SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended
September 30, 1997 or
------------------
[ ] 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
- ---------------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At October 31, 1997, 12,056,301 shares of the registrant's common stock, par
value $1.00 per share, were outstanding.
TABLE OF CONTENTS
PART I
Page
1. ITEM 1 - Financial Statements and Supplementary Data
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Stockholders' Equity 6
2. ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II
1. ITEM 1 - Legal Proceedings 18
2. ITEM 4 - Submission of Matters to a Vote of Security Holders 18
3. ITEM 6 - Exhibits and Reports on Form 8-K 18
OTHER
1. Signatures 21
2
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERTAN, INC.
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(U.S. dollars in thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30
--------------------
1997 1996
-------- --------
Net sales and operating revenues........ $121,709 $112,287
Other income............................ 92 141
--------------------
121,801 112,428
--------------------
Operating costs and expenses:
Cost of products sold................. 67,819 61,557
Selling, general and administrative
expenses............................. 51,360 50,847
Depreciation and amortization......... 1,919 2,217
--------------------
121,098 114,621
--------------------
Operating income (loss)................. 703 (2,193)
Foreign currency transaction gains.... (80) (195)
Interest expense, net................. 1,643 1,597
--------------------
Loss before income taxes................ (860) (3,595)
Provision for income taxes.............. 2,049 1,012
--------------------
Net loss................................ $ (2,909) $ (4,607)
====================
Net loss per average common share....... $(0.24) $(0.41)
Average common shares outstanding....... 11,924 11,231
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
3
CONSOLIDATED BALANCE SHEETS
INTERTAN, INC.
- --------------------------------------------------------------------------------
(In thousands, except share data)
SEPTEMBER 30 JUNE 30 SEPTEMBER 30
1997 1997 1996
------------------------------------------------
ASSETS
Current Assets:
Cash and short-term investments..................... $ 19,272 $ 34,726 $ 17,482
Accounts receivable, less allowance for
doubtful accounts................................. 13,727 9,655 14,975
Inventories......................................... 180,401 170,594 183,014
Other current assets................................ 7,758 7,271 8,357
Deferred income taxes............................... 479 634 3,012
------------------------------------------------
Total current assets.............................. 221,637 222,880 226,840
Property and equipment, less accumulated
depreciation and amortization.................... 27,850 28,812 38,623
Other assets.......................................... 1,076 2,615 2,846
Deferred income taxes................................. - - 2,395
------------------------------------------------
$250,563 $254,307 $270,704
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings.......................... $ 13,759 $ 9,821 $ 9,421
Current maturities of notes payable to Tandy
Corporation....................................... 6,958 6,958 6,958
Accounts payable.................................... 27,544 25,215 31,837
Accounts payable to Tandy Corporation............... 2,339 2,589 1,404
Accrued expenses.................................... 23,433 27,031 24,353
Income taxes payable................................ 14,498 12,734 13,126
------------------------------------------------
Total current liabilities......................... 88,531 84,348 87,099
Long-term notes payable to Tandy Corporation,
less current maturities............................. 13,018 16,420 19,668
9% convertible subordinated debentures................ 41,138 41,138 41,711
Other liabilities..................................... 6,220 6,167 5,862
------------------------------------------------
148,907 148,073 154,340
------------------------------------------------
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued or outstanding............ - - -
Common stock, $1 par value, 40,000,000 shares
authorized, 12,009,208, 11,873,437 and
11,312,427 issued and outstanding................. 12,009 11,873 11,312
Additional paid-in capital.......................... 114,796 114,350 112,370
Retained earnings................................... (386) 2,523 14,525
Foreign currency translation effects................ (24,763) (22,512) (21,843)
------------------------------------------------
Total stockholders' equity........................ 101,656 106,234 116,364
------------------------------------------------
Commitments and contingent liabilities................
$250,563 $254,307 $270,704
================================================
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERTAN, INC.
- --------------------------------------------------------------------------------
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1997 1996
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (2,909) $ (4,607)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization............................. 1,919 2,217
Deferred income taxes..................................... 133 819
Foreign currency transaction (gains) losses, unrealized... 26 (82)
Other..................................................... 491 594
Cash provided by (used for) current assets and liabilities:
Accounts receivable....................................... (4,175) (5,481)
Inventories............................................... (12,600) (19,919)
Other current assets...................................... (840) (824)
Accounts payable.......................................... 2,910 7,558
Accounts payable to Tandy Corporation..................... (213) 505
Accrued expenses.......................................... (3,202) (999)
Income taxes payable...................................... 1,759 139
----------------------------
Net cash used in operating activities (16,701) (20,080)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......................... (1,389) (2,167)
Proceeds from sales of property and equipment............... 26 41
Other investing activities.................................. 1,758 246
----------------------------
Net cash provided by (used in) investing activities....... 395 (1,880)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term bank borrowings, net.................. 4,227 8,375
Proceeds from issuance of common stock to employee plans.... 340 473
Principal repayments on long-term borrowings................ (3,479) (3,479)
----------------------------
Net cash provided by financing activities................. 1,088 5,369
----------------------------
Effect of exchange rate changes on cash....................... (236) (23)
----------------------------
Net decrease in cash and short-term investments.............. (15,454) (16,614)
Cash and short-term investments, beginning of period......... 34,726 34,096
----------------------------
Cash and short-term investments, end of period............... $ 19,272 $ 17,482
============================
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 STOCKHOLDERS' EQUITY
INTERTAN, INC.
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(In thousands)
Foreign
Currency Total
Common Stock Additional Retained Translation Stockholders'
Shares Amount Paid-in Capital Earnings Effects Equity
----------------------------------------------------------------------------------
Balance at June 30, 1997.............. 11,873 $11,873 $114,350 $ 2,523 $(22,512) $106,234
Net foreign currency
translation adjustments............. - - - - (2,251) (2,251)
Issuance of common stock
to employee plans................... 136 136 446 - - 582
Net loss.............................. - - - (2,909) - (2,909)
----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 12,009 $12,009 $114,796 $ (386) $(24,763) $101,656
==================================================================================
The comments in Management's Discussion and Analysis of Financial Condition and
Results of Operations are an integral part of these statements.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY NOTE REGARDING FORWARD-LOOKING INFORMATION
-------------------------------------------------------
With the exception of historical information, the matters discussed herein are
forward-looking statements about the business, financial condition and prospects
of InterTAN, Inc. (the "Company" or "InterTAN"). The actual results of the
Company could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, but not limited
to, international economic conditions, interest and foreign exchange rate
fluctuations, various tax issues, including possible reassessments, changes in
product demand, competitive products and pricing, availability of products,
inventory risks due to shifts in market conditions, dependence on manufacturers'
product development, the regulatory and trade environment, real estate market
fluctuations and other risks indicated in the Company's previous filings with
the Securities and Exchange Commission. These risks and uncertainties are beyond
the ability of the Company to control, and in many cases the Company cannot
predict the risks and uncertainties that could cause its actual results to
differ materially from those indicated by the forward-looking statements.
RESULTS OF OPERATIONS
---------------------
InterTAN is engaged in the sale of consumer electronics products primarily
through company-operated retail stores and dealer outlets in Canada, the United
Kingdom and Australia. The Company's retail operations are conducted through
three wholly-owned subsidiaries: InterTAN Australia Ltd., which operates in
Australia under the trade name "Tandy Electronics"; InterTAN Canada Ltd., which
operates in Canada under the trade name "RadioShack"; and InterTAN U.K. Limited,
which operates in the United Kingdom under the "Tandy" trade name. All of these
trade names are used under license from Tandy Corporation ("Tandy") of Fort
Worth, Texas. In addition, during fiscal year 1996, the Company entered into an
agreement in Canada with Rogers Cantel Inc. ("Cantel") to operate
telecommunications stores ("Cantel stores") on its behalf. The first of these
stores was opened in August, 1996 and at September 30, 1997, 54 stores were in
operation.
The number of company-operated stores and dealers at September 30, 1997 and
1996, as well as the number of locations opened and closed during the three-
month periods then ended, is presented in the table below:
7
SALES OUTLETS
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------- ----------------------------
ENDING OPENED CLOSED ENDING OPENED CLOSED
CANADA
Company-operated 450* - 2 454* 4 -
Dealers 393 4 12 410 11 3
-------------------------- ----------------------------
843 4 14 864 15 3
========================== ============================
AUSTRALIA
Company-operated 217 2 - 210 2 2
Dealers 140 1 5 206 6 -
-------------------------- ----------------------------
357 3 5 416 8 2
========================== ============================
UNITED KINGDOM
Company-operated 339 1 3 346 1 -
Dealers 128 3 5 173 2 -
-------------------------- ----------------------------
467 4 8 519 3 -
========================== ============================
TOTAL
Company-operated 1,006 3 5 1,010 7 2
Dealers 661 8 22 789 19 3
-------------------------- ----------------------------
1,667 11 27 1,799 26 5
========================== ============================
*In addition, at September 30, 1997 and September 30, 1996, the Company operated
54 and 4 stores, respectively, on behalf of Cantel. Since these locations are
not company-owned, they are not included in the above table.
OPERATING INCOME
The Company's operating income (loss) for each geographic segment for the three-
month periods ended September 30, 1997 and 1996 is presented in the following
table (in thousands):
OPERATING INCOME (LOSS)
-----------------------
UNITED CORPORATE
CANADA AUSTRALIA KINGDOM EXPENSES TOTAL
------ --------- -------- -------- --------
Three months ended
September 30, 1997 $4,955 $828 $(3,854) $(1,226) $ 703
Three months ended
September 30, 1996 $2,740 $589 $(4,498) $(1,024) $(2,193)
In Canada and Australia, the improvement in operating results was due to a
combination of higher sales and an improvement in the operating margin. In the
United Kingdom, expense control was the major factor contributing to the
reduction in the operating loss. Part of this improvement resulted from lower
depreciation expense arising from the effects of an impairment charge recorded
pursuant to Financial Accounting Standard No. 121 ("FAS 121") during the fourth
quarter of fiscal year 1997.
8
The Canadian and Australian dollars were weaker against the U.S. dollar during
the first quarter of fiscal year 1998 than they were in the same quarter a year
ago. Consequently, the local currency operating incomes in those countries
translate into fewer U.S. dollars. At the same time, the United Kingdom pound
sterling was stronger against the U.S. dollar, resulting in the operating loss
in local currency in that country translating into more U.S. dollars. Had last
year's operating results been translated into U.S. dollars at this year's
exchange rates, the consolidated improvement in operating results would have
been increased by an additional $279,000.
NET SALES
Net sales for the quarter ended September 30, 1997 were $121,709,000, an
increase of 8.4% over the sales for the same quarter in the prior year of
$112,287,000. When the impact of fluctuations in the value of the U.S. dollar
in relation to the currencies of the countries in which the Company operates is
removed, the sales gain over the same quarter last year increases to 9.0%.
Comparative store sales, measured at the same exchange rate, increased by 5.5%
from the same quarter in the prior year.
The table which follows shows by country the percentage changes in net sales for
the quarter ended September 30, 1997 compared to the corresponding period in the
prior year. Changes are presented in both U.S. dollars and local currencies to
illustrate the effects of exchange rate fluctuations. The change in comparative
store sales, measured at the same exchange rates, is also shown:
NET SALES
---------
PERCENTAGE INCREASE (DECREASE)
------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, 1997
LOCAL COMPARATIVE
U.S.$ CURRENCY STORE
------ ---------- ------------
Canada 15.3 % 16.5 % 11.0 %
Australia (2.0)% 5.0 % 2.7 %
United Kingdom 4.6 % 0.0 % 0.2 %
Strong Canadian sales was the primary factor driving the overall improvement in
sales during the quarter. Increases in the sale of cellular telephones and
related accessories was a major factor contributing to the sales gain in Canada;
the introduction of PCS/digital technology has created a demand for these
products, resulting in increased sales both in the Company's own RadioShack
stores as well as in the 54 company-operated Cantel stores. As the roll out of
the Cantel stores had only begun late in the first quarter of fiscal year 1997,
the results of these stores are not yet reflected in comparative store sales
results. A successful "Back to School" campaign contributed to an increase in
the sale of computers. The sale of telephones and accessories, as well as
batteries, also continue to play an important role in Canada's sales results.
The positive effects of the introduction of home satellite dish systems also
benefited Canadian sales during the first quarter.
9
Sales growth in Australia also continued in the first quarter of fiscal year
1998. Overall sales performance in Australia was driven primarily by gains in
the sale of telephony products, including both cordless and corded telephones
and fax machines, and batteries. In addition, sales of PC's, including printers
and accessories, were up. Although cellular sales are still down compared to
last year, a more attractive product/pricing offering has been implemented which
management believes will have a positive effect on sales in future periods.
While overall sales in the United Kingdom were flat, this nevertheless
represents an improvement over the performance in recent quarters. Sales of
cellular telephones and accessories have been growing well, especially models
with a prepaid airtime card feature. These products have proven to be
particularly attractive to the Company's customer profile. Ongoing supply
problems had a negative effect on PC sales throughout the quarter. This problem
has been addressed with the addition of a sharply-priced clone to the Company's
nationally branded product assortment. Consequently, management believes the
Company will be in a better in-stock position in computers going forward. The
negative impact experienced by all U.K. retailers as a result of the funeral of
the Princess of Wales also influenced sales in the first quarter in the United
Kingdom.
GROSS MARGIN AND COST OF PRODUCTS SOLD
The gross margin percentage decreased to 44.3% in the first quarter of fiscal
1998 from 45.2% a year ago, a reduction of 90 basis points. This margin decline
is attributable primarily to the increase of cellular in the overall product mix
in Canada, in particular in the Cantel stores where the Company agreed to accept
lower margins in exchange for the payment of certain fixed store operating costs
by Cantel. Higher computer sales and the beginning of the satellite dish
program also contributed to a lower Canadian gross margin percentage. In the
U.K., discontinued merchandise was promoted at attractive prices in an effort
both to drive sales and to make room for Christmas merchandise. While this
program was successful in achieving its objectives, it did place pressure on
gross margins. Margins in Australia were up modestly from a year ago.
The effect of a lower gross margin percentage, combined with the effect of
overall weaker currencies, was more than offset by the positive impact of
increased sales. Overall, gross margin dollars for the quarter increased by
$3,159,000:
Decrease in margin percentage $(1,020,000)
Increase in sales 4,540,000
Foreign exchange rate effects (361,000)
--------------
$ 3,159,000
==============
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses ("SG&A expenses") for the
three months ended September 30, 1997 were $51,360,000 compared to $50,847,000
in the first quarter of the prior year, an increase of $513,000 or about 1.0%.
When the effects of foreign currency fluctuations are eliminated, an increase in
SG&A expenses, measured at the same exchange rates, of $597,000 is indicated.
Much of the increase in SG&A spending resulted from increases in expenses that
were attributable to higher sales, including things such as store payroll and
the royalty payable to Tandy. These spending increases were partially offset by
a planned reduction in advertising expense, reflecting a more focused strategy.
Holding SG&A spending to this level, combined with a sales gain of 8.4% produced
a reduction in the SG&A percentage of 3.1 percentage points to 42.2% of sales.
This leverage further resulted in a 2.2 percentage point increase in the
operating margin before depreciation, despite a decline in the gross margin
percentage.
The following table provides a breakdown of SG&A expenses by major category
(percentages shown are as a rate to sales):
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
(In thousands, except percents)
THREE MONTHS ENDED
SEPTEMBER 30
1997 1996
-----------------------------------
AMOUNT PCT. AMOUNT PCT.
-----------------------------------
Advertising $ 5,533 4.5 $ 6,459 5.8
Rent 10,678 8.8 10,474 9.3
Payroll 21,178 17.4 20,619 18.4
Taxes
(other than
income taxes) 4,302 3.5 4,230 3.8
Telephone and
Utilities 1,799 1.5 1,774 1.6
Other 7,870 6.5 7,291 6.4
-----------------------------------
Total $51,360 42.2 $50,847 45.3
===================================
NET INTEREST EXPENSE
Net interest expense was $1,643,000 for the three months ended September 30,
1997 compared with $1,597,000 for the same quarter last year, reflecting the
effects of higher short-term borrowings in the United Kingdom, partially offset
by the effects of a reduction in a long-term loan (the "Series A Note") owing
under a loan agreement with Tandy (the "Secured Loan Agreement").
11
PROVISION FOR INCOME TAXES
An income tax provision of $2,049,000 was recorded during the quarter compared
with a provision of $1,012,000 recorded in the first quarter of fiscal year
1997. This increase primarily reflects higher profits in Canada. Additionally,
as the tax benefits associated with a substantial portion of the net operating
losses of the Australian subsidiary have previously been recognized, tax expense
is now being provided on profits of Australia. 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.
Management expects this trend to continue at least until profitability is
restored in the U.K.
NET INCOME PER AVERAGE COMMON SHARE
The net loss per average common share was $0.24 for the three-month period ended
September 30, 1997, as compared to a loss of $0.41 for the same quarter in the
prior year. All of the Company's potentially dilutive instruments, which are
described more fully below, were anti-dilutive for the quarter in both periods.
The Company's potentially dilutive instruments include its 9% convertible
subordinated debentures (the "Debentures"), which are convertible into 6,745,346
common shares. In addition, the Company has outstanding warrants exercisable
for 1,449,007 common shares at an exercise price of $6.618 per share. As well,
at September 30, 1997 and September 30, 1996, directors and employees of the
Company and its subsidiaries held options to purchase 804,666 and 634,335
shares, respectively, at prices ranging from $3.50 to $8.1875 per share and
$5.31 to $8.1875 per share, respectively. As indicated above, all of these
various instruments were anti-dilutive during the three-month periods ended
September 30, 1997 and 1996; however, the dilutive effect of these various
instruments could impact earnings per share calculations in future periods, and
exchange rate impacts on the Debentures could increase or decrease their
dilutive effects. In addition, if the Company were to redeem the Debentures
after February 28, 2000 by issuing common shares to the holders thereof in
accordance with the terms of the Debentures, the dilutive effect of the
Debentures would be increased if the market value of the Company's common stock
at the time of redemption were less than the conversion price ($6.10 at
September 30, 1997 exchange rates).
In February 1997, the Financial Accounting Standards Board 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 quarter ended September 30, 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.
12
FINANCIAL CONDITION
-------------------
Most balance sheet accounts are translated from their values in local currency
to U.S. dollars at the respective month end rates. The table below outlines the
percentage change, to September 30, 1997, in exchange rates as measured against
the U.S. dollar:
FOREIGN EXCHANGE RATE FLUCTUATIONS
----------------------------------
% INCREASE % INCREASE
(DECREASE) (DECREASE)
FROM SEPTEMBER 30, 1996 FROM JUNE 30, 1997
------------------------ -------------------
Canada (1.4) 0.0
Australia (8.3) (3.7)
United Kingdom 3.4 (2.8)
INVENTORIES
Inventories have increased from $170,594,000 at June 30, 1997 to $180,401,000 at
September 30, 1997, an increase of $9,807,000. This increase results primarily
from the seasonal build-up of inventories as the Company prepares for
anticipated higher sales during the Christmas period. Inventories at September
30, 1997 have declined from the September 30, 1996 level of $183,014,000, a
reduction of $2,613,000. However, 75% of this reduction is attributable to
foreign exchange rate effects.
PROPERTY AND EQUIPMENT
Property and equipment, less accumulated depreciation and amortization, totaled
$27,850,000 at September 30, 1997, compared with $38,623,000 at September 30,
1996, a reduction of $10,773,000. This decrease relates primarily to an
impairment charge of $10,042,000 recorded pursuant to FAS 121 in the fourth
quarter of fiscal 1997. This charge reduced the carrying value of the Company's
investment in store assets in the United Kingdom to their estimated fair market
value. The balance of the reduction relates to foreign currency effects and
depreciation expense, partially offset by planned additions. Foreign currency
effects and depreciation expense, partially offset by planned additions,
primarily on store refits and improvements, also explain the reduction in
property and equipment from the June 30, 1997 level of $28,812,000.
ACCOUNTS PAYABLE
The level of accounts payable has increased from $25,215,000 at June 30, 1997 to
$27,544,000 at September 30, 1997, primarily as a result of higher inventory
purchases as the Christmas selling season approaches. At September 30, 1997,
accounts payable were $4,293,000 lower than at September 30, 1996. This
decrease in accounts payable results primarily from the reduction in the level
of inventories and from foreign currency rate effects.
13
ACCRUED EXPENSES
Accrued expenses have decreased from $27,031,000 at June 30, 1997 to $23,433,000
at September 30, 1997, a decrease of $3,598,000. This reduction results for the
most part from a change in the timing of the incidence of certain inventory-
related taxes in Australia and from foreign currency rate effects. Accrued
expenses at September 30, 1996 were $24,353,000.
INCOME TAXES PAYABLE
Income taxes payable were $14,498,000 at September 30, 1997 compared to balances
at June 30, 1997 and September 30, 1996 of $12,734,000 and $13,126,000,
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 $11,600,000. 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 paragraph immediately below.
The Company was advised in August 1995 that Revenue Canada intended to extend
the scope of its 1987 to 1989 reassessments to raise certain issues flowing from
the spin-off of the Company from Tandy in fiscal year 1987. Management
disagrees with Revenue Canada's views on these issues and will vigorously defend
the Company's position should Revenue Canada pursue these issues. Management
believes it has meritorious arguments supporting its stance and, accordingly, no
additional provision has been recorded for these possible reassessments.
Depending on the ultimate resolution of these issues, the Company could
potentially have an additional liability in the range of $0 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. Depending on the ultimate resolution of these
issues, the Company could potentially have an additional liability in the range
of $0 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
14
of the 1990-1993 tax in dispute, together with interest. Notwithstanding that
the Company is still in discussions with Revenue Canada regarding these issues,
Revenue Canada 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 has
appealed this reassessment and, as indicated above, would normally be required
to post a cash deposit equal to one-half of the reassessment, pending the
outcome of such appeal. However, Revenue Canada has agreed to defer the posting
of such deposit pending the outcome of on-going discussions on this particular
issue. Revenue Canada has further agreed to accept a letter of credit in lieu
of a cash deposit should it be necessary for the Company to actively proceed
with its appeal. 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 consumed $16,701,000 in cash during the three-month period
ended September 30, 1997 compared to $20,080,000 in the same period of the prior
year, a decrease of $3,379,000. Increases in inventory levels used $7,319,000
less cash than was the case in the three-month period ended September 30, 1996,
when the effects of increased inventories to support a private label
merchandising strategy were felt in the United Kingdom. The seasonal build-up of
accounts receivable consumed $1,306,000 less in cash than in the quarter ended
September 30, 1996, primarily as a result of lower dealer sales in the United
Kingdom. Operating activities also benefited from a reduction in the net loss,
adjusted to reconcile to cash, of $719,000. The benefits of the additional cash
generated by these changes were partially offset by the fact that the pay down
of accrued expenses consumed $3,202,000 in cash for the period as compared to
$999,000 in the previous year. In addition, a reduction in the build-up of
accounts payable preserved $4,648,000 less in cash during the three-month period
ended September 30, 1997 than was the case in the comparable period a year ago.
Cash flow from investing activities generated $395,000 during the three-month
period ended September 30, 1997, while consuming $1,880,000 a year ago. This
change results from a planned reduction in capital spending as well as the
liquidation of certain other assets.
Financing activities provided $1,088,000 and $5,369,000 in cash during the
quarters ended September 30, 1997 and September 30, 1996, respectively. This
reduction results in large part from a decrease of $4,148,000 in the level of
short-term borrowings needed to finance operations in the United Kingdom.
The Company's principal sources of liquidity during fiscal year 1998 are its
cash and short-term investments, its cash flow from operations and its banking
facilities.
In 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
15
inventory level calculation not to exceed Cdn$60,000,000 ($43,446,000 at
September 30, 1997 exchange rates). This agreement has been renewed and now
extends through mid-August, 1998. The Company intends to request a further
extension of the facility prior to that time 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
September 30, 1997, there were borrowings against the credit facility
aggregating $13,759,000. In September 1997, the Company's Merchandise Agreement
with Tandy was amended to permit the Company to support purchase orders with a
surety bond or bonds as well as letters of credit. The Company has entered into
an agreement with a major insurer to provide such a surety bond (the "Bond") in
an amount not to exceed $15,000,000. Use of the Bond will give the Company
greater flexibility in placing orders with Far Eastern suppliers by releasing a
portion of the credit facility for other purposes.
In fiscal year 1997, 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 ($8,710,000 at September, 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 ($3,629,000 at September
30, 1997 exchange rates) may be used in support of short-term borrowings. At
September 30, 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 from Tandy and from
the Debentures. Both the Secured Loan Agreement 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 Tandy; there can be no assurance that either event would occur.
In addition, the Secured Loan Agreement and the Syndicated Loan Agreement
contain covenants which require the Company to maintain tangible net worth at a
specified minimum level and which limit the level of debt due both to Tandy as
well as other parties, 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. During the three-month period ended September 30, 1997, the
Company was in compliance with all of these requirements. Management expects
that the Company will meet all such covenant requirements throughout fiscal year
1998.
The Company's primary uses of liquidity during the remainder of fiscal year 1998
will include the building of inventories for the 1997 Christmas selling season,
the funding of capital expenditures and the servicing of debt. The Company
anticipates that capital additions will approximate $6,500,000 during the
remainder of fiscal year 1998, mainly related to new store openings, remodeling
and upgrading. The Company's debt servicing requirements in the balance of
fiscal year 1998 are estimated to be approximately $6,250,000 and include
principal
16
payments under the Secured Loan Agreement of $3,479,000. 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 combined with the Syndicated Loan Agreement,
the Australian Facility and the Bond will provide the Company with sufficient
liquidity to meet its planned requirements throughout fiscal year 1998, provided
the amount of any additional tax deposits is 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
-------------
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 this matter 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 S-X, "Interim Financial Statements", and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements have
been prepared in conformity with accounting principles and practices (including
consolidation practices) as reflected in the Company's Annual Report on Form 10-
K for the fiscal year ended June 30, 1997, and, in the opinion of the Company,
include all adjustments necessary for fair presentation of the Company's
financial position as of September 30, 1997 and 1996 and the results of its
operations for the three months ended September 30, 1997 and 1996 and its cash
flows for the three months ended September 30, 1997 and 1996. Such adjustments
are of a normal and recurring nature. Operating results for the three months
ended September 30, 1997 are not necessarily indicative of the results that can
be expected for the fiscal year ended June 30, 1998. 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, 1997.
17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The various matters discussed under the heading "Contingencies" on page
17 of this Form 10-Q are incorporated herein by reference.
ITEM 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 September 30, 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).
18
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 July 30, 1997 amending
the Credit Agreement.
*10(b) Fifth Amendment to Merchandise Agreement dated
September 2, 1997.
19
Exhibit No. Description
*27 Article 5, Financial Data Schedule.
*99 Letter agreement dated September 30, 1997
amending Multi-Option Switch Facility.
- ---------------------
* Filed herewithh
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
InterTAN, Inc.
(Registrant)
Date: November 12, 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)
21
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 July 30, 1997 amending
the Credit Agreement.
*10(b) Fifth Amendment to Merchandise Agreement dated
September 2, 1997.
*27 Article 5, Financial Data Schedule.
*99 Letter agreement dated September 30, 1997
amending Multi-Option Switch Facility.
- ---------------------
* Filed herewith