SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2000 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
--------- -----------
Commission file number 1-10062
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InterTAN, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2130875
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
3300 Highway #7, Suite 904
Concord, Ontario Canada L4K 4M3
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (905) 760-9701
---------------------------------
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 April 30, 2000, 28,928,818 shares of the registrant's common stock, par value
$1.00 per share, were outstanding.
1
TABLE OF CONTENTS
PART I
Page
Introductory note regarding forward-looking information 3
ITEM 1 - Financial Statements and Supplementary Data
Consolidated Statements of Operations 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II
ITEM 1 - Legal Proceedings 26
ITEM 4 - Submission of Matters to a Vote of Security Holders 26
ITEM 6 - Exhibits and Reports on Form 8-K 26
OTHER
Signatures 29
2
INTRODUCTORY NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain matters discussed herein, including comments about the growth of the
dealer division and the introduction of broadband internet connectivity in
Australia, continued growth in the sale of the latest technological products,
including direct-to-home satellite, the pace of gross margin erosion in Canada,
the mix of contract and prepaid cellular sales in Australia, growth in the sale
of parts and accessories and of products carrying after sale compensation,
continued strong growth in Canadian stores with a Panasonic Wall, management's
estimate of the implications of the introduction of the goods and services tax
in Australia, management's assessment of the impact of Year 2000 issues on the
company's financial performance, and the adequacy of the Company's liquidity 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, the adequacy of the indemnity obtained in connection with the
sale of the United Kingdom subsidiary, various tax issues (including possible
reassessments), changes in product demand and consumer preferences, competitive
products, pricing and promotional activity, availability of products, developing
and maintaining alliances with strategic vendors, inventory risks due to shifts
in market conditions, dependence on manufacturers' product development, the
regulatory and trade environment, certain aspects of Year 2000 compliance, real
estate market conditions in the United Kingdom 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.
3
ITEM 1 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements Of Operations (Unaudited)
InterTAN, Inc.
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Three months ended Nine months ended
March 31 March 31
----------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net sales and operating revenues.......... $104,604 $ 88,066 $381,777 $408,289
Other income.............................. 69 73 218 202
--------------- --------------- --------------- ---------------
104,673 88,139 381,995 408,491
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Cost of products sold.................. 59,817 49,266 222,542 230,775
Selling, general and administrative
expenses.............................. 37,297 32,817 118,853 140,971
Depreciation and amortization.......... 1,552 1,388 4,443 5,008
Loss on disposal of United Kingdom
subsidiary and other restructuring
charges................................ - 34,712 - 35,088
--------------- --------------- --------------- ---------------
98,666 118,183 345,838 411,842
--------------- --------------- --------------- ---------------
Operating income (loss)................... 6,007 (30,044) 36,157 (3,351)
Foreign currency transaction
(gains) losses....................... 127 80 291 (375)
Interest income........................... (862) (475) (1,674) (1,011)
Interest expense.......................... 129 1,025 414 4,307
--------------- --------------- --------------- ---------------
Income (loss) before income taxes......... 6,613 (30,674) 37,126 (6,272)
Provision for income taxes................ 2,985 10,548 16,750 21,481
--------------- --------------- --------------- ---------------
Net income (loss)......................... $ 3,628 $(41,222) $ 20,376 $(27,753)
=============== =============== =============== ===============
Basic net income (loss) per
average common share................. $0.12 $(2.08) $0.68 $(1.44)
Diluted net income (loss) per
average common share................. $0.12 $(2.08) $0.66 $(1.44)
Average common shares outstanding......... 29,737 19,785 29,898 19,227
Average common shares outstanding
assuming dilution.................... 30,647 19,785 30,728 19,227
The accompanying notes are an integral part of these consolidated financial
statements
4
Consolidated Balance Sheets (Unaudited)
InterTAN, Inc.
- -------------------------------------------------------------------------------
(In thousands, except share data)
March 31 June 30 March 31
2000 1999 1999
-------------------------------------------------------------
Assets
Current Assets:
Cash and short-term investments.......................... $ 49,450 $ 47,403 $ 44,095
Accounts receivable, less allowance for doubtful
accounts............................................ 11,479 9,841 7,582
Inventories.............................................. 115,343 111,934 111,081
Other current assets..................................... 3,003 3,567 3,829
Deferred income taxes.................................... 1,215 1,247 378
-------------------------------------------------------------
Total current assets................................. 180,490 173,992 166,965
Property and equipment, less accumulated
depreciation and amortization..........................
21,925 20,123 19,094
Other assets................................................. 259 276 287
Deferred income taxes........................................ 3,988 3,924 -
-------------------------------------------------------------
Total Assets................................................. $ 206,662 $ 198,315 $ 186,346
=============================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable......................................... 21,912 15,883 19,398
Accrued expenses......................................... 17,484 17,369 18,550
Income taxes payable..................................... 32,326 39,286 31,999
Deferred service contract revenue - current portion...... 5,347 4,488 4,169
-------------------------------------------------------------
Total current liabilities........................... 77,069 77,026 74,116
9% convertible subordinated debentures....................... - - 24,431
Deferred service contract revenue - non-current
portion................................................. 4,772 4,008 3,732
Other liabilities............................................ 6,380 6,521 6,371
-------------------------------------------------------------
88,221 87,555 108,650
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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, 30,408,449, 29,782,803 and
22,875,210 issued................................... 30,408 29,783 22,875
Additional paid-in capital............................... 145,138 141,126 120,826
Retained earnings (deficit).............................. (14,519) (34,895) (38,003)
Accumulated other comprehensive loss..................... (27,118) (25,254) (28,002)
Common stock in treasury, at cost, 1,504,611,
0 and 0 shares, respectively........................ (15,468) - -
-------------------------------------------------------------
Total stockholders' equity.......................... 118,441 110,760 77,696
-------------------------------------------------------------
Commitments and contingent liabilities
Total Liabilities and Stockholders' Equity................... $ 206,662 $ 198,315 $ 186,346
=============================================================
The accompanying notes are an integral part of these consolidated financial
statements
5
Consolidated Statements of Cash Flows (Unaudited)
InterTAN, Inc.
- --------------------------------------------------------------------------------
(In thousands)
Nine months ended
March 31
-----------------------------------
2000 1999
-----------------------------------
Cash flows from operating activities:
Net income (loss)...................................................... $ 20,376 $ (27,753)
Adjustments to reconcile net income
(loss) to cash provided by operating activities:
Depreciation and amortization...................................... 4,443 5,008
Foreign currency transaction gains, unrealized..................... - (292)
Loss on disposal of United Kingdom
subsidiary and other restructuring charges..................... - 35,088
Other.............................................................. 1,609 1,399
Cash provided by (used in) current assets and liabilities:
Accounts receivable................................................ (1,693) (3,897)
Inventories........................................................ (5,526) (13,830)
Other current assets............................................... 225 (2,353)
Accounts payable................................................... 6,361 14,759
Accrued expenses................................................... 2,061 3,015
Income taxes payable............................................... (7,311) 11,462
-----------------------------------
Net cash provided by operating activities.......................... 20,545 22,606
-----------------------------------
Cash flows from investing activities:
Additions to property and equipment.................................... (6,798) (5,412)
Proceeds from sales of property and equipment.......................... 114 103
Effect of sale of United Kingdom subsidiary on cash.................... - (10,971)
Other investing activities............................................. 321 1,489
-----------------------------------
Net cash used in investing activities................................ (6,363) (14,791)
-----------------------------------
Cash flows from financing activities:
Changes in short-term bank borrowings, net............................. - 2,411
Proceeds from issuance of common stock to
employee plans..................................................... 1,437 1,172
Proceeds from exercise of stock options................................ 1,776 64
Purchase of treasury stock............................................. (15,468) -
Cash paid for fractional shares........................................ (45) -
-----------------------------------
Net cash provided by (used in) financing activities.................. (12,300) 3,647
-----------------------------------
Effect of exchange rate changes on cash.................................... 165 (178)
-----------------------------------
Net increase in cash and short-term investments............................ 2,047 11,284
Cash and short-term investments, beginning of period....................... 47,403 32,811
-----------------------------------
Cash and short-term investments, end of period............................. $ 49,450 $ 44,095
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
6
Notes to Consolidated Financial Statements
Note 1 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 InterTAN, Inc.'s ("InterTAN" or the
"Company") Annual Report on Form 10-K for the fiscal year ended June 30, 1999,
and, in the opinion of the Company, include all adjustments necessary for a fair
presentation of the Company's financial position as of March 31, 2000 and 1999
and the results of its operations for the three and nine months ended March 31,
2000 and 1999 and its cash flows for the nine months ended March 31, 2000 and
1999. Such adjustments are of a normal and recurring nature. Operating results
for the three and nine months ended March 31, 2000 are not necessarily
indicative of the results that can be expected for the fiscal year ended June
30, 2000. 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, 1999.
Note 2 Sale of United Kingdom Subsidiary
In January, 1999, the Company completed the sale of 100% of the stock of its
United Kingdom subsidiary, InterTAN U.K. Ltd., recognizing an aggregate loss of
$35,088,000. InterTAN U.K. Ltd.'s results of operations through December 31,
1998 are included in the accompanying Consolidated Financial Statements.
Below is a summary of net sales and operating revenues, operating income and net
income for the United Kingdom subsidiary for the three and nine months ended
March 31, 2000 and 1999, respectively:
(In thousands)
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
---- ---- ---- ----
Net sales and
operating revenues $ - $ - $ - $ 97,141
Operating income (loss)/1/ $ - $(34,712) $ - $(31,723)
Net income (loss)/1/ $ - $(34,712) $ - $(32,641)
/1/Includes loss on disposal for the three and nine months ended March 31,
1999 of $34,712 and $35,088, respectively.
Note 3 Treasury Stock Repurchase Program
In November, 1999, the Company's Board of Directors announced a share repurchase
program under which management was authorized to purchase up to 1,500,000 of the
Company's
7
common stock over a period of three years. As a result of unanticipated market
conditions, the repurchase program was accelerated, and by March 31, 2000, all
1,500,000 shares had been acquired at an aggregate cost of $15,468,000. In
April, 2000, the Company announced that the Board of Directors had authorized a
further program, subject to regulatory approval, for the repurchase of up to
1,500,000 additional shares. Purchases of common shares under the new program
are dependent on market conditions.
Note 4 Stock Split
On November 30, 1999, the Company's Board of Directors announced a three-for-two
stock split of InterTAN's common stock for stockholders of record at the close
of business on December 16, 1999, payable on January 13, 2000. This resulted
in the issuance of 10,075,447 of common stock, including 1,537 shares held
in treasury. A corresponding decrease of $10,075,447 was made to additional
paid-in-capital. Payments aggregating approximately $45,000 were also made in
satisfaction of 2,639 fractional shares. This amount was also charged to
additional paid-in capital. All references made to the number of shares of
common stock issued or outstanding, per share prices and basic and diluted net
income per common share amounts in the consolidated financial statements and the
accompanying notes have been adjusted to reflect the split on a retroactive
basis. Previously awarded stock options, restrictive stock awards and certain
other agreements payable in the Company's common stock have been adjusted or
amended to reflect the split.
Note 5 Net Income per average Common Share
Basic net income (loss) per share ("EPS") is calculated by dividing the net
income or loss for a period by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution which
would occur if securities or other contracts to issue common stock were
exercised or converted.
Basic and diluted net income (loss) per average common share and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is set out below:
8
(In thousands, except for per share data)
Three months ended
March 31, 2000 March 31, 1999
---------------------------------------------- ------------------------------------------------
Income Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- -------------- ----------- ------------ -------------- ------------
Net income (loss) $3,628 $(41,222)
============ ==========
Basic EPS
Income available to
common stockholders $3,628 29,737 $0.12 $(41,222) 19,785 $(2.08)
========= ==========
Effect of Dilutive Securities
9% convertible debentures - - -/1/ -/1/
Stock options - 910 -/1/ -/1/
------------ ------- -------- ------
Diluted EPS
Income available to common
stockholders including
assumed conversions $3,628 30,647 $0.12 $(41,222) 19,785 $(2.08)
============ ======= ======== ======== ====== =========
(In thousands, except for per share data)
Nine months ended
March 31, 2000 March 31, 1999
----------------------------------------------- -------------------------------------------------
Income(loss) Shares Per Share Income(loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- -------------- ---------- ------------ ------------- ------------
Net income (loss) $20,376 $(27,753)
=========== ===========
Basic EPS
Income available to
common stockholders $20,376 29,898 $0.68 $(27,753) 19,227 $(1.44)
=========== ===========
Effect of Dilutive Securities
9% convertible debentures - - -/1/ -/1/
Stock options - 830 -/1/ -/1/
----------- -------- --------- -------
Diluted EPS
Income available to common
stockholders including
assumed conversions $20,376 30,728 $0.66 $(27,753) 19,227 $(1.44)
=========== ======== ========= ========= ======= ============
(1) The effects of stock options and the 9% subordinated convertible debenture
during the three and nine-month periods ended March 31, 1999 were anti-
dilutive during such periods.
During the three and nine-month periods ended March 31, 1999, the Company's
potentially dilutive instruments included its 9% convertible subordinated
debentures (the "Debentures"). Under the terms of their issuance, the
Debentures were convertible into common stock at the rate of approximately Cdn
$5.61 per share, equivalent to approximately 6,567,000 shares in the aggregate
at March 31, 1999. During the fourth quarter of fiscal year 1999, the Company
served notice of redemption on all remaining Debenture holders and all such
Debenture holders exercised their right of conversion. Also, at March 31, 2000
and 1999, the Company's directors and employees held options to purchase
1,784,360 and 1,832,253 common shares, respectively, at prices ranging from
$2.4792 to $14.75 and $2.3333 to $5.5417, respectively. During the three
9
months ended March 31, 2000, all but 1,875 of such options were considered in
calculating diluted EPS. The dilutive effect of these options in future periods
will depend on the average price of the Company's common stock during such
periods.
Note 6 Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. For the Company, comprehensive income
(loss) includes net income (loss) and the net change in foreign currency
translation effects. The comprehensive incomes for the three and nine months
ended March 31, 2000 were $589,000 and $18,512,000, respectively. For the three
and nine months ended March 31, 1999, the comprehensive losses were $35,419,000
and $23,541,000, respectively.
Note 7 Income Taxes
The provisions for domestic and foreign income taxes for the three-month periods
ended March 31, 2000 and 1999 were $2,985,000 and $10,548,000, respectively. For
the nine-month period ended March 31, 2000, an income tax provision of
$16,750,000 was recorded, compared with $21,481,000 in the first nine months of
the prior year. The Company's income tax expense primarily represents Canadian
and Australian income tax on the profits earned by its subsidiaries in those
countries. The provision for income taxes for the three and nine-month periods
ended March 31, 1999 also included a charge of $8,039,000 related to the
settlement of a dispute with the Canadian tax authorities relating to the 1990
to 1993 taxation years. No tax was currently payable in the United Kingdom for
the three or nine-month periods ended March 31, 1999, nor had any benefit been
recognized for the accumulated losses in that country.
An audit of the 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 a portion of the tax in dispute.
The tax levied by Revenue Canada in reassessing those years was offset by
refunds arising from the carryback of losses incurred in subsequent years.
Depending on the ultimate resolution of these issues, the Company could
potentially have an additional liability in the range of $0 to $12,000,000. 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. It is not practical for management to make any reasonable
determination of when this remaining outstanding Canadian tax issue will
ultimately be resolved. An audit of the Company's Canadian subsidiary's income
tax returns by Revenue Canada for the 1995 - 1996 taxation years is in process.
Audits of the Company's United States income tax returns for the 1990-1994 years
by the Internal Revenue Service (the "IRS") were completed during 1999. The
Company has been advised that the IRS alleges that the Company owes additional
taxes in respect of those years. The issues involved relate primarily to the
Company's former operations in continental Europe and the United Kingdom. The
Company disagrees with the IRS's position on these issues and believes it has
meritorious arguments in its defense. The Company has filed a protest rebutting
the assertions made by the IRS and is in the process of vigorously defending its
position. Management believes that it has a provision recorded sufficient to
pay the estimated liability
10
resulting from the issues in dispute; however, the amount ultimately paid could
differ from management's estimate.
Note 8 Bank Debt
In November, 1999, the Company replaced its previous revolving credit facility
with a new facility with Bank of America Canada (the "Revolving Credit
Facility"). The Revolving Credit Facility is denominated in Canadian dollars in
an amount not to exceed C$67,000,000 (approximately $46,200,000 at March 31,
2000 rates of exchange). The amount of credit actually available at any
particular time is dependent on a variety of factors including the level of
eligible inventories and accounts receivable of InterTAN Canada. The amount of
available credit is then reduced by the amount of trade accounts payable then
outstanding as well as certain other reserves. The interest rate under the
facility is the Canadian prime rate, London Inter Bank Offered Rate plus 1.5% or
Bankers Acceptance Rate plus 1.5%, as elected by the Company at the time of
borrowing. Letters of credit are charged at the rate of 1.5% per annum. In
addition, a standby fee is payable on the unused portion of the credit facility.
The amount of this fee is subject to certain thresholds, and ranges from 0.375%
to 0.50% of the unused credit line. The Revolving Credit Facility is
collateralized by a first priority lien over all of the assets of InterTAN
Canada and is guaranteed by InterTAN, Inc. Borrowings under the Revolving Credit
Facility by InterTAN Canada Ltd. may be directed to InterTAN, Inc. Subject to
certain financial covenants, the payment of dividends and the repurchase of
common stock by the Company is permitted. There were no loans outstanding
against the facility at March 31, 2000 and approximately $15,000 was committed
in support of letters of credit. Approximately $26,120,000 was available for use
at March 31, 2000.
Note 9 Non-employee Stock Options
In June, 1999, the Company adopted a plan which would grant additional options
to purchase common stock to each non-employee director (such options are
collectively referred to as "the 1999 Director Plan"). This plan received
shareholder approval at the Company's annual meeting of stockholders on November
9, 1999. Under the 1999 Director Plan, each non-employee director was granted
an option to purchase 30,000 shares of the Company's common stock at an exercise
price of $10.50 per share. Options granted under this plan will be exercisable
on a cumulative basis equal to one fourth per year on the date fixed for the
Company's annual meeting of stockholders, commencing with the 1999 meeting.
Under this plan, the Company will recognize aggregate compensation expense of
$910,000 of which approximately $57,000 and $313,000, respectively, was
recognized during the three and nine months ended March 31, 2000. The balance
will be amortized ratably over the remainder of the vesting period.
Note 10 Commitments and Contingencies
In connection with the sale of its United Kingdom subsidiary, the Company has
indemnified the purchaser for certain contingencies primarily relating to real
estate matters associated with store leases and working capital adjustments. In
addition, the Company remains contingently liable as guarantor of certain leases
of the United Kingdom subsidiary. At the time of the sale, the lease obligation
assumed by the purchaser and guaranteed by the Company was approximately
$32,000,000 and the average remaining life of such leases was approximately 6
years. If the purchaser were to default on the lease obligations, management
believes the Company could reduce the exposure through assignment, subletting
and other means. The Company has
11
obtained an indemnity from the parent company of the purchaser for approximately
$13,000,000 which is management's best estimate of the Company's potential
exposure under these guarantees. The amount of this indemnity declines over time
as the Company's risk diminishes. Apart from this matter and the issues
discussed in Note 7, there are no material pending proceedings or claims, other
than routine matters 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.
Note 11 Segment Reporting
The Company is managed along geographic lines. All references in these notes to
"Canada", "Australia", "United Kingdom" and "Corporate Headquarters" refer to
the Company's reportable segments, unless otherwise noted. The Company's United
Kingdom subsidiary was sold in the third quarter of fiscal year 1999.
Transactions between segments are not common and are not material to the segment
information. The table below summarizes net sales and operating revenues,
operating income and identifiable assets for the Company's segments.
Consolidated operating income is reconciled to the Company's income before
income taxes (in thousands):
Net Sales and Operating Revenues and
Operating Income by Segment:
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
Net sales and operating revenues
Canada $ 77,358 $ 63,613 $288,219 $232,120
Australia 27,246 24,453 93,558 79,028
United Kingdom/1/ - - - 97,141
$104,604 $ 88,066 $381,777 $408,289
=========== ============ ============= ============
Operating income (loss)
Canada $ 5,962 $ 4,957 $ 34,156 $ 27,367
Australia 1,282 1,422 6,088 5,750
United Kingdom/1/ - (34,712) - (31,723)
----------- ------------ ------------ -----------
7,244 (28,333) 40,244 1,394
General corporate expenses 1,237 1,711 (4,087) 4,745
----------- ------------ ------------ -----------
Operating income (loss) 6,007 (30,044) 36,157 (3,351)
Foreign currency transaction (gains)
losses 127 80 291 (375)
Interest income (862) (475) (1,674) (1,011)
Interest expense 129 1,025 414 4,307
----------- ------------ ------------ -----------
Net income (loss) before income taxes $ 6,613 $(30,674) $ 37,126 $ (6,272)
=========== ============ ============ ===========
Identifiable Assets by Segment
March 31 June 30 March 31
2000 1999 1999
Canada $155,013 $136,703 $127,886
Australia 49,571 53,787 54,477
United Kingdom/1/ - - -
Corporate 2,078 7,825 3,983
---------- --------- ----------
$206,662 $198,315 $186,346
========== ========= ==========
/1/The Company's United Kingdom subsidiary was sold during the third quarter of
fiscal year 1999.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
InterTAN is engaged in the sale of consumer electronics products primarily
through company-operated retail stores and dealer outlets in Canada and
Australia. The Company's retail operations are conducted through two wholly-
owned subsidiaries: InterTAN Australia Ltd., which operates in Australia under
the trade names "Tandy" and Tandy Electronics; and InterTAN Canada Ltd., which
operates in Canada under the trade name "RadioShack". The Company previously
also had retail and dealer outlets in the United Kingdom. These operations were
conducted through a wholly owned subsidiary, InterTAN U.K. Limited, which
operated under the "Tandy" name. Effective January, 1999, the Company's
subsidiary in the United Kingdom was sold. All of these trade names are used
under license from Tandy Corporation ("Tandy"). In addition, the Company has
entered into an agreement in Canada with Rogers Cantel Inc. ("Cantel") to
operate telecommunications stores on its behalf, currently trading under the
banner Rogers AT&T (the "Rogers AT&T stores"). At March 31, 2000, 51 Rogers AT&T
stores were in operation.
As indicated above, in January 1999, the Company sold its United Kingdom
subsidiary. In addition, during the third quarter of fiscal year 1999, a
special tax charge of $8,039,000 was recorded, reflecting the settlement of a
dispute with the Canadian tax authorities. The table below, reflects the results
of the Company's operations for the three and nine-month periods ended March 31,
2000 compared with the reported results of operations for the same period a year
ago as well as those same results of operations, adjusted to remove the results
of the United Kingdom subsidiary, and the special Canadian tax charge.
13
InterTAN, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - In thousands)
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
As As As As
Reported Adjusted Reported Adjusted
---------- ---------------- ---------------- --------------- --------------- ------------
Net sales and operating
revenues.................. $104,604 $ 88,066 $88,066 $381,777 $408,289 $311,148
Other income............... 69 73 73 218 202 171
---------- ---------------- ---------------- --------------- --------------- -----------
104,673 88,139 88,139 381,995 408,491 311,319
Operating costs and
expenses:
Cost of products sold..... 59,817 49,266 49,266 222,542 230,775 173,697
Selling, general and
administrative expenses.. 37,297 32,817 32,817 118,853 140,971 105,098
Depreciation and
amortization............. 1,552 1,388 1,388 4,443 5,008 4,152
Loss of disposition of
United Kingdom
subsidiary.............. - 34,712 - - 35,088 -
---------- ---------------- ---------------- --------------- --------------- -----------
98,666 118,183 83,471 345,838 411,842 282,947
---------- ---------------- ---------------- --------------- --------------- -----------
Operating income (loss).... 6,007 (30,044) 4,668 36,157 (3,351) 28,372
Foreign currency
transaction (gains)
losses.................... 127 80 80 291 (375) (366)
Interest income............ (862) (475) (475) (1,674) (1,011) (900)
Interest expense........... 129 1,025 1,025 414 4,307 3,269
---------- ---------------- ---------------- --------------- --------------- ------------
Income (loss) before
income taxes.............. 6,613 (30,674) 4,038 37,126 (6,272) 26,369
Provision for income taxes. 2,985 10,548 2,509 16,750 21,481 13,442
---------- ---------------- ---------------- --------------- --------------- -----------
Net income (loss).......... $ 3,628 $(41,222) $ 1,529 $ 20,376 $(27,753) $ 12,927
========== ================= ================ =============== =============== ===========
Basic net income (loss)
per average common share.. $ 0.12 $ (2.08) $ 0.08 $ 0.68 $ (1.44) $ 0.67
Diluted net income (loss)
per average common share.. $ 0.12 $ (2.08) $ 0.08 $ 0.66 $ (1.44) $ 0.53
Foreign Exchange Effects
Profit and loss accounts, including sales, are translated from local
currency values to U.S. dollars at monthly average exchange rates. During
the third quarter of fiscal year 2000, the U.S. dollar was weaker against
the Canadian but stronger against the Australian dollar relative to the
comparable values during the third quarter of the prior year. As a result,
the same local currency amounts in Canada translate into more U.S. dollars
as compared with the prior year. For example, if local currency sales in
Canada in the third quarter of fiscal year 2000 were the same as those in
the third quarter of the prior year, the current fiscal year income
statement would reflect a 4.0% increase in sales when reported in U.S.
dollars. The exact opposite would hold true in Australia, where the
currency declined by 0.8% over the third quarter of fiscal year 1999.
14
The following table outlines, for the three-month period ended March 31, 2000,
the percentage change in the weighted average exchange rates of the currencies
of Canada and Australia as compared to the same three-month period in the prior
year:
___________________________________
Canada 4.0%
Australia (0.8)%
___________________________________
Sales Outlets
The geographic distribution of the Company's sales outlets is summarized in the
following table:
Mar 31 Dec 31 Sept 30 Jun 30 Mar 31
2000 1999 1999 1999 1999
Canada
Company-operated 457/(1)/ 459/(1)/ 450/(1)/ 450/(1)/ 449/(1)/
Dealer 346 343 338 330 332
- -------------------------------------------------------------------------------
803 802 788 780 781
- -------------------------------------------------------------------------------
Australia
Company-operated 221 222 222 222 225
Dealer 111 124 124 124 126
- -------------------------------------------------------------------------------
332 346 346 346 351
- -------------------------------------------------------------------------------
Total
Company-operated 678 681 672 672 674
Dealer 457 467 462 454 458
- -------------------------------------------------------------------------------
1,135 1,148 1,134 1,126 1,132
- -------------------------------------------------------------------------------
(1) At March 31, 2000, December 31, 1999, September 30, 1999, June 30, 1999 and
March 31, 1999, the Company operated 51, 50, 45, 45, and 45 stores,
respectively, on behalf of Rogers AT&T. Also at the same dates the company
operated 3, 3, 1, 1 and 7 store-in-store formats in certain locations of
the Hudson's Bay Company. Since all of these locations are not company-
owned, they are not included in the above table.
15
Net Sales and Operating Revenues
Net sales and operating revenues ("sales") in U.S. dollars during the third
quarter of fiscal year 2000 were $104,604,000, an increase of 18.8% over the
same period a year ago. This sales comparison was affected by foreign currency
fluctuations. The increase, measured at the same exchange rates, was 15.6%.
The table which follows shows, by geographic segment, the percentage changes in
net sales for the quarter and nine months ended March 31, 2000, compared to the
corresponding period in the prior year. Changes are presented in both U.S.
dollars and local currencies to show the effects of exchange rate fluctuations.
The change in comparative - stores sales, measured at the same exchange rates,
is also shown:
Net Sales
---------
Percentage Increase (Decrease)
------------------------------
Three Months Ended Nine Months Ended
March 31, 2000 March 31, 2000
Local Comparative Local Comparative
Currency US$ Store Currency US$ Store
----------------------------------- -------------------------------------
Canada 16.9% 21.6% 12.9% 19.6% 24.2% 16.1%
Australia 12.2% 11.4% 10.9% 14.3% 18.4% 11.5%
----- ----- ----- ------ ------ -----
Combined 15.6% 18.8% 12.3% 18.3% 22.7% 14.8%
===== ===== ===== ====== ====== =====
Including United Kingdom/1/ 15.6% 18.8% 12.3% (8.5)% (6.5)% 14.8%
===== ===== ===== ====== ====== =====
/1/ The Company's United Kingdom subsidiary was sold during the third quarter of
fiscal year 1999.
The three month-period ended March 31, 2000 represents the ninth consecutive
quarter of double-digit comparable store sales growth at InterTAN. The
Company's consumers continue to demand products displaying the latest in
technological advances, and, in particular, digital products. This consumer
demand was reflected in the sales performance in both of InterTAN's countries
and was particularly evident in cellular, computers and related accessories,
and, in Canada, direct-to-home satellite.
Sales in Canada for the three-month period ended March 31, 2000 increased by
16.9% in local currency over the same quarter a year ago, with comparable-store
sales increasing by 12.9% during the same period. The direct-to-home satellite
market continues to provide significant revenue growth opportunities in Canada.
Sales in this category for the quarter were up 95% over the same quarter last
year, with unit sales more than double last year's level. Sales of computer
hardware were up over 25% and would have been even stronger but for the late
delivery of product by a key vendor. Wireless/PCS was also a significant
component of the strong Canadian sales performance, with sales in that category
increasing by 22% over the prior year quarter. The seasonal goods and
miscellaneous income category was up over 50%, led by the sale of radio-
controlled cars, as that product continues to be a year round item. The
expansion of the Company's Panasonic Wall store-in-store concept from 20 to 200
stores, which was completed during the quarter ended December 31, 1999 continues
to be a major factor in building sales in
16
the audio/video and personal electronics categories. The stores with the
Panasonic Wall continue to significantly out-perform the rest of the Company's
stores in these important categories. As previously announced, The Company and
Panasonic have agreed that this concept will be further expanded to an
additional 200 stores for a total of 400 stores during the latter part of fiscal
year 2000 and early part of fiscal year 2001.
In Australia, sales for the quarter increased by 12.2%, with comparable store
sales increasing by 10.9%. Sales of computers and related accessories continue
to be an important factor in sales growth in Australia. Sales of PC's and
monitors increased by 112% and, when accessories and other peripherals are
included, sales in the computer category as a whole increased by 62%. This
strong performance is reflective of the Company's new computer strategy in
Australia which includes both a re-merchandising of the stores and an enhanced
marketing program. Sales of TV's, VCR's and camcorders increased by 42% and
sales of CD players and hi-fi components grew by 29%. Sales of cellular/PCS,
including air time cards, increased by 27% over the prior year quarter. Sales
of prepaid models and related airtime cards were particularly strong. Going
forward, management will continue to roll out of many of the new initiatives,
strategies and alliances introduced earlier in Canada. These strategies will
include:
. Re-assorting the stores to make the Company's presentation in important
growth categories, such as high-tech digital products, even more
compelling.
. Re-modeling approximately one-third of the stores to the next generation
look by the end of the current calendar year. These stores will be
larger than the Company's existing stores and provide an opportunity to
more effectively merchandise a broader and deeper product assortment.
. Continued growth from the dealer division. The Company will aggressively
pursue opportunities to build its dealer base and to increase sales to
existing dealers.
. Introduction of broadband Internet connectivity. This product is a
logical extension to the Company's growing PC accessory line.
Gross Profit
Gross profit for the third quarter of fiscal year 2000 in U.S. dollars increased
by $5,988,000, up 15.4% from the same quarter last year. Measured at the same
exchange rates, gross profit increased by 12.5%.
The following analysis summarizes the components of the change in gross profit
from the comparable prior year quarter (in thousands):
- -------------------------------------------------------------------------------
Higher sales $6,223
Lower gross margin percentage (1,264)
Foreign currency rate effects 1,028
- -------------------------------------------------------------------------------
Increase in gross profit $5,987
===============================================================================
17
The following table illustrates gross profit as a percentage of sales, by
segment area, for the three and nine-month periods ended March 31, 2000 and
1999:
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
- ------------------------------------------------------------------------------
Canada 42.5% 42.8% 41.4% 43.4%
Australia 43.7% 47.3% 42.8% 46.4%
- ------------------------------------------------------------------------------
Combined 42.8% 44.1% 41.7% 44.2%
United Kingdom/1/ - - - 41.2%
- ------------------------------------------------------------------------------
Consolidated 42.8% 44.1% 41.7% 43.5%
==============================================================================
/1/ The Company's United Kingdom subsidiary was sold during the third quarter of
fiscal year 1999.
There were a variety of factors that contributed to the reduction in the gross
margin percentages in Canada and Australia.
In Canada, the reduction was more than explained by a shift in the sales mix
away from higher margin private label products towards lower margin national
brands and the increase in the sale of high ticket but lower margin items, such
as computers. This shift in mix accounted for about 180 basis points of margin
decline and was almost fully offset by after sale compensation in the form of
residuals and sales-based volume rebates. The 30 basis point margin decline in
Canada was significantly less than that experienced in either the first or the
second quarters, when margins declined year on year by 280 basis points and 260
basis points, respectively. This is reflective of the fact that many of the new
programs and initiatives which have contributed to higher sales but lower
margins have now been in effect for over a year. While some deterioration in
margins will continue, management expects that the pace of reduction will
continue to slow in coming periods.
In Australia, margins for the quarter fell by 360 basis points to 43.7% from
47.3% last year. This decline is similar to that experienced in the previous
quarter. There were several factors which contributed to this decline:
. Sales of higher margin software and accessories in the computer category
did not grow as fast as the sale of CPU's to help mitigate the large
increase in sales of lower margin end product.
. A significant shift in the mix of cellular sales from more lucrative
contract programs to lower margin prepaid air time models. Management has
introduced new advertising and incentive programs for sales associates to
help offset this trend.
. Clearance activity associated with the orderly transition of certain of
the Company's product lines from house brands to nationally branded
goods.
Management estimates that a shift in product mix accounted for about one-half of
the margin decline, with cellular mix and clearance activity making up the
remainder.
Management will continue to pursue opportunities to counteract the pressure
placed on margins by the Company's customers' increasing demand for new, digital
technologies which, although
18
offering great opportunities for sales growth, carry lower than our traditional
margins. Strategies will include aggressively investigating opportunities to
build sales of more profitable parts and accessories, including high speed
internet connections, batteries and other products to help the Company's
customers get "connected". Importantly, InterTAN will continue to stress the
sale of products carrying after-sale compensation, including both residuals and
sales-based volume rebates or connection bonuses. These products include direct-
to-home satellite in Canada and contract cellular in both countries. During the
three months ended March 31, 2000, after-sale compensation totaled $1,060,000,
16% of income before income taxes.
Selling, General and Administrative Expenses
SG&A expenses in Canada, Australia and at Corporate Headquarters for the quarter
increased in the aggregate by $4,480,000 over the comparable prior-year quarter.
This comparison is influenced by foreign currency rate effects. Measured at the
same exchange rates, SG&A expenses in these three segments increased by
$3,682,000 or 11%. This compares to combined increases of 15.6% and 12.5% in
sales and gross profit, respectively, all measured at the same exchange rates.
The following table provides a breakdown of selling, general and administrative
expense ("SG&A") by major category (in thousands):
Selling, General and Administrative Expenses
--------------------------------------------
(In thousands, except percents)
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
----------------------------------------- ------------------------------------------
Amount Pct. Amount Pct. Amount Pct. Amount Pct.
------------------------------------------ -------------------------------------------
Advertising $ 4,398 4.2 $ 3,033 3.4 $ 15,646 4.1 $ 16,402 4.0
Rent 6,348 6.1 5,801 6.6 19,566 5.1 25,454 6.2
Payroll 16,486 15.8 14,909 16.9 52,664 13.8 60,926 14.9
Taxes
(other than
income taxes) 2,394 2.3 2,163 2.5 7,805 2.0 11,094 2.7
Telephone &
utilities 1,161 1.1 1,044 1.2 3,319 0.9 4,180 1.0
Other 6,510 6.2 5,867 6.7 19,853 5.2 22,915 5.7
------------------------------------------ --------------------------------------------
Total $ 37,297 35.7 $ 32,817 37.3 $ 118,853 31.1 $ 140,971 34.5
========================================== ============================================
The following is a breakdown of the same-exchange-rate increase in SG&A expenses
in Canada, Australia and the Corporate Headquarters during the third quarter of
fiscal year 2000 over the same quarter in the prior year (in thousands):
19
Payroll $1,567
Advertising 1,283
Rent 427
Taxes (other than income taxes) 203
Telephone and utilities 87
Other 585
------
Total Canada and Australia 4,152
Corporate expenses (470)
------
$3,682
======
Payroll increased in both Canada and Australia in support of higher sales.
Advertising expense increased in both countries, as the Company enhanced its
promotional activities to generate greater revenues. The increase in gross
advertising spending was actually higher than indicated, as much of the increase
was funded by vendors. Rent increased in both Canada and Australia, both as a
consequence of new store openings/relocations and regular rent reviews.
Corporate expenses were down, reflecting lower operating costs associated with
the Canadian office and relocation expenses recorded in the prior year. The
impact of these savings was partially offset by a number of special charges,
including costs associated with the stock option plan for non-employee
directors, the three-for two split of the Company's common stock and previously-
announced performance-based restricted stock awards to certain senior members of
management.
SG&A expenses for the nine months ended March 31, 2000 were $22,118,000 lower
than in the corresponding period last year. This reduction is more than
attributable to the sale of the United Kingdom subsidiary. Measured at the same
exchanges rates, SG&A expenses in Canada, Australia and at Corporate
Headquarters increased by 9.3% for the nine-month period. For that same period
sales and gross profit dollars, measured at the same exchange rates, increased
by 18.3% and 11.7%, respectively.
The reduction in SG&A expenses as a percentage of sales during both the three
and nine-month periods ended March 31, 2000 was attributable both to the rate of
sales growth and, to a lesser extent, the sale of the Company's United Kingdom
subsidiary. The following table illustrates SG&A as a percentage of sales, by
geographic segment area:
Three months ended Nine months ended
March 31 December 31
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------
Canada 33.3% 33.4% 28.4% 30.3%
Australia 37.9% 40.4% 35.4% 38.2%
- -----------------------------------------------------------------------------------------------------
Combined 35.7% 37.3% 31.1% 33.8%
United Kingdom/1/ - - - 36.9%
- -----------------------------------------------------------------------------------------------------
Consolidated 35.7% 37.3% 31.1% 34.5%
======================================================================================= ==============
/1/ The Company's United Kingdom subsidiary was sold during the third quarter of
fiscal year 1999.
20
Interest income and expense
Interest income increased during the three months ended March 31, 2000 by
$387,000 over the same quarter last year, reflecting the Company's stronger cash
position. During the same two periods, interest expense declined by $896,000.
Interest expense during the current quarter consisted entirely of amortization
of loan origination fees and standby charges, as the Company had no borrowings
during the quarter. The reduction in interest expense over the prior-year
quarter was attributable to the conversion of the Company's 9% subordinated
convertible debentures (the "Debentures") during the fourth quarter of fiscal
year 1999.
Provision for Income Taxes
The provision for income taxes decreased during the third quarter of fiscal year
2000 by $7,563,000 over the same period a year ago. However, last year's
provision included a special charge of $8,039,000 in settlement of a dispute
with the Canadian tax authorities. On a comparable basis, the provision for
income taxes increased by $476,000, reflecting higher profits, primarily in
Canada. On a comparable basis, the effective rate of tax for the quarter was
45.1% down significantly from 62.1% for the same quarter last year. This
reduction is attributable to the elimination of interest on the Debentures and
reduced corporate expenses, for which no tax benefit was recognized.
Goods and Services Tax - Australia
Effective July 1, 2000, Australia will move from a wholesale-based sales tax
system to a goods and services tax or GST - a system much like a European value
added tax.
Under the present system, the tax is included in the retailer's cost. The rate
ranges from 0% to 22%, depending on the class of goods. Management estimates
that the weighted average tax included in the Company's inventory in Australia
to be about 18%. The retailer recovers this tax by factoring it into the
selling price. It is important to note that the wholesale tax is a tax on the
retailer not the consumer. The consumer ultimately pays - but through a higher
retail price.
This wholesale-based tax will be replaced by the GST effective July 1, 2000.
Under the GST, instead of the retailer paying a tax on cost, the consumer will
now pay a tax on the selling price of the goods. The rate will be 10% and, with
one or two exceptions, will apply to all goods and services. For the retailer,
this means a reduction in cost of goods sold, since it no longer pays the sales
tax. However, it will also mean lower revenues, as the government has mandated
that this tax saving must be passed on to the consumer - i.e., the retailer
cannot increase gross profit dollars as a result of the change.
The following is a brief summary of how this tax change will affect InterTAN in
Australia:
. Reported sales will decline, as the old sales tax is removed from the
selling price. Management estimates that reported sales in the Company's
stores will be reduced by about 10%. The Company will, however, report
comparable-stores sales on a consistent basis by making a corresponding
adjustment to the prior years' sales on a pro-forma basis.
. Cost of goods sold will also decline, as the old sales tax is excluded
from cost.
. Management estimates that the gross margin percentage will increase by
about 4 percentage points, as the tax is excluded from both sales and
cost of goods.
21
. Importantly, the impact on gross profit dollars will be neutral.
. Management estimates that carrying value of inventories will decline by
about 10%.
. There will also be a short-turn cash flow benefit, as sales tax currently
in inventory will be refunded over a period of months.
Generally speaking, whether or not the consumer will pay more or less for a
particular item on a tax-included basis will depend primarily on the gross
margin associated with the product. The all-in price of low-ticket, high-margin
items such as parts and accessories will go up, while the price for higher-
ticket, lower margin goods such as branded telephones, televisions and digital
cameras will fall. Management believes there are some indications that
uncertainty about the direction prices will take is already causing consumer
confusion and some delays in purchases, especially of larger ticket items.
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 March 31, 2000, in exchange rates as measured against the
U.S. dollar:
Foreign Exchange Rate Fluctuations
----------------------------------
% Increase (Decrease) % Increase (Decrease)
from March 31, 1999 from June 30, 1999
---------------------- ----------------------
Canada 4.1 1.6
Australia (4.3) (9.1)
Inventories
Inventories increased from March 31, 1999 to March 31, 2000 by $4,262,000.
However, $1,710,000 of this increase was attributable to foreign currency rate
effects. During the same period, measured at the same exchange rates,
inventories increased by 2.3%, significantly less than the quarter-on-quarter
increases in sales and gross profit dollars. The Company was able to achieve
this increase by sourcing a greater portion of its inventories locally,
requiring shorter lead times and lower order quantities. This strategy enabled
the Company to better manage the supply chain. Similar factors explain the
increase in inventories from June 30, 1999 to March 31, 2000.
Accounts Receivable
The increases in accounts receivable at March 31, 2000 from both March 31 and
June 30, 1999 are primarily attributable to increases in sales generally and, in
particular, sales of cellular, direct-to-home satellite and similar products
involving activation income and volume rebates from vendors.
22
Income Taxes Payable
The increase in income taxes payable from March 31, 1999 to March 31, 2000
results from increased profits in both the Canadian and Australian subsidiaries.
In the third quarter of fiscal year 1999, the Company reached an agreement with
the Canadian tax authorities relating to the settlement of a dispute regarding
the 1990 to 1993 taxation years. While the amount in dispute has been agreed
and a settlement agreement has been executed, the Company has not yet been fully
reassessed and, accordingly, this amount has not been paid. Management
estimates that payment relating to these issues, approximately $14,000,000, will
be made in the fourth quarter of fiscal year 2000 or early in fiscal year 2001.
The Company's remaining dispute with the Canadian tax authorities relates to the
1987 to 1989 taxation years. See Note 7 to the Company's Consolidated Financial
Statements, which is incorporated herein by reference. The Company believes it
has meritorious arguments in support of its position on the underlying issues
relating to this matter and, accordingly, no additional provision has been
recorded, pending the outcome of the appeal process. Depending on the ultimate
outcome of this matter, the Company could have an additional liability of $0 to
$12,000,000. It is not possible for management to make any reasonable
determination of when any of these issues will ultimately be resolved. An audit
of the Company's Canadian subsidiary's income tax returns by Revenue Canada for
the 1995 to 1996 taxation years is in process.
Audits of the Company's United States income tax returns for the 1990-1994 years
by the Internal Revenue Service (the "IRS") were completed during 1999. The
Company has been advised that the IRS alleges that the Company owes additional
taxes in respect of those years. The issues involved relate primarily to the
Company's former operations in continental Europe and the United Kingdom. The
Company disagrees with the IRS's position on these issues and believes it has
meritorious arguments in its defense. The Company has filed a protest rebutting
the assertions made by the IRS and is in the process of vigorously defending its
position. Management believes that it has a provision recorded sufficient to
pay the estimated liability resulting from the issues in dispute; however, the
amount ultimately paid could differ from management's estimate.
Liquidity and Capital Resources
-------------------------------
Cash flows from operating activities during the nine-month period ended March
31, 2000 generated $20,545,000 in cash, compared with $22,606,000 in cash during
the comparable period last year. This change was due primarily to changes in
working capital, partially offset by an increase in net income, adjusted for
non-cash items. In the nine months ended March 31, 2000, working capital
changes consumed $5,883,000 in cash, while generating $9,156,00 in cash in the
comparable period a year ago. Net income, adjusted for non-cash items, on the
other hand improved significantly, generating $12,978,000 more cash than in the
same period last year.
Cash flow from investing activities consumed $6,363,000 and $14,791,000 in cash
during the nine months ended March 31, 2000, and 1999, respectively. In the
current year, this cash outflow is explained by additions to property and
equipment. In the comparable prior year period the effects of capital
expenditures had been augmented by the effects on cash of the disposal of the
United Kingdom subsidiary.
Cash flows from financing activities during the nine months ended March 31, 2000
consumed $12,300,000 in cash. In November, 1999, InterTAN's Board of Directors
announced a program under which management was authorized to purchase up to
1,500,000 shares of the Company's
23
common stock. By March 31, 2000, all 1,500,000 shares had been purchased at an
aggregate cost of $15,468,000. The effects of this cash outflow were partially
offset by proceeds from the issuance of common stock to employee plans and from
the exercise of stock options. During the nine-month period ended March 31,
2000, cash flow from financing activities generated $3,647,000 in cash,
primarily as a result of changes in short-term borrowings and from the issuance
of stock to employee plans.
The Company's principal sources of liquidity are its cash and short-term
investments, its cash flow from operations and its banking facilities.
In November, 1999, the Company replaced its previous revolving credit facility
with a new facility with Bank of America Canada (the "Revolving Credit
Facility"). The Revolving Credit Facility is denominated in Canadian dollars in
an amount not to exceed C$67,000,000 (approximately $46,200,000 at March 31,
2000 rates of exchange). The amount of credit actually available at any
particular time is dependent on a variety of factors including the level of
eligible inventories and accounts receivable of InterTAN Canada. The amount of
available credit is then reduced by the amount of trade accounts payable then
outstanding as well as certain other reserves. The interest rate under the
facility is the Canadian prime rate, London Inter Bank Offered Rate plus 1.5% or
Bankers Acceptance Rate plus 1.5%, as elected by the Company at the time of
borrowing. Letters of credit are charged at the rate of 1.5% per annum. In
addition, a standby fee is payable on the unused portion of the credit facility.
The amount of this fee is subject to certain thresholds, and ranges from 0.375%
to 0.50% of the unused credit line. The Revolving Credit Facility is
collateralized by a first priority lien over all of the assets of InterTAN
Canada and is guaranteed by InterTAN, Inc. Borrowings under the Revolving Credit
Facility by InterTAN Canada Ltd. may be directed to InterTAN, Inc. Subject to
certain financial covenants, the payment of dividends and the repurchase of
common stock by the Company is permitted.
The Revolving Credit 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, 2000, there were no borrowings against the Revolving
Credit Facility and $15,000 was committed in support of letters of credit. There
was $26,120,000 of credit available for use at March 31, 2000. The Company's
Merchandise Agreement with Tandy permits 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 surety bond coverage
(the "Bond") in an amount not to exceed $18,000,000. Use of the Bond gives the
Company greater flexibility in placing orders with Far East suppliers by
releasing a portion of the credit available under the Revolving Credit Facility
for other purposes.
The Company's Australian subsidiaries, InterTAN Australia Ltd. and Technotron
Sales Corp. Pty, Ltd., have 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 ($7,284,000 at March 31, 2000 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 ($3,035,000 at March 31, 2000 exchange rates) may
be used in support of short-term borrowings. At March 31, 2000, there were no
borrowings outstanding against the Australian Facility, nor was any amount
committed in support of letters of credit.
The Company's primary uses of liquidity include the funding of capital
expenditures, the seasonal build-up of inventories for the 2000 Christmas
selling season and possible payments in
24
settlement of tax reassessments. In addition, following the completion of the
share repurchase program announced in November, 1999, the Company announced in
April 2000 that subject to regulatory approval and market conditions, management
had been authorized to purchase up to 1,500,000 additional shares. The Company
anticipates that capital additions during the remainder of fiscal year 2000 will
approximate $4,000,000, mainly related to store expansion, remodeling and
upgrading. Management is currently finalizing its capital requirements for
fiscal year 2001 and estimates those requirements to be between $12,000,000 and
$15,000,000. In addition, management expects to receive additional income tax
reassessments of approximately $14,000,000 late in fiscal year 2000 or early in
fiscal year 2001 relating to the settlement of its dispute with Revenue Canada
in respect of the 1990-1993 taxation years. See "Income Taxes". The timing of
further payments, if any, flowing from other outstanding tax issues cannot be
reasonably determine at this time. As indicated above, under the new share
repurchase plan, some purchases could occur during the remainder of fiscal year
2000 and into fiscal year 2001, as conditions warrant. It is not practical for
management to reasonably estimate the cash required to fund this program during
the balance of fiscal year 2000 and in fiscal year 2001.
Management believes that the Company's cash and short-term investments on hand
and its cash flow from operations combined with the Revolving Credit Facility,
the Australian Facility and the Bond will provide the Company with sufficient
liquidity to meet its capital expenditure requirements, to fund any income tax
reassessments and to fund its share repurchase program.
Year 2000 Issues
----------------
Management recognized that many of the Company's critical systems and those of
its key vendors and service partners required modification in order to be ready
for the Year 2000.
The Company organized Year 2000 transition teams in both Canada and Australia to
address the myriad of issues and challenges presented by the Y2K. Internal
systems and hardware were modified or replaced and all material vendors, service
providers and other stakeholders were contacted and monitored to ensure there
would be no material interruptions in supply. An outside consultant was engaged
to assess the Company's state of readiness for the Y2K transition.
Necessary modifications and testing was competed to all critical systems in both
Canada and Australia prior to the year 2000. To date the Company has experienced
only a few minor systems issues and these were resolved with little or no
disruption to the business. There have been no supply chain interruptions and
the Company's stores, warehouse and central units have been fully operational.
Product returns as a result of Y2K have been minimal. The Company does not
expect any further activity or disruptions as a result of the Year 2000
transition.
The Company's estimates that its Year 2000 compliance costs were approximately
$550,000, including approximately $225,000 paid to third-party consultants.
In management's opinion, the Company took adequate action to address Year 2000
issues and does not expect the financial impact of the Year 2000 issue to be
material to the Company's consolidated financial position, results of operations
or cash flows.
25
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The various matters discussed in Notes 7 and 10 to the Company's
Consolidated Financial Statements on page 10 and 11 of this Form 10-Q
are incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the three
months ended March 31, 2000.
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).
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) Rights Agreement between InterTAN, Inc. and
Bank Boston, NA (filed as Exhibit 4 to the
company's Form 8-A filed on September 17, 1999
and incorporated herein by reference)
*10(a) Composite Copy of Deferred Compensation Plan
reflecting amendments authorized by Board of
Directors of InterTAN, Inc. on February 14, 2000.
*10(b) Amendment to Employment Letter Agreement
between InterTAN, Inc. and James G. Gingerich
dated February 15, 2000.
*10(c) Amendment to Employment Letter Agreement
between InterTAN, Inc. and Douglas C. Saunders
dated February 15, 2000.
*10(d) Amendment to Employment Letter Agreement
between InterTAN, Inc. and Jeffrey A. Losch dated
February 15, 2000.
*10(e) Plan Agreement in respect of Deferred
Compensation Plan between InterTan, Inc. and
Jeffrey A. Losch dated February 18, 2000.
*27 Article 5, Financial Data Schedule.
- -------------------------
* Filed herewith
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended March
31, 2000.
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 12, 2000 By: /s/ James G. Gingerich
----------------------
James G. Gingerich
Executive Vice-President and
Chief Financial Officer
(Authorized Officer)
By: /s/ Douglas C. Saunders
-----------------------
Douglas C. Saunders
Vice President and Corporate Controller
(Principal Accounting Officer)
Index to Exhibits
InterTAN, Inc. Form 10-Q
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).
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) Rights Agreement between InterTAN, Inc. and Bank Boston, NA (filed as
Exhibit 4 to the company's Form 8-A filed on September 17, 1999 and
incorporated herein by reference)
*10(a) Composite Copy of Deferred Compensation Plan reflecting amendments
authorized by Board of Directors of InterTAN, Inc. on February 14,
2000.
*10(b) Amendment to Employment Letter Agreement between InterTAN, Inc. and
James G. Gingerich dated February 15, 2000.
*10(c) Amendment to Employment Letter Agreement between InterTAN, Inc. and
Douglas C. Saunders dated February 15, 2000.
*10(d) Amendment to Employment Letter Agreement between InterTAN, Inc. and
Jeffrey A. Losch dated February 15, 2000.
*10(e) Plan Agreement in respect of Deferred Compensation Plan between
InterTan, Inc. and Jeffrey A. Losch dated February 18, 2000.
*27 Article 5, Financial Data Schedule and InterTAN Canada Ltd.
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* Filed herewith