 36,556
Other assets........................................................ 2,846 2,928 4,024
Deferred income taxes............................................... 2,395 2,392 5,675
-----------------------------------------------------
$ 270,704 $ 261,633 $ 266,410
=====================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings........................................ $ 9,421 $ 975 $ -
Current maturities of notes payable to Tandy Corpo................ 6,958 6,958 17,071
Accounts payable.................................................. 31,837 24,082 20,168
Accounts payable to Tandy Corporation............................. 1,404 894 188
Accrued expenses.................................................. 24,353 25,833 23,165
Income taxes payable.............................................. 13,126 12,971 14,190
-----------------------------------------------------
Total current liabilities.................................... 87,099 71,713 74,782
Long-term notes payable to Tandy Corporation,
less current maturities ........................................ 19,668 23,070 26,318
9% convertible subordinated debentures.............................. 41,711 41,660 41,520
Other liabilities................................................... 5,862 5,678 5,102
-----------------------------------------------------
154,340 142,121 147,722
-----------------------------------------------------
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, 11,312,427, 11,172,506 and 10,795,462
shares issued and outstanding................................ 11,312 11,173 10,796
Additional paid-in capital........................................ 112,370 111,678 110,573
Retained earnings................................................. 14,525 19,132 19,168
Foreign currency translation effects.............................. (21,843) (22,471) (21,849)
Total stockholders' equity................................... -----------------------------------------------------
116,364 119,512 118,688
-----------------------------------------------------
Commitments and contingent liabilities..............................
$ 270,704 $ 261,633 $ 266,410
=====================================================
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
5
Consolidated Statements of Cash Flows
InterTAN, Inc.
- -----------------------------------------------------------------------------------------
(In thousands) Three months ended
September 30
---------------------------------------
1996 1995
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (4,607) $ (2,205)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization.............................. 2,217 1,832
Deferred income taxes..................................... 819 883
Foreign currency transaction gains, unrealized............ (82) (277)
Other..................................................... 594 234
Cash provided by (used for) current assets and liabilities:
Accounts receivable........................................ (5,481) (6,283)
Inventories................................................ (19,919) (25,600)
Other current assets....................................... (824) 276
Accounts payable........................................... 7,558 5,902
Accounts payable to Tandy Corporation...................... 505 (254)
Accrued expenses........................................... (999) (2,313)
Income taxes payable....................................... 139 (23)
---------------------------------------
Net cash used in operating activities...................... (20,080) (27,828)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......................... (2,167) (3,042)
Proceeds from sales of property and equipment............... 41 145
Other investing activities.................................. 246 651
---------------------------------------
Net cash used in investing activities...................... (1,880) (2,246)
---------------------------------------
Cash flows from financing activities:
Changes in short-term bank borrowings, net................. 8,375 -
Proceeds from issuance of common stock to employee plans.... 473 519
Proceeds from exercise of stock options..................... - 737
Principal repayments on long-term borrowings................ (3,479) (3,479)
---------------------------------------
Net cash provided by (used in) financing activities........ 5,369 (2,223)
---------------------------------------
Effect of exchange rate changes on cash...................... (23) 429
---------------------------------------
Net decrease in cash and short-term investments.............. (16,614) (31,868)
Cash and short-term investments, beginning of period......... 34,096 45,260
---------------------------------------
Cash and short-term investments, end of period............... $ 17,482 $ 13,392
=======================================
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
InterTAN, Inc.
- --------------------------------------------------------------------------------
(In thousands)
Foreign
Currency Total
Common Stock Additional Retained Translation Stockholders'
Shares Amount Paid-in Capital Earnings Effects Equity
--------------------------------------------------------------------------------------------
Balance at June 30, 1996............. 11,173 $11,173 $111,678 $19,132 ($22,471) $119,512
Net foreign currency
translation adjustments............. - - - - 628 628
Issuance of common stock
to employee plans................... 139 139 692 - - 831
Net loss............................. - - - (4,607) - (4,607)
--------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996........ 11,312 $11,312 $112,370 $14,525 ($21,843) $116,364
=============================================================================================
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
7
EXHIBIT B - 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. ("InterTAN" or the "Company"). 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,
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
---------------------
InterTAN is a retailer of consumer electronics products with locations in Canada
("RadioShack Canada"), Australia ("Tandy Electronics Australia") and the United
Kingdom ("Tandy U.K."). As used herein, "InterTAN" or "Company" sometimes
collectively refers to InterTAN, RadioShack Canada, Tandy Electronics Australia
or Tandy U.K., according to the context. The number of company-operated stores
and dealers at September 30, 1996 and 1995 is presented in the table below.
SALES OUTLETS
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------------------- ---------------------------
ENDING OPENED CLOSED ENDING OPENED CLOSED
CANADA
Company-operated * 454 4 - 445 1 2
Dealer/franchise 410 11 3 426 3 6
------------------------------- ---------------------------
864 15 3 871 4 8
=============================== ===========================
AUSTRALIA
Company-operated 210 2 2 205 - -
Dealer/franchise 206 6 - 269 10 1
------------------------------- ---------------------------
416 8 2 474 10 1
=============================== ===========================
UNITED KINGDOM
Company-operated 346 1 - 340 5 1
Dealer/franchise 173 2 - 164 1 1
------------------------------- ---------------------------
519 3 - 504 6 2
=============================== ===========================
TOTAL
Company-operated 1,010 7 2 990 6 3
Dealer/franchise 789 19 3 859 14 8
------------------------------- ---------------------------
1,799 26 5 1,849 20 11
=============================== ===========================
* In addition, the Company operated 4 stores on behalf of Rogers Cantel, Inc.
8
OPERATING PROFIT
The Company's operating profit (loss) for each geographic segment for the three-
month periods ended September 30, 1996 and 1995 is presented in the following
table (in thousands):
OPERATING PROFIT
----------------
UNITED CORPORATE
CANADA AUSTRALIA KINGDOM EXPENSES TOTAL
------- ---------- -------- ---------- --------
Three Months Ended
September 30, 1996 $2,740 $589 $(4,498) $(1,024) $(2,193)
Three Months Ended
September 30, 1995 $5,041 $ (2) $(3,646) $(1,060) $ 333
The impact of foreign exchange fluctuations on the comparison of operating
results for the quarter ended September 30, 1996 with same quarter in the prior
year was minimal.
NET SALES
Net sales for the quarter ended September 30, 1996 were $112,287,000, a decrease
of 1.2% over the sales for the same quarter in the prior year of $113,672,000.
When the impact of fluctuations in the value of the US dollar in relation to the
currencies of the countries in which the Company operates is removed, the sales
decrease in constant dollars is increased to 1.4%. Comparative store sales
decreased by 2.4% over the same quarter in the prior year.
The table below shows the percentage changes in sales for the quarter ended
September 30, 1996 compared to the quarter ended September 30, 1995. Changes
are presented in both US dollars and local currencies to illustrate the effects
of exchange rate fluctuations. The change in comparative store sales, measured
in constant dollars, is also shown.
NET SALES
-------------------------------
PERCENTAGE INCREASE (DECREASE)
THREE MONTHS ENDED
SEPTEMBER 30, 1996
LOCAL COMPARATIVE
U.S. DOLLARS CURRENCY STORE
-----------------------------------------------------------
Canada (9.5) (8.5) (9.7)
Australia 17.5 10.4 7.1
United Kingdom 2.6 3.8 3.1
9
Sales at RadioShack Canada are reflective of the difficult retail conditions in
that country in recent months. High unemployment and concerns about job
security and high consumer debt have contributed to a low level of consumer
confidence. Many consumers have been deferring major purchases, notwithstanding
some of the lowest interest rates in 30 years. The effect of this consumer
concern has been most noticeable at RadioShack Canada in the level of sales of
personal computers, as consumers have been resistant to the price points of the
latest generation of computers. Lower computer sales accounted for a
significant portion of RadioShack Canada's first quarter sales loss. Management
believes the required entry level price point has now been achieved with the
addition of a new supplier.
Tandy Electronics Australia continues to be the leader in sales performance
within the InterTAN group. In the first quarter of fiscal year 1997 sales gains
in Australia continued to be broadly based over a wide variety of categories.
Retail conditions in the United Kingdom are beginning to improve and were
reflected in the results of Tandy U.K. While the sales results at Tandy U.K.
were positive, they did fall short of earlier expectations. One of the factors
contributing to this lower than anticipated sales performance was the transition
to a new finance company in support of the Company's extended credit program.
As a result of this change, there was a period when Tandy U.K. was unable to
offer such programs to its customers, thereby affecting sales of larger ticket
items which many customers typically choose to finance. The new program is now
in place and a full range of extended credit programs will be available for the
important Christmas selling season. Sales of computers were also affected by a
low in-stock position as Tandy U.K. moved towards an arrangement with a new
supplier. In anticipation of this new arrangement, the Company had stopped
buying from its traditional suppliers. The new products are now in place and
management anticipates a good performance from this product category during the
Christmas quarter. It should be noted, however, that these products are being
sold on a commission basis. Accordingly, while sales of these products will
make a positive contribution to gross margin, the impact on sales will be less
significant than in a traditional retail arrangement.
The strategy of de-emphasizing the volatile video game business continues to
place pressure on sales in the short run. This strategy accounted for a
reduction in sales of 1.1% during the first quarter of fiscal 1997, requiring
sales growth in other areas just to stay even with the prior year.
GROSS PROFIT AND PRODUCTS SOLD
The gross margin percentage increased to 45.2% in the first quarter of fiscal
1997 from 44.2% a year ago, an increase of one full percentage point. Gross
margin increases of 1.0, 0.8 and 1.1 percentage points were experienced in each
of Canada, Australia and the United Kingdom, respectively.
Overall, gross margin dollars for the quarter increased by $521,000 as a result
of the following factors:
10
Increase in margin percentage $1,100,000
Decrease in sales (726,000)
Foreign exchange rate effects 147,000
----------
$ 521,000
==========
In Canada, the main factor contributing to the increase in the gross margin
percentage was the effect of a significant reduction in the sale of computers
which carry margins generally lower than the Company's other products.
In Australia, several factors contributed to the increase in margins, including
shifting the sales mix towards more profitable categories and expanding the
product range within those categories, particularly parts and accessories.
Cellular air time residuals, reflecting cumulative activations, are an important
contributor to margins in Australia.
The Company's new warehousing system, combined with better inventory controls
generally, contributed to improved margins in the United Kingdom. The Company
has also added many new SKU's to the product assortment in the U.K., many of
which fall into the higher margin parts and accessories categories. Margins in
the U.K. have also been enhanced by broadening the range of private label goods.
While management believes that the Company's merchandising strategy will result
in continuing improvement in overall margins, margins may not continue to
improve at the rate experienced during the first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses ("SG&A expenses") for the
three months ended September 30, 1996 were $50,847,000 compared to $48,247,000
in the first quarter of the prior year, an increase of $2,600,000. Foreign
currency fluctuations accounted for about 6% of this increase.
The following table provides a breakdown of SG&A expenses by major category
(percentages shown are of sales):
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
---------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
---------------------------------------------
(In thousands, except percents) AMOUNT PCT. AMOUNT PCT.
---------------------------------------------
Advertising $ 6,459 5.8 $ 5,732 5.0
Rent 10,474 9.3 10,011 8.8
Payroll 20,619 18.4 19,661 17.3
Taxes
(other than income taxes) 4,230 3.8 4,229 3.7
Telephone, telex and utilities 1,774 1.6 1,762 1.6
Other 7,291 6.4 6,852 6.0
------- ---- ------- ----
Total $50,847 45.3 $48,247 42.4
======= ==== ======= ====
11
Advertising expense increased during the quarter, primarily at Tandy U.K., where
additional funds were committed to the advertising budget to develop a
television-based program to rebuild the Company's image as a niche retailer.
The addition of 23 net new company-operated stores over the past year
contributed to increases in both rent and payroll costs. Rent expense also
increased as a result of higher rents on lease renewals and rent reviews.
Regular annual salary reviews and an investment in increased and higher quality
staff at central units also contributed to an increase in payroll expense.
Another factor contributing to increased SG&A spending was the scheduled 25
basis point increase in the royalty payable to Tandy Corporation ("Tandy").
Management's objective is to achieve a 100 basis point improvement in the
operating margin percentage (i.e. the change in the gross margin percentage
combined with the change in the SG&A percentage). While the gross margin
percentage improved by a full percentage point, the effect of this increase in
the operating margin was more than offset by the increase in the SG&A
percentage, as SG&A spending had been planned assuming a higher level of sales.
Management will continue to focus on this issue in future quarters in an attempt
to keep SG&A growth more closely aligned with realized sales gains.
NET INTEREST EXPENSE
Net interest expense declined by $141,000 from $1,738,000 in the first quarter
of fiscal year 1996 to $1,597,000 during the three months ended September 30,
1996. This decline is primarily due to a reduction in average net debt.
PROVISION FOR INCOME TAXES
The income tax provision of $1,012,000 recognized during the quarter relates
primarily to tax on Canadian income. In the first quarter of fiscal year 1996, a
net tax provision of $948,000 arose as tax on Canadian income was partially
offset by certain tax benefits recognized at the U.S. parent.
NET INCOME PER AVERAGE COMMON SHARE
The primary net loss and fully diluted loss per average common share were both
$0.41 for the three months ended September 30, 1996. For the same period a year
ago, the primary and fully diluted net loss per average common share were both
$0.21. The effect of the Company's 9% convertible subordinated debentures (the
"Debentures") was anti-dilutive in each of those periods. The dilutive effect
of the Canadian dollar denominated Debentures may be significant 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, at September 30, 1996, and
September 30, 1995 the Company's directors and employees held options to
purchase 634,335 and 512,066 common shares, respectively, at exercise prices
ranging from $5.31 to $8.1875. No employee or director options were exercised
during the quarter. The effects of the outstanding warrants and options were
anti-dilutive for both quarters.
12
FINANCIAL CONDITION
-------------------
Most balance sheet accounts are translated from their values in local currency
to US dollars at the respective month end rates. The table below outlines the
percentage change, to September 30, 1996, in exchange rates as measured against
the US dollar.
FOREIGN EXCHANGE RATE FLUCTUATIONS
----------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
FROM SEPTEMBER 30, 1995 FROM JUNE 30, 1996
------------------------ -------------------
Canada (1.5) 0.1
Australia 4.7 0.5
United Kingdom (1.1) 0.8
ACCOUNTS RECEIVABLE
Accounts receivable have increased from $9,422,00 at June 30, 1996 to
$14,975,000 at September 30, 1996. This increase results mainly from seasonal
increases in dealer receivables as those dealers purchase inventories for
Christmas. At September 30, 1995, accounts receivable were $15,193,000.
INVENTORIES
The increase in inventory levels from $162,207,000 at June 30, 1996 to
$183,014,000 at September 30, 1996 also results primarily from the seasonal
build-up of inventories, as the Company prepares for anticipated higher sales
during the Christmas period. The Company's merchandising strategy, which
places greater emphasis on private label products, also contributed to the
increase, as these products require larger order sizes and a longer delivery
lead time. The increase in inventories from their level of $175,295,000 at
September 30, 1995 is attributable to Tandy U.K., and results from
implementation of the merchandising strategy described above. The impact of this
strategy was similarly experienced in Canada and Australia a year ago.
Management believes the Company's inventories are of good quality and will be
sold through in the ordinary course of business without the need for unusual or
extensive price discounting.
PROPERTY AND EQUIPMENT
Property and equipment has decreased from $39,129,000 at June 30, 1996 to
$38,623,000 at September 30, 1996. The increase in routine capital investments,
primarily in store fixtures and upgrades, has been more than offset by
depreciation expense. Property and equipment was $36,556,000 at September 30,
1995. During the previous twelve months, the effect of additional investment
in property and equipment, including the opening of 23 net new stores, was
partially offset by depreciation expense.
13
CURRENT MATURITIES OF NOTES PAYABLE TO TANDY
Current maturities of notes payable to Tandy have decreased from $17,071,000 on
September 30, 1995 to $6,958,000 at September 30, 1996. This decrease results
from the re-payment of the Series B Note payable to Trans World Electronics,
Inc. ("Trans World"), a subsidiary of Tandy, in the principal amount of
$10,113,000. The balances of $6,958,000 at September 30, 1996 and June 30, 1996
represent the amount payable on the Series A Note payable to Trans World over
the next twelve months.
Accounts Payable
Accounts payable have increased from $24,082,000 at June 30, 1996 to $31,837,000
at September 30, 1996. This increase results from greater purchasing activity
for the Christmas selling season. The increase from the September 30, 1995
level of $20,168,000 is explained in part by the general increase in the level
of inventories.
INCOME TAXES PAYABLE
Income taxes payable were $13,126,000 at September 30, 1996 compared to balances
at June 30, 1996 and September 30, 1995 of $12,971,000 and $14,190,000,
respectively.
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 carry-back 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
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.
14
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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operating activities consumed $20,080,000 in cash during the three months ended
September 30, 1996 compared to $27,828,000 in the first quarter of the prior
year. Net income for the quarter, adjusted to reconcile net income to cash,
consumed $1,059,000 in cash, while generating $467,000 in cash during the same
period last year. The seasonal build-up of accounts receivable consumed $802,000
less cash than in the quarter ended September 30, 1995. The build-up in
inventories in the first quarter of fiscal 1997 consumed $5,681,000 less in cash
than was the case during the three months ended September 30, 1995 when the
effects of emphasis on the private label merchandising strategy were
experienced, in particular in Canada. Operating activities also benefited from
the conservation of cash as accounts payable increased by $7,558,000 during the
quarter compared with $5,902,000 a year ago. The pay down of accrued expenses
consumed $999,000 in cash during the quarter ended September 30, 1996 compared
to $2,313,000 in the same period last year.
Cash flow from investing activities consumed $1,880,000 during the first quarter
compared with $2,246,000 a year ago. This decrease is primarily attributable to
a reduction in capital spending over the first quarter of fiscal year 1996 as
the Company delayed plans to upgrade and remodel its stores until later in
fiscal 1997.
During the first quarter of fiscal year 1997, financing activities provided
$5,369,000 in cash, as cash consumed by the principal repayment of long-term
borrowings was more than offset by an increase in short-term borrowings of
$8,383,000 and cash generated from the issuance of common stock to employee
plans. During the first quarter of fiscal 1996, financing activities consumed
$2,223,000 in cash, primarily as a result of principal repayments of long-term
debt.
The Company's principal sources of liquidity during fiscal year 1997 are its
cash and short-term investments, its cash flow from operations and its banking
facilities.
15
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 established a one year revolving facility in
an amount which is determined using an inventory level calculation not to exceed
Cdn$60,000,000 ($44,052,000 at September 30, 1996 exchange rates). 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 and, from time to time, to finance inventory purchases. At September 30,
1996, there were borrowings against the credit facility aggregating $9,421,000.
In September 1996, the Company's Australian subsidiaries, InterTAN Australia
Ltd. and Technotron Sales Corp. Pty. Ltd., entered into a credit agreement with
an Australian bank (the "Australian Facility"). This agreement established a
credit facility in the amount of A$12,000,000 ($9,497,000 at September 30, 1996
exchange rates). The Australian Facility has no fixed term and may be
terminated at any time upon five days prior written notice by the lender. All
or any part of the facility may be used to provide letters of credit in support
of purchase orders. A maximum amount of A$5,000,000 ($3,957,000 at September
30, 1996 exchange rates) may be used in support of short-term borrowings.
Interest is charged on such borrowings at the Australian Indicator Lending Rate
plus 125 basis points. At September 30, 1996, there were no borrowings
outstanding against the Australian Facility.
In addition to the credit facilities described above, the Company's principal
sources of outside financing have been the Series A Note payable to Trans World
and the Debentures.
Both the Series A Note and the Syndicated Loan Agreement preclude the Company
from paying dividends on its common stock. Accordingly, any such payment would
require the refinancing of any amounts outstanding under these loan agreements
or the consent of the Company's banking syndicate and Trans World; there can be
no assurance that either event would occur. In addition, the Series A Note 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 and 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. At September 30,
1996, the Company was in compliance with these requirements.
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 expenditures and the servicing of debt. The Company anticipates that
capital expenditures will approximate $9,300,000 during the remainder of fiscal
year 1997, mainly related to store expansion, remodeling and upgrading. The
Company's debt servicing requirements in the balance of fiscal year 1997 are
estimated to be $6,600,000 and include principal payments on the Series A Note
of $3,479,000 as well as interest on the Series A Note and the Debentures. In
addition, as previously described, the Company believes that it could possibly
receive additional reassessments of tax from Revenue Canada, requiring
additional tax deposits. See "Income Taxes Payable."
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 Australian Facility
16
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 Payable." 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.
CONTINGENCIES
-------------
Claims have been made by a former employee for damages for wrongful dismissal
totaling approximately $880,000. The Company is vigorously defending this
action. The Company believes that the possible range of loss in these matters is
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 these matters.
In the fourth quarter of fiscal year 1993, the Company recorded a pre-tax charge
of $77,400,000 in connection with the Company's plan to close its continental
European retail operations. This provision represented 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 leasehold interests. The shutdown process is now
substantially complete. Management believes that the remaining provision of
$1,918,000 is adequate to provide for the Company's remaining obligations in
Europe, including claims brought against the Company by former employees,
dealers and franchisees.
Apart from these matters and those described under Income Taxes Payable, 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 its property is subject.
BASIS OF FINANCIAL STATEMENTS
-----------------------------
The accompanying unaudited financial statements have been prepared in accordance
with Rule 10-01 of Regulation SX, "Interim Financial Statements", and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements have been
prepared in conformity with accounting principles and practices (including
consolidation practices) as reflected in the Company's Annual Report on Form 10-
K for the fiscal year ended June 30, 1996, and, in the opinion of the Company,
include all adjustments necessary for fair presentation of the Company's
financial position as of September 30, 1996 and 1995 and the results of its
operations and its cash flow for the three months ended September 30, 1996 and
1995. Such adjustments are of a normal and recurring nature. Operating results
for the three months ended September 30, 1996 are not necessarily indicative of
the results that can be expected for the fiscal year ended June 30, 1997. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The various matters discussed under the heading "Contingencies" on
page 17 of this Form 10-Q are incorporated herein by reference.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Descript
3(a) Restated Certificate of Incorporation (Filed
as Exhibit 3(a) to InterTAN's Registration on
Statement on Form 10 and incorporated herein
by reference).
3(a)(i) Certificate of Amendment of Restated
Certificate of Incorporation (Filed as Exhibit
3(a)(i) to InterTAN's Annual Report on Form
10-K for fiscal year ended June 30, 1995 and
incorporated on June 30, herein by reference).
3(a)(ii) Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock (Filed as Exhibit 3(a)(i) to
InterTAN's Registration Statement on Form 10
and incorporated herein by reference).
3(b) Bylaws (Filed on Exhibit 39b0 to InterTAN's
Registration Statement on Form 10 and
incorporated herein by reference).
3(b)(i) Amendments to Bylaws through August 3, 1990
(Filed as Exhibit 3(b)(i) to InterTAN's Annual
Report on Form 10-K for fiscal year ended June
30, 1990 and incorporated herein by
reference).
3(b)(ii) Amendments to Bylaws through May 15, 1995
(Filed as Exhibit 3(b)(ii) to InterTAN's
Annual Report on Form 10-K for fiscal year
ended June 30, 1995 and incorporated herein
by reference).
18
3(b)(iii) Amended and Restated Bylaws (filed as Exhibit
3(b)(iii)to InterTAN's Annual Report on Form
10-K for fiscal year ended June 30, 1996 and
incorporated herein by reference).
4(a) Articles Fifth and Tenth of the Restated
Certificate of Incorporation (included in
Exhibit 3(a)).
4(b) Amended and Restated Rights Agreement between
InterTAN Inc. and The First National Bank of
Boston (Filed as Exhibit 4(b) to InterTAN's
report on Form 8-K dated September 25, 1989 and
incorporated herein to herein by reference).
4(c) Trust Indenture securing the issue of 9%
Convertible Subordinated Debentures due August
30, 2000 (Filed as Exhibit 4(c) to InterTAN's
Annual Report on Form 10-K for fiscal year
ended June 30, 1993 and incorporated herein by
reference).
4(d) Warrant Agreement dated August 5, 1993 between
InterTAN, Inc. and Trans World Electronics,
Inc. (filed as Exhibit 10(h) to InterTAN's
Annual Report on Form 10-K for fiscal year
ended June 30, 1993 and incorporated herein by
reference).
*10(a) Amending Agreement dated September 11, 1996
amending the Credit Agreement.
*10(b) Fourth Amendment to Merchandise Agreement
dated July 1, 1996.
*10(c) Third Amendment to Secured Loan dated July 1,
1996.
*11 Statement of Computation of Earnings Per Share
*27 Article 5 Financial Data Schedule
- ------------------
* Filed herewith
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
InterTAN, Inc.
(Registrant)
Date: November 13, 1996 By:/s/James T. Nichols
-------------------
James T. Nichols
President and Chief Executive Officer
(Authorized Officer)
By: /s/Douglas C. Saunders
----------------------
Douglas C. Saunders
Vice President and Corporate Controller
(Principal Accounting Officer)
20
INTERTAN, INC.
FORM 10-Q
INDEX TO EXHIBITS
Exhibit No. Description
3(a) Restated Certificate of Incorporation (Filed as
Exhibit 3(a) InterTAN's Registration Statement
on Form 10 and incorporated herein by
reference).
3(a)(i) Certificate of Amendment of Restated
Certificate of Incorporation (Filed as Exhibit
3(a)(i) to InterTAN's Annual Report on Form 10-
K for fiscal year ended June 30, 1995 and
incorporated herein by reference).
3(a)(ii) Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock (Filed as Exhibit 3(a)(i) to
InterTAN's Registration Statement on Form 10
and incorporated herein by reference).
3(b) Bylaws (Filed on Exhibit 3(b) to InterTAN's
Registration Statement on Form 10 and
incorporated herein by reference).
3(b)(i) Amendments to Bylaws through August 3, 1990
(Filed as Exhibit 3(b)(i) to InterTAN's Annual
Report on Form 10-K for fiscal year ended June
30, 1990 and incorporated herein by reference).
3(b)(ii) Amendments to Bylaws through May 15, 1995
(Filed as Exhibit 3(b)(ii) to InterTAN's Annual
Report on Form 10-K for fiscal year ended June
30, 1995 and incorporated herein by reference).
3(b)(iii) Amended and Restated Bylaws (filed as Exhibit
3(b)(iii) to InterTAN's Annual Report on Form
10-K for fiscal year ended June 30, 1996 and
incorporated herein by reference).
4(a) Articles Fifth and Tenth of the Restated
Certificate of Incorporation (included in
Exhibit 3(a)).
4(b) Amended and Restated Rights Agreement between
InterTAN Inc. and The First National Bank of
Boston (Filed as Exhibit 4(b) to InterTAN's
report on Form 8-K dated September 25, 1989 and
incorporated herein by reference).
4(c) Trust Indenture securing the issue of 9%
Convertible Subordinated Debentures due August
30, 2000 (Filed as Exhibit 4(c) to InterTAN's
Annual Report on Form 10-K for fiscal year
ended June 30, 1993 and incorporated herein by
reference).
4(d) Warrant Agreement dated August 5,1993 between
InterTAN, Inc. and Trans WorldElectronics,Inc.
(filed as Exhibit 10(h) to InterTAN's Annual
Report on Form 10-K for fiscal year ended June
30, 1993, and incorporated herein by
reference).
*10(a) Amending Agreement dated September 11, 1996
amending the Credit Agreement.
*10(b) Fourth Amendment to Merchandise Agreement dated
July 1, 1996.
*10(c) Third Amendment to Secured Loan Agreement dated
July 1, 1996.
*11 Statement of Computation of Earnings Per Share
*27 Article 5 Financial Data Schedule
- -------------------
* Filed herewith