SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31,1996 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 75-2130875
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 Main Street, Suite 1805
Fort Worth, Texas 76102
- ------------------------------- ---------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (817) 348-9701
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At January 31, 1997, 11,497,775 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 December 31,
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 DECEMBER 31, 1996.
3
Consolidated Statements of Operations
InterTAN, Inc.
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------ ------------- -------------
Net sales and operating revenues........................ $190,934 $181,411 $303,221 $295,083
Other income............................................ 115 298 256 501
-------------------------------------------------------------
191,049 181,709 303,477 295,584
-------------------------------------------------------------
Operating costs and expenses:
Cost of products sold................................. 108,976 103,788 170,533 167,251
Selling, general and administrative expenses.......... 64,895 59,667 115,742 107,914
Depreciation and amortization......................... 2,379 1,981 4,596 3,813
-------------------------------------------------------------
176,250 165,436 290,871 278,978
-------------------------------------------------------------
Operating income........................................ 14,799 16,273 12,606 16,606
Foreign currency transaction gains...................... (731) (44) (926) (192)
Interest expense, net................................... 1,908 1,909 3,505 3,647
-------------------------------------------------------------
Income before income taxes.............................. 13,622 14,408 10,027 13,151
Provision for income taxes.............................. 4,145 4,071 5,157 5,019
-------------------------------------------------------------
Net income.............................................. $ 9,477 $ 10,337 $ 4,870 $ 8,132
=============================================================
Primary net income per average common share............. $ 0.83 $ 0.93 $ 0.43 $ 0.75
Fully diluted net income per
average common share.................................. $ 0.57 $ 0.58 $ 0.37 $ 0.52
Average common shares outstanding....................... 11,366 11,148 11,298 10,801
Average common shares outstanding
assuming full dilution................................ 18,111 17,893 18,043 17,676
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 amounts)
December 31 June 30 December 31
1996 1996 1995
-----------------------------------------------
Assets
Current Assets:
Cash and short-term investments................................... $ 53,302 $ 34,096 $ 48,493
Accounts receivable, less allowance for doubtful accounts......... 14,721 9,422 15,333
Inventories....................................................... 185,292 162,207 165,384
Other current assets.............................................. 7,550 7,628 7,066
Deferred income taxes............................................. 1,459 3,831 2,985
-----------------------------------------------
Total current assets......................................... 262,324 217,184 239,261
Property and equipment, less accumulated depreciation
and amortization.................................................. 40,899 39,129 38,382
Other assets........................................................ 2,767 2,928 3,951
Deferred income taxes............................................... - 2,392 4,939
-----------------------------------------------
$305,990 $261,633 $286,533
===============================================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings........................................ $ 2,569 $ 975 $ -
Current maturities of notes payable to Tandy Corporation.......... 6,958 6,958 17,071
Accounts payable.................................................. 44,943 24,082 21,415
Accounts payable to Tandy Corporation............................. 593 894 363
Accrued expenses.................................................. 40,854 25,833 34,461
Income taxes payable.............................................. 12,402 12,971 13,478
-----------------------------------------------
Total current liabilities.................................... 108,319 71,713 86,788
Long-term notes payable to Tandy Corporation,
less current maturities........................................ 19,745 23,070 26,394
9% convertible subordinated debentures.............................. 41,456 41,660 40,822
Other liabilities................................................... 6,329 5,678 5,393
-----------------------------------------------
175,849 142,121 159,397
-----------------------------------------------
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, 11,429,187, 11,172,506 and 10,875,007
shares issued and outstanding................................ 11,429 11,173 10,875
Additional paid-in capital........................................ 112,959 111,678 111,173
Retained earnings................................................. 24,002 19,132 29,505
Foreign currency translation effects.............................. (18,249) (22,471) (24,417)
-----------------------------------------------
Total stockholders' equity................................... 130,141 119,512 127,136
-----------------------------------------------
Commitments and contingent liabilities..............................
$305,990 $261,633 $286,533
===============================================
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 Six months ended
December 31 December 31
-----------------------------------------------
1996 1995 1996 1995
-----------------------------------------------
Cash flows from operating activities:
Net income................................................................. $ 9,477 $10,337 $ 4,870 $ 8,132
Adjustments to reconcile net income to cash
provided by ( used in) operating activities:
Depreciation and amortization....................................... 2,379 1,981 4,596 3,813
Deferred income taxes............................................... 3,954 4,700 4,773 5,583
Foreign currency transaction (gains) losses, unrealized............. (773) 10 (855) (267)
Other............................................................... 742 912 1,336 1,146
Cash provided by (used for) current assets and liabilities:
Accounts receivable................................................. 552 (408) (4,929) (6,691)
Inventories......................................................... 2,568 7,067 (17,351) (18,533)
Other current assets................................................ 1,131 1,803 307 2,079
Accounts payable.................................................... 11,029 1,601 18,587 7,503
Accounts payable to Tandy Corporation............................... (821) 180 (316) (74)
Accrued expenses.................................................... 15,702 11,461 14,703 9,147
Income taxes payable................................................ (644) (483) (505) (506)
-----------------------------------------------
Net cash provided by operating activities........................... 45,296 39,161 25,216 11,332
-----------------------------------------------
Cash flows from investing activities:
Additions to property and equipment........................................ (3,569) (4,283) (5,736) (7,325)
Proceeds from sales of property and equipment.............................. 13 41 54 186
Other investing activities................................................. 523 69 769 720
-----------------------------------------------
Net cash used in investing activities................................ (3,033) (4,173) (4,913) (6,419)
-----------------------------------------------
Cash flows from financing activities:
Changes in short-term bank borrowings, net................................ (6,976) - 1,407 -
Proceeds from issuance of common stock to employee plans................... 412 372 885 891
Proceeds from exercise of stock options.................................... - 23 - 760
Principal repayments on long-term borrowings............................... - - (3,487) (3,479)
-----------------------------------------------
Net cash provided by (used in) financing activities.................. (6,564) 395 (1,195) (1,828)
-----------------------------------------------
Effect of exchange rate changes on cash..................................... 121 (282) 98 148
-----------------------------------------------
Net increase in cash and short-term investments............................. 35,820 35,101 19,206 3,233
Cash and short-term investments, beginning of period........................ 17,482 13,392 34,096 45,260
-----------------------------------------------
Cash and short-term investments, end of period.............................. $ 53,302 $ 48,493 $ 53,302 $ 48,493
===============================================
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....... - - - - 4,222 4,222
Issuance of common stock
to employee plans............. 256 256 1,281 - - 1,537
Net income..................... - - - 4,870 - 4,870
--------------------------------------------------------------------------
Balance at December 31, 1996... 11,429 $11,429 $112,959 $24,002 ($18,249) $130,141
==========================================================================
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. (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, 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
---------------------
The Company is a retailer of consumer electronics products with locations in
Canada, Australia and the United Kingdom. The number of company-operated stores
and dealers at December 31, 1996 and 1995 is presented in the table below:
SALES OUTLETS
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
ENDING OPENED CLOSED ENDING OPENED CLOSED
CANADA
Company-operated 455* 2 1 450 5 -
Dealers 426 20 4 422 7 11
------------------------------ ------------------------------
881 22 5 872 12 11
============================== ==============================
AUSTRALIA
Company-operated 213 3 - 208 5 -
Dealers 210 6 2 212 4 55
------------------------------ ------------------------------
423 9 2 420 9 55
============================== ==============================
UNITED KINGDOM
Company-operated 351 6 1 347 8 -
Dealers 175 3 1 165 2 1
------------------------------ ------------------------------
526 9 2 512 10 1
============================== ==============================
TOTAL
Company-operated 1,019 11 2 1,005 18 -
Dealers 811 29 7 799 13 67
------------------------------ ------------------------------
1,830 40 9 1,804 31 67
============================== ==============================
*In addition, the Company operated 46 stores on behalf of Rogers Cantel, Inc.
8
OPERATING INCOME
The Company's operating income (loss) for each geographic segment for the three
and six-month periods ended December 31, 1996 and 1995 is presented in the
following table (in thousands):
OPERATING INCOME
----------------
UNITED CORPORATE
CANADA AUSTRALIA KINGDOM EXPENSES TOTAL
------- --------- --------- ---------- -------
Three Months Ended
December 31, 1996 $10,297 $2,778 $ 2,749 $(1,025) $14,799
Three Months Ended
December 31, 1995 $10,696 $2,219 $ 4,573 $(1,215) $16,273
Six Months Ended
December 31, 1996 $13,037 $3,367 $(1,749) $(2,049) $12,606
Six Months Ended
December 31, 1995 $15,737 $2,217 $ 927 $(2,275) $16,606
Foreign exchange fluctuations contributed positively to consolidated operating
income for both the three and six month periods ended December 31, 1996. If the
effect of these fluctuations were eliminated, the reduction in consolidated
operating income over the corresponding periods in the prior year would have
increased by $623,000 and $610,000 respectively.
NET SALES
Net sales for the quarter ended December 31, 1996 were $190,934,000, an increase
of 5.2% over the sales for the same quarter in the prior year of $181,411,000.
When the impact of fluctuations in the value of the US dollar in relation to the
currencies of the countries in which the Company operates is removed, the sales
increase, in constant dollars, is reduced to 1.8%. Comparative store sales
decreased by 0.3% over the same quarter in the prior year. Year to date, sales
have increased by 2.8% and 0.6% in US dollars and local currency, respectively.
Comparative store sales for the six months ended December 31, 1996 have
decreased 1.1% over the same period a year ago.
The table which follows shows by country the percentage changes in net sales for
the quarter and six months ended December 31, 1996 compared to the corresponding
periods in the prior year. Changes are presented in both US dollars and local
currencies to illustrate the effects of exchange rate fluctuations. The change
in comparative store sales, measured in constant dollars, is also shown:
9
NET SALES
---------
PERCENTAGE INCREASE (DECREASE)
------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
LOCAL COMPARATIVE LOCAL COMPARATIVE
US$ CURRENCY STORE US$ CURRENCY STORE
-------------------------------- --------------------------------
Canada 5.5 % 5.0 % 1.6 % (0.6)% (0.5)% (2.8)%
Australia 12.8 % 5.8 % 3.7 % 14.7 % 7.7 % 5.1 %
United Kingdom 1.4 % (4.3)% (4.6)% 1.8 % (1.7)% (2.1)%
The Company was able to enjoy a sales gain in Canada during the Christmas
quarter, primarily as a result of increased sales of toys, batteries and
antennas as well as an increase in computer sales following the addition of a
new supplier with an attractively priced entry level product. This gain was
achieved despite another difficult Christmas season for consumer electronics
retailers in Canada. Overall, sales performance in Canada was influenced by a
reduced level of cellular sales, especially early in the quarter. In addition,
unforeseen difficulties in finding suitable locations at acceptable rent levels
resulted in the new Company-operated Cantel stores being rolled out at a slower
rate than was originally anticipated. Consequently, total cellular revenue,
including revenue from the new Cantel stores, did not meet management's
expectations. Management continues to be optimistic that the Cantel program
will result in a positive contribution as the stores mature.
In Australia, gains were experienced in a broad range of categories including
computers, batteries, CD players, telephones and telephone accessories.
Management believes that the Company's new television advertising program
contributed to overall sales performance in Australia. However the benefit of
these gains was partially offset by weak cellular sales. In Australia, the
analog phone is being gradually phased out and will not be supported by the
government operated cellular network beyond the turn of the century. Cellular
sales have been difficult as the market moves toward the technically superior,
but higher priced, digital system. Management anticipates that soft cellular
sales may continue to affect the overall sales performance in Australia until
the digital system receives wider consumer acceptance.
In the United Kingdom, sales gains were experienced in the battery, TV/video and
toy categories. The sales performance was also heavily influenced by the
computer category. It was during the Christmas quarter that the Company's new
alliance with the German manufacturer, Vobis Microcomputer AG ("Vobis") was
rolled out. Under this arrangement, Vobis will become the Company's exclusive
source of computers and related products in the U.K. and the Company will be
able to offer the latest in computer technology to its customers at affordable
prices with minimal inventory risk. While the number of computers sold
increased significantly over the same quarter last year, the Vobis program was
not fully operational in time for its intended benefits to be realized. As a
result, Vobis sales fell short of the targets management had set. In addition,
as computer revenue under this program is reported on a commission
rather
10
than a sale basis, revenues from the sale of computers were actually down over
a year ago. The effect of lower computer revenue was partially offset by the
positive benefits of the Company's new communications centers. These new
centers prominently feature, in an attractive display format, a broad range of
communications products and accessories including not only cellular products but
also pagers, traditional telephones, CB radios and scanners as well as product
accessories. These centers were successfully introduced, with sales of regular
and cellular phones as well as pagers all increasing over last year. Management
anticipates that both the communications centers and the Vobis program will have
positive operating benefits in the remainder of fiscal year 1997.
GROSS MARGIN AND COST OF PRODUCTS SOLD
The gross margin percentage increased to 42.9% in the second quarter of fiscal
1997 from 42.8% a year ago, an increase of 10 basis points. The most significant
improvement was in Australia, where margins strengthened by 1.8 percentage
points over the same quarter last year. In the United Kingdom, margins
increased by 80 basis points, while in Canada margins declined by 1.0 percentage
point. Year to date, the gross margin percentage is fifty basis points ahead of
the prior year.
A higher gross margin percentage, increased sales and foreign exchange rate
effects all combined to produce an increase in gross margin dollars for the
quarter of $4,334,000:
Increase in margin percentage $ 264,000
Increase in sales 1,434,000
Foreign exchange rate effects 2,636,000
----------
$4,334,000
==========
In Canada, the major factors contributing to the decline in margin for the
quarter were the increase in the amount of lower margin computer products in the
sales mix and the impact of selected price reductions designed to drive sales.
In Australia, a variety of factors contributed to the increase in margins. The
effect of the Company's strategy of shifting the sales mix towards more
profitable categories and expanding the range within those categories,
importantly parts and accessories, more than offset the impact of increased
sales of lower margin computer products and the decline in the number of
cellular phone activations. Cellular air time residuals, reflecting cumulative
activations, are becoming an important contributor to margins, as are the sale
of extended warranty contracts.
In the U.K., the commissions from the sale of Vobis computers helped to lift
margins, as did the activation income from the increase in the sale of cellular
products. In addition, certain of the Company's new initiatives also made
contributions to the improvement in the margin percentage. The positive effect
of these factors was partially offset by the impact of selective price
reductions necessary to encourage sales.
11
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses ("SG&A expenses") for the
three months ended December 31, 1996 were $64,895,000 compared to $59,667,000 in
the second quarter of the prior year, an increase of $5,228,000 or 8.8%. Year to
date, SG&A expenses have increased from $107,914,000 for the six months ended
December 31, 1995 to $115,742,000 in the current period, an increase of
$7,828,000 or 7.3%. Foreign currency rate fluctuations accounted for $1,964,000
and $2,123,000 of the increase for the quarter and year to date, respectively.
When these foreign currency effects are eliminated, SG&A expenses for the
quarter and year to date increased, at constant exchange rates by 5.5% and 5.3%,
respectively.
The following table provides a breakdown of SG&A expenses by major category for
the three and six month periods ended December 31, 1996 (percentages shown are
as a rate to sales):
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
(In thousands, except percents)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
1996 1995 1996 1995
-------------------------------- --------------------------------
AMOUNT PCT. AMOUNT PCT. AMOUNT PCT. AMOUNT PCT.
-------------------------------- --------------------------------
Advertising $10,397 5.4 $ 9,628 5.3 $ 16,856 5.6 $ 15,360 5.2
Rent 11,329 5.9 10,469 5.8 21,803 7.2 20,480 6.9
Payroll 26,340 13.8 23,962 13.2 46,959 15.5 43,623 14.8
Taxes
(other than
income taxes) 5,148 2.7 4,480 2.5 9,378 3.1 8,709 3.0
Telephone &
Utilities 1,946 1.0 1,644 0.9 3,720 1.2 3,406 1.2
Other 9,735 5.2 9,484 5.2 17,026 5.6 16,336 5.5
-------------------------------- --------------------------------
Total $64,895 34.0 $59,667 32.9 $115,742 38.2 $107,914 36.6
================================ ================================
Higher investments in advertising, rent and human resources continue to account
for a large part of the increase in real SG&A spending. Another contributing
factor was the scheduled increase in the royalty payable to Tandy Corporation.
Management has already taken action to control SG&A spending, which,
consequently, was well within planned levels for the quarter. In addition,
actual SG&A expenses for the quarter included unplanned severance costs as
management continues to reevaluate its staffing requirements. The effect of the
resulting reduction in head count should have a positive effect on SG&A
performance in future periods. A sales performance which fell short of
expectations was the major factor contributing to the increase in the SG&A
percentage.
12
Management's stated objective for fiscal year 1997 was to achieve a one
percentage point increase in operating margin as a rate to sales (i.e., the
gross margin percentage, net of the change in the SG&A percentage). While the
gross margin percentage for the quarter was increased by 10 basis points, the
effect of this improvement was more than offset by the increase in the SG&A
percentage. In future quarters, management will continue its focus on this issue
and will take further action to keep SG&A growth more closely aligned with
realized sales gains. However, as a result of performance year to date,
management believes it is unlikely that the operating margin objective will be
achieved for the fiscal year.
NET INTEREST EXPENSE
Net interest expense of $1,908,000 for the three months ended December 31, 1996
was comparable with the corresponding amount reported during the same quarter
last year. Net interest expense for the six months ended December 31, 1996 of
$3,505,000 was $142,000 lower than in the same period last fiscal year.
PROVISION FOR INCOME TAXES
An income tax provision of $4,145,000 was recorded during the quarter, primarily
relating to the profits of the Canadian subsidiary. In the second quarter of
fiscal year 1996, a net tax provision of $4,071,000 was recorded. For the six
months ended December 31, 1996, income tax expense of $5,157,000 was recorded
compared to $5,019,000 in the first six months of the prior year.
NET INCOME PER AVERAGE COMMON SHARE
Primary and fully diluted net income per average common share were $0.83 and
$0.57, respectively, for the three-month period ended December 31, 1996, as
compared to $0.93 and $0.58 for the same quarter in the prior year. For the
six-month period ended December 31, 1996, primary and fully diluted net income
per average common share were $0.43 and $0.37, respectively, compared to $0.75
and $0.52, respectively, for the same period a year ago.
In each of the three and six-month periods ended December 31, 1996 and December
31, 1995, the difference between primary and fully diluted net income per
average common share was due primarily to the Company's 9% convertible
subordinated debentures (the "Debentures"), which are convertible into 6,745,346
common shares. The Company has outstanding warrants exercisable for 1,449,007
common shares at an exercise price of $6.618 per share. Also, at December 31,
1996 and December 31, 1995, directors and employees of the Company and its
subsidiaries held options to purchase 810,000 and 603,332 shares, respectively,
at prices ranging from $5.31 to $8.1875 per share. The outstanding warrants and
options were also considered in determining primary and fully diluted net income
per average common share. The dilutive effect of these various instruments will
likely continue in future periods, and exchange rate impacts on the Debentures
could increase or decrease their dilutive effects.
13
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 December 31, 1996, in exchange rates as measured against
the US dollar:
FOREIGN EXCHANGE RATE FLUCTUATIONS
----------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
FROM DECEMBER 31, 1995 FROM JUNE 30, 1996
---------------------- ------------------
Canada (0.4) (0.5)
Australia 6.9 0.9
United Kingdom 10.3 10.3
ACCOUNTS RECEIVABLE
Accounts receivable have increased from $9,422,000 at June 30, 1996 to
$14,721,000 at December 31, 1996, reflecting seasonal increases for Christmas
sales to dealers. At December 31, 1996, accounts receivable were $612,000 lower
than at December 31, 1995.
INVENTORIES
Inventories have increased from $162,207,000 at June 30, 1996 to
$185,292,000 at December 31, 1996. Although increases were experienced in all
three countries, most of the inventory increase was attributable to the United
Kingdom. Inventories at December 31, 1995 were $165,384,000, resulting in a
year on year increase of $19,908,000. Approximately one-third of this increase
is attributable to stronger foreign currencies. The remainder is more than
attributable to the United Kingdom subsidiary where higher inventory levels have
resulted from the implementation of the Company's merchandising strategy, which
places greater emphasis on private label products, as these products require
larger order sizes and longer order lead time. The impact of this strategy was
similarly experienced in Canada and Australia a year ago. Also contributing to
the increase in the United Kingdom's inventory was a lower than expected level
of sales during the second quarter. Management believes that the Company's
inventory, in all three countries, is of good quality and will be sold through
in the ordinary course of business, without the need for significant mark downs.
CURRENT MATURITIES OF NOTES PAYABLE TO TANDY CORPORATION
Current maturities of notes payable to Tandy have decreased from $17,071,000 at
December 31, 1995 to $6,958,000 at December 31, 1996 and June 30, 1996. This
decrease results from the scheduled repayment of the Series B Note to Trans
World Electronics, Inc. ("Trans World"), a
14
subsidiary of Tandy Corporation, in the principal amount of $10,113,000. The
balances of $6,958,000 at December 31, 1996 and June 30, 1996, represent the
amount of the Series A Note payable to Trans World over the next twelve months.
ACCOUNTS PAYABLE
The level of accounts payable has increased from $24,082,000 and $21,415,000 at
June 30, 1996 and December 31, 1995, respectively, to $44,943,000 at December
31, 1996. These increases in accounts payable result primarily from an increase
in the level of inventories, deferred payment terms with suppliers and from
foreign currency rate effects.
ACCRUED EXPENSES
Accrued expenses have increased from $25,833,000 at June 30, 1996 and
$34,461,000 at December 31, 1995 to $40,854,000 at December 31, 1996. These
increases result from a variety of timing differences, including the payment of
compensation, advertising costs and property and sales taxes. The increase in
the sale of extended warranties has also lead to an increase in deferred service
contract income.
INCOME TAXES PAYABLE
Income taxes payable were $12,402,000 at December 31, 1996 compared to balances
at June 30, 1996 and December 31, 1995 of $12,971,000 and $13,478,000,
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 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 in the immediately following paragraph.
The Company was advised in August 1995 that Revenue Canada intended to extend
the scope of its 1987 to 1989 reassessments to raise certain issues flowing from
the spin-off of the Company from Tandy Corporation in fiscal year 1987.
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
15
potentially range from $14,000,000 to $20,000,000. As required by Canadian law,
the Company would likely 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. 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 likely 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.
Notwithstanding that the Company is still in discussions with Revenue Canada
regarding these issues, Revenue Canada was required to issue a protective
reassessment for one of the years because the time period during which such
reassessment could legally be issued was about to expire. The amount of the
reassessment, including interest, is approximately $13,800,000. This amount
relates to the 1992 taxation year only and is reflected in the range described
immediately above. The Company intends to appeal this reassessment and, as
indicated above, may be required to post a deposit equal to one-half of the
reassessment, pending the outcome of such appeal. 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 following the conclusion of discussions with the Company and
its advisors. Accordingly, it is management's assessment that no provision need
be recorded for these possible claims.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operating activities generated $45,296,000 in cash during the three months ended
December 31, 1996 compared to $39,161,000 in the second quarter of the prior
year, an increase of $6,135,000. Increases in the level of accounts payable
during the quarter preserved $9,428,000 more cash than in the prior year. The
seasonal build-up of accrued expenses preserved $15,702,000 in cash during the
quarter compared to $11,461,000 in the second quarter of fiscal year 1996, an
increase of $4,241,000. The positive effects of these two factors were partially
offset by reductions in the rate of inventory liquidation and in net income,
adjusted to reconcile net income to cash. In the three months ended December 31,
1996, a reduction in inventories generated $2,568,000 in cash compared to
$7,067,000 in the same period last year, a decrease of $4,499,000. Net income,
adjusted to reconcile net income to cash, generated $2,141,000 in cash less than
last year, falling from $17,940,000 for the three months ended December 31, 1995
to $15,799,000 in the second quarter of the current fiscal year. For similar
reasons, cash generated from operating activities also increased for the six
months ended December 31, 1996, rising by $13,884,000 from $11,332,000 in the
first six months of the prior year to $25,216,000 during the six months ended
December 31, 1996.
16
Cash flow from investing activities consumed $3,033,000 during the current
quarter compared with $4,173,000 a year ago. This decrease is primarily
attributable to a planned reduction in capital spending over the second quarter
of fiscal year 1996. For the same reason, year to date, investing activities
have consumed $4,913,000 in cash compared to $6,419,000 in the prior year.
During the second quarter of fiscal year 1997, financing activities consumed
$6,564,000 in cash, primarily as a result of the repayment of short-term bank
borrowings, partially offset by cash generated from the issuance of common
stock to employee plans. During the second quarter of fiscal year 1996,
financing activities had generated $395,000 in cash from the issuance of common
stock to employee plans and the exercise of stock options by employees. For the
six months ended December 31, 1996, financing activities consumed $1,195,000 in
cash, as the effect of the repayment of principal on long-term borrowings was
partially offset by funds generated by an increase in the level of short-term
bank borrowings and proceeds from the issuance of common stock to employee
plans. Repayment of principal on long-term borrowings, partially offset by
funds generated from the issuance of stock to employee plans and the exercise of
stock options by employees, had resulted in financing activities consuming
$1,828,000 in cash during the first six months of the prior year.
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.
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 ($43,782,000 at December 31, 1996 exchange rates). This
agreement has been renewed and now extends through mid-August, 1997. The
Company intends to request a further extension of the facility prior to August,
1997 and reasonably believes that the banking syndicate will agree to such
renewal; however, there can be no guarantee of such renewal. 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 December 31, 1996, there
were borrowings against the credit facility aggregating $2,569,000.
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 ($9,536,000 at December 31, 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 ($3,974,000 at December 31,
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 1.25
percentage points. At December 31, 1996, there were no borrowings outstanding
against the Australian Facility.
17
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, annual capital
spending and lease commitments 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 December 31,
1996, the Company was in compliance with these requirements, except that the
Company did not satisfy the cash interest coverage ratio under the Syndicated
Loan Agreement. However, each member of the bank syndicate has waived such non-
compliance and agreed to modify the covenant for the third and fourth quarters
of fiscal year 1997. Management expects that the Company will meet these
requirements, as modified, during the remainder of fiscal year 1997.
The Company's primary uses of liquidity in fiscal year 1997 will include the
funding of capital expenditures and the servicing of debt. The Company
anticipates that capital expenditures will approximate $6,245,000 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
may be required to post additional tax deposits with Revenue Canada in order to
appeal existing, and, possibly, additional reassessments of tax. 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 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.
18
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. The shutdown process is now substantially complete.
Management believes that the remaining provision 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 December 31, 1996 and 1995 and the results of its
operations and its cash flow for the three and six months ended December 31,
1996 and 1995. Such adjustments are of a normal and recurring nature. Operating
results for the three and six months ended December 31, 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.
19
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The various matters discussed under the heading "Contingencies" on
page 18 of this Form 10-Q are incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on November 12,
1996, the following persons were elected to the Board of Directors:
James T. Nichols
Clark A. Johnson
In such connection, Messrs. Nichols and Johnson received 8,663,700 and
8,668,854 votes, respectively, "For" election and 43,065 and 37,911
votes, respectively, were withheld. In total, 11,312,427 shares were
authorized to vote.
In addition, stockholders voted on a proposal to approve the InterTAN,
Inc. 1996 Stock Option Plan. Such proposal was approved with 4,875,105
votes cast in favor of approval, 805,845 votes cast against and
143,875 votes abstaining.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
3(a) Restated Certificate of Incorporation (Filed as
Exhibit 3(a) to InterTAN's Registration Statement
on Form 10 and incorporated herein by reference).
3(a)(i) Certificate of Amendment of Restated Certificate of
Incorporation (Filed as Exhibit 3(a)(i) to
InterTAN's Annual Report on Form 10-K for fiscal
year ended June 30, 1995 and incorporated herein by
reference).
3(a)(ii) Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock
(Filed as Exhibit 3(a)(i) to InterTAN's
Registration Statement on Form 10 and incorporated
herein by reference).
20
Exhibit No. Description
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).
21
Exhibit No. Description
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).
*11 Statement of Computation of Earnings Per Share
*27 Article 5, Financial Data Schedule
*99 Form of Multi-Option Switch Facility Agreement
between InterTAN Australia Ltd. and Westpac Banking
Corporation.
- --------------------
* Filed herewith
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
InterTAN, Inc.
(Registrant)
Date: February 13, 1997 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)
23
INTERTAN, INC.
FORM 10-Q
INDEX TO EXHIBITS
Exhibit No. Description
3(a) Restated Certificate of Incorporation (Filed as
Exhibit 3(a) to InterTAN's Registration Statement
on Form 10 and incorporated herein by reference).
3(a)(i) Certificate of Amendment of Restated Certificate of
Incorporation (Filed as Exhibit 3(a)(i) to
InterTAN's Annual Report on Form 10-K for fiscal
year ended June 30, 1995 and incorporated herein by
reference).
3(a)(ii) Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock
(Filed as Exhibit 3(a)(i) to InterTAN's
Registration Statement on Form 10 and incorporated
herein by reference).
3(b) Bylaws (Filed on Exhibit 3(b) to InterTAN's
Registration Statement on Form 10 and incorporated
herein by reference).
3(b)(i) Amendments to Bylaws through August 3, 1990 (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).
Exhibit No. Description
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 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).
*11 Statement of Computation of Earnings Per Share
*27 Article 5, Financial Data Schedule
*99 Form of Multi-Option Switch Facility Agreement
between InterTAN Australia Ltd. and Westpac Banking
Corporation.
- --------------------
* Filed herewith