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 October 31, 1999
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)
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California
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94-1500342
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification Number)
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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 October 31, 1999, 1998
and July 31, 1999
- Consolidated Statements of Income for the three months ended
October 31, 1999 and 1998
- Consolidated Statements of Cash Flows for the three months
ended October 31, 1999 and 1998
- Consolidated Statements of Comprehensive Income for the three months
ended October 31, 1999 and 1998
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Part II. Other Information
Signature
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1999, 1998 AND JULY 31, 1999
(DOLLARS IN THOUSANDS)
OCTOBER 31, OCTOBER 31, JULY 31,
1999 1998 1999
----------- ----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................ $24,439 $31,002 $24,705
Receivables, net......................... 27,910 28,685 26,378
Merchandise inventories.................. 308,145 291,486 271,713
Prepaid expenses......................... 8,965 6,755 11,212
Deferred tax assets...................... 13,092 8,221 8,241
----------- ----------- -----------
Total current assets................ 382,551 366,149 342,249
Fixed assets, net.......................... 207,098 200,977 196,864
Deferred tax assets........................ 9,536 15,950 9,794
Other assets............................... 38,986 36,041 37,250
----------- ----------- -----------
Total assets........................ $638,171 $619,117 $586,157
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt..... $2,827 $2,654 $2,971
Accounts payable......................... 171,290 159,783 150,332
Accrued liabilities...................... 40,034 36,625 32,942
Income taxes payable..................... 1,987 3,208 786
Deferred revenue, current portion........ 2,371 3,037 3,098
----------- ----------- -----------
Total current liabilities........... 218,509 205,307 190,129
Long-term Liabilities:
Long-term debt, less current maturities.. 302,361 288,784 280,169
Deferred revenue, less current portion... 154 167 157
----------- ----------- -----------
Total liabilities................... 521,024 494,258 470,455
----------- ----------- -----------
Commitments and contingencies
Shareholders' Equity:
Common stock:
Class B, no par value; 10,000,000
shares authorized; 1,000 shares issued
and outstanding at October 31, 1999,
October 31, 1998, and July 31, 1999..... 6 6 6
Retained earnings........................ 134,849 142,668 136,278
Accumulated other comprehensive income... (17,708) (17,815) (20,582)
----------- ----------- -----------
Total shareholders' equity.......... 117,147 124,859 115,702
----------- ----------- -----------
Total liabilities and
shareholders' equity.............. $638,171 $619,117 $586,157
=========== =========== ===========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
October 31,
-----------------------
1999 1998
----------- -----------
Net revenue...................... $251,470 $233,598
Cost of sales.................... 166,638 154,487
----------- -----------
Gross profit................... 84,832 79,111
Selling, general and
administrative expenses........ 67,168 61,640
Depreciation and amortization.... 6,395 5,690
----------- -----------
Income from operations......... 11,269 11,781
Other income and (expenses):
Interest expense............... (4,878) (4,587)
Foreign currency translation
loss......................... (7,557) (11,895)
Other income and (expenses).... (277) 325
----------- -----------
Loss before taxes............ (1,443) (4,376)
Benefit for income taxes......... (14) (1,960)
----------- -----------
Net loss.................... ($1,429) ($2,416)
=========== ===========
Basic and diluted earnings
per share:
On net loss.................. ($1,429.18) ($2,415.80)
=========== ===========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
OCTOBER 31,
---------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ ($1,429) ($2,416)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......................... 7,404 6,947
Provision for losses on accounts receivable........... 70 146
Loss on disposal of depreciable assets................. 692 617
Exchange loss.......................................... 7,795 10,973
Other non-cash (income) expense........................ (62) 50
Provision for deferred taxes........................... (4,097) (5,067)
Increase (decrease) in cash resulting from changes in:
Accounts receivable................................. (1,532) (5,590)
Inventories......................................... (36,432) (30,483)
Prepaid expenses.................................... 2,247 (136)
Accounts payable.................................... 20,958 2,340
Accrued liabilities and taxes payable............... 8,293 7,989
Deferred revenue.................................... (730) (217)
---------- ----------
Net cash provided by/ (used in) operating
activities.................................... 3,177 (14,847)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets............................. (13,649) (16,994)
Acquisition of investments.............................. (71) (844)
Increase in deposits.................................... (36) (57)
Refunds of deposits..................................... -- 10
Increase in intangibles................................. (11) (747)
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Net cash used in investing activities............ (13,767) (18,632)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officer and employees............ (334) --
Proceeds from employee loan repayments.................. 7 78
Principal payments under long-term financing
agreements............................................ (1,121) (613)
Proceeds from issuance of long-term financing
agreements............................................ 11,551 40,413
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Net cash provided by financing activities........ 10,103 39,878
---------- ----------
Effect of exchange rate changes on cash.................... 221 9,994
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Net increase (decrease) in cash and cash
equivalents.................................... (266) 16,393
Cash and cash equivalents, beginning of period............. 24,705 14,609
---------- ----------
Cash and cash equivalents, end of period................... $24,439 $31,002
========== ==========
Cash paid for interest..................................... $2,627 $1,597
========== ==========
Cash paid for income taxes................................. $3,518 $1,319
========== ==========
The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1999 1998
----------- -----------
(unaudited)
Net income (loss).......................... ($1,429) ($2,416)
Other comprehensive income, net of tax:
Foreign currency translation............ 2,874 6,477
----------- -----------
Comprehensive income........................ $1,445 $4,061
=========== ===========
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 October 31, 1999 and the
results of its operations and cash flows for the three 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 $7.6 million and $11.9
million for the three months ended October 31, 1999 and 1998,
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 three months ended October 31,
1999 and 1998 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.
Forward-Looking Statements
This report contains forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) that involve
known and unknown risks and uncertainties. The statements contained in
this report that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Use of the
words "anticipates," "believes," "estimates," "expects," "intends,"
"plans" and similar expressions, as they relate to the Company or the
management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to
future events, the outcome of which is subject to certain risks,
including among others general economic and market conditions,
significant leverage and debt service obligations, restrictive debt
covenants, changing economic conditions, including decreased consumer
spending and Internet activity, risks relating to international
operations, increased or unanticipated costs or effects associated with
year 2000 compliance by the Company or its service or supply providers,
effects of competition, higher interest rates, and other factors which
may be outside of the Company's control. Actual results or outcomes may
differ materially from those expressed or implied by such forward-
looking statement 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 the other documents the Company files from
time to time with the United States Securities and Exchange Commission
and the Company assumes no obligation to update any such forward-looking
statements.
Results of Operations
Three Months Ended October 31, 1999 Compared to Three Months
Ended October 31, 1998
Net Revenue
Net revenues were $251.5 million for the three months ended October 31,
1999, an increase of $17.9 million (or an increase of $2.6 million
excluding the favorable effects of the U.S. dollar-Japanese yen exchange
rate movements), from $233.6 million for the three months ended October
31, 1998. Management attributed the modest sales growth to, among other
things, a .8% increase in same store sales growth along with the
addition of new store openings.
During the first quarter, the Company opened two stores and closed two,
bringing its total number of stores to 179. The Company's same store
sales increased .8% for the three-months ended October 31, 1999 as
compared to the three months ended October 31, 1998.
Gross Profit
Gross profit was $84.8 million for the three months ended October 31,
1999, an increase of $5.7 million or 7.2%, from $79.1 million for the
three months ended October 31, 1998. Gross profit as a percentage of
net revenues decreased slightly to 33.7% of net revenues for the three
months ended October 31, 1999 as compared to 33.9 % of net revenues for
the three months ended October 31, 1998. The Company believes that the
factor contributing to the slight decrease in gross margin was a result
of a reduction in certain domestic pricing policies which were offset by
stronger gross margins in Japan.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $67.2 million for the
three months ended October 31, 1999, an increase of $5.6 million or
9.0%, from $61.6 million for the three months ended October 31, 1998.
Selling, general and administrative expenses as a percentage of net
revenues, increased to 26.7% of net revenues for the three months ended
October 31, 1999 as compared to 26.4% of net revenues for the three months
ended October 31, 1998. Management believes the increase as a percentage
of revenues was primarily attributed to a rise in salaries and wages and
occupancy expense.
Income from Operations
Income from operations was $11.3 million for the three months ended
October 31, 1999, a decrease of $.5 million from $11.8 million for the
three months ended October 31, 1998. As a percentage of net revenues,
income from operations declined to 4.5% of net revenues for the three
months ended October 31, 1999 as compared to 5.0% for the three months
ended October 31, 1998 with .1% attributed to an increase in depreciation
and amortization expense for the three months ended October 31, 1999
versus the three months ended October 31, 1998.
Interest Expense
Interest expense was $4.9 million for the three months ended October 31,
1999, an increase of $.3 million from $4.6 million for the three months
ended October 31, 1998. As a percentage of net revenues, interest expense
decreased to 1.9 % for the three months ended October 31, 1999 from 2.0%
for the three months ended October 31, 1998. Management attributes the
increase in interest expense to the higher debt outstandings under the
Senior Credit Facility used to finance growth and infrastructure.
Foreign Currency Translation Loss
Net foreign currency translation loss totaled $7.6 million for the three
months ended October 31, 1999 and primarily represented an unrealized
loss due to the translation of yen-denominated debt at the U.S. dollar
spot rate at quarter end compared to a $11.9 million loss for the three
month period ended October 31, 1998 which was also an unrealized loss due
to the translation of yen-denominated debt at the U.S. dollar spot rate.
The Company does not repatriate yen from its Japanese subsidiary back to
its parent.
Benefit for Income Taxes
There were no material provisions for income taxes for the three months
ended October 31, 1999 compared with a benefit for income taxes of $1.9
million for the three months ended October 31, 1998.
Net Income/Loss
As a result of the factors discussed above, the Company reported a
consolidated net loss of $1.4 million for the three months ended October
31, 1999 or (.56%) of net revenues, an improvement of $1.0 million
from a loss of $2.4 million for the three months ended October 31,
1998.
Liquidity and Capital Resources
The Company's primary sources of working capital were borrowings under
its senior credit facility and short-term vendor financing.
The Company's cash and cash equivalents were $24.4 million as of October
31, 1999 compared with $31.0 million as of October 31, 1998. Net cash
provided from operating activities was $3.2 million for the three months
ended October 31, 1999 versus net cash used in operating activities of
$14.8 million for the three months ended October 31, 1998 . For the three
months ended October 31, 1999 inventory merchandise increased $36.4
million due primarily to yen denominated inventory translated at a lower
U.S. dollar spot rate along with an inventory buildup as the Company
positions itself for the holiday season. This compares to three months
ended October 31, 1998 which recognized a $30.4 million inventory
increase for the three months ended October 31, 1998. The improvement in
cash provided from operations for the three month period ended October
31, 1999 compared to net cash used for the three month period ended
October 31, 1998 was primarily due to an increase in trade payables
associated with special buying terms for the holiday season.
The Company's investing activities consist principally of capital
expenditures for new store construction, system enhancements and store
relocations and remodels and video rental acquisitions. Capital
expenditures totaled $13.6 million and $17.0 million during the three
months ended October 31, 1999 and October 31, 1998, respectively.
Total funded debt increased $13.8 million to $305.2 million as of October
31, 1999, from $291.4 million as of October 31, 1998. The increase in
total funded debt was largely due to a net translation loss of yen
denominated debt to U.S. dollars of $8.5 million. Borrowings under the
Company's senior revolving credit facility totaled $161.5 million for
October 31, 1999, compared to $169.5 million for October 31, 1998.
Unused availability under the revolving senior credit facility as of
October 31, 1999 was $69.5 million.
Based upon the Company's current operating levels and expansion plans,
management believes net cash flows from operating activities and the
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.
Other Matters
Seasonality
Retail music sales in the United States are typically higher during the
calendar fourth quarter as a result of consumer purchasing patterns due to
increased store traffic and impulse buying by holiday shoppers. As a
result, the majority of U.S. music retailers and, more specifically, the
mall-based retailers rely heavily on the calendar fourth quarter to
achieve annual sales and profitability results. The Company has had
reduced seasonal reliance due to its deep catalog merchandising approach.
In addition, international markets exhibit less fourth quarter seasonality
than U.S. markets and the Company's international presence has
historically reduced this reliance on the U.S. holiday shopping season.
Foreign Exchange Management
The Company has substantial operations and assets located outside the
United States, primarily in the United Kingdom and Japan. With respect to
international operations, principally all of Tower'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.
Internet Activities
At July 31, 1999, the Company announced that it had transferred certain
assets with a net book value of $3.3 million to Tower Direct, LLC, a
limited liability company owned by Russell Solomon and certain family
trusts. Reflected in these financial statements, the transaction was
reversed and has temporarily been postponed pending further review by the
Company of its future Internet strategy.
Year 2000 Compliance
The Company understands the material nature of the business issues
surrounding computer processing of dates into and beyond the year 2000.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The company
continues to assess the impact of the Year 2000 issue on its current and
future internal information systems and non-information technology systems
(equipment, escalators, systems, etc.) and has developed an overall plan
to assist with the Year 2000 problem resolution process. The primary
components of the plan are as follows: awareness of the problem,
preparation of an inventory checklist, assessment of complexity,
remediation, validation testing and implementation.
With respect to information technology systems, the Company has already
completed all phases through implementation for the majority of its
financial systems and anticipates full compliance by late 1999. The
Company has also begun corrective efforts, and in many cases, completed
corrective efforts in areas of non-information technology systems and
products and the Company anticipates minimal business disruption as a
result of Year 2000 issues; however, possible consequences include, but
are not limited to delays in delivery or receipt of merchandise, inability
to process transactions, loss of communications domestically and
internationally and similar interruptions of normal business activities.
MTS has contacted and will continue to contact significant vendors,
suppliers, financial institutions and other third party providers upon
which its business depends. These efforts are designed to minimize the
impact to the Company should these third parties fail to remediate their
Year 2000 issues. However, the Company
can give no assurances that such third parties will, in fact, be
successful in resolving all of their Year 2000 issues, and the failure of
such third parties to comply on a timely basis could have an adverse
effect on the Company. To the extent practicable, the Company is
evaluating contingency plans to minimize the effects on the Company's
operations in the event of any third party system or product failure. The
Company will continue to make every effort to ensure that its business,
financial condition and result of operations will not be adversely
impacted by a failure of its systems or the systems of others.
To date, approximately 100% of the Company's administrative support IT
systems have at least completed the remediation phase. Of this amount,
approximately 100% have completed the testing and remediation phase and
95% have been replaced or upgraded. All remaining Year 2000 compliance
efforts for administrative IT functions are expected to be completed by
late 1999. Additionally, approximately 95% of non-IT systems have
completed the remediation, testing, and implementation phases with no
material replacements necessary. As of October 31, 1999, the Company has
incurred $1.0 million in Year 2000 remediation costs and estimates it will
require an additional $ .2 million to complete all Year 2000 compliance
issues identified as a result of remediation testing. These costs are
expensed as incurred and include, but are not limited to, costs directly
related to fixing Year 2000 issues, such as modifying software and hiring
Year 2000 solution providers. Although it is not certain what the worst
case Year 2000 scenario would be, management believes that any computer
generated work, i.e. inventory tracking, point of sale at cash registers,
could be performed manually as had been the case prior to implementation
of the in-store processing programs in 1994. In the event that use of a
contingency plan is required due to a Year 2000 system failure, the
Company intends to revert back to manual "off line" processing of its
sales and inventory systems until satisfactory resolution of the problem
has occurred. However, the Company does not expect an impairment in its
ability to execute critical functions.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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Exhibit Number
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Description
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27.1
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Financial Data Schedule
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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.
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By: |
/s/ DeVaughn D. Searson
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DeVaughn D. Searson
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EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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Exhibit Number
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Description
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27.1
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Financial Data Schedule
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