UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 333-54035
MTS, INCORPORATED
(Exact name of Registrant as specified in its Charter)
2500 Del Monte Street
West Sacramento, California 95691
(Address of Principal Executive Offices including Zip Code)
916-373-2500
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
MTS, INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Part I. Financial Information
- Consolidated Balance Sheets as of April 30, 2000, 1999 and July 31, 1999
- Consolidated Statements of Income for the three months ended April 30, 2000 and the nine months ended April 30, and 1999
- Consolidated Statements of Cash Flows for the nine months ended April 30, 2000 and 1999
- Consolidated Statements of Comprehensive Income for the nine months ended April 30, 2000 and 1999
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2000, 1999 AND JULY 31, 1999
(DOLLARS IN THOUSANDS)
UNAUDITED
APRIL 30 APRIL 30, JULY 31,
2000 1999 1999
----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................ $22,290 $18,079 $24,705
Receivables, net......................... 30,118 26,097 26,378
Merchandise inventories.................. 288,996 270,084 271,713
Prepaid expenses......................... 13,317 7,249 11,212
Deferred tax assets...................... 8,397 7,411 8,241
----------- ----------- -----------
Total current assets................ 363,118 328,920 342,249
Fixed assets, net.......................... 208,389 195,074 196,864
Deferred tax assets........................ 9,794 15,727 9,794
Other assets............................... 37,971 36,360 37,250
----------- ----------- -----------
Total assets........................ $619,272 $576,081 $586,157
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt..... $180,558 $2,213 $2,971
Accounts payable......................... 161,365 137,221 150,332
Accrued liabilities...................... 40,723 37,268 32,942
Income taxes payable..................... 1,808 624 786
Deferred revenue, current portion........ 2,409 6,055 3,098
----------- ----------- -----------
Total current liabilities........... 386,863 183,381 190,129
Long-term Liabilities:
Long-term debt, less current maturities.. 120,123 269,161 280,169
Deferred revenue, less current portion... 148 161 157
----------- ----------- -----------
Total liabilities................... 507,134 452,703 470,455
----------- ----------- -----------
Commitments and contingencies
Shareholders' Equity:
Common stock:
Class B, no par value; 10,000,000
shares authorized; 1,000 shares issued
and outstanding at April 30, 2000,
April 30, 1999, and July 31, 1999....... 6 6 6
Retained earnings........................ 132,603 142,461 136,278
Accumulated other comprehensive income... (20,471) (19,089) (20,582)
----------- ----------- -----------
Total shareholders' equity.......... 112,138 123,378 115,702
----------- ----------- -----------
Total liabilities and
shareholders' equity.............. $619,272 $576,081 $586,157
=========== =========== ===========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
AND FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net revenue........................ $255,042 $242,467 $842,151 $778,853
Cost of sales...................... 169,601 166,438 573,141 530,694
----------- ----------- ----------- -----------
Gross profit..................... 85,441 76,029 269,010 248,159
Selling, general and
administrative expenses.......... 74,004 68,072 226,013 207,103
Depreciation and amortization...... 6,783 6,115 19,523 18,090
----------- ----------- ----------- -----------
Income from operations........... 4,654 1,842 23,474 22,966
Other income and (expenses):
Interest expense................. (5,549) (4,518) (14,832) (13,086)
Foreign currency translation gain
(loss)......................... (1,547) 454 (7,409) (9,037)
Other income and (expenses)...... (1,873) (775) (3,011) (2,546)
----------- ----------- ----------- -----------
Income before taxes............ (4,315) (2,997) (1,778) (1,703)
(Benefit)/ provision for income tax (62) (384) 1,897 920
----------- ----------- ----------- -----------
Net loss....................... (4,253) (2,613) (3,675) (2,623)
----------- ----------- ----------- -----------
Basic and diluted earnings
per share:
On net loss....................($4,253.50) ($2,613.00) ($3,675.34) ($2,622.68)
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
APRIL 30,
---------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ ($3,675) ($2,623)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......................... 22,977 21,426
Provision for losses on accounts receivable........... 114 112
Loss on disposal of depreciable assets................. 5,126 4,043
Exchange loss.......................................... 6,063 10,432
Other non-cash expense................................. 197 347
Provision for deferred taxes........................... 767 (3,402)
(Decrease) increase in cash resulting from changes in:
Accounts receivable................................. (3,740) (3,002)
Inventories......................................... (17,283) (9,081)
Prepaid expenses.................................... (2,105) (630)
Accounts payable.................................... 11,033 (20,222)
Accrued liabilities and taxes payable............... 8,803 6,048
Deferred revenue.................................... (698) 2,795
---------- ----------
Net cash provided by operating
activities.................................... 27,579 6,243
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets............................. (27,798) (29,847)
Acquisition of investments.............................. (1,327) (1,929)
Increase in deposits.................................... (169) (157)
Refunds of deposits..................................... 29 176
Increase in intangibles................................. (358) (881)
---------- ----------
Net cash used in investing activities............ (29,623) (32,638)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officer and employees............ (334) --
Proceeds from employee loan repayments.................. 378 42
Principal payments under long-term financing
agreements............................................ (60,550) (1,854)
Proceeds from issuance of long-term financing
agreements............................................ 67,000 21,562
---------- ----------
Net cash provided by financing activities........ 6,494 19,750
---------- ----------
Effect of exchange rate changes on cash.................... (6,865) 10,115
---------- ----------
Net (decrease)increase in cash and cash equivalen (2,415) 3,470
Cash and cash equivalents, beginning of period............. 24,705 14,609
---------- ----------
Cash and cash equivalents, end of period................... $22,290 $18,079
========== ==========
Cash paid for interest..................................... $12,508 $10,663
========== ==========
Cash paid for income taxes................................. $8,139 $5,116
========== ==========
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
UNAUDITED
2000 1999
----------- -----------
Net Loss................................... ($3,675) ($2,623)
Other comprehensive income, net of tax:
Foreign currency translation............ 111 5,203
----------- -----------
Comprehenive (Loss)/ Income................ ($3,564) $2,580
=========== ===========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of MTS, Incorporated
and its majority and wholly owned subsidiaries (Company). In the opinion of the Company's
management, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to present fairly its
consolidated financial position as of April 30, 2000 and the results of its operations and cash
flows for the three and nine months then ended. The significant accounting policies and certain
financial information which are normally included in financial statements prepared in
accordance with generally accepted accounting principals, but which are not required for
interim reporting purposes, have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1999.
NOTE 2- TRANSLATION OF FOREIGN CURRENCY
The value of the U.S. dollar rises and falls day-to-day on foreign currency exchanges.
Since the Company does business in several foreign countries, these fluctuations affect the
Company's financial position and results of operations. In accordance with SFAS No. 52,
Foreign Currency Translation, all foreign assets and liabilities have been translated at the
exchange rates prevailing at the respective balance sheets dates, and all income statement
items have been translated using the weighted average exchange rates during the respective
years. The net gain or loss resulting from translation upon consolidation into the financial
statements is reported as a separate component of shareholder's equity. Some transactions of
the Company and its foreign subsidiaries are made in currencies different from their functional
currency. Translation gains and losses from these transactions are included in income as they
occur. The Company recorded net transaction losses of $7.4 million and $9.0 million for the
nine months ended April 30, 2000 and 1999, respectively. These amounts primarily represent
unrealized losses on the Company's yen- denominated debt and the strengthening of the yen
versus the U.S. dollar.
NOTE 3- INCOME TAXES
The effective income tax rates for the nine months ended April 30, 2000 and 1999 are based
on the federal statutory income tax rate, increased for the effect of state income taxes, net
of federal benefit and foreign taxes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited interim
consolidated financial statements and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q in addition to the consolidated financial statements and notes thereto for
the fiscal year ended July 31, 1999 included in the Company's 10-K and Form S-4 filed with the
United States Securities and Exchange Commission.
Forward-Looking Statements
This report and other written reports and oral statements made from time to time by the
Company may contain so-called forward-looking statements as contained in the Private Securities
Litigation Reform Act of 1995, all of which are subject to risks and uncertainties. One can
identify these forward-looking statements by their use of words such as "believes,"
"anticipates," "estimates," "expects," "intends," "plans," forecasts and other words of
similar meaning. One can also identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address the Company's growth
strategy, financial performance (including sales and earnings guidance), marketing and
expansion plans, Y2K compliance and similar matters. One must carefully consider any such
statement and should understand that many factors could cause actual results and plans to
differ from those included in the Company's forward-looking statements. These factors include
inaccurate assumptions and a broad variety of risks and uncertainties, including some that are
known and some that are not. No forward-looking statement can be guaranteed and actual future
results may vary materially. Although it is not possible to predict or identify all such
factors, they may include the following: (i) consumer demand for the Company's products, which
is believed to be related to a number of factors, including overall consumer spending patterns,
weather conditions and new releases available from suppliers; (ii) an unexpected increase in
competition, including Internet competition and competition resulting from electronic or other
alternative methods of delivery of music and other products to consumers, or unanticipated
margin or other disadvantages relative to our competitors; (iii) the continued availability and
cost of adequate capital to fund the Company's operations; (iv) higher than anticipated
interest, occupancy, labor, distribution and inventory shrinkage costs; (v) unanticipated
adverse litigation expenses or results; (vi) higher than anticipated costs associated with the
closing of underperforming stores; (vii) unanticipated increases in the cost of merchandise
sold by the Company; (viii) the performance of the Company's new strategic initiatives,
including the Internet; (ix) unanticipated costs or problems relating to the Company's Year
2000 issues; (x) changes in foreign currency exchange rates and economic and political country
risk; and (xi) the continued ability of the company to locate and develop suitable sites for
its expansion program. Actual results or outcomes may differ materially from those expressed
or implied by such forward-looking statements as a result of certain risk factors described
herein and in other documents filed with the Securities and Exchange Commission. Readers are
cautioned that all forward-looking statements involve risks and uncertainty. Readers should
also carefully review the risk factors described in other documents the company files for time
to time with the United States Securities and Exchange Commission. The Company assumes no
obligation to update any such forward-looking statements.
Results of Operations
Three Months Ended April 30, 2000 Compared to Three Months
Ended April 30, 1999
Revenue
During the three months ended April 30, 2000, the Company's consolidated net revenues
increased 5.2 % to $255.0 million from $242.5 million during the three months ended April 30,
1999, an increase of $12.5 million (or an increase of $ 3.9 million excluding the favorable
effects of the U.S. dollar-Japanese yen exchange rate movements). Management attributes the
overall sales increase to an increase in domestic same store sales along with new store
expansion. The Company's same store sales increased by 3.8% during the three months ended April
30, 2000 as compared to the three months ended April 30, 1999.
During the three months ended April 30, 2000, the Company opened two stores and closed one
store, bringing its total number of owned and operated retail stores to 182 at April 30, 2000.
Gross Profit
During the three months ended April 30, 2000, gross profit increased $9.4 million or 12.4%
to $85.4 million from $76.0 million for the three months ended April 30, 1999. Gross profit
as a percentage of net revenues increased to 33.5% for the three months ended April 30, 2000 as
compared to 31.4% for the three months ended April 30, 1999. Management believes that the
primary factor contributing to the improvement in gross profit margin as a percentage of net
revenues was due to improved gross margin realized in Japan and the United Kingdom.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.9 million or 8.7% to $74.0 million
during the three months ended April 30, 2000 from $68.1 million for the three months ended
April 30, 1999. As a percentage of net revenues, selling, general and administrative expenses
increased to 29.0% for the three months ended April 30, 2000 as compared to 28.1% for the three
months ended April 30, 1999. Management attributes the increase primarily to increased payroll
expenses and occupancy expenses coupled with start-up cost involved in establishing our Latin
American division in Argentina and additional costs associated with expanding our Internet
site and presence online.
Income from Operations
The Company's consolidated operating income during the three months ended April 30, 2000 was
$4.7 million compared with consolidated operating income of $1.8 million during the three month
period ended April 30, 1999 for an increase of $2.9 million or 152.7% which reflects primarily
improvement in the Company's gross margin.
Interest Expense
Net interest expense increased to $5.5 million during the three months ended April 30, 2000
from $4.5 million during the three months ended April 30, 1999 for an increase of 22.8%. The
increase was due to higher borrowing costs combined with increased average borrowings under the
Senior Credit Facility.
Foreign Currency Translation Gain
A non-cash foreign currency translation loss of $1.5 million was recognized for the three
months ended April 30, 2000 as compared to a non- cash foreign currency translation gain of
$0.5 million for the three months ended April 30, 1999. The swing in the account primarily
represents non-cash gains and losses due to outstanding yen denominated bank debt and the
volatility of the Japanese yen in relation to the U.S. dollar and a weakening pound sterling.
Benefit from Income Taxes
The income tax benefit for the three months ended April 30, 2000 was $0.1 million compared
with $0.4 million during the three months ended April 30, 1999. Tax provisions and benefits are
based upon management's estimate of the Company's annualized effective tax rates.
Results of Operations
Nine Months Ended April 30, 2000 compared to the nine months
ended April 30, 1999
Revenues
During the nine months ended April 30, 2000, the Company's consolidated net revenues
increased approximately 8.1% to $842.2 million from $778.9 million during the nine months
ended April 30, 1999, an increase of $63.3 million (or an increase of $21.6 million excluding
the favorable effects of the U.S. dollar-Japanese yen exchange rate movements). Management
attributed the sales growth primarily to improvement in same store sales growth coupled with
additional store expansion. The Company's same store sales increased 1.8% during the nine
months ended April 30, 2000 as compared to the nine months ended April 30, 1999.
Gross Profit
During the nine months ended April 30, 2000, gross profit increased $20.8 million or 8.4% to
$269.0 million from $248.2 million for the nine months ended April 30, 1999. Gross profit as
a percentage of net revenues remained constant at 31.9% for the nine months ended April 30,
2000 and 1999, respectively. Management believes that the primary factor contributing to the
maintenance in gross profit was due to maintaining stable pricing domestically and improving
gross margin in Japan and the United Kingdom which offset the effects of the Company's online
product discounting.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $18.9 million or 9.1% to $226.0
million during the nine months ended April 30, 2000 from $207.1 million for the nine months
ended April 30, 1999. As a percentage of net revenues, selling, general and administrative
expenses increased to 26.8% for the nine months ended April 30, 2000 as compared to 26.6% for
the nine months ended April 30, 1999. Management attributes the increase primarily to increased
payroll expenses coupled with start-up cost involved in establishing our Latin American
division in Argentina and additional costs associated with expanding our Internet site and
presence online.
Income from Operations
The Company's consolidated operating profit during the nine months ended April 30, 2000 was
$23.5 million compared with a consolidated operating profit of $23.0 million during the nine
month period ended April 30, 1999 for an increase of $0.5 million or 2.2% which reflects
primarily an increase in revenues, improved margin and a stable yen, offset by a rise in
selling, general and administrative expenses.
Interest Expense
Net interest expense increased to $14.8 million during the nine months ended April 30, 2000
from $13.1 million during the nine months ended April 30, 1999 for an increase of 13.0%. The
increase in interest expense was due to an increase in borrowings coupled with higher borrowing
costs under the Company's Senior Credit Facility.
Foreign Currency Translation Loss
A non-cash foreign currency translation loss of $7.4 million was recognized for the nine
months ended April 30, 2000 as compared to a non- cash foreign currency translation loss of
$9.0 million for the nine months ended April 30, 1999. The swing in the account primarily
represents non-cash losses of yen denominated debt translated to dollars and a weakening
British pound sterling.
Provision for Income Taxes
The income tax provision for the nine months ended April 30, 2000 was $1.9 million compared
to a provision of $0.9 million for the nine months ended April 30, 1999. Tax provisions are
based upon management's estimate of the Company's annualized effective tax rates.
Liquidity and Capital Resources
The primary sources of the Company's working capital are net cash flows from operating
activities, funds available under its senior credit facility and short term vendor financing.
The Company's cash and cash equivalents as of April 30, 2000 were $22.3 million compared
with $18.0 million as of April 30, 1999. The Company used cash primarily for investments in new
stores and store relocations and remodels, computer system enhancements and equipment
purchases. Capital expenditures totaled $27.8 million and $29.8 million during the nine months
ended April 30, 2000 and 1999, respectively.
Total funded debt increased to $ 300.7 million as of April 30, 2000, from $ 271.4 million as
of April 30, 1999. Outstandings under the Company's senior revolving credit facility were
$177.2 million on April 30, 2000. The increase in bank outstandings was largely due to
translation of yen denominated debt to U.S. dollars and the financing of operating activities.
Unused availability under the $275.0 million revolving senior credit facility as of April 30,
2000 was $ 83.1 million.
Based upon the Company's current operating levels and expansion plans, management believes
net cash flows from operating activities and its borrowing capacity under its $275 million
senior credit facility will be sufficient to meet the Company's working capital and debt
service requirements and support the development of its short and long-term strategies for at
least the next twelve months. However, credit availability will continue to depend on numerous
factors, including growth of the business, additional infrastructure needs and future results
of operations.
OTHER MATTERS
Derivatives and Foreign Exchange Management
As a global concern, the Company faces exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices evolve and could
have a material adverse impact on the Company's financial results. The Company has substantial
operations and assets located outside the United States, primarily in Japan and the United
Kingdom. With respect to international operations, principally all of the Company's revenues
and costs (including borrowing costs) are incurred in the local currency, except that certain
inventory purchases are tied to U.S. dollars. The Company's financial performance on a U.S.
dollar-denominated basis has historically been affected by changes in currency exchange rates.
Changes in certain exchange rates could adversely affect the Company's business, financial
condition and results of operations.
The Company has limited involvement with derivative financial instruments and uses them only
to manage well-defined foreign exchange risks. Forward foreign exchange contracts are used to
hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of
foreign exchange contracts outstanding at the end of the second quarter or in place during the
first nine months of fiscal 2000 were not material to the Company's results of operations or
its financial position.
Year 2000
To date, the Company has not experienced any significant business disruptions and has had no
delays in receiving product from its suppliers as a result of the Year 2000. While the risks
associated with Year 2000 readiness peaked with the change of the date from December 31,1999 to
January 01, 2000, there is a risk that a Year 2000 related issue could surface within a year.
The Company plans to continue to devote the necessary resources to resolve all significant Year
2000 issues in a timely manner.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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(b) Reports on Form 8-K.
None
MTS, INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MTS, INCORPORATED |
| (Registrant) |
| By: | /s/ DeVaughn D. Searson |
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| DeVaughn D. Searson | |
| EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER | |
| (Principal Financial and Accounting Officer) |
| Date: June 07,2000 |
EXHIBIT INDEX
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