SECURITIES AND EXCHANGE COMMISSION
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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 March 31,1997 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission file number 1-10062
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InterTAN, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 75-2130875
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 Main Street, Suite 1805
Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 348-9701
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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At April 30, 1997, 11,686,015 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 March 31,
1997, 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 MARCH 31, 1997.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERTAN, INC.
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(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31 March 31
-------------------- --------------------
1997 1996 1997 1996
-------- -------- ------- --------
Net sales and operating revenues..................... $109,555 $108,757 $412,776 $403,840
Other income ........................................ 289 196 545 697
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109,844 108,953 413,321 404,537
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Operating costs and expenses:
Cost of products sold.............................. 58,802 59,410 229,335 226,661
Selling, general and administrative expenses....... 50,766 48,840 166,508 156,754
Depreciation and amortization...................... 2,566 2,014 7,162 5,827
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112,134 110,264 403,005 389,242
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Operating income (loss).............................. (2,290) (1,311) 10,316 15,295
Foreign currency transaction (gains) losses.......... 124 (69) (802) (261)
Interest expense, net................................ 1,503 1,516 5,008 5,163
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Income (loss) before income taxes.................... (3,917) (2,758) 6,110 10,393
Provision for income taxes........................... 1,216 1,350 6,373 6,369
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Net income (loss).................................... $ (5,133) $ (4,108) $ (263) $ 4,024
=====================================================
Primary net income (loss) per average common share... $ (0.45) $ (0.38) $ (0.02) $ 0.37
Fully diluted net income (loss) per
average common share............................... $ (0.45) $ (0.38) $ (0.02) $ 0.34
Average common shares outstanding.................... 11,527 10,943 11,373 10,964
Average common shares outstanding
assuming full dilution............................. 11,527 10,943 11,373 17,722
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.
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(In thousands, except share amounts)
March 31 June 30 March 31
1997 1996 1996
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Assets
Current Assets:
Cash and short-term investments.................................... $ 39,036 $ 34,096 $ 38,597
Accounts receivable, less allowance for doubtful accounts.......... 9,829 9,422 10,775
Inventories........................................................ 171,757 162,207 160,916
Other current assets............................................... 6,258 7,628 8,585
Deferred income taxes.............................................. 435 3,831 1,853
-----------------------------------------------
Total current assets.......................................... 227,315 217,184 220,726
Property and equipment, less accumulated depreciation
and amortization................................................... 38,904 39,129 38,690
Other assets......................................................... 2,648 2,928 2,851
Deferred income taxes................................................ - 2,392 4,958
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$268,867 $261,633 $267,225
===============================================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings......................................... $ 9,769 $ 975 $ -
Current maturities of notes payable to Tandy Corporation........... 6,958 6,958 17,071
Accounts payable................................................... 21,641 24,082 15,227
Accounts payable to Tandy Corporation.............................. 398 894 470
Accrued expenses................................................... 31,518 25,833 26,031
Income taxes payable............................................... 12,290 12,971 13,689
-----------------------------------------------
Total current liabilities..................................... 82,574 71,713 72,488
Long-term notes payable to Tandy Corporation,
less current maturities......................................... 16,344 23,070 22,992
9% convertible subordinated debentures............................... 41,030 41,660 41,797
Other liabilities.................................................... 6,475 5,678 5,699
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146,423 142,121 142,976
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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, 11,629,245, 11,172,506 and 11,034,112
shares issued and outstanding................................. 11,629 11,173 11,034
Additional paid-in capital......................................... 113,686 111,678 111,008
Retained earnings.................................................. 18,869 19,132 25,397
Foreign currency translation effects............................... (21,740) (22,471) (23,190)
-----------------------------------------------
Total stockholders' equity.................................... 122,444 119,512 124,249
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Commitments and contingent liabilities...............................
$268,867 $261,633 $267,225
===============================================
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.
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(In thousands) Nine months ended
March 31
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1997 1996
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Cash flows from operating activities:
Net income (loss)....................................................................... $ (263) $ 4,024
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization...................................................... 7,162 5,827
Deferred income taxes.............................................................. 5,801 6,708
Foreign currency transaction gains, unrealized..................................... (735) (261)
Other.............................................................................. 1,706 1,786
Cash provided by (used for) current assets and liabilities:
Accounts receivable................................................................ (307) (2,100)
Inventories........................................................................ (8,370) (12,990)
Other current assets............................................................... 1,203 524
Accounts payable................................................................... (3,168) (2,400)
Accounts payable to Tandy Corporation.............................................. (499) 26
Accrued expenses................................................................... 5,525 496
Income taxes payable............................................................... (483) (346)
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Net cash provided by operating activities.......................................... 7,572 1,294
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Cash flows from investing activities:
Additions to property and equipment..................................................... (6,566) (9,649)
Proceeds from sales of property and equipment........................................... 161 343
Other investing activities.............................................................. 1,089 1,955
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Net cash used in investing activities................................................. (5,316) (7,351)
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Cash flows from financing activities:
Changes in short-term bank borrowings, net............................................. 8,630 3,718
Proceeds from issuance of common stock to employee plans................................ 1,427 1,445
Proceeds from exercise of stock options................................................. - 760
Principal repayments on long-term borrowings............................................ (6,958) (6,958)
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Net cash provided by (used in) financing activities................................... 3,099 (1,035)
Effect of exchange rate changes on cash.................................................. (415) 429
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Net increase (decrease) in cash and short-term investments............................... 4,940 (6,663)
Cash and short-term investments, beginning of period..................................... 34,096 $ 45,260
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Cash and short-term investments, end of period........................................... 39,036 38,597
======= ========
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.
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(In thousands)
Foreign
Additional Currency Total
Common Stock Paid-in Retained Translation Stockholders'
Shares Amount Capital Earnings Effects Equity
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Balance at June 30, 1996................. 11,173 $11,173 $111,678 $19,132 ($22,471) $119,512
Net foreign currency
translation adjustments................. - - - - 731 731
Issuance of common stock
to employee plans....................... 456 456 2,008 - - 2,464
Net income............................... - - - (263) - (263)
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Balance at March 31, 1997................ 11,629 $11,629 $113,686 $18,869 ($21,740) $122,444
====== ======= ======== ======= ======== ========
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
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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 March 31, 1997 and 1996 is presented in the table below:
SALES OUTLETS
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------ -----------------------
ENDING OPENED CLOSED ENDING OPENED CLOSED
CANADA
Company-operated 452* 1 4 448 2 3
Dealers 429 6 3 420 3 5
----- -- -- ----- -- --
881 7 7 868 5 8
=== == == ===== == =
AUSTRALIA
Company-operated 212 - 1 209 2 1
Dealers 195 1 16 202 2 18
----- -- -- ----- -- --
407 1 17 411 4 19
===== == == ===== == ==
UNITED KINGDOM
Company-operated 348 - 3 346 1 2
Dealers 172 - 3 175 10 -
----- -- -- ----- -- --
520 - 6 521 11 2
===== == == ===== == ==
TOTAL
Company-operated 1,012 1 8 1,003 5 6
Dealers 796 7 22 797 15 23
----- -- -- ----- -- --
1,808 8 30 1,800 20 29
===== == == ===== == ==
*In addition, the Company operated 49 stores on behalf of Rogers Cantel Inc.
8
OPERATING INCOME
The Company's operating income (loss) for each geographic segment for the three
and nine-month periods ended March 31, 1997 and 1996 is presented in the
following table (in thousands):
OPERATING INCOME (LOSS)
------------------------
UNITED CORPORATE
CANADA AUSTRALIA KINGDOM EXPENSES TOTAL
------ --------- ------- -------- --------
Three Months Ended
March 31, 1997 $ 3,210 $ 547 $(4,963) $(1,084) $(2,290)
Three Months Ended
March 31, 1996 $ 3,589 $ 153 $(3,801) $(1,252) $(1,311)
Nine Months Ended
March 31, 1997 $16,247 $3,914 $(6,712) $(3,133) $10,316
Nine Months Ended
March 31, 1996 $19,326 $2,370 $(2,874) $(3,527) $15,295
Foreign exchange fluctuations accounted for $263,000 of the increase in the
consolidated operating loss for the three-month period ended March 31, 1997.
For the nine-month period ended March 31, 1997, the effect of foreign exchange
fluctuations was not significant.
NET SALES
Net sales for the quarter ended March 31, 1997 were $109,555,000, an increase of
0.7% over the sales for the same quarter in the prior year of $108,757,000.
When the impact of fluctuations in the value of the US dollar in relation to the
currencies of the countries in which the Company operates is removed, the sales
increase reverses to a loss of 2.2%. Comparative store sales, measured at the
same exchange rate, decreased by 4.5% from the same quarter in the prior year.
Year to date, sales have increased by 2.2% in US dollars. In local currency,
however, year to date sales have decreased by 0.2%. Comparative store sales for
the nine months ended March 31, 1997 have decreased 2.0% from the same period a
year ago.
The table which follows shows by country the percentage changes in net sales for
the quarter and nine months ended March 31, 1997 compared to the corresponding
periods in the prior year. Changes are presented in both US dollars and local
currencies to illustrate the effects of exchange rate fluctuations. The change
in comparative store sales, measured at the same exchange rates, is also shown:
9
NET SALES
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PERCENTAGE INCREASE (DECREASE)
------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1997
LOCAL COMPARATIVE LOCAL COMPARATIVE
US$ CURRENCY STORE US$ CURRENCY STORE
----- -------- ----------- ----- -------- -----------
Canada 1.1 % 0.4 % (3.4)% (0.2)% (0.2)% (2.9)%
Australia (1.4)% (4.2)% (7.6)% 9.7 % 4.0 % 1.2 %
United Kingdom 1.6 % (4.7)% (4.1)% 1.7 % (2.5)% (2.6)%
Like most retailers, the sales performance of the Company for the quarter was
negatively affected by the fact that last year was a leap year, resulting in an
extra selling day in February, and by the fact that Easter in 1997 fell in March
rather than April, as was the case a year ago. Management estimates that these
two factors combined to affect the sales comparison with last year by
approximately $2 million or 2 percentage points. In addition, soft computer and
cellular sales depressed sales in all three of the Company's markets.
Management believes that consumers have delayed major computer purchases in the
anticipation of the introduction of the new MMX technology. The roll-out of
these products took place much later in the countries in which the Company
operates than was the case in the United States. The transition from analog to
digital-based cellular products has also had a negative effect on sales
performance, particularly in the U.K. and Australia.
In Canada, severe winter weather conditions in Eastern Canada and certain
regions of the west placed pressure on sales. While the performance of the new
company-operated Cantel stores continues to run short of expectations, some
improvements have been made. Management has recently been reorganized at store
level to control costs and the stores have been remerchandised to display the
complete product assortment - both cellular and other communications end
equipment and accessories - more effectively. At quarter-end, the Company
operated 49 stores on behalf of Rogers Cantel Inc., increasing to 57 stores in
April.
The impact of soft cellular sales was felt most in Australia. In that country,
the government-controlled air network will not be supporting analog product
beyond 1999. Management believes customers are reluctant to commit to a product
which has such a short life. While digital product is available, until recently
its pricing was such that it was not an affordable alternative to many
consumers. Management anticipates that this situation should be improved with
the introduction of newer, more attractively priced digital products late in the
fiscal year.
In the U.K., sales performance was affected by the nature of the Company's
agreement to sell computers for the German manufacturer, Vobis Microcomputer AG
("Vobis"). Under this arrangement, Vobis retains title to and merchandising
control of the inventory and the Company is the sales agent for Vobis,
receiving a commission on each sale. Had the Company purchased,
10
managed and sold computer inventory as it had done in the past, the revenue
generated from the sale of computers, rather than commissions earned, would have
produced an overall small sales gain. Difficulties with product supply and
quality have also been experienced with this program. Management is actively
working with Vobis to address these issues. Cellular sales were also soft in
the U.K., with the number of activations down from a year ago. Management
attributes this decline to a pricing policy by carriers designed to encourage
consumers away from analog product, which has been traditionally more affordable
than digital product.
GROSS MARGIN AND COST OF PRODUCTS SOLD
The gross margin percentage increased to 46.3% in the third quarter of fiscal
1997 from 45.4% a year ago, an increase of 90 basis points. The most significant
improvement was in Australia, where margins strengthened by 5.4 percentage
points over the same quarter last year. In the United Kingdom, margins declined
by 60 basis points, while in Canada margins increased by 10 basis points. Year
to date, the consolidated gross margin percentage is 50 basis points ahead of
the prior year.
The effect of a higher gross margin percentage, combined with the effect of
stronger currencies generally, was partially offset by the negative impact of
lower sales. Overall, gross margin dollars for the quarter increased by
$1,407,000:
Increase in margin percentage $ 1,118,000
Decrease in sales (1,135,000)
Foreign exchange rate effects 1,424,000
-----------
$ 1,407,000
===========
In Canada, pricing cuts were taken on a selected group of products which were
then promoted in an effort to grow sales. Despite the pressure that this
strategy placed on margins, Canada was nevertheless able to achieve a slight
increase in the gross margin percentage by increasing the proportion of higher
margin private label products, especially batteries and parts and accessories,
in the sales mix.
A higher gross margin percentage continues to be a significant factor in the
improved performance of the Australian subsidiary. There are a variety of
reasons for this margin increase, including initiatives directed at increasing
the level of extended warranty contracts and the introduction of an innovative
and profitable service to recondition rechargeable batteries. Cellular air time
rebates, reflecting cumulative activations, continue to be an increasingly
important factor in Australia's margin improvement. Finally, while weak cellular
sales depressed overall sales, the reduction had a positive effect on the gross
margin performance.
11
In the U.K., significant efforts were made to promote the sale of discontinued
merchandise, not only to clear older stock and reduce inventory levels
generally, but also to generate sales. Sales of these products drove down the
gross margin percentage for the quarter. The negative effect of this reduction
was partially offset by commissions from the sale of Vobis computers, which flow
directly to margin. See discussion under "Net Sales".
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses ("SG&A expenses") for the
three months ended March 31, 1997 were $50,766,000 compared to $48,840,000 in
the third quarter of the prior year, an increase of $1,926,000 or 3.9%. Year to
date, SG&A expenses have increased from $156,754,000 for the nine months ended
March 31, 1996 to $166,508,000 in the current period, an increase of $9,754,000
or 6.2%. Foreign currency rate fluctuations accounted for $1,587,000 and
$3,710,000 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 0.7% and 3.8%,
respectively.
The following table provides a breakdown of SG&A expenses by major category for
the three and nine-month periods ended March 31, 1997 (percentages shown are as
a rate to sales):
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
(In thousands, except percents)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
1997 1996 1997 1996
------------- ------------- ------------- -------------
AMOUNT PCT. AMOUNT PCT. AMOUNT PCT. AMOUNT PCT.
------- ---- ------- ---- ------- ---- ------- ----
Advertising $ 5,384 4.9 $ 5,344 4.9 $ 22,240 5.4 $ 20,704 5.1
Rent 10,831 9.9 10,110 9.3 32,634 7.9 30,590 7.6
Payroll 20,459 18.7 19,997 18.4 67,418 16.3 63,620 15.8
Taxes
(other than
income taxes) 4,336 4.0 3,927 3.6 13,714 3.3 12,636 3.1
Telephone and
Utilities 1,917 1.7 1,842 1.7 5,637 1.4 5,248 1.3
Other 7,839 7.1 7,620 7.0 24,865 6.0 23,956 5.9
------- ---- ------- ---- -------- ---- ------- ----
Total $50,766 46.3 $48,840 44.9 $166,508 40.3 $156,754 38.8
======= ==== ======= ==== ======== ==== ======== ====
As indicated above, while SG&A expenses increased by $1,926,000 for the quarter,
$1,587,000 of this increase was attributable to foreign currency rate effects.
Previous initiatives to control SG&A spending had an effect in the third
quarter, as the real increase in SG&A spending of $339,000, measured at
constant exchange rates, is more than explained by one-time severance
12
costs and the scheduled increase in the royalty payable to Tandy Corporation
("Tandy"). Consequently, a sales performance which fell short of expectations
was the major factor contributing to an increase in the SG&A percentage for the
quarter of 1.4 percentage points to 46.3%.
Management's stated objective for fiscal year 1997 was to achieve a one
percentage point increase in operating margin as a percentage of 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 90 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 $1,503,000 for the three months ended March 31, 1997 was
comparable with the corresponding amount reported during the same quarter last
year. Net interest expense for the nine months ended March 31, 1997 of
$5,008,000 was $155,000 lower than in the same period last fiscal year.
PROVISION FOR INCOME TAXES
An income tax provision of $1,216,000 was recorded during the quarter, primarily
relating to the profits of the Canadian subsidiary. In the third quarter of
fiscal year 1996, a net tax provision of $1,350,000 was recorded. For the nine
months ended March 31, 1997, income tax expense of $6,373,000 was recorded
compared to $6,369,000 in the first nine months of the prior year. The unusually
high effective tax rate, on a consolidated basis, is due to the fact that the
Company received no tax benefit from the operating losses incurred by its U.K.
subsidiary, while tax expense must be recognized on the profits of the Canadian
subsidiary. Management expects this trend to continue until profitability is
restored in the U.K.
NET INCOME PER AVERAGE COMMON SHARE
The primary and fully diluted net losses per average common share were $0.45 for
the three-month period ended March 31, 1997, as compared to a loss of $0.38 for
the same quarter in the prior year. For the nine-month period ended March 31,
1997, the primary and fully diluted net losses per average common share were
$0.02, compared to net incomes of $0.37 and $0.34, respectively, for the same
period a year ago.
13
In the nine-month period ended March 31, 1996, 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. At March 31, 1997 and March 31, 1996, directors and employees of the
Company and its subsidiaries held options to purchase 795,333 and 502,000
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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 128, Earnings per Share ("FAS 128"), which is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Effective December 31, 1997, the Company will
adopt FAS 128, which established new standards for computing and presenting
earnings per share ("EPS"). The statement requires dual presentation of basic
and diluted EPS on the face of the income statement for entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation, to the numerator and denominator of
the diluted EPS computation. Basic EPS excludes the effect of potentially
dilutive securities while diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised,
converted, or resulted in the issuance of common stock that would then share in
the earnings of the entity. For the three and nine months ended March 31, 1997,
pro forma basic and diluted loss per common share computed pursuant to FAS 128
would not have differed from that presented on the face of the Consolidated
Statement of Operations.
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 March 31, 1997, in exchange rates as measured against the
US dollar:
FOREIGN EXCHANGE RATE FLUCTUATIONS
----------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
FROM MARCH 31, 1996 FROM JUNE 30, 1996
------------------- ------------------
Canada (1.8) (1.5)
Australia 0.5 (0.2)
United Kingdom 7.3 5.6
14
INVENTORIES
Inventories have increased from $162,207,000 at June 30, 1996 to
$171,757,000 at March 31, 1997, an increase of $9,550,000. Inventories at March
31, 1996 were $160,916,000, resulting in a year-on-year increase of $10,841,000.
Approximately 20% of each of these increases is attributable to foreign currency
rate effects, in particular a stronger pound sterling. The remainder is
primarily 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 effects
of this strategy had been experienced earlier in Canada and Australia. Also
contributing to the increases in the United Kingdom subsidiary's inventory was a
lower than expected level of sales both during the third quarter and year-to-
date. Inventory levels in the United Kingdom subsidiary are being actively
managed down and some improvement was experienced during the third quarter.
Management anticipates that by the end of the fiscal year, inventories in the
United Kingdom subsidiary will be more closely aligned with the prior year.
Management also 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
March 31, 1996 to $6,958,000 at March 31, 1997 and June 30, 1996. This decrease
results from the scheduled repayment of the Series B Note 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 March 31, 1997 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 decreased from $24,082,000 at June 30, 1996 to
$21,641,000 at March 31, 1997. At March 31, 1997, accounts payable were
$6,414,000 higher than at March 31, 1996. This increase 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
$26,031,000 at March 31, 1996 to $31,518,000 at March 31, 1997. 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.
15
INCOME TAXES PAYABLE
Income taxes payable were $12,290,000 at March 31, 1997 compared to balances at
June 30, 1996 and March 31, 1996 of $12,971,000 and $13,689,000, 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 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 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 cash deposit or letters of credit 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
16
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 has appealed this reassessment and, as indicated above, may
be required to post a cash deposit or letters of credit 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 $7,572,000 in cash during the nine months ended
March 31, 1997 compared to $1,294,000 in the same period of the prior year, an
increase of $6,278,000. Increases in inventory levels used $4,620,000 less cash
than in the previous fiscal year. Accrued expenses conserved $5,525,000 in cash
for the period as compared to $496,000 in the previous year, the difference
relating primarily to the timing of advertising expenditures and an accrual for
the payment of sales related taxes in the United Kingdom. The benefits of the
additional cash generated by these changes were partially offset by a reduction
in net income, adjusted to reconcile net income to cash, which generated
$4,413,000 less cash than last year, falling from $18,084,000 for the nine
months ended March 31, 1996 to $13,671,000 at the end of the third quarter of
the current fiscal year.
Cash flow from investing activities consumed $5,316,000 during the current year
to date period, as compared with $7,351,000 a year ago. This decrease is
primarily attributable to a planned reduction in capital spending.
Financing activities provided $3,099,000 in cash during the nine months ended
March 31, 1997, while consuming $1,035,000 in cash during the same period a year
ago. This change results primarily from an increase of $4,912,000 in the level
of short-term borrowings needed to finance operations. This increase in cash
was partially offset by the fact that there were no exercises of stock options
by employees, thus no cash generated, during the nine months ended March 31,
1997. The exercise of such options had generated $760,000 in cash a year ago.
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 ($43,332,000 at March 31, 1997 exchange rates). This agreement
has been renewed and now extends through mid-August, 1997.
17
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 March 31, 1997,
there were borrowings against the credit facility aggregating $9,769,000.
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 ($9,432,000 at March 31, 1997
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 ($3,930,000 at March 31,
1997 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 March 31, 1997, 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 from the borrowings evidenced by 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 March 31, 1997,
the Company was in compliance with all of these requirements. 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 during the remainder of fiscal year 1997
will include the funding of capital expenditures which the Company anticipates
will approximate $2,200,000 during the remainder of fiscal year 1997, mainly
related to store expansion, remodeling and upgrading. As previously described,
the Company believes that it may be required to post additional tax deposits or
letters of credit 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
18
will provide the Company with sufficient liquidity to meet its planned
requirements through the 1997 Christmas selling season, 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, on terms
acceptable to the Company.
CONTINGENCIES
-------------
Claims have been made by a former employee for damages for wrongful dismissal
totaling approximately $870,000. The Company is vigorously defending this
action. The Company believes that the possible range of loss in this matter 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.
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 certain trade creditors, 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 March 31, 1997 and 1996 and the results of
its operations for the three and nine months ended March 31, 1997 and 1996 and
its cash flow for the nine months ended March 31, 1997 and 1996. Such
adjustments are of a normal and recurring nature. Operating results for the
three and nine months ended March 31, 1997 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 19 of this Form 10-Q are incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were put to a vote of the Company's stockholders during the
three month period ended March 31, 1997.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
3(a) Restated Certificate of Incorporation (Filed as
Exhibit 3(a) to InterTAN's Registration
Statement on Form 10 and incorporated herein by
reference).
3(a)(i) Certificate of Amendment of Restated
Certificate of Incorporation (Filed as Exhibit
3(a)(i) to InterTAN's Annual Report on Form 10-
K for fiscal year ended June 30, 1995 and
incorporated herein by reference).
3(a)(ii) Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock (Filed as Exhibit 3(a)(i) to
InterTAN's Registration Statement on Form 10
and incorporated herein by reference).
3(b) Bylaws (Filed on Exhibit 3(b) to InterTAN's
Registration Statement on Form 10 and
incorporated herein by reference).
3(b)(i) Amendments to Bylaws through August 3, 1990
(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).
20
Exhibit No. Description
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 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 February 11, 1997
amending the Credit Agreement.
*10(b) Third Amendment to InterTAN Advertising
Agreement dated to be effective as of January
1, 1997.
21
Exhibit No. Description
*10(c) Retirement Agreement dated March 3, 1997
between InterTAN, Inc. and James Michael Wood.
*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 March 31, 1997.
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: May 14, 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). *10(a) Amending Agreement dated
February 11, 1997 amending the Credit
Agreement.
*10(b) Third Amendment to InterTAN Advertising
Agreement dated to be effective as of January
1, 1997.
*10(c) Retirement Agreement dated March 3, 1997
between InterTAN, Inc. and James Michael Wood.
*11 Statement of Computation of Earnings Per
Share.
*27 Article 5, Financial Data Schedule.
- -------------------
* Filed herewith