SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 12, 2004
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
001-05767 54-0493875
--------- ----------
(Commission (I.R.S. Employer
File No.) Identification No.)
9950 Mayland Drive, Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 527-4000
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 19, 2004, Circuit City Stores, Inc. ("Circuit City"), through a
wholly owned subsidiary, consummated its acquisition of all outstanding
shares of InterTAN, Inc. The acquisition of a controlling interest in
InterTAN, Inc. on May 12, 2004, in a public tender offer, was
previously reported by Circuit City on a Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 14, 2004.
Circuit City acquired InterTAN using available cash. Circuit City is
filing this amendment for the purpose of providing required financial
information with respect to the acquisition of InterTAN in accordance
with the requirements of Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The following audited consolidated financial statements of InterTAN,
Inc. and the related report of independent accountants are attached as
Appendix A:
Report of Independent Accountants................................. A-1
Consolidated Statements of Operations for the:
Nine Months Ended March 31, 2004......................... A-2
Twelve Months Ended June 30, 2003, 2002 and 2001......... A-2
Consolidated Balance Sheets at:
March 31, 2004........................................... A-3
June 30, 2003 and 2002................................... A-3
Consolidated Statements of Stockholders' Equity at:
June 30, 2003, 2002 and 2001............................. A-4
March 31, 2004........................................... A-4
Consolidated Statements of Cash Flows for the:
Nine Months Ended March 31, 2004......................... A-5
Twelve Months Ended June 30, 2003, 2002 and 2001......... A-5
Notes to Consolidated Financial Statements........................ A-6
(b) Pro Forma Financial Information.
The unaudited pro forma consolidated financial information and related
notes of Circuit City for the fiscal year ended February 29, 2004 and
fiscal quarter ended May 31, 2004 with respect to the acquisition of
InterTAN, Inc. are attached as Appendix B.
(c) Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: /s/Philip J. Dunn
------------------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
Date: July 12, 2004
3
EXHIBIT INDEX
Exhibit
Number Document
23.1 Consent of PricewaterhouseCoopers LLP
E-1
APPENDIX A
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, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of InterTAN,
Inc. and its subsidiaries at March 31, 2004, June 30, 2003 and June 30, 2002,
and the results of their operations and their cash flows for the nine-month
period ended March 31, 2004 and each of the three years in the period ended June
30, 2003 in conformity with generally accepted accounting principles in the
United States of America. 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 in the
United States of America, which require 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 our opinion.
PricewaterhouseCoopers LLP
Toronto, Ontario
May 13, 2004
A-1
InterTAN, Inc.
Consolidated Statements of Operations
Nine-month Period
ended March 31 Year ended June 30
--------------------------- ----------------------------------------
--------------------------- ----------------------------------------
(In thousands, in U.S. dollars, except per share data) 2004 2003 2003 2002 2001
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(Note 1) (Unaudited) (Note 1) (Note 1) (Note 1)
Net sales and operating revenues $ 378,062 $ 312,149 $ 403,052 $ 393,809 $ 468,756
Other income (loss) (50) (11) (21) (7) 138
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378,012 312,138 403,031 393,802 468,894
Operating costs and expenses:
Cost of products sold 217,908 186,924 239,311 243,381 280,953
Selling, general and administrative expenses 128,654 101,913 137,152 116,958 144,268
Depreciation 5,907 5,045 6,923 5,674 6,357
(Gain) loss on disposal of subsidiary company (Note 2) - - - 217 (4,101)
Restructuring charges (Note 3) - - - 2,912 -
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352,469 293,882 383,386 369,142 427,477
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Operating income 25,543 18,256 19,645 24,660 41,417
Foreign currency transaction gains (losses) (100) 37 (2,112) 41 (353)
Interest income 300 223 299 1,444 1,737
Interest expense (688) (831) (1,018) (403) (873)
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Income before income taxes and cumulative effect 25,055 17,685 16,814 25,742 41,928
of accounting change
Income taxes (Note 9) 14,498 8,103 8,523 12,174 18,401
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Income before cumulative effect of accounting change 10,557 9,582 8,291 13,568 23,527
Cumulative effect of accounting change for vendor
allowances, net of income taxes of $388 (Note 1) - (580) (580) - -
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Net income $ 10,557 $ 9,002 $ 7,711 $ 13,568 $ 23,527
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Basic net income per average common share
Before cumulative effect of accounting change $ 0.52 $ 0.46 $ 0.40 $ 0.54 $ 0.84
Cumulative effect of accounting change - (0.03) (0.03) - -
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Basic net income per average common share $ 0.52 $ 0.43 $ 0.37 $ 0.54 $ 0.84
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--------------------------------------------------------------------------------------------------------------------------------
Diluted net income per average common share
Before cumulative effect of accounting change $ 0.51 $ 0.45 $ 0.39 $ 0.53 $ 0.82
Cumulative effect of accounting change - (0.03) (0.03) - -
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Diluted net income per average common share $ 0.51 $ 0.42 $ 0.36 $ 0.53 $ 0.82
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Average common shares outstanding 20,434 21,053 20,925 25,142 27,937
Average common shares outstanding assuming dilution 20,796 21,240 21,103 25,610 28,664
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The accompanying notes are an integral part of these consolidated financial statements.
A-2
InterTAN, Inc.
Consolidated Balance Sheets
March 31 June 30 June 30
(In thousands, in U.S. dollars, except share amounts) 2004 2003 2002
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Assets
Current Assets
Cash and short-term investments $ 35,697 $ 10,322 $ 14,699
Accounts receivable, less allowance for doubtful accounts 19,528 16,275 12,903
Inventories 91,157 92,433 81,314
Deferred service contract costs - current portion (Note 10) 1,538 1,368 1,170
Prepaids, deposits and other current assets 1,823 5,301 1,300
Deferred income taxes (Note 9) 1,342 1,306 1,374
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Total current assets 151,085 127,005 112,760
Property and equipment, less accumulated depreciation (Note 7) 34,417 33,537 29,604
Deferred service contract costs - non-current portion (Note 10) 1,306 1,071 946
Other assets 569 761 328
Deferred income taxes (Note 9) 3,707 3,955 3,580
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Total Assets $ 191,084 $ 166,329 $ 147,218
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Liabilities and Stockholders' Equity
Current Liabilities
Short-term bank borrowings (Note 4) $ 4,116 $ - $ -
Accounts payable 23,511 22,633 12,793
Accrued expenses (Note 8) 19,860 15,290 19,445
Income taxes payable (Note 9) 5,943 1,867 8,365
Long-term bank indebtedness - current portion (Note 4) 1,525 1,484 -
Obligation under capital leases - current portion (Note 11) 287 216 164
Deferred service contract revenue - current portion (Note 10) 9,699 8,809 7,274
Deferred income taxes (Note 9) 358 400 -
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Total current liabilities 65,299 50,699 48,041
Long-term bank indebtedness - non-current portion (Note 4) 4,576 5,937 -
Obligation under capital leases - non-current portion (Note 11) 578 432 384
Deferred service contract revenue - non current portion (Note 10) 7,912 6,917 6,043
Other liabilities 5,371 4,847 4,304
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Total liabilities 83,736 68,832 58,772
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Stockholders' Equity
Preferred stock, no par value, 1,000,000 shares authorized,
none issued or outstanding - - -
Common stock, $1 par value, 40,000,000 shares authorized,
32,684,931, 32,453,259 and 32,091,097, respectively, issued 32,685 32,453 32,091
Additional paid-in capital 161,611 159,776 157,684
Common stock in treasury, at cost, 12,443,493, 11,857,093
and 10,337,243 shares, respectively (129,476) (123,760) (111,527)
Retained earnings 45,588 35,031 27,320
Accumulated other comprehensive loss (3,060) (6,003) (17,122)
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Total stockholders' equity 107,348 97,497 88,446
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Commitments and contingencies (See Notes 2, 5, 9 and 11)
Total Liabilities and Stockholders' Equity $ 191,084 $ 166,329 $ 147,218
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The accompanying notes are an integral part of these consolidated financial statements.
A-3
InterTAN, Inc.
Consolidated Statements of Stockholders' Equity
Accumulat-
ed Other
Additional Retained Compre- Compre-
Common Stock Paid-In Treasury Stock Earnings ensive hensive
(In thousands, in U.S. dollars) Shares Amount Capital Shares Amount (Deficit) Income (Loss) Total
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Balance at June 30, 2000 30,498 $30,498 $146,214 (1,790)$ (18,700) $(9,775) $(29,461)$118,776
Comprehensive income:
Net income 23,527 $23,527 23,527
Foreign currency translation adjustments 12,454 12,454 12,454
-------
Comprehensive income $35,981
=======
Issuance of common stock to employee plans 281 281 3,079 3,360
Issuance of common stock under stock option plans 446 446 1,858 2,304
Stock-based compensation 593 18 178 771
Purchase of treasury stock (1,330) (16,883) (16,883)
------------------------------------------------------ -----------------
------------------------------------------------------ -----------------
Balance at June 30, 2001 31,225 31,225 151,744 (3,102) (35,405) 13,752 (17,007) 144,309
Comprehensive income:
Net income 13,568 $13,568 13,568
Foreign currency translation adjustments (115) (115) (115)
-------
Comprehensive income $13,453
=======
Issuance of common stock to employee plans 268 268 2,641 2,909
Issuance of common stock under stock option plans 598 598 3,043 3,641
Stock-based compensation 256 256
Purchase of treasury stock (7,235) (76,122) (76,122)
------------------------------------------------------ -----------------
------------------------------------------------------ -----------------
Balance at June 30, 2002 32,091 $32,091 $157,684 (10,337)$(111,527) $27,320 $(17,122) $88,446
Carried forward 32,091 $32,091 $157,684 (10,337)$(111,527) $27,320 $(17,122) $88,446
Comprehensive income:
Net income 7,711 $ 7,711 7,711
Foreign currency translation adjustments 11,119 11,119 11,119
-------
Comprehensive income $18,830
=======
Issuance of common stock to employee plans 346 346 1,979 2,325
Issuance of common stock under stock option plans 16 16 56 72
Stock-based compensation 57 57
Purchase of treasury stock (1,520) (12,233) (12,233)
------------------------------------------------------ -----------------
------------------------------------------------------ -----------------
Balance at June 30, 2003 32,453 32,453 159,776 (11,857) (123,760) 35,031 (6,003) 97,497
Comprehensive income:
Net income 10,557 $10,557 10,557
Foreign currency translation adjustments 2,943 2,943 2,943
-------
Comprehensive income $13,500
=======
Issuance of common stock to employee plans 190 190 1,666 1,856
Issuance of common stock under stock option plans 42 42 169 211
Purchase of treasury stock (586) (5,716) (5,716)
------------------------------------------------------ ------------------
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Balance at March 31, 2004 32,685 $32,685 $161,611 (12,443)$(129,476) $45,588 $ (3,060)$107,348
------------------------------------------------------ ------------------
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The accompanying notes are an integral part of these consolidated financial statements.
A-4
InterTAN, Inc.
Consolidated Statements of Cash Flows
Nine-month period
ended March 31 Year ended June 30
--------------------------- -----------------------------------
--------------------------- -----------------------------------
(In thousands, in U.S. dollars) 2004 2003 2003 2002 2001
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--------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 10,557 $ 9,002 $ 7,711 $ 13,568 $ 23,527
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 5,907 5,045 6,923 5,674 6,357
Deferred income taxes 316 - 680 360 (801)
Inventory adjustment - - - 3,500 -
(Gain) loss on disposal of subsidiary company - - - 217 (4,101)
Stock-based compensation 860 877 1,119 1,409 2,097
Other 284 36 115 (10) 111
Cash provided by (used in) assets and liabilities:
Accounts receivable (2,837) (960) (1,870) (271) (1,954)
Inventories 3,843 (1,281) (671) 5,308 203
Other current assets 3,448 (665) (3,512) (378) (630)
Accounts payable 248 5,558 7,330 (6,980) (1,601)
Accrued expenses 4,294 (6,603) (5,868) 5,468 346
Income taxes payable 4,014 (5,968) (6,588) (15,993) (4,721)
Deferred service contract revenue 1,424 688 654 1,325 422
Deferred service contract costs (400) (82) (316) (254) (434)
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Net cash provided by operating activities 31,958 5,647 5,707 12,943 18,821
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Cash flows from investing activities:
Additions to property and equipment (5,726) (4,779) (6,438) (14,550) (12,891)
Proceeds from sales of property and equipment 28 61 63 140 435
Effect of disposal of subsidiary companies on cash - - - - 47,735
Other investing activities 655 (154) (384) 1,504 1,329
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Net cash provided by (used in) investing activities (5,043) (4,872) (6,759) (12,906) 36,608
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Cash flows from financing activities:
Short-term bank borrowings 19,784 47,796 47,796 - -
Repayments of short-term bank borrowings (15,706) (48,224) (48,224) - -
Long-term bank indebtedness - 6,803 7,421 - -
Repayments of long-term bank indebtedness (1,491) - - - -
Proceeds from issuance of common stock
to employee plans 996 978 1,263 1,753 2,033
Proceeds from exercise of stock options 211 43 72 3,401 950
Payment of obligation under capital leases (253) 11 (180) (101) -
Purchase of treasury stock (5,716) (12,233) (12,233) (75,882) (15,529)
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Net cash used in financing activities (2,175) (4,826) (4,085) (70,829) (12,546)
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Effect of exchange rate changes on cash 635 267 760 (742) (1,400)
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Net increase (decrease) in cash
short-term investments 25,375 (3,784) (4,377) (71,534) 41,483
Cash and short-term investments, beginning of period 10,322 14,699 14,699 86,233 44,750
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Cash and short-term investments, end of period $ 35,697 $ 10,915 $ 10,322 $ 14,699 $ 86,233
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 723 $ 750 $ 940 $ 378 $ 752
Income taxes $ 10,164 $ 13,760 $ 14,319 $ 28,111 $ 23,858
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The accompanying notes are an integral part of these consolidated financial statements.
A-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business and Principles of Consolidation
InterTAN, Inc. (the "Company" or "InterTAN") is engaged in the sale of consumer
electronics products primarily through company-operated retail stores and dealer
outlets in Canada. The Company's retail operations are conducted through its
wholly-owned subsidiary, InterTAN Canada Ltd., which operates in Canada under
the trade name "RadioShack". The Company previously also had retail and dealer
outlets in Australia, which were conducted through a wholly-owned subsidiary,
InterTAN Australia Ltd. and operated under the "Tandy" name. The Australian
subsidiary was sold effective April 2001. See Note 2 to the consolidated
financial statements. The "RadioShack" and "Tandy" trade names are used under
license from RadioShack Corporation ("RadioShack U.S.A."). See Note 5 to the
consolidated financial statements. In addition, the Company has entered into an
agreement in Canada with Rogers Wireless Inc. ("Rogers") to operate
telecommunications stores under the Rogers Wireless banner (the "Rogers Wireless
stores"). At March 31, 2004, 84 Rogers Wireless stores were in operation. The
consolidated financial statements include the accounts of the Company, its
Canadian subsidiary and, for fiscal year 2001, its former subsidiary in
Australia. All material intercompany transactions, balances and profits have
been eliminated.
Tender Offer
On March 30, 2004, the Company entered into a definitive agreement under which
Circuit City Stores, Inc., ("Circuit City") will acquire InterTAN in a cash
tender offer for US $14 per InterTAN common share. Under the terms of the
agreement, Circuit City commenced a tender offer to acquire all outstanding
shares of InterTAN common stock. The tender offer was conditioned upon at least
a majority of the fully diluted shares being tendered. The tender offer closed
on May 11, 2004, at which time approximately 95% of InterTAN's common stock had
been tendered. Consequently, from that date forward, InterTAN will be a
subsidiary of Circuit City. The tender offer was extended to May 14, 2004 and
will be followed by a merger in which the holders of the remaining outstanding
shares of InterTAN common stock will receive $14 per share in cash. The
transaction is contingent upon customary closing conditions, including
regulatory and other standard approvals.
Change of Year End
The fiscal year end of the Company has been June 30. On December 5, 2003, the
Board of Directors approved a change in fiscal year end from June 30 to March 31
to better reflect the Company's operational business cycle. Accordingly, the
current fiscal period of the Company only includes the nine months ended March
31, 2004.
Cash and Short-term Investments
Cash and short-term investments are defined as cash and short-term highly liquid
deposits with maturity dates of less than 90 days.
A-6
Accounts Receivable and Allowance for Doubtful Accounts
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base and
their location in many different geographic areas of Canada. However, the
Company does have some concentration of credit risk in the wireless telephone
and direct-to-home satellite services industries. An allowance for doubtful
accounts is provided when accounts are determined to be uncollectible. The
allowance for doubtful accounts at March 31, 2004, June 30, 2003 and June 30,
2002 was $46,000, $105,000 and $26,000, respectively.
Inventories
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 are 40 years for buildings and range from three to twelve years for
equipment, furniture and fixtures. Leasehold improvements are depreciated over
the life of the lease or the useful life of the asset, whichever is shorter.
Leases entered into by the Company, in which substantially all of the benefits
and risks of ownership are transferred to the Company are recorded as capital
leases and included in property and equipment and obligation under capital
leases. All other leases are classified as operating leases under which leasing
costs are expensed in the period in which they are incurred. The capital cost of
vehicles acquired under capital leases, net of estimated residual values, is
depreciated over the term of the lease.
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 and
equipment retired or sold are removed from the accounts, and gains or losses are
recognized in the consolidated statements of operations.
The Company reviews all long-lived assets (i.e., property and equipment) for
impairment whenever events or changes in circumstances indicate that the net
book value of the assets may not be recoverable. An impairment loss would be
recognized if the sum of the expected future cash flows (undiscounted and before
interest) from the use of the assets is less than the net book value of the
assets. The amount of the impairment loss would generally be measured as the
difference between the net book value of the assets and their estimated fair
value.
Net Sales and Operating Revenues and Cost of Products Sold
Net sales and operating revenues include items related to normal business
operations, including service contract revenue, cellular and satellite
activation income, residual income, and sales-based volume rebates. Retail sales
are recorded at the time of the sale to the customer. Service contract revenue
is recognized rateably over the life of the contract. Cellular and satellite
activation income is commission revenue received from carriers for obtaining
their new customer, which is recognized as income when the product is sold, with
an appropriate provision for contract cancellations. Residual income is
participation income from suppliers, based on the customer's continued use of
the carrier's network. Residual income is recognized monthly,
A-7
based on the contractual percentage of each customer's monthly bill. Sales-based
volume rebates are additional commission revenue which is recognized when
service contract thresholds are achieved, either on a quarterly or on an annual
basis. Purchase-based volume rebates are recognized when earned and are credited
to cost of products sold or inventory, as appropriate.
Cost of products sold includes the purchase price of the product, including any
customs duties, sales or import taxes and purchase fees or commissions. Cost of
products sold also includes purchasing and receiving costs, inbound freight
charges, inspection costs, warehousing costs and other costs of the Company's
distribution system, including outbound freight to the Company's stores. The
cost of transferring product between stores and the cost of returning product to
the warehouse is included in selling, general and administrative expenses. These
costs aggregated $764,000 for the nine-month period ended March 31, 2004 and
$884,000, $747,000 and $782,000 during fiscal years ended June 30, 2003, 2002
and 2001, respectively. The amount for fiscal year 2001 excludes the Company's
former subsidiary in Australia, which was sold in April 2001.
Selling, general and administrative expenses
Selling, general and administrative expenses include store-operating costs
(inclusive of store occupancy costs), advertising, regional, district and head
office administration expenses, and the amortization of direct selling expenses
associated with deferred service contract revenue.
Advertising Costs
Advertising costs are expensed upon commencement of the related advertising
program. During the nine-month period ended March 31, 2004 net advertising
expense was $18,685,000. During fiscal years ended June 30, 2003, 2002 and 2001,
net advertising expense was $20,314,000, $13,010,000 and $17,203,000,
respectively. Prior to fiscal year 2003, allowances received from vendors for
co-operative advertising programs were netted against total advertising costs.
Upon adoption of a new accounting standard for vendor allowances during fiscal
year 2003, such amounts are now treated as a reduction in the cost of products
sold when the related product or service is sold, unless the amount represents a
reimbursement of a specific, identifiable and incremental cost incurred to sell
the vendor's products or services. See "Vendor Allowances." Vendor
reimbursements that were treated as a reduction of selling, general and
administrative expenses totalled $2,667,000 during the nine-month period ended
March 31, 2004 and $2,570,000, $1,927,000 and $2,030,000 during fiscal years
ended June 30, 2003, 2002 and 2001, respectively.
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 into 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 equity as part of "accumulated other
comprehensive loss". Gains and losses from foreign currency transactions are
included in the operations of each period.
A-8
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in stockholders' equity
during a period except those changes resulting from investments by owners and
distributions to owners. For the Company, the components of comprehensive income
(loss) include net income or loss and the effects of exchange rate changes on
net assets located outside the United States (foreign currency translation
adjustments). For the nine-month period ended March 31, 2004, the foreign
currency transaction gain was $2,943,000. For fiscal years ended June 30, 2003,
2002 and 2001, foreign currency translation gains (losses) were $11,119,000,
($115,000) and $12,454,000, respectively. The fiscal year 2001 amount includes
an adjustment of $18,225,000 related to the reclassification of accumulated
foreign currency translation losses to the net gain or loss on the sale of the
Australian subsidiary.
Contract Management
At March 31, 2004, the Company had 508 company-operated stores in Canada, of
which 80 were operated under "contract management" arrangements. Under the
typical contract management arrangement, the store manager is not employed by
the Company, but is under contract to operate the store on its behalf. The
Company selects and supplies the store location (including lease payments and
other fixed location charges) and also supplies leasehold improvements, fixtures
and store inventory. The Company is also committed to provide supporting
services, including advertising, insurance and training. The contract manager is
responsible for the labor and overhead necessary to operate the store. 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. The contract manager
program was used much more extensively in the Company's former subsidiary in
Australia. At April 30, 2001, the effective date of sale of that subsidiary, the
Company had 223 company-operated stores in Australia, of which 148 were operated
under contract management arrangements.
The revenue, as well as the expenses paid by the Company, related to contract
management stores is included in the consolidated statements of operations. The
contract manager's compensation is included in selling, general and
administrative expenses. Contract manager's deposits are included in the Other
liabilities section of the consolidated balance sheets and amounted to
$1,567,000 at March 31, 2004 and $1,419,000 and $1,049,000 at June 30, 2003 and
June 30, 2002, 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
the nine-month period ended March 31, 2004 was $123,000. Amortization of these
costs, for fiscal years ended June 30, 2003, 2002 and 2001 was $100,000, $63,000
and $129,000, respectively. Unamortized balances at March 31, 2004, June 30,
2003 and June 30, 2002 were $550,000, $678,000 and $23,000, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. The asset
and liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax
A-9
consequences of temporary differences between the book amounts and tax basis of
assets and liabilities. However, deferred tax assets are only recognized to the
extent that it is more likely than not that the Company will realize the
benefits of that deferred tax asset.
InterTAN generally 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 which are to be so
reinvested. If the earnings of the Company's Canadian subsidiary as of March 31,
2004 were remitted to the parent, approximately $109,540,000, 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 would also be subject to Canadian withholding tax
(presently at a rate of 5%) for which there would likely be no U.S. tax relief.
Forward Exchange Contracts and Other Derivative Instruments
Foreign exchange contracts and other derivative instruments are measured at fair
value and recognized in the consolidated balance sheets as either assets or
liabilities, as the case may be. The treatment of changes in the fair value of a
derivative (i.e., gains and losses) depends on its intended use and designation.
Gains and losses on derivatives, designated as hedges against the cash flow
effect of a future transaction are initially reported as a component of
comprehensive income and, subsequently, reclassified into earnings when the
transaction affects earnings. Gains and losses on derivatives designated as
hedges against the foreign exchange exposure of a net investment in a foreign
operation form part of the cumulative translation adjustment. Gains and losses
on all other forms of derivatives are recognized in earnings in the period of
change.
From time to time, the Company's Canadian subsidiary hedges certain commitments
denominated in currencies other than the Canadian dollar through the purchase of
forward contracts. Forward contracts are purchased only to cover specific
commitments to purchase inventory for resale. For financial accounting purposes,
FAS 133 does not permit the Company to designate these contracts as hedges.
Accordingly, changes in the fair market value of these forward contracts are
included in the Company's consolidated statements of operations. 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 also included in income in the periods the
exchange rates change.
Earnings per Share
A basic earnings per share ("EPS") is calculated by dividing the net income or
loss by the weighted average number of shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted.
A-10
The following table reconciles the numerator and denominator used in the basic
and diluted earnings per share calculations for the nine-month period ended
March 31, 2004 and for the years ended June 30, 2003, 2002 and 2001:
Nine-month period ended March 31
(U.S.dollars in thousands, 2004
expect for per share date -----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------
Income before cumulative
effect of accounting change $ 10,557
=========
Basic EPS
Income available to
common stockholders $ 10,557 20,434 $0.52
----------- ========
Effect of Dilutive Securities
Stock options - 362
--------- ------------
Diluted EPS
Income available to
common stockholders including
assumed conversions $ 10,557 20,796 $ 0.51
========== ========== ========
Year ended June 30
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
(U.S.dollars in thousands, 2003 2002 2001
expect for per share data)
----------------------------------- ------------------------------------ ---------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator Amount
----------------------------------- ------------------------------------ ---------------------------------
----------------------------------- ------------------------------------ ---------------------------------
Income before cumulative
effect of accounting change $ 8,291 $ 13,568 $ 23,527
============ =========== ===========
============ =========== ===========
Basic EPS
Income available to
common stockholders $ 8,291 20,925 $0.40 $ 13,568 25,142 $ 0.54 $ 23,527 27,937 $ 0.84
------------ ======== ========= ========
------------ ======== ========= ========
Effect of Dilutive Securities
Stock options - 178 - 468 - 727
------------ ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- -----------
Diluted EPS
Income available to
common stockholders including
assumed conversions $ 8,291 21,103 $ 0.39 $ 13,568 25,610 $ 0.53 $ 23,527 28,664 $ 0.82
============ ============ ======== =========== ============ ========= =========== =========== ========
On March 31, 2004, the Company's directors and employees held options to
purchase 1,116,210 common shares at prices ranging from $2.48 to $11.95 per
share. During quarters one through three of the nine-month period ended March
31, 2004, all but 375,829, 357,589 and 109,364, respectively, of options then
outstanding were included in the computation of diluted earnings per common
share. These options were excluded because the option exercise price was greater
than the average market price of the common stock during the particular quarter.
The dilutive effect of the various options held by the Company's directors and
employees in future periods will depend on the average market price of the
Company's common stock during such periods.
Accounting for Stock-based Compensation
The Company measures the expense associated with its stock-based compensation
using the intrinsic value method. Application of this method generally results
in compensation expense equal to the quoted price of the shares granted at the
date of grant under the option less the
A-11
amount, if any, the director or employee is required to pay for the underlying
shares. See Note 14.
In January 2003, the Financial Accounting Standards Board ("the FASB") issued
Financial Accounting Standards ("FAS") No. 148 ("FAS 148") - "Accounting for
Stock-Based Compensation - Transition and Disclosure". FAS 148 gives entities
that elect to adopt the fair market value method of accounting for stock options
granted to employees provided for in FAS 123 three alternative transitional
accounting methods. In addition, the opportunity to apply the fair market value
method only to options granted after the adoption of the standard will not be
available for fiscal years beginning after December 31, 2003. FAS 148 also
provides that certain pro forma and other information regarding stock options
which is currently required only in an entity's annual financial statements will
now be required in interim reports as well and will be required to be displayed
more prominently. FAS 148 is effective for fiscal years ending after December
15, 2002 and for interim periods beginning after December 15, 2002. As
indicated, the Company currently uses the intrinsic value method of accounting
for compensation expense related to stock options granted to employees and
directors and currently has no plans to change its method of accounting for such
expense as contemplated in FAS 123 and FAS 148.
Because the Company uses the intrinsic value method of accounting for
compensation expense related to stock options granted to employees and directors
and because, with the exception of certain options granted to directors during
fiscal year 1999, the exercise price of the stock options granted is equal to
the market price of the common stock on the date of grant, compensation expense
has typically not been recognized upon the grant of stock options. Had the
Company adopted the fair value method of recognizing stock-based compensation,
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 for the nine-month period ended March 31, 2004 and for the fiscal years
ended June 30, 2003, 2002 and 2001 as if the Company had adopted the fair value
method:
Nine-month
period ended
March 31 Year ended June 30
-------------------------------------
-------------------------------------
(U.S. dollars, in thousands, except per share amounts) 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Net income as reported $ 10,557 $ 7,711 $ 13,568 $ 23,527
Stock-based compensation expenses included
in reported net income, net of related tax effects - 57 256 227
Total stock-based compensation expenses determined
under fair value methods for all awards, net of related
tax effects (707) (997) (1,577) (1,942)
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 9,850 $ 6,771 $ 12,247 $ 21,812
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Basic net income per common share, as reported $ 0.52 $ 0.37 $ 0.54 $ 0.84
Basic net income per common share, pro forma $ 0.48 $ 0.32 $ 0.49 $ 0.78
Diluted net income per common share, as reported $ 0.51 $ 0.36 $ 0.53 $ 0.82
Diluted net income per common share, pro forma $ 0.47 $ 0.32 $ 0.48 $ 0.76
-----------------------------------------------------------------------------------------------------------------------------------
A-12
For purposes of the pro forma information above, the fair value of each option
granted in each period was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions:
June 30
March 31 ----------------------------------------------
2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.1% 3.6% 4.4% 5.6%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility 64.6% 63.7% 59.6% 54.1%
Expected life of stock options, in years 7.0 7.0 7.0 7.0
----------------------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted during the nine-month period
ended March 31, 2004 and fiscal years ended June 30, 2003, 2002 and 2001 using
the model and assumptions described above was $5.96, $3.98, $5.21 and $6.73,
respectively.
Vendor Allowances
During the fiscal year ended June 30, 2003, the Company changed its method of
accounting for vendor allowances in accordance with Emerging Issues Task Force
Consensus No. 02-16 ("EITF 02-16") - "Accounting by a Reseller for Cash
Consideration Received from a Vendor". This standard requires that these
allowances and certain other amounts received by resellers from vendors be
treated as a reduction of the cost of inventory acquired from the vendor and
recorded as a component of the cost of products sold when the related product or
service is sold, unless the amount represents a reimbursement of a specific,
identifiable and incremental cost incurred to sell the vendor's products or
services. Previously, and in accordance with generally accepted accounting
principles, the Company had recognized and recorded vendor allowances as a
reduction of advertising expense included in selling, general and administrative
expenses. The cumulative effect of the change in the method of accounting for
vendor allowances resulted in an after-tax, non-cash charge to net income of
$580,000 in the fiscal year ended June 30, 2003. The table below compares the
effect during the fiscal years ended June 30, 2002 and 2001, on a pro forma
basis as if the policy was in place during the years presented:
A-13
Year ended June 30
(U.S. dollars, in thousands, except per share amounts) 2002 2001
------------------------------------------------------------------------------------------------------
As Reported
Net income $13,568 $23,527
Basic net income per average common share 0.54 0.84
Diluted net income per average common share 0.53 0.82
Pro Forma
Net income $13,634 $23,753
Basic net income per average common share 0.54 0.85
Diluted net income per average common share 0.53 0.83
------------------------------------------------------------------------------------------------------
New Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in an entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company does not
have any ownership in any variable interest entities. The adoption of FIN 46 did
not have a material impact on the Company's consolidated financial position or
on its results of operations.
In April 2003, the FASB issued Financial Accounting Standards No. 149 ("FAS
149") - "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". This statement amends FAS 133 by requiring that contracts with
comparable characteristics be accounted for similarly and clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. FAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003 and must be applied prospectively. The adoption of FAS 149 did not have
a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued Financial Accounting Standards No. 150 ("FAS 150")
- "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This statement established standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. FAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 and must be applied prospectively by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. The adoption of FAS 150 did
A-14
not have a material impact on its consolidated financial statements since it
does not currently have any financial instruments with characteristics of both
liabilities and equity.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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.
Reclassifications
Certain previous year amounts have been reclassified to conform to the
current-year presentation. This included reclassifying the current and
non-current balances of deferred service contract costs, which had previously
been netted against deferred service contract revenue, to assets. This
reclassification has no impact on the consolidated statements of operations,
stockholders' equity and cash flows.
2. (Gain) Loss on Disposal of Subsidiary Company
During the fourth quarter of fiscal year 2001, the Company sold its former
subsidiary in Australia and recorded a gain of $4,101,000. The consolidated
statements of operations and cash flows for the fiscal year ended June 30, 2001
include the results of the Australian subsidiary.
The gain on disposal reported in fiscal year 2001 was based on management's
calculation of certain adjustments to be paid following completion of the sale.
The purchaser has advised the Company that it disagrees with management's
calculation of those adjustments and has commenced legal action in support of
its claim. Management believes that its calculation of the adjustments is
appropriate and that there are strong arguments against the position adopted by
the purchaser. The Company is in the process of vigorously defending its
position. The trial with respect to this matter concluded in April 2004 and the
Court has reserved its judgement to a date to be determined by the Court. Should
the purchaser prevail in this dispute, the Company would have an additional
liability of approximately $3,063,000.
Under the terms of the sale agreement, during the nine-month period following
the sale, which ended January 31, 2002, the Company indemnified the purchaser
against any inaccuracies in the financial statements of the former Australian
subsidiary as of the date of sale. Except as noted above, no claims were made
under this indemnity within the prescribed time period. Layered on top of this
indemnity was a two-year indemnity covering tax matters only which expired April
30, 2003. This indemnity had a limit of A$4,000,000 (approximately $3,063,000).
No claims were made under this tax indemnity. In addition, the Company
indemnified the purchaser against termination costs with respect to certain
employees. One claim has been received under this indemnity for an amount of
approximately $92,000. The time for making additional claims under this
indemnity has now expired.
A-15
United States federal tax and Australian withholding tax on the sale were
approximately $600,000. Management believes there are authoritative arguments in
support of the position that this transaction is exempt from Australian capital
gains tax by virtue of the tax treaty between the United States and Australia,
and, accordingly, no Australian tax was recorded with respect to the sale.
However, there can be no assurance that the Australian tax authorities will not
challenge this position. If Australian tax were to apply to the gain on sale,
the Company would have an additional liability of approximately $9,954,000,
which the Company would vigorously dispute.
During the fourth quarter of fiscal year 2002, the Company re-evaluated the
collectibility of certain receivables relating to one of its divested businesses
and recorded a charge of $217,000.
3. Restructuring Charges
During the first quarter of fiscal year 2002, the Company recorded a
restructuring charge of $2,703,000, representing the cost of streamlining the
Company's Corporate Office and integrating it with InterTAN's operating
subsidiary, InterTAN Canada Ltd.
During the fourth quarter of fiscal year 2002, the Company announced a further
restructuring of its merchandising and marketing groups to streamline the
decision making process and to optimize responsiveness. In connection with this
restructuring, the Company recorded a charge of $209,000 during the fourth
quarter of fiscal year 2002.
The following is a summary of activity within the restructuring reserve for the
nine-month period ended March 31, 2004 and for the fiscal years ended June 30,
2003 and 2002:
Balance Balance
June 30 Provision June 30
(U.S. dollars in thousands) 2001 Recorded Paid 2002
---------------------------------------------------------------------------------------------------------
Professional fees and related expenses $ - $ 7 $ 7 $ -
Retirement, severance and other
compensation costs - 2,790 1,023 1,767
Other charges - 115 115 -
---------------------------------------------------------------------------------------------------------
$ - $ 2,912 $ 1,145 $ 1,767
---------------------------------------------------------------------------------------------------------
Balance Balance Balance
June 30 June 30 March 31
(U.S. dollars in thousands) 2002 Paid 2003 Paid 2004
---------------------------------------------------------------------------------------------------
Retirement, severance and other
compensation costs $ 1,767 $ 414 $ 1,353 $ 151 $ 1,202
---------------------------------------------------------------------------------------------------
A-16
In conjunction with the restructuring during the first quarter of fiscal year
2002, the Company also expensed costs aggregating $510,000 incurred in
connection with the study of various alternatives to enhance shareholder value.
This amount has been included in selling, general and administrative expenses.
In conjunction with the restructuring during the fourth quarter of fiscal year
2002, the Company also recorded an inventory charge of $3,500,000 designed to
expedite the acceleration of the Company's transition towards a merchandise
strategy focused on higher growth, primarily digital products. This inventory
adjustment was charged to cost of products sold.
4. Bank Debt
In December 2002 the Company's Canadian subsidiary entered in a new credit
facility (the "Credit Facility") in the amount of C$85,000,000 (approximately
$64,830,000 at March 31, 2004 exchange rates) with a major Canadian bank,
replacing its then existing asset-backed facility which had been in place since
December 1997. The Credit Facility consists of two revolving renewable
facilities and a five-year non-revolving term facility.
The first one-year renewable revolving facility is for C$30,000,000
(approximately $22,880,000 at March 31, 2004 rates of exchange). This facility
is intended for normal working capital requirements and is available throughout
the year. The Credit Facility, as amended on September 15, 2003, provided that
the amount that can be used for letters of credit was limited to C$5,000,000
during the fiscal year ended June 30, 2003 (approximately $3,814,000 at March
31, 2004 rates of exchange), increasing to C$14,000,000 and C$17,000,000 during
fiscal years 2004 and 2005, respectively. Further increases of C$2,000,000 each
were contemplated for fiscal years 2006 and 2007.
The second one-year renewable revolving facility is for C$45,000,000
(approximately $34,322,000 at March 31, 2004 rates of exchange). This facility
is for seasonal working capital requirements and is available only during the
annual period of September 1 to January 31. This facility cannot be used for
letters of credit and must be repaid in full each January 31.
The one-year renewable revolving and seasonal revolving facilities were
renegotiated and a loan amendment was signed in March 2004. The effect of the
loan amendment was to increase the first one-year renewable revolving facility
from C$30,000,000 to C$45,000,000 and to decrease the second renewable revolving
facility from C$45,000,000 to C$20,000,000. In addition, the seasonal facility
is now available only during the period August 1 to November 1, each calendar
year. As a consequence, the aggregate amount of the Company's credit facility
was reduced from C$85,000,000 to C$75,000,000 (approximately $57,203,000 at
March 31, 2004 rates of exchange). A subsequent amendment, effective, April 19,
2004, increased the amount that can be used for letters of credit under the
first one-year renewable revolving facility to C$40,000,000, effective as of
that date.
Advances under these revolving facilities are limited to a borrowing base
calculation tied to the Company's accounts receivable and inventories. At March
31, 2004, no amounts were
A-17
outstanding under either facility. The short-term bank borrowings of $4,116,000
at March 31, 2004 represent a book overdraft due to outstanding cheques. At
March 31, 2004 $6,245,000 was committed in support of letters of credit. At
March 31, 2004, C$36,800,000 (approximately $28,067,000 at March 31, 2004 rates
of exchange) was available for use under these facilities.
The Credit Facility also includes a five-year non-revolving term facility in the
amount of C$10,000,000 (approximately $7,627,000 at March 31, 2004 rates of
exchange). This facility is intended for capital expenditures or the repurchase
of the Company's common stock. In December 2002, the Company drew down on this
facility in full to finance the seventh share repurchase program announced in
October 2002. At March 31, 2004 C$8,000,000 (approximately $6,102,000 at March
31, 2004 rates of exchange) was outstanding under this facility. A repayment of
C$2,000,000 (approximately $1,525,000 at March 31, 2004 rates of exchange) was
made on December 15, 2003. Further repayments of C$2,000,000 are due on December
17, 2004 through December 17, 2007, inclusive.
The Credit Facility requires that the Company remain in compliance with certain
financial ratios including the current ratio, fixed charge coverage ratio,
tangible net worth and total adjusted debt to tangible net worth. The Company
was in compliance with all of these covenants at March 31, 2004. Borrowing rates
under the facility range from Canadian prime plus 0.50% to prime plus 1.5%,
based on the Company's quarterly performance against predetermined fixed charge
coverage ratios. Using the same criteria, the Company may borrow at Canadian
bankers' acceptance and LIBOR rates plus from 1.50% to 2.5%. Letters of credit
are charged at rates ranging from 1.5% per annum to 2.5% per annum, using the
same performance criteria. Using the same fixed charge coverage test, a standby
fee of 0.25% to 0.50% is payable on the unused portion of the revolving credit
facilities at that time. The weighted average interest rate, including standby
fees, for the year was 5.93%.
Security granted by InterTAN Canada Ltd. to secure its obligations under the
Credit Facility include a demand debenture with a face value of C$125,000,000
($95,338,000 at March 31, 2004 rates of exchange), general security agreement,
charge/mortgage on real property owned by it and a general assignment of
accounts receivable. The obligations of InterTAN Canada Ltd. are further secured
by a guarantee issued by InterTAN, Inc. of all future indebtedness, liability
and obligations now or in the future owing by it to lenders under the Credit
Facility.
Arrangement fees incurred in establishing the Credit Facility, including
professional fees and a loan origination fee were approximately C$1,000,000
(approximately $763,000 at March 31, 2004 exchange rates). These costs have been
allocated between the revolving and non-revolving facilities. Costs aggregating
C$290,000 (approximately $221,000 at March 31, 2004 rates of exchange) were
allocated to the short-term facilities and the remaining C$710,000
(approximately $542,000 at March 31, 2004 rates of exchange) were allocated to
the long-term facility and are amortized over the terms of the respective
facilities. As a result of the change in control of the Company, discussed
below, the unamortized costs were expensed subsequent to March 31, 2004.
A change in control of the Company is an event of default of the Credit
Facility. Following the acquisition of control of the Company by Circuit City
(See Note 1) the Company's bankers have
A-18
waived such event of default for a sixty day period while the Company, its
bankers, Circuit City and its bankers negotiate a new banking arrangement.
5. Merchandise, License and Advertising Agreements with RadioShack U.S.A.
The Company and RadioShack U.S.A. have entered into a Merchandise Agreement, a
License Agreement and an Advertising Agreement (collectively, "the RadioShack
agreements"), all of which expire June 30, 2010. The license agreement permits
InterTAN to use the "RadioShack" trade name in Canada until June 30, 2010 and
may be terminated with five years' prior written notice by either party. Prior
to the sale of its Australian subsidiary, the Company also had the right to use
the "Tandy" trade name in Australia. In the event a change in control of
InterTAN, Inc. or any of its subsidiaries occurs, RadioShack U.S.A. may revoke
the Merchandise Agreement and the License Agreement. In April 2001, the Company
entered into an additional agreement with RadioShack U.S.A. (the "Amending
Agreement"). Under the terms of the Amending Agreement, RadioShack U.S.A. agreed
to enter into new license and merchandise agreements with InterTAN Australia
Ltd. following the sale of that company in consideration of a payment by the
Company of $6,000,000. The Amending Agreement also provides that in the event
the Company subsequently consummates a transaction with a third party that
results in the occurrence of an event of default under the License Agreement and
such third party does not desire to use the "RadioShack" trade name, trade or
service marks in Canada, the Company shall pay the sum of $22,500,000 to
RadioShack U.S.A. In consideration therefore, RadioShack agreed that it will
terminate the existing License and Merchandise Agreements as a result of such
event of default only at the request of such third party. RadioShack U.S.A.
further agrees that it will cooperate with the Company and such third party in
effecting a transition by allowing a reasonable transition period for changing
store signage and point-of-sale materials and the sell-through of existing
inventory and merchandise on order. The Advertising Agreement entitles the
Company to limited use of certain marketing materials, research and marks
developed by or for RadioShack U.S.A. since January 1, 1994. The right to use
any marks covered by the agreement are vested in the Company by being added to
the license agreements described above. The fee payable to RadioShack U.S.A.
under this agreement for calendar years 2002 and 2003 is $45,000. This fee
increased to $55,000 for 2004 and subsequent years.
In consideration for the rights granted under the License Agreement, the Company
is obliged to pay a royalty of 1.0% of consolidated sales using or deriving
benefit from the use of the service marks or trade marks licensed under the
agreement. During the nine-month period ended March 31, 2004, the Company paid
RadioShack U.S.A. royalties totalling $3,341,000. During fiscal years ended June
30, 2003, 2002 and 2001, the Company paid RadioShack U.S.A. royalties totalling
$3,600,000, $3,643,000 and $4,505,000, respectively. Pursuant to the terms of
the Merchandise Agreement, the Company is obliged to use RadioShack U.S.A.'s
export unit, RadioShack Global Sourcing Limited Partnership ("RSGS"), formerly
RadioShack International Procurement Limited Partnership, as its exclusive
exporter of products from the Far East through the term of the Merchandise
Agreement for RadioShack branded product. In such connection, the Company must
pay an annual purchasing agent/exporter fee to RSGS calculated by adding 0.2% of
consolidated sales for each twelve-month period ended June 30 in excess of
$400,000,000 to the base amount of $532,500 ($710,000 prior to the sale of
InterTAN Australia
A-19
Ltd.) and deducting from this certain credits the Company earns by purchasing
products from RadioShack U.S.A. and RSGS. The Company paid RadioShack U.S.A.
instalments in respect of these fees totalling $199,700 for the nine-month
period ended March 31, 2004. The timing and amount of the final payment will
depend on the resolution of the dispute with RadioShack U.S.A. The Company paid
RadioShack U.S.A. fees totalling $481,000, $473,000 and $554,000 in respect of
fiscal years ended June 30, 2003, 2002 and 2001, respectively, under this
arrangement. During the nine-month period ended March 31, 2004 the Company's
Canadian subsidiary purchased approximately 13.6% of its merchandise from
RadioShack U.S.A. and RSGS. During fiscal years ended June 30, 2003, 2002 and
2001 the Company's Canadian subsidiary and, in the case of fiscal year 2001, its
Australian subsidiary combined purchased approximately 9.5%, 11% and 14%,
respectively, of their merchandise from those sources. The Company's purchase
orders with RSGS must be supported, based on a formula set out in the
Merchandise Agreement, by letters of credit issued by banks on behalf of
InterTAN, by a surety bond, or backed by cash deposits. The Company has secured
surety bond coverage from a major insurer in an amount not to exceed $2,000,000
as at March 31, 2004 and June 30, 2003 ($6,000,000 at June 30, 2002). At March
31, 2004 the Company had no amount on deposit with RSGS. At June 30, 2003 and
2002 the Company had $4,179,000 and $0, respectively, on deposit with RSGS.
In March 2004, RadioShack U.S.A. advised the Company that it was serving notice,
in accordance with the RadioShack Agreements, that those agreements would expire
on June 30, 2009, instead of June 30, 2010. In April 2004, RadioShack U.S.A.
announced that it was terminating the RadioShack Agreements immediately because
of an alleged breach of the Advertising Agreement, but subject to a six-month
transition period pursuant to the License Agreement. Subsequently, RadioShack
U.S.A. further announced that it was entitled under the terms of the Advertising
Agreement to terminate that agreement as of December 31, 2004 and that the
License Agreement and the Merchandise Agreement contained provisions that would
result in termination of those agreements on the same date. RadioShack U.S.A.
has also applied for an injunction in support of its position. The Company
believes, with the exception of the announced termination of the agreements
effective June 30, 2009, that the purported terminations are invalid and is
vigorously contesting them.
6. Treasury Stock Repurchase Program
By June 30, 2003, the Company had completed seven previously announced share
repurchase programs. In total, under all seven plans, 11,736,250 shares had been
acquired by June 30, 2003 for total consideration of $122,278,904, or
approximately $10.42 per share. On April 22, 2003, the Company announced an
eighth stock repurchase program under which management is authorized, subject to
regulatory approval and market conditions, to purchase up to 1,025,000
additional shares, approximately 5% of the Company's common shares then
outstanding. Regulatory approval to proceed with this plan was received in July
2003. During the second quarter of the nine-month period ended March 31, 2004,
586,400 shares were acquired under the eighth plan at an aggregate cost of
$5,715,437, or approximately $9.75 per share.
A-20
7. Property and Equipment
Property and equipment at March 31, 2004, June 30, 2003 and June 30, 2002 are
summarized as follows:
March 31 June 30 June 30
(U.S. dollars in thousands) 2004 2003 2002
------------------------------------------------------------------------------------------------
Land $ 301 $ 293 $ 260
Buildings 5,686 5,532 4,915
Equipment, furniture and fixtures 44,585 39,909 31,469
Leasehold improvements 29,969 27,934 22,811
------------------------------------------------------------------------------------------------
80,541 73,668 59,455
Less accumulated depreciation 46,124 40,131 29,851
------------------------------------------------------------------------------------------------
Property and equipment, less
accumulated depreciation $ 34,417 $ 33,537 $ 29,604
------------------------------------------------------------------------------------------------
Equipment, furniture and fixtures in the nine-month period ended March 31, 2004
and in the fiscal years ended June 30, 2003 and June 30, 2002 includes assets
acquired under capital leases with an original capital cost of $1,061,000,
$851,000 and $649,000, respectively. The accumulated depreciation related to
capital leases was $178,000, $203,000 and $136,000 at March 31, 2004, June 30,
2003 and June 30, 2002, respectively. Also included in fiscal year 2002 are
assets under construction in the amount of $5,974,000 which were not in use at
June 30, 2002.
8. Accrued Expenses
Accrued expenses at March 31, 2004, June 30, 2003 and June 30, 2002 are
summarized as follows:
March 31 June 30 June 30
(U.S. dollars in thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------
Payroll and bonuses $ 7,509 $ 6,253 $ 4,917
Accrual for equipment,
furniture and fixtures - - 3,430
Sales taxes 2,616 2,422 3,229
Other 9,735 6,615 7,869
---------------------------------------------------------------------------------------------
Accrued Expenses $ 19,860 $ 15,290 $ 19,445
---------------------------------------------------------------------------------------------
The accrual for equipment, furniture and fixtures for the fiscal year ended June
30, 2002 relates to the remaining amount due under contract on a capital project
associated with the Company's distribution facility. Although this capital
project had been substantially completed, it was still in the testing phase and
was included in projects in progress. The amount due under contract had been
accrued as these amounts had not been settled at June 30, 2002.
A-21
9. Income Taxes
The components of the provisions for domestic and foreign income taxes are shown
below:
Nine-month
period ended
March 31 Year ended June 30
----------------------------------------------
(U.S. dollars in thousands) 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------
Current expense:
United States $ 2,442 $ 650 $ - $ 1,119
Foreign 11,746 7,153 12,212 18,083
-------------------------------------------------------------------------------------------------------
14,188 7,803 12,212 19,202
Deferred (benefit) expense:
United States (42) 400 - -
Foreign 352 320 (38) (801)
-------------------------------------------------------------------------------------------------------
Total income tax expense $ 14,498 $ 8,523 $ 12,174 $ 18,401
-------------------------------------------------------------------------------------------------------
The Company's income tax expense primarily represents Canadian income tax on the
profits earned by its Canadian subsidiary. The provision for income taxes for
the nine-month period ended March 31, 2004 includes a provision for Canadian
taxes on a dividend distribution to the parent company and an amount of
$2,400,000, representing management's estimate of the tax owing as a result of
the conclusion of a long outstanding dispute with the Internal Revenue Service
("IRS"). The Company, on the advice of counsel, had believed that the outcome on
this matter was favourable and accordingly, no loss provision had previously
been recorded. In January 2004, the Company was advised that the United States
Tax Court had issued a judgement in favour of the IRS. The Company has appealed
the Tax Court decision to the Fifth Circuit Court of Appeal. The fiscal year
ended June 30, 2001 provision included a special charge of $700,000 related to
the settlement of outstanding issues with the Canadian and United States
authorities as well as a provision of $581,000 relating to the sale of the
Australian subsidiary. United States tax on the gain on sale was minimal because
of the utilization of loss carry-forwards for which the deferred tax asset had a
full valuation allowance. No provision for Australian taxes was made during the
fiscal year ended June 30, 2001 because the Australian subsidiary had a pre-tax
loss through the date of its sale.
A-22
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:
Nine-month
period ended
March 31 Year ended June 30
-------------------------------------------
(U.S. dollars in thousands, except percents) 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
Components of pre-tax income (loss):
United States $ (4,554) $ (1,647) $ (2,177) $ 4,401
Foreign 29,609 18,461 27,919 37,527
-----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,055 16,814 25,742 41,928
Statutory U.S. tax rate 35% 35% 35% 35%
-----------------------------------------------------------------------------------------------------------------------------
Federal income tax expense at statutory rate 8,769 5,885 9,010 14,675
Foreign tax rate differentials (459) 24 592 1,365
Provincial income taxes, less foreign federal income
tax benefit 1,218 799 1,124 1,686
Withholding tax on receipt of dividend from foreign subsidiary - 250 - -
Income tax dispute settlements 2,400 - - 700
Adjustment to valuation allowance for deferred tax assets 240 (10,981) 519 (7,988)
Adjustment to net operating losses 137 1,090 (1,755) -
Reduction (increase) in Canadian statutory rates (99) 86 375 1,799
Utilization of available loss carryforwards - - - 6,122
Deemed dividend on property held in the United States 1,497 11,602 1,652 -
Non-deductible professional fees 547 - - -
Other, net 248 (232) 657 42
-----------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 14,498 $ 8,523 $ 12,174 $ 18,401
-----------------------------------------------------------------------------------------------------------------------------
A-23
Deferred tax assets are comprised of the following at March 31, 2004:
Assets:
March 31 June 30 June 30
(U.S. dollars in thousands) 2004 2003 2002
---------------------------------------------------------------------------------------
Depreciation $ - $ 321 $ 519
Deferred service contracts 5,201 4,529 4,008
Loss carryforwards 12,782 12,596 23,505
Other 2,369 3,154 2,894
---------------------------------------------------------------------------------------
20,352 20,600 30,926
Valuation allowance (15,303) (15,339) (25,972)
---------------------------------------------------------------------------------------
Deferred tax asset $ 5,049 $ 5,261 $ 4,954
---------------------------------------------------------------------------------------
The net deferred tax asset is
classified as follows:
Current $ 1,342 $ 1,306 $ 1,374
Long-term 3,707 3,955 3,580
---------------------------------------------------------------------------------------
Deferred tax asset $ 5,049 $ 5,261 $ 4,954
---------------------------------------------------------------------------------------
Liabilities:
(U.S. dollars in thousands) 2004 2003 2002
---------------------------------------------------------------------------------------
Portion of undistributed earnings of foreign
subsidiary not permanently reinvested $ 358 $ 400 $ -
---------------------------------------------------------------------------------------
Deferred tax liability $ 358 $ 400 $ -
---------------------------------------------------------------------------------------
The deferred tax liability is
classified as follows:
Current $ 358 $ 400 $ -
Long-term - - -
---------------------------------------------------------------------------------------
Deferred tax liability $ 358 $ 400 $ -
---------------------------------------------------------------------------------------
The reduction in the valuation allowance of approximately $10,600,000 in the
fiscal year ended June 30, 2003 primarily relates to the utilization of net
operating loss carry-forwards in the United States as a result of deemed
dividends related to the Company's stock repurchase program. The Company
regularly assesses the future tax benefit which might be derived from the
Company's deferred tax assets. In assessing the future benefit which might be
derived from these deferred tax assets, the Company considers its recent
operating history and financial condition within each separate tax jurisdiction.
A-24
In the United States, the Company has net operating loss carry-forwards for tax
purposes of approximately $18,700,000. These loss carry-forwards will expire
between 2013 and 2020. Also in the United States, the Company has alternative
minimum tax credits of approximately $2,000,000. These tax credits may be
carried forward indefinitely and can be used in future years to reduce income
taxes payable. In Canada, the Company has a net capital loss carry forward from
the sale of its Australian and United Kingdom subsidiaries of approximately
$17,707,000. These losses may be carried forward indefinitely, but may only be
applied against capital gains.
During the fiscal years ended June 30, 1999 and 2001, the Company reached
agreements with the Canadian tax authorities, settling substantially all of its
remaining outstanding Canadian tax issues related to the 1987 and 1988 taxation
years. In October 2002, a payment of approximately $7,300,000 was made in
satisfaction of a significant portion of these issues. Management estimates that
its liability with respect to these remaining issues is approximately $723,000.
Management further believes that it has a provision recorded sufficient to pay
the estimated liability resulting from these issues; however, the amount
ultimately paid could differ from management's estimate.
10.Product Warranties
Products sold in the Company's stores typically carry a one-year warranty
covered by the product manufacturer. Accordingly, the Company does not provide
for the expected warranty costs. The Company also offers extended warranty plans
to its customers. These contracts extend the warranty period beyond the original
warranty period provided by the manufacturer and provide enhanced benefits. The
term of these contracts, including the original warranty period, is typically
three years. As the Company is the primary obligor on these contracts, all
revenue on the sale of extended warranty plans is deferred and is amortized on a
straight-line basis, over the term of the contract. The Company has certain
recourse for a portion of the obligation against the manufacturer during the
one-year warranty period covered by such manufacturer. The Company pays its
sales associates a specific commission on the sale of extended warranty plans.
These costs are also deferred and expensed rateably over the term of the
contracts. Actual warranty costs are expensed as incurred. The following is a
summary of the activity in the deferred revenue and deferred charge accounts
during the nine-month period ended March 31, 2004 and fiscal years ended June
30, 2003 and June 30, 2002:
A-25
Year ended June 30, 2002
-----------------------------------------------------------------------------------------------------------------------
Balance Amortized Foreign Balance
June 30 to Currency June 30
(U.S. dollars, in thousands) 2001 Additions Income Effects 2002
-----------------------------------------------------------------------------------------------------------------------
Deferred revenue $ 11,997 $ 9,115 $ (7,835) $ 40 $ 13,317
Deferred costs (1,891) (1,434) 1,214 (5) (2,116)
-----------------------------------------------------------------------------------------------------------------------
$ 10,106 $ 7,681 $ (6,621) $ 35 $ 11,201
-----------------------------------------------------------------------------------------------------------------------
Year ended June 30, 2003
-----------------------------------------------------------------------------------------------------------------------
Balance Amortized Foreign Balance
June 30 to Currency June 30
(U.S. dollars, in thousands) 2002 Additions Income Effects 2003
-----------------------------------------------------------------------------------------------------------------------
Deferred revenue $ 13,317 $ 9,850 $ (9,127) $ 1,686 $ 15,726
Deferred costs (2,116) (1,499) 1,449 (273) (2,439)
-----------------------------------------------------------------------------------------------------------------------
$ 11,201 $ 8,351 $ (7,678) $ 1,413 $ 13,287
-----------------------------------------------------------------------------------------------------------------------
Nine-month period ended March 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Balance Amortized Foreign Balance
June 30 to Currency March 31
(U.S. dollars, in thousands) 2003 Additions Income Effects 2004
-----------------------------------------------------------------------------------------------------------------------
Deferred revenue $ 15,726 $ 9,706 $ (8,301) $ 480 $ 17,611
Deferred costs (2,439) (1,650) 1,318 (73) (2,844)
-----------------------------------------------------------------------------------------------------------------------
$ 13,287 $ 8,056 $ (6,983) $ 407 $ 14,767
-----------------------------------------------------------------------------------------------------------------------
11.Commitments and Contingencies
The Company leases virtually all of its retail space under operating leases with
terms ranging from one to fifteen years. Leases are normally based on a minimum
rent 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.
For the nine-month period ended March 31, 2004, minimum rents, including
immaterial contingent rents and sublease rental income, were $14,409,000. In the
fiscal years ended June 30, 2003, 2002 and 2001, minimum rents, including
immaterial contingent rents and sublease rental income, were $15,454,000,
$13,585,000 and $20,293,000, respectively. Future minimum rent commitments at
March 31, 2004 for all long-term non-cancellable leases (net of immaterial
sublease rent income) are as follows:
A-26
(U.S. dollars in thousands)
---------------------------------------------------------------------------
2005 $ 15,646
2006 14,500
2007 13,266
2008 12,440
2009 11,703
2010 and thereafter 67,556
---------------------------------------------------------------------------
The Company leases its automobile fleet under capital leases with terms of up to
five years. The Company guarantees the residual value of the automobiles at the
end of the lease or in the event of the early termination of the contract. The
following is a schedule, by year, of the future minimum obligations under these
capital leases, together with the balance of the obligation at March 31, 2004:
(U.S. dollars in thousands)
-------------------------------------------------------------
2005 $ 320
2006 497
2007 122
2008 18
-------------------------------------------------------------
Total minimum lease payment 957
Less imputed interest (92)
-------------------------------------------------------------
Balance of the obligation March 31, 2004 865
Less current portion (287)
-------------------------------------------------------------
Non-current portion $ 578
-------------------------------------------------------------
Interest is calculated monthly at the lessor's cost to issue one-month
commercial paper plus 40 basis points. Interest in the above schedule was
calculated at 4.4%, the rate in effect at March 31, 2004.
In connection with the sale of its former United Kingdom subsidiary during
fiscal year 1999, the Company remains contingently liable as guarantor of
certain leases of InterTAN U.K. Limited. At March 31, 2004 the remaining lease
obligation assumed by the purchaser and guaranteed by the Company was
approximately $13,500,000 and the average remaining life of such leases was
approximately four years. No claims have been received from landlords in respect
of this obligation. If the purchaser were to default on the lease obligations,
management believes the Company could reduce the exposure through assignment,
subletting and other means. The Company has obtained an indemnity from the
purchaser for an amount equal to management's best estimate of the Company's
potential exposure under these guarantees. At March 31, 2004, the amount of this
indemnity was (pound)3,000,000 (approximately $5,531,000 at the March 31, 2004
A-27
rate of exchange.) The amount of this indemnity declines over time as the
Company's risk diminishes. It will be reduced to (pound)2,000,000 in January
2005 and by a further (pound)1,000,000 in January 2006 and will be reduced to
zero in January 2007.
During fiscal year 2002, the Company entered into a contract under which it is
obligated to spend approximately C$40,000,000 (approximately $30,508,000 at
March 31, 2004 rates of exchange) in advertising over a five-year period. At
March 31, 2004 the remaining commitment under this contract was approximately
C$15,600,000 (approximately $11,898,000 at March 31, 2004 rates of exchange).
Apart from the matters described above and in Notes 2, 5 and 9, there are no
pending legal proceedings or claims other than non-material 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.
12.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,
deposits, short-term bank borrowings, accounts payable, accrued expenses,
long-term bank indebtedness-current portion and obligation under capital
leases-current portion. At March 31, 2004, the Company had long-term debt
instruments outstanding in the amount of $5,154,000. At June 30, 2003 and June
30, 2002, the Company had long-term debt instruments outstanding in the amount
of $6,369,000 and $384,000, respectively. The carrying value of these
obligations approximated their fair value.
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. Except for the opportunity cost of future currency
values being more favourable than anticipated, the Company's risk in those
transactions is limited to the cost of replacing the contracts at current market
rates in the event of non-performance by the counterparties. The Company
believes its risk of counterparty non-performance is remote, and any losses
incurred would not be material. At March 31, 2004, the Company had no foreign
exchange contracts outstanding. At June 30, 2003 and June 30, 2002, the Company
had approximately $6,000,000 and $2,000,000, respectively, of foreign exchange
contracts outstanding with a market value of approximately $(551,000) and $0,
respectively. Maturity on these contracts outstanding at June 30, 2003 was less
than 60 days from the fiscal year end. For financial accounting purposes, under
FAS 133, the Company did not designate these contracts as hedges. Accordingly,
changes in the fair market value of these forward contracts were included in the
Company's consolidated statements of operations.
13.Employee Benefit Plans
A-28
The InterTAN, Inc. Group Registered Retirement Savings Plan is available to all
employees of InterTAN, Inc. who have completed at least 60 days of service.
Eligible employees may contribute up to 4% of their salary to a maximum of
one-half of the maximum annual contribution allowable under Canadian law
(currently C$7,250 or approximately $5,500 at March 31, 2004 rates of exchange).
The Company matches the employee's contribution.
Effective July 1, 2002, the Company amended its Stock Purchase Plan. All
employees who hold the position of manager or higher for a period of at least 18
months may now contribute up to 8% of annual compensation, which contribution is
matched dollar for dollar by the Company. Shares of InterTAN, Inc. common stock
are provided to the plan either by periodic purchases on the open market or by
the Company issuing new shares. As a result of the March 30, 2004 agreement
under which Circuit City offered to buy all outstanding shares of InterTAN, Inc.
common stock, the Stock Purchase Plan was suspended effective March 31, 2004.
All participants in the plan at March 31, 2004 now receive the matching company
contribution in cash.
Also effective July 1, 2002, the InterTAN Canada Group Registered Retirement
Savings Plan was created. Full time and qualifying part time employees with at
least 12 months service may join the plan and contribute up to 3% of annual
compensation. Employee contributions are matched dollar for dollar by the
Company. Both employee and employer contributions are invested in a broad range
of investment options. After membership in the plan for 12 months, the employee
may elect to contribute up to an additional 2% of compensation to the plan,
which contribution is also matched dollar for dollar by the Company. Such
additional contributions will be invested in a unitized stock fund investing in
InterTAN, Inc. common stock. Any member of the existing Stock Purchase Plan who
joins the Group Registered Retirement Savings Plan must withdraw from the Stock
Purchase Plan, in which case the 12 month qualifying periods described above are
waived. All contributions to the unitized stock fund were suspended effective
March 31, 2004 as a result of the Circuit City agreement. All employee and
matching contributions made subsequent to March 31, 2004 are redirected into a
money market fund until such time as a new investment option can be investigated
and arranged.
The Company's former Stock Purchase Plan was available to most employees. Each
participant could contribute from 1% to 10% of annual compensation. The Company
matched from 40% to 80% of the employee's contribution depending on the length
of the employee's participation in the program. Shares were provided to the plan
either by periodic purchases on the open market or by the Company issuing new
shares. Membership in this plan was frozen effective June 30, 2002. Existing
members were grandfathered into the new plan.
Under the InterTAN Canada Ltd. Employee Savings Plan (the "Savings Plan"), a
participating employee could contribute 5% of annual compensation into the plan.
The Company matched 80% of the employee's contribution. An employee could also
elect to contribute an additional 5% of annual compensation to the plan, which
is not matched by the employer. The Company's contributions fully vested at the
end of each calendar quarter. An Administrative Committee appointed by the
Company's Board of Directors directed the investment of the plan's assets, a
significant portion of which were invested in InterTAN, Inc. common stock. The
Savings Plan
A-29
was terminated effective June 30, 2002. Plan assets were distributed to members
during the first quarter of fiscal year ended June 30, 2003.
The aggregate cost of these plans, included in other selling, general and
administration expenses, was $1,545,000 in the nine-month period ended March 31,
2004 and $1,707,000, $1,337,000 and $1,382,000 in the fiscal years ended June
30, 2003, 2002 and 2001, respectively.
14.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 1,200,000
and 2,250,000 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, non-statutory 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 March 31, 2004, options to purchase 3,000 shares were outstanding under the
1986 Stock Option Plan. While options outstanding under this plan will remain in
force until they are exercised, cancelled or expire, no further options may be
granted. At March 31, 2004, options to purchase 918,210 shares were outstanding
under the 1996 Stock Option Plan and 513,322 options were available for future
grant. During fiscal year ended June 30, 2001, the Company accelerated the
vesting of approximately 138,000 options held by senior employees of InterTAN
Australia Ltd. and recorded compensation expense of $556,000.
In 1991, the Company adopted the Non-Employee Director Stock Option Plan (the
"1991 Director Plan") under which each non-employee director was granted an
option, exercisable immediately, to purchase 37,500 shares of the Company's
common stock. Upon election, all new non-employee directors are granted an
option to purchase 37,500 shares of the Company's common stock. Options granted
under the 1991 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 1991 Director Plan cannot exceed
300,000 shares. At March 31, 2004, options to purchase 75,000 shares were
outstanding under the 1991 Director Plan and 37,500 options were available for
future grant.
In June, 1999, the Company adopted a plan which would grant additional options
to purchase common stock to each non-employee director (such options are
collectively referred to as "the
A-30
1999 Director Plan"). Under the 1999 Director Plan, each non-employee director
was granted an option to purchase 30,000 shares of the Company's common stock at
an exercise price of $10.50 per share. Options granted under this plan are
exercisable on a cumulative basis equal to one-fourth per year on the date fixed
for the Company's annual meeting of stockholders, commencing with the 1999
meeting which was held in November, 1999. At March 31, 2004 there were 120,000
options outstanding under the 1999 Director Plan. 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. Under this plan, the Company recognized total compensation expense
of $910,000, with amortization completed during fiscal year 2003. Compensation
expense of $57,000, $256,000, and $227,000 was recognized during fiscal years
ended June 30, 2003, 2002 and 2001, respectively. Approximately $102,000 of the
fiscal year ended June 30, 2002 amount was included in the restructuring charge
recorded during the first quarter.
On May 11, 2004, as a result of the acquisition of the Company by Circuit City
(See Note 1) all conditions and restrictions with respect to options to purchase
Common Shares under the Company's 1986 and 1996 Stock Option Plans and the 1991
Director Plan, including limitations on exercisability and vesting, immediately
lapsed and all outstanding options became exercisable.
In June, 1999, the Company granted a total of 56,250 shares of restricted stock
awards to two executive officers and the managing directors of the Company's
Canadian and Australian subsidiaries. On the date of grant, the market value of
these restricted stock awards totalled $590,625. These shares were to vest
equally over a three-year period provided the Company's consolidated operating
income in a particular year increases by at least 15%. If operating income
growth for a particular year were less than 15% but more than 10%, then
one-fifth of the annual amount was to vest for each percentage point of growth
over 10%. If operating income growth for a year was less than 10%, the
restricted stock for that year would not vest. However, if cumulative compounded
annual consolidated operating income grew by 15% per annum over the three-year
period, then any restricted stock not previously vested would vest in its
entirety. These restricted stock awards, which expired at the end of fiscal year
ended June 30, 2002, did not result in any compensation expense being recognized
during fiscal years ended June 30, 2002 and 2001. No such restricted stock
awards were in effect during the nine-month period ended March 31, 2004 and the
fiscal year ended June 30, 2003.
The Company had established an incentive stock award plan for approximately 700
store managers. Under this plan, managers who achieved certain profit
improvement targets in their respective stores during fiscal years ended June
30, 2000 and 2001 each received up to 150 shares of the Company's common stock.
Compensation expense of $100,000 relating to this plan was recognized during
fiscal year ended June 30, 2001. No such plan was in effect during the
nine-month period ended March 31, 2004 and the fiscal years ended June 30, 2003
and June 30, 2002.
A summary of transactions relating to the stock plans is summarized in the
following tables:
A-31
March 31 June 30
----------------------------------------------------------------------
2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
(in U.S. dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 1,175,722 $ 7.09 1,110,996 $ 7.84 1,532,445 $ 7.22 1,998,705 $ 6.74
Granted 1,842 $ 9.00 259,925 $ 6.14 264,222 $ 8.11 33,498 $10.87
Exercised (41,700) $ 5.05 (16,000) $ 4.51 (598,420) $ 6.08 (445,824) $ 5.17
Forfeited (19,654) $ 9.20 (179,199) $10.53 (87,251) $ 9.79 (53,934) $ 8.78
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 1,116,210 $ 7.12 1,175,722 $ 7.09 1,110,996 $ 7.84 1,532,445 $ 7.22
-----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of period 776,790 $ 7.39 788,497 $ 7.27 789,891 $ 7.37 1,148,423 $ 6.46
-----------------------------------------------------------------------------------------------------------------------------------
Fixed Price Stock Options
Options Weighted Weighted Options Weighted
Outstanding Average Average Exercisable Average
Range of Exercise at Remaining Exercise at Exercise
Prices March 31, 2004 Life (years) Price March 31, 2004 Price
--------------------------------------------------------------------------------------------------------------------
$2.48 37,500 3.25 $ 2.48 37,500 $ 2.48
$3.54 - $3.96 282,250 4.04 $ 3.68 282,250 $ 3.68
$4.00 - $6.07 259,800 8.83 $ 6.03 12,000 $ 5.20
$7.10 - $8.95 183,686 7.44 $ 7.81 96,004 $ 7.84
$9.00 - $11.95 352,974 5.65 $ 10.86 349,036 $ 10.88
--------------------------------------------------------------------------------------------------------------------
1,116,210 6.20 $ 7.12 776,790 $ 7.39
--------------------------------------------------------------------------------------------------------------------
15.Preferred Stock Purchase Rights
Effective September 20, 1999, the Board of Directors adopted a shareholder
rights plan. Pursuant to the terms of this plan, the Company declared a dividend
of one right ("Right") on each share of Common Stock of the Company. Each Right
entitles the holder to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock, no par value per share, of the Company at an
exercise price of $56.67. The Rights are not currently exercisable and will
become exercisable ten days after a person or group acquires beneficial
ownership of 15% or more of the Company's outstanding common stock or announces
a tender offer or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the outstanding
common stock. The Rights are subject to redemption by the Company for $0.01 per
Right at any time prior to the tenth day after the first public announcement of
the acquisition by a person or group of beneficial ownership of 15% or more of
the Company's common stock. In addition, the Board of Directors is authorized to
amend the Rights plan at any time before the Rights become exercisable.
If a person or group acquires beneficial ownership of 15% or more of the
Company's Common Stock and the Rights are then exercisable, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then current exercise price, a number of the Company's
shares of Common Stock having a market value of twice such price. In addition,
if InterTAN is acquired in a merger or other business combination transaction
after a person has acquired beneficial ownership of 15% or more of the Company's
Common Stock and
A-32
the Rights are then exercisable, each Right will entitle its holder to purchase,
at the Right's then current exercise price, a number of the acquiring company's
shares of common stock having a market value of twice such price. Following the
acquisition by a person or group of beneficial ownership of 15% or more of the
Company's Common Stock and prior to an acquisition of beneficial ownership of
50% or more of the Company's Common Stock, the Board of Directors may exchange
the Rights (other than Rights owned by such person or group, which will have
become null and non-transferable), in whole or in part, at an exchange ratio of
one share of Common Stock (or one one-hundredth of a share of Preferred Stock)
per Right. The Rights under this plan will expire on September 20, 2009.
In March 2004, the Rights Agreement was amended to provide that the Rights would
not become exercisable as a result of an acquisition of the Company's common
stock by Circuit City (See "Note 1"). The amendment also provided for the
termination of the Rights Agreement should Circuit City acquire more than 50% of
the Company's common stock pursuant to the tender offer. Accordingly, the Rights
Agreement was terminated effective May 11, 2004.
16.Battery Plus Acquisition
In April 2002, the Company completed the acquisition of selected assets of
Battery Plus, a retailer of batteries and specialty consumer electronic
products, including 42 retail locations. The costs of the assets acquired was
approximately $3,000,000, which included inventory valued at approximately
$1,800,000. This acquisition did not have a material effect on the Company's
financial position, results of operations or cash flows.
17.Segment Reporting Disclosures
The Company was traditionally managed along geographic lines, with its Corporate
Headquarters also treated as a separate business unit. Following the sale of the
Company's former subsidiary in Australia during the fourth quarter of fiscal
year ended June 30, 2001, the Company undertook a restructuring program to
streamline its operations and integrate its former Corporate Headquarters with
its Canadian subsidiary. Accordingly, the Company now has only one business
segment, referred to herein as "Canada", the "Canadian subsidiary" or
"RadioShack Canada". Transactions between segments during prior periods were not
common and were not material to the segment information.
Summarized in the table below are the net sales and operating revenues,
depreciation, operating income (loss), assets and capital expenditures for the
Company's reportable segments for the nine-month period ended March 31, 2004 and
for the fiscal years ended June 30, 2003, 2002 and 2001:
A-33
Nine-month period
ended March 31 Year ended June 30
-------------------------------------------------------
(US dollars, in thousands) 2004 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues:
Canada $ 378,062 $ 403,052 $ 393,809 $ 382,353
Australia - - - 86,403 3
--------------------------------------------------------------------------------------------------------------------------------
$ 378,062 $ 403,052 $ 393,809 $ 468,756
--------------------------------------------------------------------------------------------------------------------------------
Depreciation:
Canada $ 5,907 $ 6,923 $ 5,674 $ 5,029
Australia - - - 1,246 3
Corporate Headquarters - - 1 - 1 82
--------------------------------------------------------------------------------------------------------------------------------
$ 5,907 $ 6,923 $ 5,674 $ 6,357
--------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Canada $ 25,543 $ 19,645 $ 24,660 2 $ 41,503
Australia - - - 4,087 3
Corporate Headquarters expenses - - 1 - 1 (4,173)
--------------------------------------------------------------------------------------------------------------------------------
Operating income 25,543 19,645 24,660 41,417
Foreign currency transaction gains (losses) (100) (2,112) 41 (353)
Interest income 300 299 1,444 1,737
Interest expense (688) (1,018) (403) (873)
--------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting change $ 25,055 $ 16,814 $ 25,742 $ 41,928
--------------------------------------------------------------------------------------------------------------------------------
Assets:
Canada $ 191,084 $ 166,329 $ 147,218 $ 163,016
Australia - - - - 3
Corporate Headquarters - - 1 - 1 52,514
--------------------------------------------------------------------------------------------------------------------------------
$ 191,084 $ 166,329 $ 147,218 $ 215,530
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Canada $ 5,726 $ 6,438 $ 14,550 $ 10,258
Australia - - - 2,626 3
Corporate Headquarters - - 1 - 1 7
--------------------------------------------------------------------------------------------------------------------------------
$ 5,726 $ 6,438 $ 14,550 $ 12,891
--------------------------------------------------------------------------------------------------------------------------------
1 During fiscal year 2002, the Company's former Corporate Headquarters unit was
integrated with its Canadian subsidiary.
2 Includes a charge of $217,000 relating to one of the Company's divested
operations.
3 The Company sold its Australian subsidiary as of April 30, 2001 and
recognized a gain of $4,101,000. Accordingly, the Company's 2001 results in
Australia reflect ten months of operation and the gain on sale.
A-34
18.Quarterly Data (Unaudited)
($ in thousands, in U.S. dollars,except per share data)
Quarter 1st 2nd 3rd
-----------------------------------------------------------------------------------------------------------
Nine-month period ended March 31, 2004
Net sales and operating revenues $ 106,459 $ 171,284 $ 100,319
Gross profit 42,054 72,501 45,599
Net income $ 1,481 $ 8,891 $ 185
Basic net income per average common share 1 $ 0.07 $ 0.43 $ 0.01
Diluted net income per average common share 1 $ 0.07 $ 0.43 $ 0.01
Average common shares outstanding 20,623 20,469 20,208
Average common shares outstanding assuming dilution 20,923 20,819 20,643
Quarter 1st 2nd 3rd 4th
-------------------------------------------------------------------------------------------------------------------------
Fiscal year ended June 30, 2003
Net sales and operating revenues $ 92,903 $ 137,381 $ 81,865 $ 90,903
Gross profit 36,375 55,002 3,848 38,516
Net income (loss) before cumulative
effect of change in accounting policy 1,935 7,997 (350) (1,291)
Cumulative effect of accounting change for vendor
allowances, net of income taxes of $388 (580) - - -
---------------------------------------------------------
Net income (loss) $ 1,355 $ 7,997 $ (350) $ (1,291)
=========================================================
Basic net income per average common share 1
Before cumulative effect of accounting change $ 0.09 $ 0.38 $ (0.02) $ (0.06)
Cumulative effect of accounting change (0.03) - - -
Basic net income per average common share 1 $ 0.06 $ 0.38 $ (0.02) $ (0.06)
Diluted net income per average common share 1
Before cumulative effect of accounting change $ 0.09 $ 0.37 $ (0.02) $ (0.06)
Cumulative effect of accounting change (0.03) - - -
Diluted net income per average common share 1 $ 0.06 $ 0.37 $ (0.02) $ (0.06)
Average common shares outstanding 21,357 21,192 20,600 20,540
Average common shares outstanding assuming dilution 21,613 21,361 20,600 20,540
1 Period-to-date earnings per share is calculated by dividing period-to-date
earnings by the weighted average shares outstanding for the full period.
Therefore, period-to-date earnings per share reported on the statements of
operations does not equal the sum of the quarterly earnings per share.
A-35
19.Product Sales Information
The Company's net sales and operating revenues are summarized by groups of
similar products and services as follows:
Nine-month period
ending March 31 Year ended June 30
-----------------------------------------------
(U.S. dollars, in thousands) 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Telephone, wireless and communication products $ 104,039 $113,745 $107,295 $105,382
Home and personal entertainment products 94,081 111,179 106,584 101,212
Computer products and digital cameras 78,606 74,319 80,209 76,408
Parts, accessories and seasonal 89,088 89,488 87,249 87,096
Service and other revenue 12,248 14,321 12,472 12,255
----------------------------------------------------------------------------------------------------------------------------------
378,062 403,052 393,809 382,353
Net sales and operating revenues of former
subsidiary in Australia - - - 86,403
----------------------------------------------------------------------------------------------------------------------------------
Consolidated net sales and operating revenues $ 378,062 $403,052 $393,809 $468,756
----------------------------------------------------------------------------------------------------------------------------------
20.Subsequent Events
The tender offer by Circuit City successfully closed on May 11, 2004 (See "Note
1"). On March 30, 2004, certain members of executive management entered into new
employment agreements with the Company's subsidiary, InterTAN Canada Ltd., which
took effect as a result of the successful closing of the tender offer. Under the
terms of these new employment agreements InterTAN Canada Ltd. assumed the
aggregate obligation for the Company's deferred compensation plan in the amount
of $6,687,000, which represents the fair value of the amounts that were to be
received under the plan when the executives reached age 65. At March 31, 2004,
an amount of approximately $458,000 had been accrued in support of these future
payouts. Under the terms of the amended employment agreements, the obligation
under the Company's deferred compensation plan immediately vested and an
aggregate amount of $2,722,666 became payable to the executives on May 11, 2004.
The balance of the obligation is payable in the amount of $1,481,000 one year
following closing, $1,241,667 two years following closing and $1,241,667 three
years following closing of the tender offer, provided the executives remain in
the Company's employ on such dates.
In March 2004, the Company entered into an agreement to acquire all of the
outstanding shares of Logitech Electronics, Inc., one of the suppliers of
private label product to the Company, for aggregate consideration of C$4,000,000
(approximately $3,050,000 at March 31, 2004 rates of exchange). This transaction
is expected to close on June 1, 2004. This acquisition is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
A-36
APPENDIX B
PRO FORMA FINANCIAL INFORMATION
On May 12, 2004, Circuit City acquired a controlling interest in InterTAN in a
public tender offer for all of the outstanding InterTAN common shares. On May
19, 2004, Circuit City had acquired all remaining outstanding shares of InterTAN
for cash consideration totaling $265.6 million, which includes transaction costs
and is net of cash acquired of $30.6 million.
The unaudited pro forma financial information included on page B-2 through page
B-4 gives effect to the acquisition of InterTAN. The historical financial
information for Circuit City was excerpted or derived from the audited financial
statements and related notes incorporated by reference in the Circuit City
Stores, Inc. Annual Report on Form 10-K for the fiscal year ended February 29,
2004 and from the unaudited financial statements contained in the Circuit City
Stores, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended May 31,
2004.
The unaudited pro forma consolidated statements of operations assume that
Circuit City acquired InterTAN at the beginning of fiscal 2004, March 1, 2003.
Pro forma financial information for the twelve months ended February 29, 2004
reflects the twelve months ended February 29, 2004 for Circuit City and the
twelve months ended March 31, 2004 for InterTAN. Pro forma financial information
for the three months ended May 31, 2004 reflects the three months ended May 31,
2004 for both Circuit City and InterTAN. Financial information for InterTAN for
the month of March 2004 is included in both unaudited pro forma statements of
operations. Net sales and operating revenues totaled $35.5 million and net
earnings totaled $0.6 million for March 2004.
A pro forma consolidated balance sheet has not been included as the transaction
is reflected in the consolidated balance sheet of Circuit City filed in the
Circuit City Stores, Inc. Quarterly Report on Form 10-Q for the three months
ended May 31, 2004 and filed with the SEC.
Circuit City has estimated the fair value of the assets and liabilities on a
preliminary basis using available information. Based on the preliminary
estimates, the fair value of goodwill is $172.6 million and the fair value of
identifiable intangible assets is $37.5 million. Goodwill is not amortized, but
will be reviewed for impairment at least annually. The identifiable intangible
assets include contract-based intangibles that preliminarily have been assigned
indefinite lives as there are no current outstanding reasons to believe the
contracts will not continue to be renewed. The identifiable intangible assets
will be reviewed for impairment at least annually.
The pro forma adjustments are based on available information and assumptions
that management believes are reasonable and are described in the following
notes. The unaudited pro forma consolidated financial information does not
necessarily represent Circuit City's results of operations had the transaction
occurred at that date nor is it necessarily indicative of results of operations
that may occur in the future. The actual financial position and results of
operations of the combined entity will differ, perhaps significantly, from the
pro forma amounts reflected.
B-1
CIRCUIT CITY STORES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended February 29, 2004
(Amounts in thousands except per share data)
Circuit City InterTAN Pro Forma Circuit City
Historical Historical Adjustments Pro Forma
----------- ----------- --------------- ------------
NET SALES AND OPERATING REVENUES $ 9,745,445 $ 468,965 $ - $ 10,214,410
Cost of sales, buying and warehousing 7,518,120 270,295 11,051 (a) 7,799,466
----------- ----------- ------------ ------------
GROSS PROFIT 2,227,325 198,670 (11,051) 2,414,944
Finance income 32,693 - - 32,693
Selling, general and administrative expenses 2,220,796 173,610 (6,343) (b) 2,388,063
Stock-based compensation expense 38,658 - - 38,658
Interest expense 1,804 875 - 2,679
----------- ----------- ------------ ------------
(Loss) earnings from continuing
operations before income taxes (1,240) 24,185 (4,708) 18,237
Income tax (benefit) provision (453) 14,919 (2,227) (c) 12,239
----------- ----------- ------------ ------------
NET (LOSS) EARNINGS FROM CONTINUING OPERATIONS $ (787) $ 9,266 $ (2,481) $ 5,998
=========== =========== ============ ============
Weighted average common shares:
Basic 205,865 205,865
=========== ============
Diluted 205,865 205,865
=========== ============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS:
Basic $ - $ 0.03
============ ============
Diluted $ - $ 0.03
============ ============
See accompanying notes to unaudited pro forma consolidated financial statements.
B-2
CIRCUIT CITY STORES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended May 31, 2004
(Amounts in thousands except per share data)
Circuit City InterTAN Pro Forma Pro Forma Circuit City
Historical Historical Adjustments Adjustment(d) Pro Forma
---------- ---------- -------------- ---------- ----------
NET SALES AND OPERATING REVENUES $2,066,588 $ 101,027 $ - (21,710) $2,145,905
Cost of sales, buying and warehousing 1,586,153 54,981 2,776 (a) (13,118) 1,630,792
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 480,435 46,046 (2,776) (8,592) 515,113
Finance income 5,564 - - - 5,564
Selling, general and administrative expenses 487,945 53,998 (13,462) (b) (7,888) 520,593
Stock-based compensation expense 5,954 - - - 5,954
Interest expense 350 80 - (81) 349
---------- ---------- ---------- ---------- ----------
(Loss) earnings from continuing
operations before income taxes (8,250) (8,032) 10,686 (623) (6,219)
Income tax (benefit) provision (3,016) (89) 3,782 (c) (250) 427
---------- ---------- ---------- ---------- ----------
NET (LOSS) EARNINGS FROM CONTINUING OPERATIONS $ (5,234) $ (7,943) $ 6,904 (373) $ (6,646)
========== ========== ========== ========== ==========
Weighted average common shares:
Basic 199,429 199,429
========== ==========
Diluted 199,429 199,429
========== ==========
NET LOSS FROM CONTINUING OPERATIONS PER SHARE:
Basic $ (0.03) $ (0.03)
========== ==========
Diluted $ (0.03) $ (0.03)
========== ==========
See accompanying notes to unaudited pro forma consolidated financial statements.
B-3
CIRCUIT CITY STORES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Represents adjustment to reclassify certain costs from selling, general and
administrative expenses to cost of sales, buying and warehousing consistent
with Circuit City's classification.
(b) The pro forma adjustments to selling, general and administrative expenses
are as follows:
Twelve Months Three Months
Ended Ended
(Amounts in millions) February 29, 2004 May 31, 2004
-------------------------------------------------------------------------------- -----------------------------------------------
Higher depreciation expense due to the net write-up of property, plant
and equipment to fair value and changes to the remaining useful lives $ 1.0 $ 0.3
Reclassification of certain costs from selling, general and administrative
expenses to cost of sales, buying and warehousing consistent
with Circuit City's classification (11.0) (2.8)
Transaction related costs incurred by InterTAN prior to the acquisition
date - (11.7)
Elimination of interest income due to funding of transaction through
cash on hand. Assumes an annual average interest rate of 1.17%
for the twelve months ended February 29, 2004, and 1.07% for the
three months ended May 31, 2004 3.1 0.6
Reclassification of capital tax from income taxes to selling, general and
administrative expenses consistent with Circuit City's classification 0.6 0.1
---------------------- ---------------------
Total pro forma adjustment to selling, general and administrative expenses $ (6.3) $ (13.5)
====================== =====================
(c) The pro forma adjustment to income taxes has been made at an estimated
combined rate of 35.4 percent for the twelve months ended February 29, 2004
and 36.8 percent for the three months ended May 31, 2004. In addition, a
pro forma adjustment has been made to reclassify capital taxes from income
taxes to selling, general and administrative expenses consistent with
Circuit City's classification.
(d) The historical results for both Circuit City and InterTAN include InterTAN
results for the period from May 12, 2004, the date Circuit City acquired a
controlling interest, through May 31, 2004. These pro forma adjustments
eliminate the InterTAN results that have been included in both the
historical results of Circuit City and InterTAN.
B-4