-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O+aRTlr1Us3DHwjYr/q6aSFPLAW1ze2/X0qud/swxvR3QXYa+yOVPr/0yYLozwP6 OFvHKCOMozPMZk4wx9NsyA== 0000930661-97-002279.txt : 19970929 0000930661-97-002279.hdr.sgml : 19970929 ACCESSION NUMBER: 0000930661-97-002279 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERTAN INC CENTRAL INDEX KEY: 0000803227 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 752130875 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10062 FILM NUMBER: 97685820 BUSINESS ADDRESS: STREET 1: 201 MAIN STREET SUITE 1805 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173489701 MAIL ADDRESS: STREET 1: 201 MAIN ST STREET 2: STE 1805 CITY: FORT WORTH STATE: TX ZIP: 76102 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 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 ___________________ Commission file number 1-10062 ------- InterTAN, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2130875 - ----------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 Main Street, Suite 1805 Fort Worth, Texas 76102 - ----------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 817-348-9701 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ---------------------------------------- ---------------------------- Common Stock, par value $1.00 per share* New York Stock Exchange (*Includes related preferred stock purchase rights) Securities registered pursuant of Section 12(g) of the Act: None 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 15, 1997 was $68,302,370 based on the New York Stock Exchange closing price on such date. As of September 15, 1997 there were 12,009,208 shares of the registrant's Common Stock outstanding. 1 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Stockholders are attached as Exhibit 13 to this Annual Report on Form 10-K and are incorporated by reference into Parts I, II and IV. Portions of the definitive Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III. With the exception of those portions which are incorporated by reference in this Annual Report on Form 10-K, the 1997 Annual Report to Stockholders and the definitive 1997 Proxy Statement are not to be deemed incorporated into or filed as part of this Report. PART I Item 1. BUSINESS. InterTAN, Inc. ("InterTAN" or the "Company") was incorporated in the State of Delaware in June 1986 in order to receive from Tandy Corporation ("Tandy") the assets and businesses of its foreign retail operations, conducted in Canada under the "RadioShack" trade name, in Australia under the "Tandy Electronics" trade name and in the United Kingdom and Europe under the "Tandy" trade name. Following the transfer of assets, on January 16, 1987 Tandy distributed shares of InterTAN common stock to the Tandy stockholders in a tax- free distribution on the basis of one InterTAN share for every ten Tandy shares held. Thus Tandy effected a spin-off and divestiture of these foreign retail operations and its then ownership interest in InterTAN and its operations, thereby constituting InterTAN as an independent public corporation. The Company's operations in continental Europe were closed during fiscal year 1994. FACTORS THAT COULD AFFECT FUTURE PERFORMANCE This report contains certain forward-looking statements about the business and financial condition of InterTAN, including various statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein below. The forward-looking statements are reasonably based on current assumptions regarding important risk factors. Accordingly, actual results may vary significantly from those expressed in the forward-looking statements, and the inclusion of such statements should not be regarded as a representation by the Company or any other person that the anticipated results expressed therein will be achieved. The following information sets forth certain factors that could cause the actual results to differ materially from those contained in the forward-looking statements. RELIANCE ON TANDY RELATIONSHIP. Tandy, including certain of its affiliates, is the Company's principal supplier, is the licensor of the Company's principal trade names, and is a secured creditor of the Company. Maintaining its contractual relationships, particularly the supply and license arrangements, with Tandy is critical to the Company. The loss of such relationships with Tandy would have a material adverse effect on the Company. See "Business - Suppliers", "- Merchandise, License and Advertising Agreements" and Note 3 to the Notes to Consolidated Financial Statements contained in InterTAN's 1997 Annual Report to Stockholders. 2 QUARTERLY VARIATIONS; SEASONALITY. The Company's quarterly results of operations may fluctuate significantly as the result of the timing of the opening of, and the amount of net sales contributed by, new stores and the timing of costs associated with the selection, leasing, construction and opening of new stores, as well as seasonal factors, product introductions and changes in product mix. In addition, sales can be affected as a result of store closures. The Company's business is seasonal, with sales and earnings being relatively lower during the fiscal quarters other than the second fiscal quarter which includes the Christmas selling season. Adverse business and economic conditions during this period may adversely affect results of operations. In addition, excluding the effects of new store openings, the Company's inventories and related short-term financing needs are seasonal, with the greatest requirements occurring during its second fiscal quarter. The Company's financial results for a particular quarter may not be indicative of results for an entire year and the Company's revenues and/or expenses will vary from quarter to quarter. The Company's operating results may also be affected by changes in global economic conditions in the markets where its stores are located, as well as by weather and other natural conditions. See "Business -Other - Seasonality" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION. The retailing industry in which the Company operates is highly competitive. Products substantially similar to those sold through the Company's retail outlets are sold by many other retail stores, including department and discount stores, consumer electronics chains and computer outlets. The nature and extent of competition differs from store to store and also from product line to product line. Certain of the Company's competitors are larger, have a higher degree of market recognition and have greater resources, financial or otherwise, than the Company. The Company believes that the major competitive factors in its businesses include customer service, store location, product availability and selection, price, technical support, and marketing and sales capabilities. The Company's utilization of trained personnel and the ability to use national and local advertising media in each country in which it operates are important to the Company's ability to compete in its businesses. Given the highly competitive nature of the retail industry, no assurances can be given that the Company will continue to compete successfully with respect to the above- referenced factors. See "Business - Geographic Analysis." PRODUCT SUPPLY. The Company's merchandise strategy places heavy emphasis on private label products. These products are typically sourced for the Company in the Far East and manufactured to the Company's order and specification. Consequently, private label products require larger minimum order quantities and longer lead times than nationally branded product which is generally available locally on reasonably short notice. There can be no assurance that the Company will be able to arrange for the production of private label goods to the level required to meet its merchandising objectives. The private label goods being sourced by the Company in the Far East are also typically purchased by Tandy and are therefore manufactured to North American standards. These products are, with minor, and in many cases no, modifications, suitable for sale in Canada. However, the Company's Australian and U.K. operations require products using voltage and other specifications which differ from North American standards. There can be no assurance that vendors will agree to manufacture products to these specifications in quantities that are affordable to the Company. Delays in the timing of arrival of goods from the Far East could also have an adverse impact on the Company's business, particularly delays during the Christmas selling season. See "Business - Business Strategy" and "- Products." DEPENDENCE ON PRODUCT DEVELOPMENT. The Company's operating results are, and will continue to be, subject in part to the introduction and acceptance of new products in the consumer electronics industry. Fluctuations in consumer demand, which could be caused by lack of successful product development, delays in product introductions, product related difficulties or lack of consumer 3 acceptance, could adversely affect the growth rate of sales of products and services and could adversely affect the Company's operating results. The Company's operating results are also affected by its ability to anticipate and quickly respond to the changes taking place in its markets as consumers' needs, interests and preferences alter with time. There can be no assurance that the Company will be successful in this regard. See "Business - Products and Distribution" and "- Business Strategy - Strategic Alliances." OFFERING ADDITIONAL PRODUCTS AND SERVICES. The Company's strategy, particularly through certain of its strategic alliances, includes offering additional communications products and services, which may include, among others, paging, cable television, home security monitoring and communication, cellular phone service, local phone service, and Internet access. Entry into new markets entails risks associated with the state of development of the market, intense competition from companies already operating in those markets, potential competition from companies that may have greater financial resources and experience than the Company, and increased selling and marketing expenses. There can be no assurance that the Company's products or services will receive market acceptance in a timely manner, or at all, or that prices and demand in new markets will be at a level sufficient to provide profitable operations. See "Business - Products and Distribution" and "- Business Strategy - Strategic Alliances." RELIANCE ON STORE LOCATIONS. The Company's success is dependent in part upon its ability to open and operate new stores on a profitable basis and to increase sales at existing stores. The Company's performance is also dependent to a significant degree upon its ability to hire, train and integrate qualified employees into its operations. The Company plans to open approximately 10-15 new stores in fiscal 1998. There can be no assurances that the Company will be able to locate and obtain favorable store sites to meet its goals, attract and retain competent personnel, open new stores on a timely and cost-efficient basis or operate the new and existing stores on a profitable basis. The Company plans to open new stores in existing markets, which may result in the diversion of sales from existing stores and thus some reduction in comparable store sales. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Sales and Operating Revenues." NEED FOR ADDITIONAL FINANCING. The Company requires substantial capital to fund its inventory purchases and store openings and renovations. Consequently, the Company's ability to grow sales and the future of its operations will be affected by the availability of financing and the terms thereof. There can be no assurance that the Company will have access to the financing necessary to meet its sales growth plans or that such financing will be available to the Company on favorable terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." POSSIBLE INCOME TAX REASSESSMENTS. The Company is in discussion with Revenue Canada regarding several issues relating to the Company's spin-off from Tandy and the Company's former operations in continental Europe. If Revenue Canada were to prevail in its stated position on these matters, after the Company had unsuccessfully pursued all rights of appeal, the Company would likely need to seek additional financing. Depending on the level of reassessments, the Company may also need to seek additional financing to post deposits necessary to pursue its rights of appeal. There can be no assurance that such additional financing would be available. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Income Taxes" and "- Liquidity and Capital Resources." MANAGEMENT INFORMATION SYSTEMS. The Company's success is dependent to a significant degree upon the accuracy and proper utilization of its management information systems. For example, the 4 Company's ability to manage its inventories, accounts receivable, accounts payable and to price its products appropriately, depends upon the quality and utilization of the information generated by its management information systems. In addition, the success of the Company's operations is dependent to a significant degree upon its management information systems. The failure of the Company's management information systems to adapt to business needs resulting from, among other things, expansion of its store base and the further development of its various businesses, could have a material adverse effect on the Company. See "Business--Management Information Systems." VOLATILITY OF STOCK PRICE. The price of the Common Stock may be subject to significant fluctuations in response to the Company's operating results, developments in the consumer electronics industry, general market movements, economic conditions, and other factors. For example, announcements of fluctuations in the Company's, its vendors' or its competitors' operating results, and market conditions for growth stocks or retail industry stocks in general, could have a significant impact on the price of the Common Stock. In addition, the U.S. stock market in recent years has experienced price and volume fluctuations in general that may have been unrelated or disproportionate to the operating performance of individual companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Common Stock and the ability of the Company to access the capital markets, if necessary, to finance its future operations. See "Market for the Registrant's Common Equity and Related Stockholder Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." CURRENCY FLUCTUATION AND GLOBAL ECONOMIC RISKS. The Company's financial results are reported in U.S. Dollars. Due to the structure of the Company's operations, possible periodic fluctuation of local currencies against the U.S. dollar will have an impact on the Company's financial results. The Company's subsidiaries conduct business in several foreign currencies; accordingly, depreciation in the value of those currencies against the U.S. dollar reduces earnings as reported by the Company in its financial statements. The Company and its subsidiaries purchased approximately 30% of their inventory through Tandy in fiscal 1997. These purchases were all made in U.S. dollars and the products purchased were sold in Canada, the United Kingdom and Australia in local currencies. Accordingly, exchange rate fluctuations could have a significant effect on the Company's gross margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." Additionally, certain of the Company's debt instruments are not denominated in the functional currency of the borrower. "See Management Discussion & Analysis of Financial Condition and Results of Operations Foreign Currency Transaction (Gains) Losses". Currency exchange rates may fluctuate significantly over short periods of time. Such rates generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates, and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. Furthermore, due to the nature of the Company's operations, the operating results of the Company may, from time to time, be generally affected by global economic and political conditions and such conditions in each particular country in which the Company operates. 5 DESCRIPTION OF BUSINESS InterTAN is engaged principally in the sale of consumer electronics products and services through company-operated retail stores and dealer outlets in Canada, the United Kingdom and Australia. In Canada, the Company also operates cellular telecommunications stores (the "Cantel Stores") on behalf of Rogers Cantel Inc. ("Cantel"). See "Geographic Analysis - Canada". The Company also sells product to direct resellers and end users in certain European countries where the Company has no company-operated stores or licensed dealers. InterTAN's ongoing retail operations are conducted through three wholly-owned subsidiaries; InterTAN Australia Ltd. ("InterTAN Australia"), a New South Wales corporation which operates in Australia under the trade name "Tandy Electronics", InterTAN Canada Ltd. ("InterTAN Canada"), an Alberta corporation which operates in Canada under the trade name "RadioShack", and InterTAN U.K. Limited ("InterTAN U.K."), an England/Wales corporation which operates in the United Kingdom under the "Tandy" trade name. As used herein, "InterTAN" or "Company" sometimes collectively refers to InterTAN, InterTAN Australia, InterTAN Canada and InterTAN U.K., according to the context. As at June 30, 1997, InterTAN's company-operated retail stores and dealers totaled 1,683 consisting of 452 company-operated and 401 dealer stores in Canada, 341 company-operated and 130 dealer stores in the U.K., and 215 company-operated and 144 dealer stores in Australia. In addition, at June 30, 1997, the Company operated 56 Cantel Stores in Canada. InterTAN's company- operated retail stores are located primarily in leased premises. The "dealers" included in the above totals are independent retail businesses which operate under their own trade names but are permitted, under dealer agreements, to purchase any of the products sold by company-operated stores. The dealer agreements contain a sub-license permitting such dealer to designate its consumer electronics department or business as a "RadioShack Dealer", a "Tandy Dealer", or a "Tandy Electronics Dealer", as applicable. EMPLOYEES As at June 30, 1997 InterTAN employed approximately 4,400 persons. Approximately 130 of InterTAN Canada's employees are represented by unions. Those employees are engaged in InterTAN Canada's warehousing and distribution operations and in the Company's stores in the province of Manitoba. Approximately 55 of InterTAN Australia's employees are represented by three separate unions. Approximately 30 of those individuals are employed in warehousing operations while the balance, who are repair technicians and security monitoring staff, are represented by separate unions. PRODUCTS AND DISTRIBUTION InterTAN's stores carry a broad range of private label and brand name, moderately priced, quality consumer electronics products. The Company's private label products are similar, and in many instances identical, to those sold through Tandy's RadioShack retail stores in the United States. The selection of products offered for sale is comprehensive ranging from, among other things, small parts and accessories to large ticket items such as stereo systems and computers. Types of product include: telephony products, including both traditional and cellular telephones, pagers, answering machines and fax machines, personal electronics products, personal computer hardware and software, batteries, parts and accessories, communications products, audio and video products and other small electronic items. It is management's view that the range of products offered by InterTAN is broader than that typically offered by others in the retail consumer electronics industry. The product line in InterTAN stores varies from country to country due to product availability, local laws, regulations and consumer preferences. The trade-marks 6 RadioShack, Optimus and Tandy, among others, are used under license from Tandy; the Company's trade-marked brands include, among others, Genexxa and Techcessories. See "Merchandise, License and Advertising Agreements - License Agreements." InterTAN also offers its customers a selection of brand name products including, among others, Panasonic, AT&T, Compaq, IBM, Sony, Lexmark and Sanyo (the lack of a /R/, TM or SM is not intended, regarding all of the names referred to herein above, to indicate a lack of registration therefor). These brand name products have been selected to complement InterTAN's own private label lines either as extensions or to offer consumers a choice against which they may compare the relative capability and value of InterTAN's private label products. Brand name goods are also used to test new products. Products substantially similar to those sold through InterTAN's retail outlets are sold by many other retail stores, including department stores, consumer electronics chains and computer outlets. Management believes InterTAN is recognized as the leading retailer of certain categories of products (e.g., scanners and multi-testers), as being a primary source for other specific products (e.g., parts and accessories and telephony) and as having the widest selection in a given category (e.g., batteries). These areas of specialty and market leadership typically generate higher gross margin returns relative to certain of the Company's other product lines. 1997 SALES BY PRODUCT GROUP (Rounded to nearest 1%) Product Group Total -------------------------------- Parts & Accessories 23% Audio/Video 18% Telephony 15% Computers 13% Personal Electronics 9% Communications 5% Other 17% -------------------------------- 100% ==== InterTAN believes that it has an efficient product distribution system and efficient store operations systems and procedures. InterTAN has traditionally focused on effective store operations and has developed information systems to monitor and control store performance. The store format typically incorporates the concept of small, strategically located stores mostly in primary and secondary retailing centers, and provides the customer with convenience and readily available products to meet a wide range of consumer electronic needs. InterTAN emphasizes product knowledge and customer service. Management believes that many customers perceive store personnel as having superior product knowledge and are, accordingly, a trusted information resource for consumers. InterTAN also provides after-sale service for all the products it sells during warranty periods and beyond. The Company has adapted RadioShack USA's "Repair Shop at RadioShack" program in each of its three markets. Under this program, the Company offers out-of-warranty repair service to customers for a wide range of nationally branded electronic products. The Company's service centers provide repair capability within a satisfactory turnaround period. The Company has also introduced RadioShack USA's "RadioShack Unlimited" program in each of its markets. Through an in-store catalog, customers are offered thousands of unusual and hard to find items. 7 MANAGEMENT INFORMATION SYSTEMS The Company has a network of point-of-sale terminals in every company- operated store in each of the three countries in which it operates. Each of the Company's stores has at least one or more computers which serve as point-of-sale terminals and are linked to operations headquarters in the particular country. This information network, referred to as EPOS, provides detailed sales and margin information on a daily basis, updates InterTAN's customer database and provides improved financial controls, as well as acting as a monitor of individual store performance. In Canada and the United Kingdom, EPOS is also linked directly to a system used to automatically replenish a store's stock as inventory is sold. These programs are generally store specific and not only help ensure that stores are stocked with inventory in adequate and appropriate quantities but also relieve store managers of time consuming stock ordering duties, leaving them more time to spend with customers and staff. Although not store specific, a form of automatic replenishment is also used in Australia. SUPPLIERS InterTAN acquires approximately 30% of its inventory pursuant to a merchandise agreement with Tandy and acquires the balance from numerous other manufacturers located in the United States and in the countries in which InterTAN has operations. InterTAN uses Tandy's purchasing and export agent, A&A International, Inc. ("A&A"), a wholly-owned subsidiary of Tandy, as its exclusive purchasing agent and exporter in the Far East. See "Merchandise, License and Advertising Agreements - Merchandise Agreement." InterTAN purchased approximately $93,000,000 of products through Tandy in fiscal 1997. This amount is exclusive of certain costs normally associated with cost of goods such as duties, freight and certain taxes. Under its merchandise arrangements with Tandy, InterTAN may purchase any products which Tandy has available for sale in its then current RadioShack catalog, or those products which may otherwise be reasonably available from Tandy or through A&A. Through its ongoing relationship with Tandy, InterTAN is able to take advantage of Tandy's sourcing strength to obtain products which management believes generate gross margins which are higher than industry averages and which offer enhanced customer value. While the Company from time to time enters into exclusivity arrangements with certain suppliers (see "Business Strategy - Strategic Alliances"), InterTAN is not materially dependent on any one supplier other than Tandy. See "Merchandise, License and Advertising Agreements." GEOGRAPHIC ANALYSIS The principal geographic areas of operations for InterTAN are Canada, Australia and the United Kingdom. InterTAN closed all company-operated outlets in continental Europe during fiscal year 1994. InterTAN has broader market coverage than most of its competitors due to the large number of stores in each country in which it operates. Market coverage is further enhanced by the dealer networks. A table appears in Note 13 to the Consolidated Financial Statements contained in InterTAN's 1997 Annual Report to Stockholders which appears on page 35 of Exhibit 13 to this Annual Report on Form 10-K which shows net sales, operating profit and identifiable assets of the Company by geographic area for the three years ended June 30, 1997. This table is incorporated herein by reference. 8 CANADA. As at June 30, 1997, InterTAN Canada operated a total of 452 RadioShack stores in Canada. In addition, a network of dealers accounts for a further 401 Canadian RadioShack locations. InterTAN Canada uses a form of contract management program similar to that used in Australia in a small number of its company-operated stores. See "Geographic Analysis - Australia". The Company also operated 56 Cantel Stores at June 30, 1997. See "Business Strategy - -- Strategic Alliances". The consumer electronics industry in Canada is highly competitive. The influx of "big box" retailers into the Canadian market, some of them with origins in the United States, has added additional pressure to an already competitive marketplace. These conditions were made even more difficult during fiscal year 1997 by the consumer's resistance to the price levels of the most recent generation of personal computers and delays in the introduction of digital cellular products. Further, digital satellite systems, which have made a positive contribution to retailing results in the United States, were only introduced in Canada in late fiscal year 1997 due to regulatory restrictions and supplier constraints. Management believes that InterTAN Canada's range of products and service orientation differentiate the Company from other consumer electronics retailers in Canada. Based on publicly available material, InterTAN believes that the largest retailers in Canada in fiscal 1997 (other than department stores) which have a product line similar to, or competitive with, products offered for sale by InterTAN Canada were: Approximate No. of Stores: -------------------------- Future Shop 76 Adventure Electronique 153 InterTAN's other main competitors in Canada are department stores, general retailers and other consumer electronics retailers. InterTAN Canada's RadioShack stores are very similar to those operated by Tandy in the United States. Because of its geographic proximity to the United States, InterTAN Canada enjoys the benefit of name recognition, and advertising in general, as many of Tandy's advertising programs penetrate the border through media such as cable television and print media. The Company is the market leader in Canada in the number of retail locations and offers the broadest geographic coverage. InterTAN Canada also maintains a strong presence in secondary retail markets through its dealer network. InterTAN Canada has a broad customer base. Management believes that the Company is considered the primary place to shop for products and advice in selected niches such as parts and accessories, telephony and personal electronics. UNITED KINGDOM. As at June 30, 1997, InterTAN had 341 company- operated stores and 130 dealer stores in the United Kingdom, all operating under the Tandy name. Management has identified InterTAN U.K.'s primary competitors as: 9 Approximate No. of Stores: -------------------------- Dixons Group* 709 Comet (Kingfisher Group) 356 Argos 394 * Includes stores trading under the banners Dixons, Currys, PC World and The Link. Unlike Canada and Australia, the Company's competitors in the United Kingdom have a broad market share which results in aggressive price and promotion competition. Consumer electronics retailing continues to undergo significant changes in the United Kingdom. More out-of-town superstores are being built, attracting shoppers from the more traditional downtown or "High Street" locations. While many of these stores offer a full range of electrical goods, their major attraction to consumers appears to be for larger purchases such as white goods, computers and home entertainment. There has also been a continued rationalization in the High Street with the closure of 200 Powerhouse locations and the failure of Escom, a computer retailer, and Colourvision, a television and video retailer. Another competitor, Norweb, sold approximately 70 stores to Comet. The shift to out-of-town locations, combined with the rationalization described above, has left basically four competitors in the High Street - InterTAN U.K., Dixons, Argos and independents. It is management's view that Dixons is InterTAN's most direct competitor in the United Kingdom. Management believes that the shift towards out-of-town retailing will provide the Company with several strategic opportunities to fill the retail gap left in the High Street. Management believes that certain customer profiles will continue to shop in High Street locations and there will be continuing customer demand for products such as portable electronics and accessories from recognized retailers in those locations. AUSTRALIA. As at June 30, 1997 InterTAN Australia had 215 company- operated stores and 144 dealer stores. Of the 215 company-operated retail stores, 142 are operated under "contract management" arrangements. Under the contract management arrangement, the store manager is not employed by InterTAN Australia. InterTAN Australia supplies the store inventory. The store manager is generally obliged to build up a cash deposit to InterTAN Australia amounting to up to 50% of the average stock value at the store. The gross profit attained by the store is split between InterTAN Australia and the contract manager, who is responsible for paying normal operating expenses such as labor and utility costs out of his/her share of the gross profits. Out of its share of the gross profits, InterTAN Australia is responsible for all occupancy related payments under the relevant store lease and other fixed operating expenses. InterTAN Australia is committed to providing warranty and service back-up, including advertising and training. Management believes that the contract management program is successful in improving margins and reducing costs by better aligning Company and contract managers profit goals. While the retailing of household goods in Australia is showing signs of improvement, performance in this category is still weak in comparison with other retail sectors, such as recreational goods and food. While many economic indicators are positive, including interest rates, continued concerns over job security have caused consumer confidence to remain weak. Further, the entrance into Australia of category-killer chains has put pressure on both sales and margins. In prior years, further turmoil was created in the 10 marketplace as several of the Company's competitors went through periods of financial reorganization which resulted in downward pressure on pricing of certain products. As the economy in Australia begins to improve, management believes the Company is positioned to take advantage of the opportunity to increase sales by building on its market strengths - a large number of convenient sales outlets, a broad product offering, including many unusual and hard to find items, and a well-trained, service-oriented sales staff. With 359 company-operated and dealer locations, InterTAN Australia is Australia's largest consumer electronics retail chain in number of locations. Management believes that InterTAN's primary competitors in Australia are: Approximate No. of Stores: -------------------------- Vox 205 Brash 127 Dick Smith 77 Harvey Norman 68 There are few fully independent consumer electronics retailers in Australia since many of the independently owned electronics retailers are members of large buying groups such as Betta and Retravision, each having several hundred members. BUSINESS STRATEGY In the early 1990's, the Company had experienced gradually eroding margins in all three of its markets. Management believes that one of the factors which contributed to this decline in margins was a shift in the product mix from higher margin private label products, sourced primarily through Tandy, to lower margin nationally branded products. In response to this and other concerns, InterTAN adopted a business strategy to refocus the Company in its unique market niche and to incorporate many of the new service initiatives created by Tandy's RadioShack division. As a first step in implementing this strategy, the Company appointed new management at corporate headquarters and in the Canadian and United Kingdom subsidiaries. A marketing director was also added to the Australian subsidiary. These individuals were recruited not only for their broad-based business skills, but more importantly for their extensive retail experience. Another early step in the strategy was the relocation of the Company's corporate headquarters from Canada to Fort Worth, Texas. This action has better enabled InterTAN to strengthen its strategic relationship with Tandy. The Company has an agreement with Tandy to enable it to take advantage of certain marketing and service initiatives introduced by RadioShack USA. These include the positioning statement "You've got questions. We've got answers." and the service initiatives: "The Repair Shop at RadioShack"; "RadioShack Express"; and "RadioShack Unlimited". See "Merchandise, License and Advertising Agreements - Advertising Agreement." Being located in Fort Worth has better enabled the Company to maximize the benefits of these new initiatives. The key elements of InterTAN's business strategy are discussed more fully below. PRODUCTS. InterTAN's strategy focuses on a product plan dedicated to profitable sales growth by improving operating margins while at the same time increasing sales. Cornerstones of this plan are a product offering which includes a high concentration of private label goods, emphasis on 11 core categories, reducing the number of trade marks used on private label goods, and managing the percentage of lower margin product in the overall sales mix. This strategy has been complemented by the introduction of certain of Tandy's service initiatives designed not only to produce revenue in their own right, but also to increase traffic in the Company's stores. During fiscal year 1997, the Company's sales consisted of the following: Private label goods 57% Name brand goods 30% Computers 13% ---- 100% ==== The Company's objective is to gradually increase the percentage in the product mix of higher margin private label goods from the present level. In order to achieve this objective, the Company is working more closely with A&A, which should enable the Company to expand the range of private label products available to its customers and to leverage Tandy's sourcing capabilities to negotiate favorable prices and product offerings with Far East vendors. Increasing the level of private label products in the merchandise mix will be a gradual process as these products require longer lead times. The benefits of this strategy may be offset by the effect of other initiatives taken to emphasize certain product lines, such as cellular, in particular products sold through the Cantel stores, other telephony products, computers and direct to home satellite systems. While these products have sales growth potential, they also typically carry margins which are below the Company's average. InterTAN has identified six categories which yield attractive margins and in which management believes the Company has a strong position in all of its markets. These include parts and accessories, telephones (including answering machines and fax machines), cellular phones, personal electronics products, communications equipment and batteries. These categories are emphasized in the Company's merchandising and marketing programs. InterTAN believes that regular promotion of these items and displaying them in a prominent place in its stores will result in higher sales and margins. In prior periods the Company utilized several brand names on its private label goods which were used under license from Tandy. In addition, InterTAN had developed many of its own brand names. Management believes that the numerous private label names then in use not only resulted in customer confusion but also increased the Company's product sourcing and marketing costs. In response to these concerns, the number of private label brand names has been reduced to five, three of which - RadioShack, Optimus and Tandy - are used under license from Tandy. The remaining two - Genexxa and Techcessories - were developed and are owned by InterTAN and are typically used on private label goods sourced from a supplier other than Tandy. The final cornerstone of InterTAN's product strategy is managing the impact of lower margin product categories. These categories currently include computers and, previously, video games. While computers yield relatively low margins, the Company believes it is necessary to stock and display them to meet customer expectations and to stimulate sales of higher margin accessories and components. To minimize the impact on overall margins, the Company carefully monitors the level of computer inventories and sales. 12 STRATEGIC ALLIANCES. InterTAN has the largest number of sales outlets among consumer electronics retailers in both Canada and Australia and is among the top four in the United Kingdom. The Company has over twenty years of retail experience in all of its markets and is known for its knowledgeable and friendly sales associates. Management believes that there are opportunities to leverage on this strength by forming strategic alliances with other businesses which are also leaders in their respective fields. An example of such an alliance is the retail association announced in the fourth quarter of fiscal year 1996 between RadioShack Canada and Cantel, Canada's only nationally-licensed wireless communications company. At June 30, 1997 the Company operated 56 Cantel Stores in major malls across Canada. These stores predominantly carry Cantel's cellular communications products and accessories. However, approximately one-quarter of the selling space is devoted to complementary end products and accessories offered by the Company. Additionally, most of RadioShack Canada's 452 company-operated stores exclusively feature Cantel wireless communications products and services. Cantel funded the fixturing of "Cantel Express" sections in those stores for the exclusive offering of Cantel cellular products (including digital), paging and other services. This relationship aligns the Company's consumer electronics retail expertise with Cantel's technological strength. In addition to the Cantel alliance, the Company recently announced an agreement with AT&T Long Distance Services Company ("AT&T Canada") under which the Company will market AT&T Canada telecommunications services in all of its company-operated stores. AT&T Canada will also fund the construction of AT&T Canada store-in-store facilities in selected Company retail locations. In Australia, the Company has entered into an arrangement with Optus Communications Pty Limited ("Optus") to offer its cellular products exclusively in Tandy Electronics' 215 company-operated stores. As a part of this arrangement, the Company receives training programs, marketing support and a share of future air time revenues. In addition, new products and end services to be released by Optus, such as fiber optic television cable services and video communication, should become marketable in the future. In the United Kingdom, the Company has also established a non- exclusive alliance with a major cellular provider, Vodafone Limited. Financial support from this relationship as well as from certain handset vendors enabled the Company to construct Communications Centers in all of its 341 company- operated stores in the United Kingdom. In addition to cellular products, these Centers feature the full range of the Company's communications products including, traditional telephones, answering machines, scanners, CB radios and accessories for these products. During fiscal year 1997, the Company had also entered into an agreement with Vobis Microcomputer AG to market that company's personal computer line exclusively in its United Kingdom stores. However, that relationship was terminated, by mutual agreement, in June, 1997. The Company will continue to pursue additional alliance opportunities, to the extent practical, in other areas of its business in all three countries. RETAIL OPERATIONS. InterTAN will maintain its current strategy of leasing conveniently located stores in malls in Canada, malls and High Street locations in the United Kingdom and malls and street locations in Australia. The Company also operates a limited number of express stores in Canada and the United Kingdom. These express stores feature a targeted range of merchandise in a more compact floor plan and are established in high traffic areas that do not presently have a company-operated store or which 13 could support a second location. A selected number of clearance stores are also operated in both Canada and the United Kingdom. ADVERTISING. Traditionally, InterTAN's advertising approach has been strongly product and price-oriented and skewed heavily toward the utilization of print media, with broadcast media support only occurring during the Christmas selling season. The Company has recently added informative image advertising to promote its strength of having knowledgeable and service-oriented sales associates whom consumers can trust to take the "technological mystery" out of their electronics purchases. Also, specific advertising with an emphasis on service was created as The Repair Shop program and other service initiatives were launched in each of the countries, thereby giving consumers additional reasons to buy, other than promotional prices alone. This strategy was supported by additional television image advertising outside of the Christmas period. In addition, InterTAN's flyer, catalog, newspaper insert and other newspaper advertising programs each carry the "You've got questions. We've got answers." positioning statement. The Repair Shop program and additional service initiatives are also being featured. The Company continues to rely on a strong flyer program, newspaper inserts and other forms of distribution of its advertising material. Additionally, more focused direct mail promotions were made to encourage repeat business in the Company's core categories where it has strong market positions and attractive margins. As well, credit promotions and extended product warranties are offered and featured in the Company's advertising. INVENTORY AND DISTRIBUTION. The additional inventory requirements needed to implement a strategy intended to increase sales of private label goods (see "Business Strategy - Products") as well as the introduction of the Cantel Stores, have made it difficult to maintain inventory turns at fiscal year 1995 levels. Consequently, inventory turns decreased to 1.83 and 1.72 for fiscal years 1996 and 1997, respectively. The larger minimum order size and longer lead time associated with private label purchases resulted in expected holding cost increases which are more than offset by enhanced anticipated margins. Management believes that initiatives taken in the Management Information Systems area, including the installation of EPOS systems in all three countries and the use of automatic stock replenishment in Canada and the United Kingdom, combined with increased management attention focused on inventory flow, have helped mitigate the impact of these strategies on inventory levels. Management believes that InterTAN's warehouse facilities are generally well located and efficient in each country. Late in fiscal year 1995, the parts warehouse in Canada was consolidated with the central warehouse to take advantage of excess capacity. This action has resulted in lower costs and improved effectiveness. A number of changes were made to the warehouse in the United Kingdom, including recruitment of new management, changes to the physical layout and improved security, all intended to improve performance, productivity and cost control. During fiscal year 1995, InterTAN U.K. commenced a major enhancement of its computer hardware and software. The roll out of this new system was completed in fiscal year 1996 and has produced improved warehousing and distribution efficiencies. Early in fiscal year 1996, a new carrier was engaged in the United Kingdom to distribute inventory from the warehouse to the stores. One of the benefits of this new arrangement is the more frequent inventory replenishment of the InterTAN U.K. stores. In Australia, an electronic material picking system similar to that previously installed in Canada will be introduced early in fiscal year 1998. The Canadian system has also been expanded and upgraded since its introduction. 14 MERCHANDISE, LICENSE AND ADVERTISING AGREEMENTS MERCHANDISE AGREEMENT. The Company and Tandy are parties to a Merchandise Agreement which requires the Company to use A&A as its exclusive exporter of products from the Far East during the term thereof. Consequently, the Company must pay A&A an annual purchasing agent/exporter fee equal to $1 million plus 0.2% of the Company's consolidated sales in excess of $500 million less certain credits the Company earns by purchasing products from A&A. The Merchandise Agreement originally required the Company to provide irrevocable letters of credit to A&A in support of 100% of outstanding inventory purchase orders. In May 1994, this provision was amended to lower the level of letter of credit coverage to a minimum of 60% during the December to April period gradually rising to 90% in August. In October, 1995, agreement was reached to further lower the letter of credit requirements on certain Canadian purchases. Subsequently, the same reduced letter of credit requirements were extended to the Company's other subsidiaries. In September, 1997 the Merchandise Agreement was further amended to permit purchase orders to be supported by a surety bond, as well as by letters of credit. The terms of the various commissions and fees payable by InterTAN to Tandy under the Merchandise Agreement are to be reviewed by the parties during the six-month periods ending June 30, 2000 and June 30, 2005. In the event that satisfactory agreement regarding such terms is not reached, following such reviews, the Merchandise Agreement may be canceled by either party following 180 days' prior written notice. LICENSE AGREEMENTS. In October and November, 1993, the Company entered into a series of license agreements with Tandy. These agreements permit InterTAN to use the "RadioShack" trade name in Canada, the "Tandy" trade name in the United Kingdom and the "Tandy Electronics" trade name in Australia and New Zealand. Effective July 1, 1996, the expiry dates of these license agreements were extended from June 30, 2000 to June 30, 2006, with automatic annual extensions to June 30, 2010. The license agreements may be terminated with five years' prior written notice by either party. Each of the license agreements also provides for a license to use certain of Tandy's trademarks. In addition, InterTAN has the right to sub-license to its dealers and franchisees. In consideration for these rights, the Company was obliged to pay a sales-based royalty of 0.25% beginning in fiscal year 1996. This royalty increases by up to 0.25% each fiscal year until it reaches a maximum of up to 1.0% in fiscal year 1999. Both the Merchandise Agreement and the license agreements may be revoked by Tandy in the event of a change in control of InterTAN, the default by the Company in payment of certain indebtedness owing to Tandy or a breach of the terms of these agreements. The rights to use the trade names licensed by Tandy are currently, and in varying degrees (depending on the country of business), an integral part of InterTAN's marketing strategy. The loss of the licenses would have a material adverse impact on the business of InterTAN. ADVERTISING AGREEMENT. In June 1995, the Company announced an advertising agreement with Tandy. Under the terms of the agreement, the Company is entitled to the limited use of certain marketing materials, research and marks developed by or for Tandy since January 1, 1994, including the service marks "The Repair Shop at RadioShack", "RadioShack Unlimited" and "You've got questions. 15 We've got answers." The right to use any marks covered by the agreement are vested in the Company by being added to the license agreements described above. In consideration for use of the materials and marks developed during calendar year 1994, the Company paid to Tandy a one-time license fee of $100,000. With respect to materials and marks developed during the term of the agreement, the Company has agreed to pay to Tandy 6% of Tandy's cost, as defined, of developing such materials and marks. Under the current agreement, the Company's share of these costs is capped at the 1996 level. The agreement currently expires December 31, 1997 but may, at the Company's request and at Tandy's option, be extended. OTHER SEASONALITY. InterTAN's business is seasonal, with sales peaking in the November - December Christmas selling season. The United Kingdom and Australian operations were historically reported with a one month lag. Effective with fiscal year 1995, these subsidiaries changed their fiscal year end from May 31 to June 30 to coincide with that of the parent company. This change in reporting did not have a material effect on the annual consolidated financial statements. Cash flow requirements are also seasonal since inventories build prior to the Christmas selling season. Significant inventory growth for all operations typically begins to build in late summer and peaks in mid November. COMPETITION. InterTAN is a specialty consumer electronics retailer and management is not aware of any direct competitors in the niche market in which the Company operates in most of InterTAN's markets. However, products substantially similar to many of those sold through InterTAN's retail outlets are sold by many other retail stores, including department and discount stores, consumer electronics chains and computer outlets. See "Geographic Analysis." Some of these competitors have greater resources, financial or otherwise, than InterTAN. ITEM 2. PROPERTIES. InterTAN owns three facilities consisting of a 412,000 square-foot building (owned by InterTAN Canada) containing office and warehouse space in Barrie, Ontario, Canada, where the headquarters of InterTAN Canada are located, two buildings aggregating 152,000 square-feet (owned by InterTAN Australia) containing office and warehouse space in Mount Druitt, New South Wales, Australia, where the headquarters of InterTAN Australia are located, and a 43,000 square-foot building (owned by InterTAN U.K.) located near Birmingham, England, where the headquarters for InterTAN U.K. and a properties warehouse are located. InterTAN U.K. leases three facilities totaling 136,000 square feet near Birmingham, England in which the Company's distribution center and repair facilities are located. InterTAN's head office is located in a leased 6,675 square-foot facility in Fort Worth, Texas. With the exception of a retail store being located in each of InterTAN's three owned properties discussed above, InterTAN's retailing operations are primarily conducted in leased facilities. The average store size is between 1,200 and 1,800 square feet. 16 For additional information concerning InterTAN's properties, the following sections of Exhibit 13 attached hereto are hereby incorporated by reference: Pages ----- Rent Expense 16-17 Retail Square Feet 1 Sales Outlets 13 ITEM 3. LEGAL PROCEEDINGS. With the exception of the matters discussed in Notes 6 and 8 of the Notes to Consolidated Financial Statements contained in InterTAN's 1997 Annual Report to Stockholders which appear on pages 30 and 32, respectively, of Exhibit 13 attached hereto, such Notes being incorporated herein by reference, there are no material pending legal proceedings, other than ordinary routine litigation incidental to InterTAN's business, to which InterTAN or any of its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal United States market in which InterTAN's common stock trades is the New York Stock Exchange. The common stock also trades in Canada on the Toronto Stock Exchange. The high and low closing sales prices (in U.S. dollars), as reported by the New York Stock Exchange, of InterTAN's common stock for each full quarterly period within the two most recent fiscal years are set out below: Quarter Ended High Low ------------- ------- ------ June, 1997 $ 4 $3 3/8 March, 1997 4 3/4 3 7/8 December, 1996 6 3/8 4 5/8 September, 1996 6 5/8 5 5/8 June, 1996 6 7/8 5 1/4 March, 1996 6 1/2 4 5/8 December, 1995 9 3/8 7 1/8 September, 1995 10 7 1/4 As of September 15, 1997, there were approximately 11,400 recordholders of InterTAN's common stock. InterTAN has never declared cash dividends. Based upon InterTAN's long-term growth opportunities, in the opinion of management, the stockholders are best served by InterTAN pursuing a 17 strategy of reinvesting all profits. Further, InterTAN is currently precluded from paying dividends under its various loan agreements. ITEM 6. SELECTED FINANCIAL DATA. "Financial Highlights" contained in InterTAN's 1997 Annual Report to Stockholders which appears on page 1 of Exhibit 13 attached hereto is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in InterTAN's 1997 Annual Report to Stockholders which appears on pages 13 through 21 of Exhibit 13 attached hereto is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following reports, statements and notes contained in InterTAN's 1997 Annual Report to Stockholders which appear on the indicated pages of Exhibit 13 attached hereto are incorporated herein by reference: Report of Independent Accountants - page 38 Consolidated Statements of Operations - Three years ended June 30, 1997 - page 22 Consolidated Balance Sheets - Two years ended June 30, 1997 - page 23 Consolidated Statements of Cash Flows - Three years ended June 30, 1997 - page 24 Consolidated Statements of Stockholders' Equity - Three years ended June 30, 1997 - page 25 Notes to Consolidated Financial Statements - pages 26 - 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has been no change in independent accountants and no disagreement with any independent accountant on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure during the period since the end of fiscal 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information called for by this Item with respect to directors and executive officers has been omitted pursuant to General Instruction G(3) to Form 10-K. This information is incorporated by reference from the 1997 definitive proxy statement filed with the Securities and Exchange Commission pursuant to Regulation 14A. 18 ITEM 11. EXECUTIVE COMPENSATION. The information called for by this Item with respect to executive compensation has been omitted pursuant to General Instruction G(3) to Form 10-K. The information is incorporated herein by reference from the 1997 definitive proxy statement filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this Item with respect to security ownership of certain beneficial owners and management has been omitted pursuant to General Instruction G(3) to Form 10-K. This information is incorporated by reference from the 1997 definitive proxy statement filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by this Item with respect to certain relationships and transactions with management and others has been omitted pursuant to General Instruction G(3) to Form 10-K. This information is incorporated by reference from the 1997 definitive proxy statement filed with the Securities and Exchange Commission pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements The consolidated financial statements of InterTAN incorporated by reference in this Form 10-K are listed in the index given in Item 8. (2) Financial Statement Schedules: Financial Statement Schedule II is filed herewith. All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1997 Annual Report to Stockholders and included in Exhibit 13 attached hereto. 19 (3) 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 as 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). 20 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) InterTAN, Inc. Restated 1986 Stock Option Plan (as amended as of February 22, 1994 and April 18, 1995) (Filed as exhibit 10(a) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(b) InterTAN, Inc. Restated 1991 Non-Employee Director Stock Option Plan (as amended through February 21, 1994) (Filed as Exhibit 10(b) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(c) Secured Loan Agreement with Trans World Electronics, Inc. (Filed as Exhibit 10(g) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1993 and incorporated herein by reference). 10(c)(i) First Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated January 4, 1994 (Filed as Exhibit 10(e)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1994 and incorporated herein by reference). 10(c)(ii) Second Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated as of May 6, 1994 (Filed as Exhibit 10(g)(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference). 10(c)(iii) Third Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated July 1, 1996 (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). 21 10(d) Retirement Agreement dated March 3, 1997 between InterTAN, Inc. and James Michael Wood (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(e) Registration Rights Agreement between InterTAN, Inc. and Trans World Electronics, Inc. (Filed as Exhibit 10(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1993 and incorporated herein by reference). 10(f) Employment Agreement between InterTAN, Inc. and James T. Nichols dated January 1, 1995 (Filed as Exhibit 10(ii) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(g) Employment Agreement between InterTAN, Inc. and David S. Goldberg dated February 3, 1995 (Filed as Exhibit 10(iii) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(h) Employment Agreement between InterTAN, Inc. and John A. Capstick dated February 20, 1995 (Filed as Exhibit 10(iv) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(h)(i) Letter dated December 6, 1995 extending term of employment agreement for John A. Capstick (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). 10(i) Employment Agreement between InterTAN, Inc. and James G. Gingerich dated March 1, 1995 (Filed as Exhibit 10(v) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(j) Employment Agreement between InterTAN, Inc. and Douglas C. Saunders dated March 10, 1995 (Filed as Exhibit 10(vi) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 22 10(k) Minutes of Settlement dated April 13, 1995 between InterTAN, Inc. and James B. Williams (Filed as Exhibit 10(k) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(l) Retirement and Severance Agreement dated July 31, 1994 between InterTAN, Inc. and Louis G. Neumann (Filed as Exhibit 10(l) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(m) Merchandise Agreement dated October 15, 1993 between InterTAN, Inc., InterTAN Canada Ltd., InterTAN U.K. Limited, InterTAN Australia Ltd., Technotron Sales Corp. Pty. Limited, Tandy Corporation and A&A International, Inc. (Filed as Exhibit 10(m) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(m)(i) First Amendment to Merchandise Agreement dated November 1, 1993 (Filed as Exhibit 10(m)(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference). 10(m)(ii) Second Amendment to Merchandise Agreement dated October 2, 1995 (Filed as Exhibit 10 to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1995 and incorporated herein by reference). 10(m)(iii) Third Amendment to Merchandise Agreement dated February 1, 1996 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(m)(iv) Fourth Amendment to Merchandise Agreement dated July 1, 1996 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). 10(n) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN Australia Ltd. (Filed as Exhibit 10(n) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 23 10(o) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN U.K. Limited (Filed as Exhibit 10(o) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(o)(i) First Amendment to License Agreement (United Kingdom) between InterTAN U.K. Limited and Tandy Corporation dated April 21, 1995 (Filed as Exhibit 10(o)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(p) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN Canada Ltd. (Filed as Exhibit 10(p) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(p)(i) First Amendment to License Agreement (Canada) between InterTAN Canada Ltd. and Tandy Corporation dated March 24, 1995 (Filed as Exhibit 10(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(p)(ii) Second Amendment to License Agreement (Canada), Second Amendment to License Agreement (United Kingdom), and First Amendment to License Agreement (Australia and New Zealand), each dated November 9, 1995 (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). 10(p)(iii) Third Amendment to License Agreement (Canada), Third Amendment to License Agreement (United Kingdom), and Second Amendment to License Agreement (Australia and New Zealand), each dated June 26, 1996 (Filed as Exhibit 10(p)(iii) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1996 and incorporated herein by reference). 10(q) Credit Agreement dated as of May 6, 1994 (Filed as Exhibit 10(q) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference) . 10(q)(i) Amending Agreement and Extension Agreement, each dated as of April 25, 1995, amending and extending Credit Agreement (Filed as Exhibit 10(q)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 24 10(q)(ii) Amending Agreement dated March 1, 1996, amending and extending Credit Agreement (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(q)(iii) Amending Agreement dated June 25, 1996, amending and extending Credit Agreement (Filed as Exhibit 10(q)(iii) to InterTAN's Annual Report on Form 10- K for fiscal year ended June 30, 1996 and incorporated herein by reference). 10(q)(iv) Amending Agreement dated September 11, 1996 amending the Credit Agreement (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). 10(q)(v) Amending Agreement dated February 11, 1997 amending the Credit Agreement (Filed as exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(r) Inventory Repurchase Agreement dated as of May 6, 1994 (Filed as Exhibit 10(r) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1994 and incorporated herein by reference). 10(s) InterTAN Advertising Agreement and first amendment thereto (Filed as Exhibit 10(s) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(s)(i) Second Amendment to InterTAN Advertising Agreement dated to be effective as of January 1, 1996 (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(s)(ii) Third Amendment to InterTAN Advertising Agreement dated to be effective as of January 1, 1997 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(t) Master Sales Agreement (United Kingdom) dated to be effective as of December 31, 1995, among InterTAN, Inc., InterTAN U.K. Limited, and Tandy Corporation (Filed as 25 Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). 10(u) InterTAN, Inc. 1996 Stock Option Plan and Forms of Stock Option Agreement (Filed as Exhibits 4.6 and 4.7, respectively, to InterTAN's Registration Statement on Form S-8, SEC file number 333-16105, filed on November 14, 1996 and incorporated herein by reference). * 13 1997 Annual Report to Stockholders page 1 ("Financial Highlights" only) and pages 13 through 38. 21 Subsidiaries of InterTAN, Inc. (Filed as Exhibit 21 to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). * 23 Consent of Independent Accountants. * 27 Article 5 Financial Data Schedule. 99 Form of Multi-Option Switch Facility Agreement between InterTAN Australia Ltd. and Westpac Banking Corporation (Filed as Exhibit 99 to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1996 and incorporated herein by reference). - ----------------- * Filed herewith (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended June 30, 1997. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. September 26, 1997 /s/James T. Nichols ------------------------------------- James T. Nichols, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 26th day of September 1997 by the following persons on behalf of InterTAN, Inc. and in the capacities indicated. Signature Title - --------- ----- /s/James G. Gingerich Senior Vice President and - ----------------------------- Chief Financial Officer James G. Gingerich (Principal Financial Officer) /s/Douglas C. Saunders Vice President and - ----------------------------- Corporate Controller Douglas C. Saunders (Principal Accounting Officer) /s/Ron G. Stegall Director and - ----------------------------- Chairman of the Board Ron G. Stegall /s/William C. Bousquette Director - ----------------------------- William C. Bousquette /s/John A. Capstick Director - ----------------------------- John A. Capstick /s/Clark A. Johnson Director - ----------------------------- Clark A. Johnson /s/Walter F. Loeb Director - ----------------------------- Walter F. Loeb /s/John H. McDaniel Director - ----------------------------- John H. McDaniel /s/W. Darcy McKeough Director - ----------------------------- W. Darcy McKeough /s/James T. Nichols - ----------------------------- James T. Nichols Director 27 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of InterTAN, Inc. Our audits of the consolidated financial statements referred to in our report dated September 11, 1997, appearing on Page 38 of the 1997 Annual Report to Shareholders of InterTAN, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K), also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/Price Waterhouse LLP Fort Worth, Texas September 11, 1997 28 Schedule II INTERTAN, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
YEAR ENDED JUNE 30 -------------------------------- 1997 1996 1995 -------- -------- -------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance, beginning of year $ 1,746 $ 1,175 $ 1,259 Additions charged to profit and loss 52 599 126 Accounts receivable charged off, net of recoveries (259) (28) (210) -------- -------- -------- Balance, end of year $ 1,539 $ 1,746 $ 1,175 ======== ======== ======== BUSINESS RESTRUCTURING RESERVE Balance, beginning of year $ 2,630 $ 2,610 $ 6,380 Credited to cost and expense -- -- (1,600) Payments and other dispositions, net (1,181) 20 (2,170) -------- -------- -------- Balance, end of year $ 1,449 $ 2,630 $ 2,610 ======== ======== ======== DEFERRED TAX VALUATION ALLOWANCE Balance, beginning of year $ 30,461 $ 28,107 $ 37,578 Additions to valuation allowance 8,828 3,610 3,427 Adjustments to valuation allowance (1,656) (329) (9,100) Reduction in deferred tax assets -- (749) (3,690) Foreign exchange rate effects 1,705 (178) (108) -------- -------- -------- Balance, end of year $ 39,338 $ 30,461 $ 28,107 ======== ======== ========
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 as 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). E-1 Exhibit No. Description ----------- ----------- 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) InterTAN, Inc. Restated 1986 Stock Option Plan (as amended as of February 22, 1994 and April 18, 1995) (Filed as exhibit 10(a) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(b) InterTAN, Inc. Restated 1991 Non-Employee Director Stock Option Plan (as amended through February 21, 1994) (Filed as Exhibit 10(b) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(c) Secured Loan Agreement with Trans World Electronics, Inc. (Filed as Exhibit 10(g) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1993 and incorporated herein by reference). 10(c)(i) First Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated January 4, 1994 (Filed as Exhibit 10(e)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1994 and incorporated herein by reference). 10(c)(ii) Second Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated as of May 6, 1994 (Filed as Exhibit 10(g)(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference). E-2 Exhibit No. Description ----------- ----------- 10(c) (iii) Third Amendment to Secured Loan Agreement with Trans World Electronics, Inc. dated July 1, 1996 (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). 10(d) Retirement Agreement dated March 3, 1997 between InterTAN, Inc. and James Michael Wood (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(e) Registration Rights Agreement between InterTAN, Inc. and Trans World Electronics, Inc. (Filed as Exhibit 10(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1993 and incorporated herein by reference). 10(f) Employment Agreement between InterTAN, Inc. and James T. Nichols dated January 1, 1995 (Filed as Exhibit 10(ii) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(g) Employment Agreement between InterTAN, Inc. and David S. Goldberg dated February 3, 1995 (Filed as Exhibit 10(iii) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(h) Employment Agreement between InterTAN, Inc. and John A. Capstick dated February 20, 1995 (Filed as Exhibit 10(iv) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(h)(i) Letter dated December 6, 1995 extending term of employment agreement for John A. Capstick (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). E-3 Exhibit No. Description ----------- ----------- 10(i) Employment Agreement between InterTAN, Inc. and James G. Gingerich dated March 1, 1995 (Filed as Exhibit 10(v) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(j) Employment Agreement between InterTAN, Inc. and Douglas C. Saunders dated March 10, 1995 (Filed as Exhibit 10(vi) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). 10(k) Minutes of Settlement dated April 13, 1995 between InterTAN, Inc. and James B. Williams (Filed as Exhibit 10(k) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(l) Retirement and Severance Agreement dated July 31, 1994 between InterTAN, Inc. and Louis G. Neumann (Filed as Exhibit 10(l) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(m) Merchandise Agreement dated October 15, 1993 between InterTAN, Inc., InterTAN Canada Ltd., InterTAN U.K. Limited, InterTAN Australia Ltd., Technotron Sales Corp. Pty. Limited, Tandy Corporation and A&A International, Inc. (Filed as Exhibit 10(m) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(m)(i) First Amendment to Merchandise Agreement dated November 1, 1993 (Filed as Exhibit 10(m)(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference). 10(m)(ii) Second Amendment to Merchandise Agreement dated October 2, 1995 (Filed as Exhibit 10 to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1995 and incorporated herein by reference). E-4 Exhibit No. Description ----------- ----------- 10(m)(iii) Third Amendment to Merchandise Agreement dated February 1, 1996 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(m)(iv) Fourth Amendment to Merchandise Agreement dated July 1, 1996 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). 10(n) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN Australia Ltd. (Filed as Exhibit 10(n) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(o) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN U.K. Limited (Filed as Exhibit 10(o) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(o)(i) First Amendment to License Agreement (United Kingdom) between InterTAN U.K. Limited and Tandy Corporation dated April 21, 1995 (Filed as Exhibit 10(o)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(p) License Agreement dated November 4, 1993 between Tandy Corporation and InterTAN Canada Ltd. (Filed as Exhibit 10(p) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1993 and incorporated herein by reference). 10(p)(i) First Amendment to License Agreement (Canada) between InterTAN Canada Ltd. and Tandy Corporation dated March 24, 1995 (Filed as Exhibit 10(i) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1995 and incorporated herein by reference). E-5 Exhibit No. Description ----------- ----------- 10(p)(ii) Second Amendment to License Agreement (Canada), Second Amendment to License Agreement (United Kingdom), and First Amendment to License Agreement (Australia and New Zealand), each dated November 9, 1995 (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). 10(p)(iii) Third Amendment to License Agreement (Canada), Third Amendment to License Agreement (United Kingdom), and Second Amendment to License Agreement (Australia and New Zealand), each dated June 26, 1996 (Filed as Exhibit 10(p)(iii) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1996 and incorporated herein by reference). 10(q) Credit Agreement dated as of May 6, 1994 (Filed as Exhibit 10(q) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1994 and incorporated herein by reference). 10(q)(i) Amending Agreement and Extension Agreement, each dated as of April 25, 1995, amending and extending Credit Agreement (Filed as Exhibit 10(q)(i) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(q)(ii) Amending Agreement dated March 1, 1996, amending and extending Credit Agreement (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(q)(iii) Amending Agreement dated June 25, 1996, amending and extending Credit Agreement (Filed as Exhibit 10(q)(iii) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1996 and incorporated herein by reference). 10(q)(iv) Amending Agreement dated September 11, 1996 amending the Credit Agreement (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended September 30, 1996 and incorporated herein by reference). E-6 Exhibit No. Description ----------- ----------- 10(q)(v) Amending Agreement dated February 11, 1997 amending the Credit Agreement (Filed as exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(r) Inventory Repurchase Agreement dated as of May 6, 1994 (Filed as Exhibit 10(r) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1994 and incorporated herein by reference). 10(s) Second Amendment to InterTAN Advertising Agreement and first amendment thereto (Filed as Exhibit 10(s) to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). 10(s)(i) Second Amendment to InterTAN Advertising Agreement dated to be effective as of January 1, 1996 (Filed as Exhibit 10(a) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10(s)(ii) Third Amendment to InterTAN Advertising Agreement dated to be effective as of January 1, 1997 (Filed as Exhibit 10(b) to InterTAN's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(t) Master Sales Agreement (United Kingdom) dated to be effective as of December 31, 1995, among InterTAN, Inc., InterTAN U.K. Limited, and Tandy Corporation (Filed as Exhibit 10(c) to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1995 and incorporated herein by reference). 10(u) InterTAN, Inc. 1996 Stock Option Plan and Forms of Stock Option Agreement (Filed as Exhibits 4.6 and 4.7, respectively, to InterTAN's Registration Statement on Form S-8, SEC file number 333-16105, filed on November 14, 1996 and incorporated herein by reference). *13 1997 Annual Report to Stockholders page 1 ("Financial Highlights" only) and pages 13 through 38. E-7 Exhibit No. Description ----------- ----------- 21 Subsidiaries of InterTAN, Inc. (Filed as Exhibit 21 to InterTAN's Annual Report on Form 10-K for fiscal year ended June 30, 1995 and incorporated herein by reference). *23 Consent of Independent Accountants. *27 Article 5 Financial Data Schedule. 99 Form of Multi-Option Switch Facility Agreement between InterTAN Australia Ltd. and Westpac Banking Corporation (Filed as Exhibit 99 to InterTAN's Quarterly Report on Form 10-Q for quarter ended December 31, 1996 and incorporated herein by reference). _________________ * Filed herewith E-8 EX-13 2 FINANCIAL HIGHLIGHTS & MD & A INTERTAN, INC. - -------------------------------------------------------------------------------- EXHIBIT 13 Company Profile InterTAN, Inc., headquartered in Fort Worth, Texas, is an international consumer electronics retailer with approximately 1,700 company-operated retail stores and dealer outlets in Canada, the United Kingdom and Australia. InterTAN's retail operations are conducted under trade names licensed from Tandy Corporation: "RadioShack" in Canada, "Tandy" in the United Kingdom and "Tandy Electronics" in Australia. InterTAN carries a broad range of private label and brand name consumer electronics products, including telephony products such as telephones and cellular equipment, personal electronics, computers, batteries, parts and accessories, communication products, and audio and video. InterTAN is committed to providing consumers with high quality merchandise, convenient locations and excellent service from friendly, knowledgeable sales associates. InterTAN's common shares are traded on the New York Stock Exchange under the symbol "ITN" and the Toronto Stock Exchange under the symbol "ITA." [Three images, each being a graphic depiction of a flag from the countries of Canada, the United Kingdom and Australia appear in the background of the foregoing text. In the upper right-hand corner above the foregoing text appears the Company's logo followed by the words "InterTAN, Inc.".] ================================================================================ FINANCIAL HIGHLIGHTS
(In thousands, except percent, per share data, Year ended June 30 number of sales outlets and number of employees) 1997 1996 1995 1994 1993/4/ - ----------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Net sales $519,318 $506,445 $491,751 $465,766 $641,966 Gross profit percent 44.8 44.3 43.2 44.3 43.0 Operating income (loss) (3,801)/1/ 11,629 13,861/2/ 16,851/2/ (93,155)/2/ Net income (loss) (16,609) (2,241) 8,123 9,649 (109,060) Primary net income (loss) per average common share (1.45) (0.21) 0.81 2.09 (12.20) Fully diluted net income (loss) per average common share (1.45) (0.21) 0.65 1.50 (12.20) ............................................................................................................................. FINANCIAL POSITION AT YEAR END: Total assets 254,307 261,633 262,039 258,591 240,534 Net working capital 138,532 145,471 157,582 148,108 40,989 Long-term debt 57,558 64,730 83,555 89,831 40,000/3/ Stockholders' equity 106,234 119,512 113,326 101,513 82,179 ............................................................................................................................. OTHER INFORMATION AT YEAR END: Number of sales outlets 1,683/5/ 1,780 1,839 1,817 2,136 Retail square feet (company-operated stores) 1,479 1,424 1,468 1,508 1,950 Number of employees 4,366 4,343 4,217 4,220 5,662 - -----------------------------------------------------------------------------------------------------------------------------
/1/ Fiscal year 1997 includes an asset impairment charge of $10,042,000. /2/ Fiscal years 1995, 1994 and 1993 include provisions (credits) of ($1,600,000), ($3,612,000) and $77,400,000, respectively, relating to business restructuring. /3/ Classified as current in 1993 and included in debt to be refinanced on the balance sheet. If the long-term debt had not been reclassified, net working capital would have been $80,989,000. /4/ Amounts for 1993 include results for the Company's former operations in continental Europe which have been closed. /5/ This decrease is solely attributable to a planned decline in the number of low volume dealers. 1 INTERTAN, INC. - -------------------------------------------------------------------------------- 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 OVERVIEW 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. The geographic distribution of the Company's sales outlets is summarized in the following table: SALES OUTLETS
FISCAL YEAR 1997 June 30 ENDING OPENED CLOSED 1996 1995 - ------------------------------------------------------------------------- CANADA Company-operated 452* 9 7 450 446 Dealer 401 44 45 402 429 ......................................................................... 853 53 52 852 875 - ------------------------------------------------------------------------- AUSTRALIA Company-operated 215 7 2 210 205 Dealer 144 16 74 202 260 ......................................................................... 359 23 76 412 465 - ------------------------------------------------------------------------- UNITED KINGDOM Company-operated 341 7 11 345 335 Dealer 130 7 48 171 164 ......................................................................... 471 14 59 516 499 - ------------------------------------------------------------------------- TOTAL Company-operated 1,008 23 20 1,005 986 Dealer 675 67 167 775 853 ......................................................................... 1,683 90 187 1,780 1,839 - -------------------------------------------------------------------------
* In addition, the Company operated 56 stores on behalf of Rogers Cantel Inc. 13 INTERTAN, INC. - -------------------------------------------------------------------------------- The dealers included in the preceding table are independent retail businesses which operate under their own trade names but are permitted, under dealer agreements, to purchase any of the products sold by InterTAN company stores. The dealer agreements contain a license permitting the dealer to designate the consumer electronics department of the dealer's business as a "RadioShack Dealer," a "Tandy Dealer," or a "Tandy Electronics Dealer," as applicable. Sales to dealers accounted for approximately 9% of total sales during fiscal year 1997. During fiscal year 1996, the Company entered into an agreement 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 June 30, 1997, 56 stores were in operation. Under the terms of this agreement, Cantel leases the store and is responsible for fixed costs, including rent and realty taxes. The Company purchases inventory from Cantel and receives a commission on certain sales. In addition to Cantel products, a portion of each store displays complementary products offered by the Company. Since these locations are not company-owned, they are not included in the above table. InterTAN's business is seasonal; sales peak in the November-December Christmas selling season. The Company's cash flow requirements are also seasonal since inventories build prior to the Christmas selling season. Significant inventory growth for all operations typically begins to build in late summer and peaks in November. Since the impact of the fluctuations of local country currencies against the U.S. dollar can be significant, the following analysis of the income and expense categories is based both on amounts expressed in U.S. dollars and as a percent of sales. Profit and loss accounts, including sales, are translated from local currency values to U.S. dollars at the monthly average exchange rates. During fiscal year 1997, the U.S. dollar was weaker against the Australian dollar and U.K. pound sterling than in fiscal year 1996. As a result, the same local currency amounts translate into more U.S. dollars as compared with the prior year. For example, if local currency sales of the Australian operation in fiscal 1997 were equal to those in fiscal 1996, the fiscal 1997 income statement would reflect a 3.5% increase in sales when reported in U.S. dollars. On the other hand, during fiscal year 1997 the U.S. dollar strengthened against the Canadian dollar. Consequently, in Canada, the same local currency amounts translated into less U.S. dollars in fiscal year 1997 as compared with fiscal year 1996. The table below outlines the percentage change in the weighted average exchange rates as compared to the prior year:
1997 1996 1995 - -------------------------------------- Canada (0.3) 1.4 (3.1) Australia 3.5 2.1 8.3 United Kingdom 4.8 (1.9) 5.6 - --------------------------------------
NET SALES AND OPERATING REVENUES Net sales and operating revenues ("sales") in U.S. dollars increased by $12,873,000 in fiscal year 1997, an increase of 2.5% over fiscal year 1996. The impact on sales of a stronger Australian dollar and pound sterling was partially offset by a weaker Canadian dollar. On a net basis, foreign exchange effects accounted for $10,727,000 of the increase. Measured at the same exchange rates, therefore, sales increased by $2,146,000, or 0.4%. This increase in sales, measured at comparable exchange rates, was more than attributable to an increase in the number of company-operated stores. During fiscal year 1997, the Company opened 23 new company-operated stores while closing 20 stores for a net increase of 3 company-operated stores. The new stores had a more pronounced impact on sales, as new store openings tend to take place in the earlier part of the fiscal year, prior to the Christmas selling season. Store closures, on the other hand, had a less pronounced impact on sales, as closures tend to occur during the latter part of the fiscal year so that their results include Christmas sales. In fiscal year 1996, the Company increased the net number of stores by 19, while reducing the number of stores in fiscal year 1995 by 9. In Canada, during fiscal year 1997, the Company also operated Cantel stores. At June 30, 1997, 56 Cantel stores were open. No such stores were open in either fiscal year 1996 or 1995. While the Company is always seeking viable new and replacement locations, focus during fiscal 1998 will continue to be on improving existing locations and reviewing and rationalizing selected marginal locations, particularly in the United Kingdom. Management currently anticipates that the number of stores closed during fiscal 1998 will approximate the number of new store openings; however, this strategy could change. Should this occur, the effect on sales is not expected to be material. The decrease in the number of dealers in all three countries is primarily attributable to programs designed to eliminate dealers that were not purchasing product in sufficient quantities to make them profitable to the Company. The reduction in the number of dealers is not expected to have a material effect on sales. The Company intends to continue to explore opportunities to expand its dealer base to produce sales from communities too small to support company- operated stores. 14 INTERTAN, INC. - -------------------------------------------------------------------------------- The following table illustrates the total percentage sales increase (decrease) by geographic area as measured in U.S. dollars and local currencies:
SALES INCREASE (DECREASE) U.S. dollars Year ended June 30 (Percent change) 1997 1996 1995 - -------------------------------------------------------------- Canada 1.0 2.2 2.0 Australia 9.3 12.1 7.8 United Kingdom 1.0 (0.6) 8.8 - -------------------------------------------------------------- Local Currencies Year ended June 30 1997 1996 1995 - -------------------------------------------------------------- Canada 1.3 1.0 5.3 Australia 5.6 10.3 (0.1) United Kingdom (3.7) 1.3 3.2 - --------------------------------------------------------------
The following table illustrates comparative company-operated store sales measured at comparable exchange rates:
COMPARATIVE COMPANY-OPERATED STORE SALES/1/ Year ended June 30 (Percent change) 1997 1996 1995 - -------------------------------------------------------------- Canada (1.8) 0.6 6.5 Australia 2.9 10.7 2.5 United Kingdom (4.1) (0.7) 4.1 .............................................................. Consolidated (1.6) 1.9 4.9
/1/ Derived from the accumulation of each store's monthly sales in local currency for those months in which it was open both in the current and preceding year. Comparative stores sales declined during fiscal year 1997 as a whole by 1.6%, with reductions being experienced in all four quarters. There were a number of factors which adversely influenced the Company's sales performance during fiscal year 1997. Consumer resistance to pricing had a negative effect on computer sales in the first quarter in Canada. In addition, cellular sales were soft in all three countries in the third quarter. In Canada, management believes consumers were delaying purchases in anticipation of the arrival of digital wireless technology, while in Australia and the United Kingdom there was resistance to pricing, as the market moved to digital from the more traditional analog product. A generally weak consumer electronics market in the United Kingdom, in particular during the important Christmas quarter, also was a factor. Management believes that certain steps taken to refocus the Company into its market niche, including the decision to de-emphasize the video game business, had an unfavorable impact on sales. For example, reduced video game sales depressed overall sales for the year by about 1%, requiring improvements in other product categories just to stay even with the prior year. The impact of these transitional effects on revenues should not be material in future periods. Although sales were generally disappointing throughout the year, the fourth quarter finished strongly, with comparative store gains in both Canada and Australia. Management believes the steps taken to refocus the Company into its niche market together with the introduction of a number of new service initiatives and advertising programs made available to it under an advertising agreement with Tandy, including the positioning statement, "You've got questions. We've got answers." and the service initiatives, "The Repair Shop at RadioShack" and "RadioShack Unlimited" had an overall positive impact on sales during fiscal year 1997 and management believes that sales will continue to benefit from these and other service initiatives during fiscal year 1998. Sales in U.S. dollars increased by $14,694,000 in fiscal year 1996, an increase of 3.0% over fiscal year 1995. The impact on sales of stronger Australian and Canadian dollars was partially offset by a weaker pound sterling. Measured at the same exchange rates, sales increased by $13,244,000, or 2.7%. An increase of 19 company-operated stores was an important factor in this improved performance. Comparative store sales increased by 1.9% during fiscal year 1996. Sales increased by $24,122,000 in fiscal year 1995. A stronger Australian dollar and pound sterling accounted for $7,034,000 of the increase. Sales at comparable exchange rates increased by 3.6% in fiscal year 1995. This increase in sales was achieved despite a net reduction of nine company-operated stores. Comparative store sales increased by 4.9% during fiscal year 1995. GROSS PROFIT An increase in the gross margin percentage, higher sales and foreign currency rate effects all contributed to an increase in gross margin of $8,090,000 during fiscal year 1997. The following analysis summarizes the components of the increase in gross profit over that experienced in fiscal year 1996 (in thousands):
- ------------------------------------------- Higher gross margin percentage $2,615 Higher sales 950 Foreign currency rate effects 4,525 ........................................... $8,090 - -------------------------------------------
15 INTERTAN, INC. - -------------------------------------------------------------------------------- The following table illustrates gross profit as a percentage of sales, by geographic area:
GROSS PROFIT BY GEOGRAPHIC AREA Year ended June 30 (As a percent of sales) 1997 1996 1995 - -------------------------------------------------------------- Canada 45.3 45.6 45.1 Australia 47.7 45.5 43.8 United Kingdom 42.1 41.6 39.9 .............................................................. Consolidated 44.8 44.3 43.2 - --------------------------------------------------------------
The gross profit percentage for fiscal year 1997 rose from 44.3% a year ago to 44.8%, an increase of 50 basis points. This improvement results primarily from further development of the merchandising strategy, initially implemented two years ago, which places greater emphasis on the Company's higher margin core categories, including parts and accessories and private label goods. Emphasis on the sale of extended warranty contracts and tighter controls over inventories also had a positive effect on margins. Management believes that the steps taken to refocus the Company in its niche market as well as the benefits of current and planned service and other initiatives will continue to make a positive contribution to margins in fiscal year 1998. However, the benefits of this strategy may be offset by the effect of initiatives taken to emphasize certain product lines, such as cellular, in particular products sold through the Cantel stores, other telephony products and direct to home satellite systems, which have sales growth potential but carry below average margins. Gross profit in fiscal year 1996 was $12,078,000 higher than in fiscal 1995, primarily due to an increase in sales and an improvement in the gross margin percentage, which increased by 1.1 percentage points to 44.3% of sales. This increase resulted primarily from the implementation of the new merchandising strategy described above. In fiscal year 1995, the gross margin percentage declined by 0.9 percentage points. Much of this decline occurred in Canada and was due to a swing in the sales mix away from private label goods towards branded product, in particular computers. Management addressed this issue by better managing the percentage of computers in the product mix. The effect of the decline in Canadian margins was partially offset by an improvement in the gross margin percentage in Australia following the installation of an electronic point-of-sale system in that operation. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A"), increased during the fiscal year 1997 by $11,517,000 or 5.6%. The following chart illustrates SG&A expense as a percentage of sales by geographic area:
SG&A EXPENSE BY GEOGRAPHIC AREA Year ended June 30 (As a percent of sales) 1997 1996 1995 - -------------------------------------------------------------- Canada 35.9 35.6 34.5 Australia 42.1 41.6 41.9 United Kingdom 48.2 45.0 42.1 .............................................................. Consolidated 41.8 40.6 39.4 - --------------------------------------------------------------
The following table provides a breakdown of SG&A expense by major category (in thousands):
SG&A EXPENSE BY CATEGORY 1997 1996 1995 DOLLARS % OF SALES Dollars % of Sales Dollars % of Sales - -------------------------------------------------------------------------------------------------- Payroll $87,774 16.9 $83,507 16.5 $78,359 15.9 Advertising 27,792 5.4 26,045 5.1 24,638 5.0 Rent 43,578 8.4 40,918 8.1 39,423 8.0 Taxes (other than income taxes) 18,105 3.5 16,942 3.3 16,160 3.3 Telephone and utilities 7,333 1.4 6,865 1.4 6,669 1.4 Other 32,629 6.2 31,417 6.2 28,518 5.8 .................................................................................................. $217,211 41.8 $205,694 40.6 $193,767 39.4 - --------------------------------------------------------------------------------------------------
16 INTERTAN, INC. - -------------------------------------------------------------------------------- Foreign exchange rate effects and the scheduled increase in the royalty payable to Tandy explain almost one-half of the increase in SG&A spending during fiscal year 1997. The profitable growth of the business in Australia as well as the new Cantel stores in Canada contributed to higher payroll costs. Advertising was increased both in Australia and the United Kingdom in an attempt to build brand awareness and grow sales. A greater store count, increases following rent reviews and higher tax rates resulted in increased rents and property taxes in all three jurisdictions. Management's objective for fiscal year 1997 had been to achieve a one percentage point increase in the operating margin (i.e., an increase in the gross margin percentage combined with a reduction in the SG&A percentage). While the gross margin percentage improved, this improvement was more than offset by an increase in the SG&A percentage. As actual SG&A spending was within planned levels, this increase resulted from a sales performance which fell short of expectations. Following a disappointing Christmas quarter, management took further steps to more closely control costs in all jurisdictions, but with particular emphasis on Canada and the United Kingdom. This strategy showed results in the fourth quarter, as SG&A declined modestly as a percentage of sales and SG&A spending in the United Kingdom, measured at constant exchange rates, showed a year-on-year decline for the quarter. Management will continue to focus its attention on controlling costs in future periods in an effort to keep increases in SG&A spending more in line with realized sales gains. In fiscal year 1996, SG&A expense was $205,694,000, an increase of $11,927,000. Implementing a strategy of growing the business by refocusing the Company in its niche market, introducing new service and other initiatives and expanding in selected markets of necessity required some increase in SG&A spending. The increase in the number of stores resulted in higher rent and increased store payroll costs. Payroll costs also increased as a result of the "Repair Shop at RadioShack" initiative as well as the strengthening of the management teams in all three countries. Management information systems were also improved, particularly in the United Kingdom. In fiscal year 1995, SG&A expense increased by $7,546,000. The effects of foreign exchange rate fluctuations accounted for more than one-half of this increase. SG&A spending in fiscal year 1995 was heavily affected by the decision to refocus the Company in its niche market. This action resulted in one-time costs incurred in the process of restructuring the business, as well as the relocation of the corporate headquarters from Toronto to Fort Worth. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased by $1,699,000 during fiscal year 1997, rising to $9,671,000 from $7,972,000 in fiscal year 1996. This increase results from a full year's depreciation charge on capital expenditures, primarily on new stores and store renovations made in fiscal year 1996. Investment in enhanced management information systems was also a factor. The level of capital spending in fiscal year 1996 had been higher than in each of the preceding two years, primarily because of an increase in new store openings. As a consequence of the impairment charge of $10,042,000 recorded in the United Kingdom in fiscal year 1997, management anticipates that depreciation expense in each of the next two years will be approximately $1,500,000 lower than would have been the case, absent the impairment charge. Thereafter, the effect on depreciation expense of the impairment charge is not expected to be material. Depreciation and amortization expense increased modestly in fiscal year 1996 by $468,000, primarily as a result of increased capital spending on store renovations, new stores and investments in management information systems. Depreciation and amortization expense had decreased by $477,000 during fiscal year 1995, primarily as a result of reduced capital spending during the Company's financial restructuring in fiscal year 1994. IMPAIRMENT OF LONG-LIVED ASSETS Because of the continued and higher than expected operating losses in the United Kingdom, the Company conducted an impairment evaluation of its fixed assets in the United Kingdom in accordance with the provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". As a result of this evaluation, during the fourth quarter of fiscal year 1997, the Company recognized a non-cash impairment charge of $10,042,000 which represents the difference between the estimated market value and the book value of the Company's investment in property and equipment in the United Kingdom, primarily in its retail store locations, including, lease premiums, leasehold improvements and store fittings and fixtures. Fair market value was principally determined based upon estimated future discounted cash flows (before interest). PROVISION FOR BUSINESS RESTRUCTURING In May, 1993 the Company recorded a pre-tax charge in the amount of $77,400,000 in connection with the shutdown of it former continental European retail operations. During fiscal 1995, certain claims and contingencies were settled for amounts less than originally estimated. As a result of these settlements and certain other developments, management reduced 17 INTERTAN, INC. - -------------------------------------------------------------------------------- the accrual by $1,600,000. Management believes the remaining restructuring reserve at June 30, 1997 of $1,449,000 is adequate to provide for the Company's remaining obligations in Europe including those arising from legal actions brought against the Company by former employees, dealers and franchisees. FOREIGN CURRENCY TRANSACTION (GAINS)/LOSSES Foreign currency transaction gains of $610,000 and $338,000 arose during fiscal years 1997 and 1996, respectively, compared to a foreign currency loss of $314,000 in fiscal year 1995. These gains and losses resulted from a variety of factors, including the effect of fluctuating foreign currency values on inter- company debt and trade payables denominated in currencies other than the functional currency of the debtor as well as on the carrying value of the Company's remaining assets in continental Europe. The Company's major exposure to foreign currency risks are the Canadian dollar denominated subordinated convertible debentures (the "Debentures") carried on the books of the Company and the U.S. dollar denominated note due to Tandy which is recorded in the Canadian subsidiary. Historically, these two debts provided a natural hedge, as the related foreign currency risks were largely offsetting. The foreign exchange risk with respect to these two debts is increasing with time as the note payable to Tandy is repaid. NET INTEREST EXPENSE Interest expense, net of interest income, was $6,663,000, $6,709,000 and $7,462,000 for fiscal years 1997, 1996 and 1995, respectively. The reduction in net interest expense in fiscal year 1997 results from lower interest bearing debt as a consequence of principal repayments on the note payable to Tandy. The effect of this reduction was partially offset by an increase in short-term borrowings in the United Kingdom. Principal repayments to Tandy, as well as the voluntary conversion of a portion of the Debentures by the holders thereof, contributed to lower net interest expense in fiscal year 1996. In addition, the amortization of a significant portion of the Company's bank financing costs had been completed in fiscal 1995. INCOME TAXES The Company's unusually high effective tax rate is primarily due to the fact that the Company recognizes income tax expense on the profits generated by InterTAN Canada, but does not recognize income tax benefits on the losses incurred by InterTAN U.K. Limited. The Company expects its tax rate to continue to be unusually high until the losses in the United Kingdom are substantially reduced. The Company has regularly assessed the future benefit, if any, which might be derived from the Company's deferred tax assets. Based on the operating performance of the Canadian subsidiary in fiscal 1995, management concluded that the valuation allowance should be reduced by $9,100,000 and the Company recognized a deferred tax benefit of that amount. The Company also recorded a current deferred tax benefit of $1,000,000 relating to the parent Company during fiscal year 1995. No further reductions were made to the valuation allowance during fiscal 1996. During fiscal year 1997, based on the improved operating performance of the Australian subsidiary during the last two fiscal years, management concluded that the valuation allowance against the deferred tax assets of that subsidiary should be reduced by $634,000 and the Company recorded a deferred tax benefit of that amount. With the exception of the deferred tax benefits described above, the provision for taxes in fiscal years 1996 and 1997 of $7,499,000 and $6,755,000, respectively, primarily represents a provision for Canadian federal and provincial taxes on the profits of the Canadian subsidiary. At June 30, 1997, the Company had deferred tax assets in all three countries aggregating $39,972,000 against which a valuation allowance has been recorded in the amount of $39,338,000. Approximately $32,053,000 of the valuation allowance relates to loss carry forwards and other timing differences in Australia and the United Kingdom. The potential realization of the deferred tax assets will be reviewed on a regular basis. 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 18 INTERTAN, INC. - -------------------------------------------------------------------------------- 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 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. NET INCOME PER AVERAGE COMMON SHARE The primary net loss and fully diluted loss per average common share were $1.45 and $0.21 for fiscal years 1997 and 1996, respectively, as the effect of the Debentures was anti-dilutive. For fiscal year 1995, primary net income per average common share and fully diluted net income per average common share were $0.81 and $0.65, respectively. In that period, the difference between primary and fully diluted net income per average common share was due primarily to the dilutive effect of the Debentures, which were convertible into 7,123,860 common shares at that time. Because the Debentures were anti-dilutive during one or more quarters during each of fiscal years 1997, 1996 and 1995, fully diluted net income (loss) per average common share during the four quarters of those fiscal years do not equal fully diluted net income per average common share for those fiscal years as a whole. The dilutive effect of this instrument will likely continue in future periods and exchange rate impacts on the Debentures may increase or decrease their dilutive effects. 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 June 30, 1997 exchange rates). The Company has outstanding warrants exercisable for 1,449,007 common shares at an exercise price of $6.618 per share. These warrants expire on August 5, 1998. Also, in fiscal years 1997, 1996 and 1995, the Company's directors and employees held options to purchase 785,500, 650,833 and 650,000 common shares, respectively, at exercise prices ranging from $3.50 to $8.1875, $5.31 to $8.125 and $5.31 to $7.125, respectively. The outstanding warrants and options, when dilutive, were also considered in determining primary and fully diluted net income per average common share. 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 year ended June 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. 19 INTERTAN, INC. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Operating activities generated $5,570,000 in cash during fiscal year 1997. Net income, adjusted to reconcile net income to cash, generated $10,566,000 in cash, which was partially offset by $7,592,000 in cash consumed in building inventories. The increase in inventories in fiscal 1997 was due primarily to the requirements of the 56 Cantel stores in Canada and the need to build inventories in response to higher sales in Australia. Operating activities had generated $12,185,000 in cash during fiscal year 1996. Net income, adjusted to reconcile net income to cash, generated $15,418,000 in cash, while increases in inventories consumed $13,698,000 in cash during that year. The increase in the Company's inventory levels in fiscal year 1996 resulted from implementing a merchandising strategy which places greater emphasis on higher margin private label goods. These products require larger order sizes and longer lead times. An improvement in the Company's in-stock position and a wider product assortment also contributed to the increase. The effect of this reduction in cash was partially offset by an increase in accounts payable which preserved $9,960,000 in cash during fiscal 1996. Operating activities resulted in an inflow of cash of $8,030,000 during fiscal year 1995. Net income in fiscal year 1995, adjusted to reconcile net income to cash, generated $13,784,000 in cash which was partially offset by a reduction in accrued expenses and higher levels of accounts receivable and other current assets, primarily cash on deposit with Tandy. Investing activities consumed $7,981,000 in cash during fiscal year 1997 compared with $9,961,000 and $5,773,000 in cash in fiscal years 1996 and 1995, respectively. These cash outflows primarily result from additions to property and equipment as the Company proceeds with a plan to open new stores and renovate existing stores. These capital expenditures were higher in fiscal year 1996, primarily because of the large number of new stores opened in that period. During fiscal year 1996, the Company opened 32 new stores, while in fiscal years 1997 and 1995, 23 and 10 new stores, respectively, were opened. In fiscal year 1997, financing activities generated $3,555,000 in cash. The effects of an increase in short-term borrowings in the United Kingdom combined with proceeds from the issuance of stock to employee plans were partially offset by scheduled repayments on a note payable under the Company's Secured Loan Agreement with Tandy. In fiscal year 1996, financing activities consumed $13,895,000 in cash. In that year, the amount of cash consumed by scheduled repayments on one of the notes payable to Tandy was augmented by effect of the early retirement of another note payable to Tandy. The effect on cash of these repayments was partially offset by short-term borrowings and cash generated from the sale of stock to employee plans. In fiscal year 1995, financing activities consumed $1,658,000 in cash. Cash consumed by the principal payment of debt to Tandy was partially offset by the proceeds from the sale of common stock to employee plans. The Company's principal sources of liquidity during fiscal year 1998 will be its cash and short-term investments, its cash flow from operations and its banking facilities. In May, 1994, InterTAN Canada Ltd., InterTAN, Inc., and InterTAN U.K. Limited entered into a one-year credit agreement ("Syndicated Loan Agreement") with a syndicate of banks. This agreement established a one-year revolving facility in an amount which is determined using an inventory level calculation not to exceed Cdn$60,000,000 ($43,446,000 at June 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 August, 1998 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 June 30, 1997, there were borrowings against the credit facility aggregating $9,821,000 and $13,985,000 was committed in support of letters of credit. There was $19,640,000 of credit available for use at June 30, 1997. 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 recently concluded 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. 20 INTERTAN, INC. - -------------------------------------------------------------------------------- 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 ($9,046,000 at June 30, 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 ($3,769,000 at June 30, 1997 exchange rates) may be used in support of short-term borrowings. Interest is charged on such borrowings at the Australian Indicator Lending Rate plus 1.25 percentage points. At June 30, 1997, while there were no borrowings outstanding against the Australian Facility, $4,000,000 was committed in support letters of credit as described above and $5,046,000 of credit was available for use. 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 fiscal year 1997, the Company was in compliance with all of these requirements, except for the cash interest coverage ratios under the Syndicated Loan Agreement and the Secured Loan Agreement at December 31, 1996 and June 30, 1997, respectively. The banking syndicate and Tandy have waived the non-compliance with these covenants. Management expects that the Company will meet all covenant requirements during fiscal year 1998. The Company's primary uses of liquidity during 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 $8,000,000 during fiscal year 1998, mainly related to store expansion, remodeling and upgrading. The Company's debt servicing requirements in fiscal year 1998 are estimated to be $12,600,000 and include principal payments under the Secured Loan Agreement of $6,958,000. 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". 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 through fiscal year 1998, provided the amount of any additional tax deposits was not at the upper end of the ranges described above under "Income Taxes". 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. 21 INTERTAN, INC. - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30 (In thousands, except per share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Net sales and operating revenues $519,318 $506,445 $491,751 Other income 640 902 1,217 ..................................................................................................... 519,958 507,347 492,968 Operating costs and expenses: Cost of products sold (including purchases from Tandy Corporation of $91,945, $86,366, and $69,091, respectively) 286,835 282,052 279,436 Selling, general and administrative expenses 217,211 205,694 193,767 Depreciation and amortization 9,671 7,972 7,504 Impairment of long-lived assets 10,042 -- -- Provision for business restructuring -- -- (1,600) ..................................................................................................... 523,759 495,718 479,107 ..................................................................................................... Operating income (loss) (3,801) 11,629 13,861 Foreign currency transaction (gains) losses (610) (338) 314 Interest expense, net 6,663 6,709 7,462 ..................................................................................................... Income (loss) before income taxes (9,854) 5,258 6,085 Provision (benefit) for income taxes 6,755 7,499 (2,038) ..................................................................................................... Net income (loss) $(16,609) $ (2,241) $ 8,123 - ----------------------------------------------------------------------------------------------------- Primary net income (loss) per average common share $ (1.45) $ (0.21) $ 0.81 ..................................................................................................... Fully diluted net income (loss) per average common share $ (1.45) $ (0.21) $ 0.65 ..................................................................................................... Average common shares outstanding 11,459 10,901 10,043 ..................................................................................................... Average common shares outstanding assuming full dilution 11,459 10,901 17,186 .....................................................................................................
The accompanying notes are an integral part of these consolidated financial statements. 22 INTERTAN, INC. - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS June 30, June 30, (In thousands, except share amounts) 1997 1996 - ------------------------------------------------------------------------------------------------------------ ASSETS Current Assets: Cash and short-term investments $ 34,726 $ 34,096 Accounts receivable, less allowance for doubtful accounts 9,655 9,422 Inventories 170,594 162,207 Other current assets 7,271 7,628 Deferred income taxes 634 3,831 ............................................................................................................ Total current assets 222,880 217,184 Property and equipment, less accumulated depreciation and amortization 28,812 39,129 Other assets 2,615 2,928 Deferred income taxes -- 2,392 ............................................................................................................ $254,307 $261,633 - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term bank borrowings $ 9,821 $ 975 Current maturities of note payable to Tandy Corporation 6,958 6,958 Accounts payable 25,215 24,082 Accounts payable to Tandy Corporation 2,589 894 Accrued expenses 27,031 25,833 Income taxes payable 12,734 12,971 ............................................................................................................ Total current liabilities 84,348 71,713 Long-term note payable to Tandy Corporation, less current maturities 16,420 23,070 9% convertible subordinated debentures 41,138 41,660 Other liabilities 6,167 5,678 ............................................................................................................ 148,073 142,121 ............................................................................................................ Stockholders' Equity: Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding -- -- Common stock, $1 par value, 40,000,000 shares authorized, 11,873,437 and 11,172,506 issued and outstanding 11,873 11,173 Additional paid-in capital 114,350 111,678 Retained earnings 2,523 19,132 Foreign currency translation effects (22,512) (22,471) ............................................................................................................ Total stockholders' equity 106,234 119,512 ............................................................................................................ Commitments and contingent liabilities $254,307 $261,633 - ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 23 INTERTAN, INC. - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30 (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (16,609) $ (2,241) $ 8,123 Adjustments to reconcile net income (loss) to cash provided by operating activities: Results from the Australia and the U.K. transitional month (see Note 13) -- -- (1,740) Depreciation and amortization 9,671 7,972 9,444 Deferred income taxes 5,589 7,172 (1,392) Foreign currency transaction gains, unrealized (612) (100) (170) Impairment of long-lived assets 10,042 -- -- Provision for business restructuring -- -- (1,600) Other 2,485 2,615 1,119 Cash provided by (used for) current assets and liabilities: Receivables (164) (674) (1,517) Inventories (7,592) (13,698) 1,687 Other current assets (126) 1,298 (1,480) Accounts payable 263 9,960 834 Accounts payable to Tandy Corporation 1,721 449 (851) Accrued expenses 970 452 (3,667) Income taxes payable (68) (1,020) (760) .................................................................................................................. Net cash provided by operating activities 5,570 12,185 8,030 .................................................................................................................. Cash flows from investing activities: Additions to property and equipment (9,244) (12,119) (7,530) Proceeds from sales of property and equipment 271 331 1,538 Other investment activities 992 1,827 219 .................................................................................................................. Net cash used in investing activities (7,981) (9,961) (5,773) .................................................................................................................. CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term borrowings, net 8,554 972 -- Proceeds from issuance of common stock to employee plans 1,959 1,484 1,809 Proceeds from exercise of stock options -- 760 12 Principal repayments on long-term borrowings (6,958) (17,111) (3,479) .................................................................................................................. Net cash provided by (used in) financing activities 3,555 (13,895) (1,658) .................................................................................................................. Effect of exchange rate changes on cash (514) 507 395 .................................................................................................................. NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 630 (11,164) 994 Cash and short-term investments, beginning of year 34,096 45,260 44,266 .................................................................................................................. Cash and short-term investments, end of year $ 34,726 $ 34,096 $ 45,260 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 7,213 $ 7,976 $ 8,616 Income taxes $ 1,299 $ 967 $ 271 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 24 INTERTAN, INC. - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Foreign Currency Common Stock Additional Retained Translation (In thousands) Shares Amount Paid-In Capital Earnings Effects Total - ---------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 9,715 $ 9,715 $103,599 $ 14,990 $(26,791) $101,513 Net foreign currency translation adjustments -- -- -- -- 2,175 2,175 Issuance of common stock to employee plans 476 476 2,767 -- -- 3,243 Issuance of common stock under stock option plans 2 2 10 -- -- 12 Results from the Australia and the U.K. transitional month (see Note 13) -- -- -- (1,740) -- (1,740) Net income -- -- -- 8,123 -- 8,123 ............................................................................................................................ Balance at June 30, 1995 10,193 10,193 106,376 21,373 (24,616) 113,326 Net foreign currency translation adjustments -- -- -- -- 2,145 2,145 Issuance of common stock to employee plans 483 483 2,805 -- -- 3,288 Issuance of common stock under stock option plans 118 118 642 -- -- 760 Conversion of subordinated debentures to common stock 379 379 1,855 -- -- 2,234 Net loss -- -- -- (2,241) -- (2,241) ............................................................................................................................ Balance at June 30, 1996 11,173 11,173 111,678 19,132 (22,471) 119,512 Net foreign currency translation adjustments -- -- -- -- (41) (41) Issuance of common stock to employee plans 700 700 2,672 -- -- 3,372 Net loss -- -- -- (16,609) -- (16,609) ............................................................................................................................ BALANCE AT JUNE 30, 1997 11,873 $11,873 $114,350 $ 2,523 $(22,512) $106,234
The accompanying notes are an integral part of these consolidated financial statements. 25 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company operates consumer electronics retail stores in Canada, Australia, and the United Kingdom. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions, balances and profits have been eliminated. The Company's fiscal year ends June 30. CASH AND SHORT-TERM INVESTMENTS Cash in stores, deposits in banks and short-term investments with original maturities of three months or less are considered as cash and cash equivalents. INVENTORY Inventories are comprised primarily of finished merchandise and are stated at the lower of cost, based on the average cost method, or market value. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 25 to 40 years for buildings, 3 to 8 years for fixtures and equipment and 25 years for lease premiums. Leasehold improvements are amortized over the life of the lease or the useful life of the asset, whichever is shorter. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which materially prolong the useful lives of the assets are capitalized. The cost and related accumulated depreciation of property retired or sold are removed from the accounts, and gains or losses are recognized in the income statement. In March 1995, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). Effective July 1, 1996, the Company adopted FAS 121 which requires that long- lived assets (i.e. property, plant and equipment and goodwill) held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss will be recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset, or group of assets, is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between the net book value of the assets and the estimated fair value of the related assets. See Note 5 for a discussion of an impairment charge recorded in fiscal year 1997. NET SALES AND OPERATING REVENUES Net sales and operating revenues include items related to normal business operations, including service contract and repair income. Service contract revenue, net of direct selling expenses, is recognized over the life of the contract. TRANSLATION OF FOREIGN CURRENCIES The local currencies of the Company's foreign entities are the functional currencies of those entities. For reporting purposes, assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date; income and expense items are translated using monthly average exchange rates. The effects of exchange rate changes on net assets located outside the United States are recorded in a separate account in equity. Gains and losses from foreign currency transactions are included in the operations of each period. CONTRACT MANAGEMENT At June 30, 1997, InterTAN Australia had 215 company-operated stores, of which 142 were operated under "contract management" arrangements. Under the typical contract management arrangement, the store manager is not employed by InterTAN Australia, but is under contract to operate the store on behalf of the Company. InterTAN Australia selects and supplies the store location (including lease payments and other fixed location charges) and also supplies leasehold improvements, fixtures and store inventory. InterTAN Australia is also committed to provide supporting services, including advertising and training. The contract manager is responsible for the labor and overhead necessary to operate the store (i.e., the contract manager is responsible for paying the employees and store utility and other operating costs). The contract manager is also required to provide a cash deposit. In return for the service of operating the store, the contract manager receives compensation equal to approximately one half of the store's gross profit. InterTAN Canada has 19 stores which operate under similar arrangements. The revenue, as well as the expenses paid by the Company, related to contract management stores are included in the consolidated statement of operations. The contract manager's compensation is included in selling, general and administrative expenses. Contract managers' deposits are included in the "Other liabilities" section of the consolidated balance sheet and amounted to $4,579,000 and $4,014,000 at June 30, 1997 and June 30, 1996, respectively. CAPITALIZED FINANCING COSTS Costs incurred in connection with the issuance of debt and renewal fees are capitalized and are amortized over the term of the respective debt. Amortization of these costs, which include underwriting, bank, legal and accounting fees, for fiscal years 1997, 1996 and 1995 was $684,000, $608,000 and $1,199,000, respectively. Unamortized balances at June 30, 1997 and June 30, 1996 were $1,317,000 and $1,805,000, respectively. 26 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ADVERTISING COSTS Advertising costs are expensed the first time the related advertising occurs. During fiscal years 1997, 1996 and 1995, advertising expense was $27,792,000, $26,045,000 and $24,638,000, respectively. INCOME TAXES Income taxes are accounted for using the asset and liability method pursuant to Financial Accounting Standard No. 109 ("FAS 109"), "Accounting for Income Taxes". The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the book amounts and tax basis of assets and liabilities. However, FAS 109 allows the recognition of a deferred tax asset only to the extent that it is more likely than not that the Company will realize the benefits of that deferred tax asset. InterTAN considers the earnings of its foreign subsidiaries to be permanently reinvested for use in those operations and, consequently, deferred federal income taxes, net of applicable foreign tax credits, are not provided on the undistributed earnings of foreign subsidiaries. If the earnings of those subsidiaries as of June 30, 1997 were remitted to the parent, approximately $42,000,000, subject to adjustment for deemed foreign taxes paid, would be included in the taxable income of the parent. By operations of tax statutes currently in effect, the Company would incur certain U.S. income taxes, including alternative minimum tax. Such remittances may also be subject to certain foreign withholding taxes (presently rates range from 0% to 15%) for which there would likely be no U.S. tax relief. FORWARD EXCHANGE CONTRACTS Gains and losses on contracts entered to hedge open inventory purchase orders are included in the cost of the merchandise purchased. Gains and losses on contracts intended to mitigate the effects of exchange rate fluctuations on payables and debt denominated in currencies other than the functional currency of the debtor are included in income in the periods the exchange rates change. EARNINGS PER SHARE The Company computes primary net income (loss) per average common share by dividing net income by the sum of the weighted average number of common shares outstanding and dilutive common stock equivalents as determined using the treasury stock method. Dilutive common stock equivalents consist of outstanding stock options and warrants. Fully diluted net income per average common share reflects the assumed conversion of the 9% subordinated convertible debentures ("Debentures") into common stock, whereby the related interest expense and foreign currency transaction (gains) losses, net of tax, are added back to net income. In February 1997, the FASB issued Financial Accounting Standard No. 128, "Earnings per Share" ("FAS 128"), which is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Effective December 31, 1997, the Company will adopt FAS 128, which established new standards for computing and presenting earnings per share ("EPS"). The statement requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes the effect of potentially dilutive securities while diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, converted, or resulted in the issuance of common stock that would then share in the earnings of the entity. For the year ended June 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. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the FASB issued Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Effective July 1, 1996, the Company adopted FAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. The pronouncement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock option compensation plans. However, as provided in FAS 123, the Company has elected to continue to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). See Note 11. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Actual results could differ from those estimates. NOTE 2 BANK DEBT In May, 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 (the "Bank Syndicate"). This agreement established a one year revolving facility in an amount which is determined using an inventory level calculation not to exceed Cdn$60,000,000 ($43,446,000 at June 30, 1997 exchange rates). The interest 27 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rate under the credit facility is the Canadian prime rate plus 1% on loans to InterTAN Canada Ltd. and the U.K. base rate plus 2% for loans to InterTAN U.K. Limited. In addition, a standby fee of 0.25% per annum is payable on the unused portion of the credit facility. The credit agreement is secured principally by an inventory repurchase agreement among the Bank Syndicate agent, the Company and Tandy Corporation ("Tandy"), the Company's principal supplier. The Syndicated Loan Agreement has been renewed, and now extends through mid-August, 1998. The Syndicated Loan Agreement requires the Company to maintain tangible net worth greater than $80,000,000 before considering the effects of foreign currency translation. The Company is also required to maintain capital expenditures at or below $13,000,000 per annum, maintain a consolidated working capital ratio above 2.0:1 and a debt to equity ratio, as defined, below 0.75:1. For fiscal year 1997, the Syndicated Loan Agreement also required the Company to maintain earnings before depreciation, extraordinary non-cash charges, interest and taxes less capital expenditures of at least 0.9 times net finance charges for the twelve months ending September 30, 1996 and 1.50 times net finance charges for the twelve month periods ending December, 1996 and March 31 and June 30, 1997. The Company has met all covenant tests under the Syndicated Loan Agreement throughout fiscal year 1997, except for the cash interest coverage ratio for the twelve months ended December 31, 1996. However, each member of the Bank Syndicate waived such non-compliance and agreed to modify the cash interest coverage ratios for the third and fourth quarters of fiscal year 1997 to 1.0 and 1.05, respectively. The Company was in compliance with these ratios, as revised. For fiscal year 1998, the cash interest coverage ratios have been set at 1.25 for the twelve months ending September 30 and December 31, 1997 and 1.50 for the twelve months ending March 31 and June 30, 1998. Management expects that the Company will meet these requirements during the fiscal year 1998. The Syndicated Loan Agreement also precludes the Company from paying dividends. At June 30, 1997, there were borrowings against the credit facility aggregating $9,821,000, at an interest rate of 8.5%. In addition, $13,985,000, was committed in support of letters of credit issued primarily to secure product purchases from Far Eastern suppliers. There was $19,640,000 of credit available for use at June 30, 1997. One of the Company's directors also serves as a director of the agent bank of the Bank Syndicate. Such director abstains from voting on any matters requiring Board action which involve the Company and the Bank Syndicate. In November, 1996, the Company's Australian subsidiaries, InterTAN Australia Ltd. and Technotron Sales Corp. Pty. Ltd., entered into a credit agreement with an Australian bank (the "Australian Facility"). This agreement established a credit facility in the amount of A$12,000,000 ($9,046,000 at June 30, 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 ($3,769,000 at June 30, 1997 exchange rates) may be used in support of short-term borrowings. Interest is charged on such borrowings at the Australian Indicator Lending Rate plus 1.25 percentage points. At June 30, 1997, while there were no borrowings outstanding against the Australian Facility, $4,000,000 was committed in support of letters of credit issued primarily to secure product purchases from Far Eastern suppliers. There was $5,046,000 of credit available for use at June 30, 1997. NOTE 3 DEBT AND MERCHANDISE AGREEMENT WITH TANDY On August 5, 1993, Tandy, through its wholly-owned subsidiary, Trans World Electronics, Inc., provided the Company with a term loan facility ("Series A Note") in the amount of $41,748,000 bearing interest at 8.64%. It is payable semi-annually over a six year period commencing February 25, 1995. In addition, Tandy provided the Company with a $10,113,000 three year loan ("Series B Note") which bore interest at 8.11% and was due on August 25, 1996. The Series B Note was repaid in May, 1996. Under the terms of the agreement concerning the Series A and B Notes ("Secured Loan Agreement"), the Company has granted Tandy a first priority lien over all of the assets of the Company and its subsidiaries. In addition, InterTAN, Inc. has pledged the shares of each of its subsidiaries to Tandy. The Secured Loan Agreement allows new revolving credit facility lenders to participate in the security granted to Tandy. The Series A Note can be repaid at any time without penalty. The Secured Loan Agreement requires the Company to maintain tangible net worth greater than $80,000,000 before considering the effects of foreign currency translation. Total debt due to Tandy, including long-term notes payable under the Secured Loan Agreement, accounts payable, and open inventory purchase orders placed with Tandy which are not supported by letters of credit, is limited to $60,000,000. In addition, total debt due to parties other than Tandy, excluding the Debentures and trade payables, is limited to $50,000,000. The Secured Loan Agreement also requires the Company to maintain earnings before interest, taxes and unrealized foreign currency transaction gains or losses of at least 2.0 times finance charges for each six and twelve month period ending December 31 and June 30, respectively. In addition, the Company is required to maintain capital expenditures below agreed levels during each six month period throughout the term of the loan. The Company has met all of these covenants during fiscal year 1997 except for the financial charge ratio which was 0.94 at June 30, 1997, excluding the impairment charge discussed in Note 5. Tandy has waived such non- compliance. Management anticipates that it will meet these covenants during fiscal year 1998. The Secured Loan Agreement also precludes the Company from paying dividends. 28 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Series A Note matures as follows (in thousands):
For years ending June 30 - ------------------------------------- 1998 $ 6,958 1999 6,958 2000 6,958 2001 3,479 ..................................... $24,353 Less unamortized discount 975 ..................................... $23,378 - -------------------------------------
In consideration for Tandy's extension of credit, InterTAN issued to Tandy five- year warrants to purchase 1,449,007 shares of the Company's common stock exercisable beginning August 5, 1993 at an exercise price of $6.618 which was the market price of the Company's common stock at the date of issuance. These warrants were valued at $2,155,000 and this amount was recorded as a discount against the Series A and B Notes. The discount is being amortized over the term of the Series A Note. Amortization during each of fiscal years 1997, 1996 and 1995 was $308,000. The Company and Tandy have entered into a Merchandise Agreement and a series of license agreements. These agreements permit InterTAN to use, in designated countries, the "Tandy", "Tandy Electronics" and "RadioShack" trade names until June 30, 2006, with automatic annual extensions to June 30, 2010. The license agreements may be terminated with five years' prior written notice by either party. In the event a change in control of InterTAN, Inc. or any of its subsidiaries occurs, Tandy may revoke the Merchandise Agreement and the license agreements. In consideration for these rights, the Company was obliged to pay a royalty of 0.25% of consolidated sales beginning in fiscal year 1996. This royalty increases by 0.25 percentage points each fiscal year until it reaches a maximum of up to 1.0% in fiscal 1999. During fiscal years 1997 and 1996, the Company paid Tandy royalties totaling $2,538,000 and $1,260,000, respectively. The Company is obliged to use Tandy's export unit, A &A International, Inc. ("A & A"), as its exclusive exporter of products from the Far East through the term of the Merchandise Agreement. In such connection, the Company must pay a purchasing agent/exporter fee to A & A calculated by adding 0.2% of consolidated sales in excess of $500,000,000 to the base amount of $1,000,000 and deducting from this certain credits the Company earns by purchasing products from Tandy and A & A. The Company paid Tandy fees totaling $815,000, $785,000 and $810,000 in fiscal years 1997, 1996 and 1995, respectively, under this arrangement. The Company's purchase orders with Tandy are supported, based on a formula agreed with Tandy, by letters of credit issued by banks on behalf of InterTAN or backed by cash deposits. In September, 1997, the Merchandise Agreement 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 recently concluded an agreement with a major insurer to provide such a surety bond in an amount not to exceed $15,000,000. The Company has also entered into an advertising agreement with Tandy giving the Company rights to advertising initiatives developed by Tandy for its RadioShack stores in the United States. During fiscal years 1997 and 1996, the Company incurred expenses of $211,000 and $410,000, respectively, under this agreement. NOTE 4 DEBENTURES During fiscal year 1994, the Company closed a private placement of Cdn$60,000,000 ($43,446,000 at June 30, 1997 exchange rates) of 9% subordinated convertible debentures which will mature on August 30, 2000. At June 30, 1997, Cdn$56,812,000 of Debentures ($41,138,000 at June 30, 1997 exchange rates) were outstanding. The Debentures are convertible at any time at a conversion rate of 118.7310 common shares for each Cdn$1,000 face amount of Debentures, equivalent to a conversion price of approximately Cdn$8.42, or $6.10 per share at the June 30, 1997 exchange rate. The Debentures are subordinated to all senior indebtedness of the Company, including the Syndicated Loan Agreement, the Australian Facility and the Secured Loan Agreement. The Debentures are redeemable, in whole or in part, on a pro rata basis, upon 30 business days' notice at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, provided that the current market price of the Company's common shares as of the date of such notice is not less than 125% of the conversion price. After August 30, 1999, the Debentures will be redeemable upon 30 trading days notice at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, if any, regardless of the current market price of the Company's common shares. After February 28, 2000, the Company may redeem the Debentures by issuing and delivering to the holders that number of the Company's common shares obtained by dividing the principal amount of the Debentures by 95% of the market price of the Company's common stock at the date of redemption. NOTE 5 PROPERTY AND EQUIPMENT Property and equipment at June 30, 1997 and June 30, 1996 are summarized as follows (in thousands):
1997 1996 - -------------------------------------------------------- Land $ 1,134 $ 1,137 Buildings 10,072 10,218 Equipment, furniture and fixtures 44,143 40,477 Leasehold improvements 42,638 40,189 Leasehold premiums 9,139 8,664 ........................................................ 107,126 100,685 Less accumulated depreciation and amortization 78,314 61,556 ........................................................ Property and equipment, net $ 28,812 $ 39,129 - --------------------------------------------------------
29 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Because of the continued and higher than expected operating losses in the United Kingdom, the Company conducted an impairment evaluation of its property and equipment in the United Kingdom in accordance with the provisions of FAS 121. As a result of this evaluation, during the fourth quarter of fiscal year 1997, the Company recognized a non-cash impairment loss of $10,042,000 which represents the difference between the estimated market value and the book value of the Company's investment in property and equipment in the United Kingdom, primarily in its retail store locations, including lease premiums, leasehold improvements and store fittings and fixtures. Fair market value was principally determined based upon estimated future discounted cash flows (before interest). The amount of this adjustment was credited to accumulated depreciation. NOTE 6 ACCRUED EXPENSES The following is a summary of accrued expenses at June 30, 1997 and June 30, 1996 (in thousands):
1997 1996 - ------------------------------------------------------ Payroll and bonuses $ 7,383 $ 7,227 Taxes (other than income taxes) 2,832 2,554 Deferred service contract income 6,156 4,121 European restructuring costs 1,449 2,630 Other 9,211 9,301 ...................................................... $27,031 $25,833 - ------------------------------------------------------
In May, 1993, the Company recorded a pre-tax charge in the amount of $77,400,000 in connection with the shut down of its former continental European retail operations. During fiscal year 1995, certain claims and contingencies were settled for amounts less than originally estimated. As a result of these settlements and certain other developments, management reduced the accrual by $1,600,000. Management believes the remaining restructuring reserve at June 30, 1997 of $1,449,000 is adequate to provide for the Company's remaining obligations in Europe including those arising from legal actions brought against the Company by former employees, dealers and franchisees. NOTE 7 INCOME TAXES The components of the provisions for domestic and foreign income taxes are shown below (in thousands):
Year ended June 30 1997 1996 1995 - ---------------------------------------------------------------- Current United States $ 148 $ (374) $(1,178) Foreign 1,018 701 532 ................................................................ 1,166 327 (646) Deferred Foreign 5,589 7,172 (1,392) ................................................................ Total income tax expense (benefit) $ 6,755 $ 7,499 $(2,038) - ----------------------------------------------------------------
Components of the difference between income tax expense and the amount calculated by applying the U.S. statutory rate of 35% to income before income taxes are as follows (in thousands):
Year ended June 30 1997 1996 1995 - ---------------------------------------------------------------- Components of pre-tax income (loss): United States $ (901) $(1,872) $(3,578) Foreign (8,953) 7,130 9,663 ................................................................ Income (loss) before income taxes (9,854) 5,258 6,085 Statutory U.S. tax rate 35% 35% 35% ................................................................ Federal income tax expense (benefit) at statutory rate (3,449) 1,840 2,130 Foreign tax rate differentials 1,177 887 927 Provincial income taxes, less foreign federal income tax benefit 1,202 1,433 900 Book losses for which no tax benefit was recognized 9,367 3,610 3,427 Adjustment to valuation allowance for deferred tax assets (1,656) (329) (9,100) Other, net 114 58 (322) ................................................................ Total income tax expense (benefit) $ 6,755 $7,499 $(2,038) - ----------------------------------------------------------------
Deferred tax assets are comprised of the following at June 30 (in thousands):
JUNE 30, June 30, 1997 1996 - ---------------------------------------------------------------- DEFERRED TAX ASSETS Depreciation $ 5,410 $ 2,045 Deferred service contracts 2,029 1,454 Reserves for business restructuring 633 835 Loss carryforwards 26,363 28,157 Other 5,537 4,193 ................................................................ 39,972 36,684 Valuation allowance (39,338) (30,461) ................................................................ DEFERRED TAX ASSET $ 634 $ 6,223
Since the adoption of FAS 109 in July, 1993, the Company has regularly assessed the future benefit, if any, which might be derived from the Company's deferred tax assets. In assessing the future benefit, if any, which might be derived from these deferred tax assets, the Company considers its recent operating history and financial condition. 30 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Based on the operating performance of the Canadian subsidiary in fiscal 1995, management concluded that the valuation allowance should be reduced by $9,100,000 and the Company recognized a deferred tax benefit of that amount. No further reductions were made to the valuation allowance during fiscal 1996. During fiscal year 1997, based on the improved operating performance of the Australian subsidiary during the last two fiscal years, management concluded that the valuation allowance against the deferred tax assets of that subsidiary should be reduced by $634,000 and the Company recorded a deferred tax benefit of that amount. For Canadian tax purposes, the Company has net operating loss carryforwards of approximately $2,600,000 which can be used to offset future taxable income in Canada. These loss carry-forwards will expire in 2001. The Company also has net operating loss carry-forwards for tax purposes of approximately $72,100,000 and $1,900,000 in the United Kingdom and Australia, respectively. These losses can be carried forward indefinitely in both jurisdictions. Certain restrictions may apply to the use of these loss carry-forwards in the event of a change in control of the Company. 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 of the 1990-1993 tax in dispute. 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. An audit of the French branch of the Canadian subsidiary was also completed by the French tax authorities for the 1988 through 1990 taxation years. An assessment of approximately $2,000,000 has been issued. The Company has appealed this assessment. It is management's view that the position of the French tax authorities on this matter is without merit and that the Company will be successful in its appeal process. Accordingly, no provision has been made in the accounts for this assessment. In order to avoid having to pay this tax while the appeal proceeds, the Company has provided the French tax authorities with a letter of guarantee for the amount in dispute. 31 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 COMMITMENTS AND CONTINGENCIES The Company leases virtually all of its retail space under operating leases with terms ranging from three to twenty-five years. Canadian leases are normally based on a minimum rental plus a percentage of store sales in excess of a stipulated base. The remainder of InterTAN's store leases generally provide for fixed monthly rent adjusted periodically using inflation indices and rent reviews. In fiscal years 1997, 1996 and 1995 minimum rents, including immaterial contingent rents and sublease rental income, were $36,365,000, $34,033,000 and $32,585,000, respectively. Future minimum rent commitments at June 30, 1997 for all long-term non-cancelable leases (net of immaterial sublease rent income) are as follows (in thousands):
1998 $33,591 2001 $22,080 1999 31,106 2002 17,354 2000 26,670 2003 and thereafter 95,125 - -----------------------------------------------------------------
A claim which had been made by a former employee for damages for wrongful dismissal totaling $880,000 was settled in July, 1997 for an amount substantially less than the amount claimed by this former employee and within the amount the Company had recorded as a provision representing its best estimate of the possible range of loss on this matter. Apart from this matter and those described in Notes 6 and 7, 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 their property is subject. NOTE 9 FINANCIAL INSTRUMENTS Other than debt instruments, management believes that the book value of the Company's financial instruments recorded on the balance sheet approximates their estimated fair value based on their nature and generally short maturity; such instruments include cash and short-term investments, accounts receivable, short- term bank borrowings, accounts payable and accrued expenses. The estimated fair values of the Company's long-term debt instruments are shown in the table below (in thousands):
JUNE 30, 1997 June 30, 1996 BOOK ESTIMATED Book Estimated VALUE FAIR VALUE value fair value - ----------------------------------------------------------------- Note payable to Tandy $24,353 $24,274 $31,311 $31,397 Discount on Tandy note (975) -- (1,283) -- - ----------------------------------------------------------------- Carrying value of note payable to Tandy $23,378 $24,274 $30,028 $31,397 - ----------------------------------------------------------------- 9% convertible subordinated debentures $41,138 $39,492 $41,660 $44,785 - -----------------------------------------------------------------
The estimated fair value of the note payable to Tandy has been determined by discounting the related cash flows using management's estimate of the Company's incremental borrowing rate for similar issues. The estimated fair value of the Debentures is based on market price. The Company enters into foreign exchange contracts to hedge against exchange rate fluctuations on certain debts, payables and open inventory purchase orders denominated in currencies other than the functional currency of the issuing entity. All foreign exchange contracts are written with major international financial institutions. The Company's risk in those transactions is limited to the cost of replacing the contracts at current market rates in the event of nonperformance by the counterparties. The Company believes its risk of counterparty nonperformance is remote, and any losses incurred would not be material. At June 30, 1997 and 1996, the Company had approximately $10,280,000 and $25,795,000, respectively, of foreign exchange contracts outstanding with a market value of approximately $190,000 and $17,000, respectively. Maturity on these contracts outstanding at June 30, 1997 ranged from one to six months from fiscal year-end. NOTE 10 STOCK PURCHASE AND SAVINGS PLANS The Company's Stock Purchase Program is available to most employees. Each participant may contribute from 1% to 10% of annual compensation. The Company matches from 40% to 80% of the employee's contribution depending on the length of the employee's participation in the program. Shares are provided to the plan either by periodic purchases on the open market or by the Company issuing new shares. Under the InterTAN Canada Ltd. Employee Savings Plan (the "Savings Plan"), a participating employee may contribute 5% of annual compensation into the plan. The Company matches 80% of the employee's contribution. The Savings Plan is available to most Canadian employees who have been employed at least two years. An employee may also elect to contribute an additional 5% of annual compensation to the plan which is not matched by the employer. The Company's contributions are fully vested at the end of each calendar quarter. An Administrative Committee appointed by the Company's Board of Directors directs the investment of the plan's assets, a significant portion of which are invested in InterTAN, Inc. common stock. Effective October 1, 1995, the InterTAN Employee Deferred Salary and Investment Plan was amended and restated as the InterTAN, Inc. 401(k) Plan. This plan is available to all U.S. employees who have completed at least two months service with the Company. Eligible employees may contribute, subject to statutory limits, up to 14% of their salary to the plan. The Company matches the employee contributions to a maximum of 4% of salary. Fifty percent of the Company's contributions vest in the first year with full vesting after an employee has completed two years of service with the Company. Employees have a number of investment options available to them within the plan, one of which is InterTAN, Inc. common stock. 32 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The aggregate cost of these plans included in other selling, general and administration expense totaled $1,701,000, $1,811,000 and $1,563,000 in 1997, 1996 and 1995, respectively. NOTE 11 STOCK OPTION PLANS In 1986 and 1996 the Company adopted employee stock option plans (the"1986 Stock Option Plan" and the "1996 Stock Option Plan") under which the Organization and Compensation Committee of the Board of Directors may grant options to key management employees to purchase up to an aggregate of 800,000 and 1,500,000 shares, respectively, of the Company's common stock. Incentive options granted under these plans are exercisable on a cumulative basis equal to one-third for each year outstanding; unless otherwise specified by the Committee, nonstatutory options issued under the plans are exercisable on a cumulative basis equal to 20% for each year outstanding. Upon death or disability of an optionee, all options then held become immediately exercisable for one year, and upon retirement, at age 50 or older, the Committee may accelerate the dates at which the outstanding options may be exercised. Options under these plans generally expire ten years after the date of grant. The exercise price of the options granted is determined by the Committee, but cannot be less than 100% of the market price of the common stock at the date of grant. At June 30, 1997, options to purchase 427,500 shares were outstanding under the 1986 Stock Option Plan. While options outstanding under this plan will remain in force until they are exercised, canceled or expire, no further options may be granted. At June 30, 1997, options to purchase 183,000 shares were outstanding under the 1996 Stock Option Plan and 1,317,000 options were available for future grant. In 1991, the Company adopted the Non-Employee Director Stock Option Plan ("Director Plan") under which each non-employee director was granted an option, exercisable immediately, to purchase 25,000 shares of the Company's common stock. Upon election, all new non-employee directors are granted an option to purchase 25,000 shares of the Company's common stock. Options granted under the Director Plan are exercisable at a price equal to 100% of the market price of the common stock at the date of grant. The options generally expire ten years after the date of grant unless the optionee ceases to be a non-employee director, in which case the options expire one year after the date of cessation. Common stock issued under the Director Plan cannot exceed 200,000 shares. At June 30, 1997, options to purchase 175,000 shares were outstanding under the Director Plan and 25,000 options were available for future grant. A summary of transactions relating to these stock option plans is as follows: SUMMARY OF STOCK OPTION TRANSACTIONS
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- WEIGHTED- Weighted- Weighted- AVERAGE Average Average EXERCISE Exercise Exercise OPTIONS PRICE Options Price Options Price - ------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 650,833 $7.27 650,000 $6.97 707,499 $6.65 Grants 209,500 $5.94 210,000 $7.55 150,500 $7.98 Exercised -- -- (118,000) $6.44 (2,333) $5.14 Forfeited (74,833) $7.01 (91,167) $6.83 (205,666) $6.64 - ------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 785,500 $6.94 650,833 $7.27 650,000 $6.97 - ------------------------------------------------------------------------------------------------------------------- Exercisable at end of year 439,331 $7.10 303,167 $7.01 355,834 $6.76 - ------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $ 3.71 $ 4.67
FIXED PRICE STOCK OPTIONS
WEIGHTED- WEIGHTED- WEIGHTED- OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE OUTSTANDING EXERCISE EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES AT 6/30/97 PRICE PRICE AT 6/30/97 PRICE - --------------------------------------------------------------------------------------------------------- $3.50 - $5.94 52,000 8.11 $ 5.44 47,000 $ 5.65 $6.00 - $8.19 733,500 8.13 $ 7.06 392,331 $ 7.28 - --------------------------------------------------------------------------------------------------------- 785,500 8.13 $ 6.94 439,331 $ 7.10 - ---------------------------------------------------------------------------------------------------------
33 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As discussed in Note 1, the Company adopted the disclosure-only provision of FAS 123. Accordingly, because the exercise price of the stock options granted is equal to the market price of the common stock on the date of grant, no compensation expense has been recognized with respect to stock options granted during fiscal 1997, 1996 or 1995. Had the Company fully adopted FAS 123, the estimated fair value of the options granted would have been amortized to compensation expense over the vesting period. Pro forma information is presented below as if the Company had fully adopted the fair value method described in FAS 123.
1997 1996 - --------------------------------------------------------------------------------------------------------- AS PRO As Pro (in thousands except per share amounts) REPORTED FORMA Reported Forma - --------------------------------------------------------------------------------------------------------- Net loss $(16,609) $(17,172) $(2,241) $(2,417) Primary net loss per average common share $ (1.45) $ (1.50) $ (0.21) $ (0.22) Fully diluted net loss per average common share $ (1.45) $ (1.50) $ (0.21) $ (0.22)
For purposes of the pro forma information above, the fair value of each option granted for each year was estimated as of the date of grant using the Black- Scholes option pricing model with the following weighted-average assumptions for fiscal year 1997 and 1996, respectively: expected volatility of 53.9% and 54.1%, risk free interest rates of 6.2% and 5.6%, expected lives of seven years for both years and expected dividend yields of 0.0% for both years. The effects of applying FAS 123 in this pro forma disclosure are not indicative of future amounts as the pro forma amounts above do not include the impact of stock options granted prior to fiscal 1996 and additional awards are anticipated in the future. NOTE 12 PREFERRED STOCK PURCHASE RIGHTS In December, 1986, the Board of Directors adopted a shareholder rights plan, which expires in September, 1999, and declared a dividend of one right for each outstanding share of InterTAN common stock. The plan was amended in October, 1987 and September, 1989. The rights are represented by the Company's common stock certificates; and if they become exercisable, will entitle holders to purchase one one-hundredth of a share of InterTAN Series A Junior Participating Preferred Stock for a purchase price of $175 (subject to adjustment). The rights become exercisable and will trade separately from the common stock only upon the date of a public announcement that a person, entity or group ("person") has acquired 20% or more of InterTAN's outstanding common stock without the prior approval of the Company ("Acquiring Person"), or, 10 days after the commencement or the public announcement of an offer which would result in any person becoming an Acquiring Person. In the event that an Acquiring Person becomes the beneficial owner of 20% or more of the common stock of the Company, the rights will be exercisable for InterTAN equity securities with a fair market value (as determined under the rights plan) equal to $350. In accordance with the terms of the rights plan, the rights are redeemable at a price of $0.03 per right. NOTE 13 GEOGRAPHIC AREAS The Company operates in one industry segment: consumer electronics retailing. The principal geographic areas of InterTAN's operations are Canada, Australia, the United Kingdom and, previously, continental Europe. Prior to fiscal year 1995, units operating outside North America reported on a May 31 fiscal year end. Effective with fiscal year 1995, the Company's subsidiaries in Australia and the United Kingdom changed their fiscal year end to June 30 to coincide with that of the parent Company. As a consequence of this change, losses for the month of June, 1994, in Australia and the United Kingdom, which totaled $1,740,000, were charged directly to retained earnings. As previously discussed in Note 5, the operating loss in the United Kingdom for fiscal year 1997 includes a non-cash impairment charge of $10,042,000. In addition, as discussed in Note 6, the Company has closed all company-operated outlets in continental Europe. A credit provision of $1,600,000 was recorded in continental European income for 1995. 34 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows net sales, operating profit and identifiable assets by geographic area for fiscal years 1997, 1996 and 1995 (in thousands). Transfers between geographic areas were immaterial:
United Continental Canada Australia Kingdom Europe Total - -------------------------------------------------------------------------------------------------------------- JUNE 30, 1997 Net sales and operating revenues $251,907 $102,628 $164,783 $ -- $519,318 Other income 9 363 268 -- 640 ............................................................................................... Net sales and other income $251,916 $102,991 $165,051 $ -- $519,958 - ----------------------------------------------------------------------------------------------- Operating profit (loss) $ 18,826 $ 4,721 $(23,147) $ -- $ 400 General corporate expenses (4,201) Foreign currency transaction gains 610 Interest expense, net (6,663) ............................................................................................... Loss before income taxes $ (9,854) - ----------------------------------------------------------------------------------------------- Identifiable assets $121,564 $ 51,640 $ 69,959 $ 1,680 $244,843 Corporate assets 9,464 ............................................................................................... Total assets $254,307 - ----------------------------------------------------------------------------------------------- JUNE 30, 1996 Net sales and operating revenues $249,413 $ 93,896 $163,136 $ -- $506,445 Other income 41 426 435 -- 902 ............................................................................................... Net sales and other income $249,454 $ 94,322 $163,571 -- $507,347 - ----------------------------------------------------------------------------------------------- Operating profit (loss) $ 21,274 $ 2,777 $ (7,807) $ -- $ 16,244 General corporate expenses (4,615) Foreign currency transaction gains 338 Interest expense, net (6,709) ............................................................................................... Income before income taxes $ 5,258 - ----------------------------------------------------------------------------------------------- Identifiable assets $124,404 $ 48,839 $ 75,948 $ 2,111 $251,302 Corporate assets 10,331 ............................................................................................... Total assets $261,633 - ----------------------------------------------------------------------------------------------- JUNE 30, 1995 Net sales and operating revenues $243,949 $ 83,724 $164,078 $ -- $491,751 Other income 413 362 442 -- 1,217 ............................................................................................... Net sales and other income $244,362 $ 84,086 $164,520 $ -- $492,968 - ----------------------------------------------------------------------------------------------- Operating profit (loss) $ 22,820 $ 534 $ (5,954) $ 1,600 $ 19,000 General corporate expenses (5,139) Foreign currency transaction losses (314) Interest expense, net (7,462) ............................................................................................... Income before income taxes $ 6,085 - ----------------------------------------------------------------------------------------------- Identifiable assets $128,214 $ 41,837 $ 67,105 $ 2,427 $239,583 Corporate assets 22,456 ............................................................................................... Total assets $262,039 - -----------------------------------------------------------------------------------------------
35 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 QUARTERLY DATA (UNAUDITED)
Quarter Ended September 30 (In thousands, except per share data) 1996 1995 - -------------------------------------------------------------------------- Net sales and operating revenues $112,287 $113,672 Other income 141 203 .......................................................................... 112,428 113,875 Operating costs and expenses: Cost of products sold 61,557 63,463 Selling, general and administrative expenses 50,847 48,247 Depreciation and amortization 2,217 1,832 Impairment of long-lived assets .......................................................................... 114,621 113,542 .......................................................................... Operating income (loss) (2,193) 333 Foreign currency transaction (gains) losses (195) (148) Interest expense, net 1,597 1,738 .......................................................................... Income (loss) before income taxes (3,595) (1,257) Provision for income taxes 1,012 948 .......................................................................... Net income (loss) $ (4,607) $ (2,205) - -------------------------------------------------------------------------- Primary net income (loss) per average common share $ (0.41) $ (0.21) Fully diluted net income (loss) per average common share/(1)/ $ (0.41) $ (0.21) .......................................................................... AVERAGE COMMON SHARES OUTSTANDING 11,231 10,453 AVERAGE COMMON SHARES OUTSTANDING ASSUMING FULL DILUTION 11,231 10,453 - --------------------------------------------------------------------------
(1) THE SUM OF FULLY DILUTED EARNINGS PER SHARE FOR THE FOUR QUARTERS ENDING JUNE 30, 1997 AND 1996 DOES NOT EQUAL THE FULLY DILUTED EARNINGS PER SHARE AS REPORTED FOR THE RESPECTIVE YEARS PRIMARILY BECAUSE THE COMPANY'S CONVERTIBLE DEBENTURES WERE DILUTIVE IN THE SECOND QUARTER, BUT ANTI- DILUTIVE IN ALL OTHER QUARTERS AND FOR EACH YEAR AS A WHOLE. 36 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED QUARTER ENDED QUARTER ENDED DECEMBER 31 MARCH 31 JUNE 30 1996 1995 1997 1996 1997 1996 - --------------------------------------------------------------- $190,934 $181,411 $109,555 $108,757 $106,542 $102,605 115 298 289 196 95 205 ............................................................... 191,049 181,709 109,844 108,953 106,637 102,810 108,976 103,788 58,802 59,410 57,500 55,391 64,895 59,667 50,766 48,840 50,703 48,940 2,379 1,981 2,566 2,014 2,509 2,145 -- -- -- -- 10,042 -- ............................................................... 176,250 165,436 112,134 110,264 120,754 106,476 ............................................................... 14,799 16,273 (2,290) (1,311) (14,117) (3,666) (731) (44) 124 (69) 192 (77) 1,908 1,909 1,503 1,516 1,655 1,546 ............................................................... 13,622 14,408 (3,917) (2,758) (15,964) (5,135) 4,145 4,071 1,216 1,350 382 1,130 ............................................................... $ 9,477 $ 10,337 $ (5,133) $ (4,108) $(16,346) $ (6,265) - --------------------------------------------------------------- $ 0.83 $ 0.93 $ (0.45) $ (0.38) $ (1.40) $ (0.57) $ 0.57 $ 0.58 $ (0.45) $ (0.38) $ (1.40) $ (0.57) ............................................................... 11,366 11,148 11,527 10,943 11,706 11,069 18,111 17,893 11,527 10,943 11,706 11,069 - ---------------------------------------------------------------
37 INTERTAN, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS of InterTAN, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of InterTAN, Inc. and its subsidiaries at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/Price Waterhouse LLP Fort Worth, Texas September 11, 1997 MARKET PRICE AND RELATED MATTERS The high and low closing prices in U.S. dollars of InterTAN's common stock on the New York Stock exchange for each full quarterly period within the two most recent fiscal years is as set out below:
QUARTER ENDED HIGH LOW - ------------------------------------- June 1997 $ 4 $ 3 3/8 March 1997 4 3/4 3 7/8 December 1996 6 3/8 4 5/8 September 1996 6 5/8 5 5/8 June 1996 6 7/8 5 1/4 March 1996 6 1/2 4 5/8 December 1995 9 3/8 7 1/8 September 1995 10 7 1/4 - -------------------------------------
As of August 31, 1997 there were approximately 11,400 record shareholders of InterTAN's common stock. InterTAN has never declared cash dividends. Based upon InterTAN's long-term growth opportunities, in the opinion of management, the stockholders are best served by reinvesting all profits. Further, InterTAN is currently precluded from paying dividends under the Secured Loan Agreement and Syndicated Loan Agreement. 38 EX-23 3 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23 INTERTAN, INC. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-74314) and in the Registration Statements on Form S-8 (Nos. 33-63090, 33-92286, 33-29055, 333-4344, 333-16105 and 333-22011) of InterTAN, Inc. of our report dated September 11, 1997 appearing on page 38 of the Annual Report to shareholders, which is incorporated in this Annual Report on Form 10-K for the year ended June 30, 1997. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which is also included in this Form 10-K. /s/Price Waterhouse LLP Fort Worth, Texas September 26, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 34,726 0 9,655 0 170,594 222,880 28,812 0 254,307 84,348 57,558 0 0 11,873 94,361 254,307 519,318 519,958 286,835 286,835 0 0 6,663 (9,854) 6,755 (16,609) 0 0 0 (16,609) (1.45) (1.45)
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