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, 2002.
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)
CALIFORNIA 94-1500342
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2500 DEL MONTE, WEST SACRAMENTO, CA 95691
(Address of principal executive office)
916-373-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Number of shares outstanding of the Registrant's common stock:
Class Outstanding at April 30, 2002
Class B Common Stock, no par value 1,000 shares
THE FINANCIAL STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED APRIL 30, 2002 HAVE NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC
ACCOUNTANT AS REQUIRED BY RULE 10-01(D) OF REGULATION S-X BECAUSE THE COMPANY
ELECTED NOT TO HAVE ARTHUR ANDERSEN LLP REVIEW SUCH FINANCIAL STATEMENTS IN
RELIANCE ON SECURITIES AND EXCHANGE RELEASE NO. 34-45589. PLEASE SEE ADDITIONAL
INFORMATION REGARDING THE COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED
APRIL 30, 2002 BEGINNING ON PAGE 3 HEREOF.
MTS, INCORPORATED
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information..................................................................................
Item 1. Financial Statements................................................................................
Consolidated Balance Sheets as of April 30, 2002 and 2001 and July 31, 2001............................ 3
Consolidated Statements of Income for the three months ended April 30, 2002 and 2001 and
the nine months ended April 30, 2002 and 2001........................................................ 4
Consolidated Statements of Cash Flows for the nine months ended April 30, 2002 and 2001............... 5
Consolidated Statements of Comprehensive Income for the nine months ended April 30, 2002 and 2001..... 6
Notes to Consolidated Financial Statements............................................................ 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 18
Part II. Other Information ....................................................................................
Item 1. Legal Proceedings................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................................................... 19-20
Signature...................................................................................................... 21
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FINANCIAL STATEMENTS FOR THE QUARTER
ENDED APRIL 30, 2002 WHICH HAVE NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC
ACCOUNTANT AS REQUIRED BY RULE 10-01(D) OF REGULATION S-X BECAUSE THE COMPANY
ELECTED NOT TO HAVE ARTHUR ANDERSEN LLP REVIEW SUCH FINANCIAL STATEMENTS IN
RELIANCE ON SECURITIES AND EXCHANGE RELEASE NO. 34-45589. THE COMPANY INTENDS TO
HAVE ITS FINANCIAL STATEMENTS FOR THE QUARTER ENDED APRIL 30, 2002 REVIEWED BY
AN INDEPENDENT PUBLIC ACCOUNTANT OTHER THAN ARTHUR ANDERSEN LLP AS SOON AS
PRACTICABLE FOLLOWING THE DATE HEREOF AND, IF SUCH REVIEW RESULTS IN A CHANGE TO
THE FINANCIAL STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE
COMPANY WILL FILE AN AMENDMENT TO THIS QUARTERLY REPORT TO FILE SUCH REVISED
FINANCIAL STATEMENTS, INCLUDING A DISCUSSION OF ANY MATERIAL CHANGES FROM THE
UNREVIEWED FINANCIAL STATEMENTS ORIGINALLY FILED.
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2002 AND 2001 AND JULY 31, 2001
(DOLLARS IN THOUSANDS)
UNAUDITED UNAUDITED
APRIL 30, APRIL 30, JULY 31,
2002 2001 2001
--------- --------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 31,641 $ 36,653 $ 32,075
Receivables, net 25,461 33,162 31,805
Merchandising inventories 233,947 275,655 249,128
Prepaid expenses 9,249 8,561 8,970
Deferred tax assets -- 14,377 --
--------- --------- ---------
Total current assets 300,298 368,408 321,978
Fixed assets, net 162,506 185,499 178,021
Deferred tax assets -- 10,456 --
Other assets 20,416 38,975 26,976
--------- --------- ---------
Total assets $ 483,220 $ 603,338 $ 526,975
========= ========= =========
Liabilities and Shareholder's Equity
Current Liabilities:
Current maturities of long-term debt $ 182,264 $ 204,611 $ 179,374
Accounts payable 145,366 161,906 163,336
Reserve for restructuring costs 68 3,318 2,225
Accrued liabilities 43,392 40,267 39,399
Income taxes payable -- 91 --
Deferred revenue, current portion 3,221 2,593 2,780
--------- --------- ---------
Total current liabilities 374,311 412,786 387,114
Long-term Liabilities:
Long-term debt, less current maturities 116,860 118,466 118,341
Deferred revenue, less current portion 122 134 131
--------- --------- ---------
Total liabilities 491,293 531,386 505,586
--------- --------- ---------
Shareholder's Equity:
Common stock:
Class B, no par value; 10,000,000 shares authorized;
1,000 shares issued and
outstanding at April 30, 2002,
April 30, 2001 and July 31, 2001 6 6 6
Retained earnings 6,580 85,566 35,848
Accumulated other comprehensive income (14,659) (13,620) (14,465)
--------- --------- ---------
Total shareholder's equity (8,073) 71,952 21,389
--------- --------- ---------
Total liabilities and shareholder's equity $ 483,220 $ 603,338 $ 526,975
========= ========= =========
The accompanying notes are an integral part of these statements.
3
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2002 AND 2001
AND THE NINE MONTHS ENDED APRIL 30, 2002 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
APRIL 30, APRIL 30,
2002 2001 2002 2001
---------- ----------- ----------- -----------
Net revenue $ 225,217 $ 255,098 $ 745,576 $ 833,474
Cost of sales (a) 154,758 184,175 524,125 583,369
---------- ----------- ----------- -----------
Gross Profit 70,459 70,923 221,451 250,105
Selling, general and administrative expenses (b) 63,830 70,901 203,714 226,152
Restructuring and asset impairment costs 1,097 17,789 1,903 17,789
Depreciation and amortization 7,088 7,353 21,394 23,017
---------- ----------- ----------- -----------
Loss from operations (1,556) (25,120) (5,560) (16,853)
Other expenses:
Interest Expense (6,806) (7,553) (20,121) (19,374)
Foreign currency translation benefit (loss) 1,102 (2,123) (188) (5,542)
Other (expenses)/income (1,326) 418 (2,428) (271)
---------- ----------- ----------- -----------
Loss before taxes (8,586) (34,378) (28,297) (42,040)
Provision/(benefit) for income taxes 37 -- 971 (1,468)
---------- ----------- ----------- -----------
Net loss $ (8,623) $ (34,378) $ (29,268) $ (40,572)
========== =========== =========== ===========
Basic and diluted loss per share $(8,623.70) $(34,377.57) $(29,268.43) $(40,572.07)
========== =========== =========== ===========
(a)Includes $0 and $4.4 million of inventory write-downs related to the
Restructuring Plan for the three months ended April 30, 2002 and 2001,
respectively and $11.2 and $4.4 million for the nine months ended April
30, 2002 and 2001, respectively.
(b)Includes $1.5 and $1.6 million in professional fees related to the
Restructuring Plan for the three months ended April 30, 2002 and 2001,
respectively and $4.2 and $1.6 million for the nine months ended April
30, 2002 and 2001, respectively.
The accompanying notes are an integral part of these statements.
4
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
UNAUDITED
APRIL 30,
---------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(29,268) $(40,572)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 22,292 25,226
Restructuring and asset impairment costs 9,407 21,438
Provision for losses on accounts receivable 14 57
Loss on disposal of depreciable assets 1,029 3,573
Exchange (gain)/loss (303) 7,393
Other non-cash expense 350 320
Provision for deferred taxes -- 1,554
Increase/(decrease) in cash resulting from
changes in:
Accounts receivable 6,344 (1,705)
Inventories 4,026 13,369
Prepaid expenses (279) 4,167
Accounts payable (17,970) (3,795)
Accrued liabilities and taxes payable 3,993 807
Deferred revenue 432 (376)
-------- --------
Net cash provided by operating activities 67 31,456
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (8,443) (23,213)
Acquisition of investments (1,826) (1,710)
Increase in deposits (670) (262)
Refunds of deposits 559 38
Increase in intangibles (1,570) (2,092)
-------- --------
Net cash used in investing activities (11,950) (27,239)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from life insurance loans 3,526 --
Proceeds from employee loan payments 143 93
Principal payments under long-term financing agreements (63,792) (35,803)
Proceeds from issuance of long-term financing agreements 73,985 60,482
-------- --------
Net cash provided by financing activities 13,862 24,772
-------- --------
Effect of exchange rate changes on cash (2,413) (13,822)
-------- --------
Net (decrease)/increase in cash and cash equivalents (434) 15,167
Cash and cash equivalents, beginning of period 32,075 21,486
-------- --------
Cash and cash equivalents, end of period $ 31,641 $ 36,653
======== ========
Cash paid for interest $ 16,965 $ 16,250
======== ========
Cash paid for income taxes $ 60 $ 2,010
======== ========
The accompanying notes are an integral part of these statements.
5
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED APRIL 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
UNAUDITED
2002 2001
-------- --------
Net Loss $(29,268) $(40,572)
Other comprehensive income, net of tax
Foreign currency translation (194) 5,164
-------- --------
Comprehensive Loss $(29,462) $(35,408)
======== ========
The accompanying notes are an integral part of these statements.
6
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 (the "Company"). In
the opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments and restructuring and asset impairment charges) necessary
to present fairly its consolidated financial position as of April 30, 2002 and
the results of its operations and cash flows for the 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 unaudited
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, 2001.
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 a net transaction loss of $188,000 and $5.5 million for the nine months
ended April 30, 2002 and April 30, 2001, respectively. These amounts primarily
represent the volatility of currencies in international countries in which the
Company does business.
NOTE 3 - INCOME TAXES
The effective income tax rates for the nine months ended April 30, 2002 and 2001
are based on the federal statutory income tax rate, increased for the effect of
state income taxes, net of federal benefit and foreign taxes and decreased due
to the creation of a valuation allowance related to the net operating loss and
certain deferred tax assets.
NOTE 4 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
At July 31, 2001 the Company recorded pre-tax restructuring charges of $46.7
million as a result of steps the Company is taking that are intended to improve
the Company's operations and improve cash flows. For the nine-month period ended
April 30, 2002, the Company's pre-tax restructuring charges were an additional
$17.3 million.
At July 31, 2001 the Company had recorded a restructuring liability in the
amount of $2.2 million. For the nine-month period ended April 30, 2002, the
restructuring liability was $68,000. The change in the restructuring liability
is due to the following:
7
MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INVENTORY LEASEHOLD LEASE EMPLOYEE
WRITE- PROFESSIONAL IMPROVEMENTS TERMINATION TERMINATION
(IN THOUSANDS) DOWNS FEES WRITE-OFFS COSTS COSTS OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------
RESTRUCTURING
LIABILITY AT JULY
31, 2001 $ -- $ -- $ 1,023 $ 813 $ 225 $ 164 $ 2,225
- -----------------------------------------------------------------------------------------------------------------
RECORDING OF
RESTRUCTURING
ACTIVITY: $ -- $ -- $(1,023) $ (812) $ (225) $ (97) $(2,157)
- -----------------------------------------------------------------------------------------------------------------
TOTAL
RESTRUCTURING
LIABILITY AT
APRIL 30, 2002 $ -- $ -- $ -- $ 1 $ -- $ 67 $ 68
- -----------------------------------------------------------------------------------------------------------------
The change in the restructure reserve estimates is primarily due to the closure
of the Toronto store in October 2001.
In connection with its Restructuring Plan, management believes that as of April
30, 2002 the Company has substantially completed its restructuring initiatives
through phase two of a three-phase program. Phase one included, among other
initiatives, the identification and closing of unprofitable operations. The
initial plan also contained several initiatives intended to improve cash flow,
including reductions in working capital and capital expenditures and reducing
overhead expenses. Phase two included further reductions in working capital
levels after the holiday season to meet planned levels and the closing of six
additional domestic stores, including two outlet stores.
Management expects to substantially complete the final phase of its
Restructuring Plan by the end of fiscal year 2002. The Company will continue to
monitor under performing stores and assets in addition to evaluating its ongoing
working capital commitments. Any significant shortfalls in future operational
results could require the Company to implement additional restructuring efforts.
NOTE 5 - DEBT
In April 2002, the Company completed an amendment of its Credit Facility,
extending the maturity of the Credit Facility to June 23, 2002. Also in April
2002, the Company entered into a stock purchase agreement, pursuant to which the
Company agreed to sell its Japanese operations to a corporation wholly-owned by
Nikko Principal Investments Japan Ltd. for an aggregate purchase price of 16
billion Japanese yen (approximately $124 million at current exchange rates). The
stock purchase agreement was amended to change the target closing date for the
transaction from May 23, 2002 to June 19, 2002, although the Company anticipates
that the closing date will be further extended to coincide with the closing date
of the refinancing of the Credit Facility. The amendment to the stock purchase
agreement also provides that the agreement will terminate if not closed prior to
August 15, 2002. The Company anticipates that net proceeds from the sale of its
Japanese operations will be used to pay down a significant portion of the Credit
Facility and the balance of the facility will be refinanced. On June 5, 2002,
the Company received a commitment letter from CIT Group/Business Credit, Inc.
("CIT") committing to an amount of $125 million, based upon a collateral formula
that may fluctuate at close to
8
MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
refinance a substantial portion of the balance of the Credit Facility following
application of the proceeds from the sale of the Company's Japanese operations.
The Company is also negotiating supplemental financing to refinance any
remaining balance on the Credit Facility. In addition, the Company is in
negotiations with the lenders under the Credit Facility to extend the maturity
of the Credit Facility beyond June 23, 2002 in order to accommodate the closing
schedule for the sale of the Japanese operations and the refinancing.
As extended and restated in April 2001, further amended in October 2001, with
the maturity extended to June 23, 2002, the Company's Credit Facility provided
for initial maximum borrowings of up to $225.0 million, consisting of two
sub-facilities (one for an initial maximum of $98.4 million and one for an
initial maximum Japanese yen of (Yen)15,596,828,718, which was equivalent to
$126.6 million at inception). In accordance with the terms of the Credit
Facility, maximum borrowings under the Credit Facility declined $30.0 million
between July and December 2001. Maximum borrowings under the Credit Facility are
subject to a borrowing base formula, maximum leverage ratio tests and
maintaining a minimum rolling quarterly EBITDA. As of April 30, 2002,
approximately $190.3 million was available under the Credit Facility, of which
$180.0 million had been drawn. The $180.0 million includes a decrease of $2.8
million due to Japanese yen debt translated back to U.S. dollars at the spot
rate on April 30, 2002.
Upon completion of a long-term refinancing of its Credit Facility, the Company
believes that the cash flow generated from its operations, together with amounts
available from other financing alternatives, will be sufficient to fund its debt
service requirements, lease obligations, working capital needs, its currently
anticipated capital expenditures and other operating expenses for the next
twelve months. However, the Company's ability to complete a long-term
refinancing of its Credit Facility will be subject to the Company's ability to
complete the sale of its Japanese operations and the transaction contemplated by
the CIT commitment letter. In addition, the Company's ability to service it's
senior subordinated notes is subject to the successful completion of a long-term
refinancing of the Company's Credit Facility, future economic conditions and
financial, business and other factors, many of which are beyond the Company's
control. Although the Company believes that it will be able to close the sale of
its Japanese operations and refinance the Credit Facility, no assurance can be
given that the Company will be successful in selling its Japanese operations and
refinancing the Credit Facility or that any refinancing will be on terms that
are favorable to the Company. Consummation of the sale of its Japanese
operations is subject to conditions, including the purchaser's completion of
financing for the acquisition and the Company's satisfactory refinancing of the
Credit Facility. In addition, the commitment letter received by the Company from
CIT is subject to numerous conditions precedent, including the negotiation and
execution of final definitive agreements, completion of the sale of the Japanese
operations and obtaining supplemental financing to refinance any remaining
balance on the Credit Facility. If the Company is unable to complete the sale of
its Japanese operations and a long-term refinancing of its Credit Facility or if
the Company is unable to refinance the Credit Facility on terms that are
favorable to the Company, the Company's business, financial condition and
results of operations would be materially and adversely affected.
The Credit Facility and the senior subordinated notes impose certain
restrictions on the Company's ability to make capital expenditures and limit the
Company's ability to incur additional indebtedness. Such restrictions could
limit the Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Credit Facility and
the senior subordinated notes also, among other things, limit the ability of the
Company to dispose of assets, repay indebtedness or amend other debt
instruments, pay distributions, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances and make
acquisitions.
9
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, 2001
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with historical
consolidated financial information and the consolidated financial statements of
the Company and the notes thereto included elsewhere in this report on Form
10-Q. The results shown herein are not necessarily indicative of the results to
be expected in any future period. The following discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties. Use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans" and similar expressions are intended to identify
forward-looking statements. A variety of factors could cause the Company's
actual results to differ materially from the anticipated results expressed in
such forward-looking statements, including among other things: (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 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 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
implementation of the Company's Restructuring Plan and/or lower than anticipated
resulting operations and cash flow benefits; (vii) unanticipated increases in
the cost of merchandise sold by the Company; (viii) changes in foreign currency
exchange rates and economic and political risks; (ix) the adverse effects of
acts or threats of war, terrorism or other armed conflict on the United States
and international economies; (x) the ability of the Company to comply with the
ongoing monthly affirmative and negative covenants as prescribed by the
Company's Amended and Restated Credit Agreement, as amended; (xi) the ability of
the Company to refinance its Credit Facility prior to the maturity thereof;
(xii) the successful completion of the sale of the Company's Japanese
operations; (xiii) the ability of the Company to continue to service its senior
subordinated notes; and (xiv) the ability of the Company to successfully defend
itself in ongoing and future litigation. All forward-looking statements included
in this Form 10-Q are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. Please refer to the Risk Factors section of the Company's Annual
Report Form 10-K for further information on other factors, which could affect
the financial results of the Company and such forward-looking statements.
OVERVIEW
During the third quarter of the Company's 2001 fiscal year, the Company
commenced a business plan and restructuring process and retained a consulting
firm to assist the Company in its efforts. These efforts produced a three-phase
restructuring plan that was adopted by the Company in February 2001 (the
"Restructuring Plan").
The Restructuring Plan contains several initiatives designed to improve the
Company's operations, including closing and liquidating most stand-alone and
combination bookstores, selling the Company's Argentina, Hong Kong, Taiwan and
Singapore operations and converting them to franchises, closing the Company's
Canadian operations, closing under-performing domestic record, outlet and
frame/gallery stores, and monitoring performance of additional stores. The
Restructuring Plan also contains several initiatives intended to improve
10
cash flow, by reducing overhead expenses, reducing working capital and reducing
capital expenditures until internally generated cash flow will support further
growth.
The Company began implementing the Restructuring Plan shortly after its
adoption. Management believes that, as of April 30, 2002, the Company has
substantially completed its restructuring initiatives through phase two of the
three-phase Restructuring Plan. Phase one included the identification and
closing of unprofitable operations both domestically and internationally and the
initiatives to improve cash flow. Phase two included further reductions in
working capital levels after the holiday season to meet planned levels and the
closing of six additional domestic stores, including two outlet stores.
Management expects to substantially complete the final phase of the
Restructuring Plan by the end of fiscal 2002. Upon completion of the
Restructuring Plan, the Company plans to continue to monitor under performing
stores and assets in addition to evaluating its ongoing working capital
commitments. Any significant shortfalls in future operational results could
require the Company to implement additional restructuring efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2002 COMPARED TO THREE MONTHS ENDED APRIL 30, 2001
REVENUES
For the three months ended April 30, 2002, the Company's consolidated net
revenues decreased 11.7% to $225.2 million from $255.1 million for the three
months ended April 30, 2001, a decrease of $29.9 million (or a decrease of $21.5
million excluding the effects of U.S. dollar foreign exchange fluctuations). The
Company's net revenues were comprised of U.S. revenues of $125.2 million and
international revenues of $100.0 million for the three months ended April 30,
2002, compared to $148.7 million in the U.S. and $106.4 million internationally
for the three months ended April 30, 2001. The overall decrease in total Company
revenues for the three months ended April 30, 2002 was driven primarily by the
closing of unprofitable stores associated with the Restructuring Plan, the
adverse effect of foreign currency fluctuations, and a decline in consumer
demand attributed to the overall downturn in the economy and weak new releases
from product manufacturers. During the three months ended April 30, 2002, the
Company closed one store, bringing its total number of owned and operated retail
stores to 172.
GROSS PROFIT
For the three months ended April 30, 2002, gross profit decreased $464,000 to
$70.5 million from $70.9 million for the three months ended April 30, 2001 (or a
decrease of $2.2 million excluding the effects of the U.S. dollar foreign
exchange fluctuations and the impact of the Restructuring Plan). Management
attributes the decline in gross profit, excluding the effect of the inventory
write-downs related to the restructuring charge, principally to the decrease in
revenues as previously discussed and the adverse effect of foreign currency
fluctuations. Gross profit as a percentage of net revenues increased to 31.3%
for the three months ended April 30, 2002, compared to 27.8% (or 29.5 %
excluding the effects of the Restructuring Plan) for the three months ended
April 30, 2001. Management attributes the percentage increase primarily to the
culmination of inventory liquidation associated with the Restructuring Plan and
stronger margins associated with the Company's Internet Division and certain
international markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses, (excluding the effects of the $1.5
and $1.6 million in professional fees related to the Restructuring Plan for the
three months ending April 30, 2002 and 2001, respectively, and depreciation and
amortization,) decreased $7.0 million to $62.3 million for the three months
ended April 30,
11
2002 from $69.3 million for the three months ended April 30, 2001. Excluding the
effect of professional fees related to the restructuring charge, decreases in
personnel, occupancy and other cost savings initiatives resulting from the
Restructuring Plan contributed primarily to the reduction in overall operating
costs. As a percentage of net revenues, selling, general and administrative
expenses, (excluding the effects of the professional fees related to the
Restructuring Plan and depreciation and amortization) increased to 27.7% for the
three months ended April 30, 2002, compared to 27.2% for the three months ended
April 30, 2001. Management attributes the percentage increase primarily to the
decrease in net revenues as previously discussed.
RESTRUCTURING AND IMPAIRMENT COSTS
The Company recorded pre-tax restructuring and asset impairment charges of $2.6
million for the three months ended April 30, 2002, compared to $23.8 million for
the three months ended April 30, 2001, a decrease of $21.2 million, related to
the implementation of the Restructuring Plan. Of the $2.6 and $23.8 million in
total pre-tax restructuring and asset impairment charges for the three months
ended April 30, 2002 and 2001, respectively, $0 and $4.4 million for the three
months ended April 30, 2002 and 2001, respectively, were related to inventory
write-downs and were recorded in cost of sales. $1.5 and $1.6 million for the
three months ended April 30, 2002 and 2001, respectively, related to
professional fees and were recorded in selling, general and administrative
expenses. The remaining $1.1 and $17.8 million for the three months ended April
30, 2002 and 2001, respectively, of total pre-tax restructuring and asset
impairment charges were reported separately.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $7.1 million for the three months
ended April 30, 2002, compared to $7.4 million for the three months ended April
30, 2001, a decrease of $300,000. The decrease was primarily due to the
reduction in fixed assets associated with the Restructuring Plan in fiscal 2001.
LOSS FROM OPERATIONS
The Company's consolidated operating loss for the three months ended April 30,
2002 was $1.6 million compared to a consolidated operating loss of $25.1 million
for the three month period ended April 30, 2001, a decrease of $23.5 million (or
a decrease of $2.3 million excluding the effects of the Restructuring Plan). The
improvement in operations was primarily attributable to decreases in selling,
general and administrative expenses and reductions in restructuring and
impairment costs, as previously discussed.
INTEREST EXPENSE
Net interest expense decreased to $6.8 million for the three months ended April
30, 2002 from $7.6 million for the three months ended April 30, 2001, for a
decrease of 10.5%. The decrease was due primarily to lower borrowing levels and
an overall decrease in the borrowing index rates under the Company's Credit
Facility.
FOREIGN CURRENCY TRANSLATION BENEFIT
A non-cash foreign currency translation benefit of $1.1 million was recognized
for the three months ended April 30, 2002, compared to a non-cash foreign
currency translation loss of $2.1 million for the three months ended April 30,
2001. The account primarily represents the foreign exchange fluctuations against
the U.S. dollar in the foreign countries in which the Company does business.
12
INCOME TAXES
A pre-tax loss resulted in an income tax provision for the three months ended
April 30, 2002 of $37,000 compared to an income tax provision of $0 for the
three months ended April 30, 2001. Tax provisions and benefits are based upon
management's estimate of the Company's annualized effective tax rates.
NINE MONTHS ENDED APRIL 30, 2002 COMPARED TO NINE MONTHS ENDED APRIL 30, 2001
REVENUES
For the nine months ended April 30, 2002, the Company's consolidated net
revenues decreased 10.5% to $745.6 million from $833.5 million for the nine
months ended April 30, 2001, a decrease of $87.9 million (or a decrease of $58.7
million excluding the effects of U.S. dollar foreign exchange fluctuations). The
Company's net revenues were derived from U.S. revenues of $427.6 million and
international revenues of $318.0 million for the nine months ended April 30,
2002, compared to $489.7 million in the U.S. and $343.8 million internationally
for the nine months ended April 30, 2001. The overall decrease in total Company
revenues for the nine months ended April 30, 2002 was driven primarily by the
closing of unprofitable stores associated with the Restructuring Plan, the
adverse effect of foreign currency fluctuations, a decline in consumer spending
attributed to the events of September 11, 2001, an overall downturn in the
economy and weak new releases from product manufacturers. During the nine months
ended April 30, 2002, the Company opened five stores and closed six stores,
bringing its total number of owned and operated retail stores at 172.
GROSS PROFIT
For the nine months ended April 30, 2002, gross profit decreased $28.6 million
to $221.5 million from $250.1 million for the nine months ended April 30, 2001
(or a decrease of $13.2 million excluding the effects of the U.S. dollar foreign
exchange fluctuations and the impact of the Restructuring Plan). Management
attributes the decline in gross profit, excluding the effect of the inventory
write-downs related to the restructuring charge, principally to the decrease in
revenues and the adverse effect of foreign currency fluctuations. Gross profit
as a percentage of net revenues decreased to 29.7% for the nine months ended
April 30, 2002 (or 31.2 % and 30.5% for the nine months ended April 30, 2002 and
2001, respectively, excluding the effects of the Restructuring Plan), compared
to 30.0% for the nine months ended April 30, 2001. Management attributes the
percentage increase, excluding the effects of the Restructuring Plan, primarily
to the culmination of inventory liquidation associated with the Restructuring
Plan and improving margins associated with the Company's Internet Division and
certain international markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses, (excluding the effects of the $4.2
and $1.6 million in professional fees related to the Restructuring Plan for the
nine months ending April 30, 2002 and 2001, respectively, and depreciation and
amortization,) decreased $22.5 million to $203.7 million for the nine months
ended April 30, 2002 from $226.2 million for the nine months ended April 30,
2001. Excluding the effect of professional fees related to the restructuring
Plan, decreases in personnel, occupancy and other cost savings initiatives
resulting from the Restructuring Plan contributed primarily to the reduction in
overall operating costs. As a percentage of net revenues, selling, general and
administrative expenses, (excluding the effects of the professional fees related
to the Restructuring Plan and depreciation and amortization) increased to 27.3%
for the nine months ended April 30, 2002, compared to 27.1% for the nine months
ended April 30, 2001. Management attributes the percentage increase primarily to
the decrease in net revenues as previously discussed.
13
RESTRUCTURING AND IMPAIRMENT COSTS
The Company recorded pre-tax restructuring and asset impairment charges of $17.3
million for the nine months ended April 30, 2002 compared to $23.8 million for
the nine months ended April 30, 2001, a decrease of $6.5 million, related to the
implementation of the Restructuring Plan. Of the $17.3 and $23.8 million in
total pre-tax restructuring and asset impairment charges for the nine months
ended April 30, 2002 and 2001, respectively, $11.2 and $4.4 million for the nine
months ended April 30, 2002 and 2001, respectively, were related to inventory
write-downs and were recorded in cost of sales. $4.2 and $1.6 million for the
nine months ended April 30, 2002 and 2001, respectively, related to professional
fees and were recorded in selling, general and administrative expenses. The
remaining $1.9 and $17.8 million for the nine months ended April 30, 2002 and
2001, respectively, of total pre-tax restructuring and asset impairment charges
were reported separately.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $21.4 million for the nine months
ended April 30, 2002, compared to $23.0 million for the nine months ended April
30, 2001, a decrease of $1.6 million. The decrease was primarily due to the
reduction in fixed assets associated with the Restructuring Plan in fiscal 2001.
LOSS FROM OPERATIONS
The Company's consolidated operating loss for the nine months ended April 30,
2002 was $5.6 million compared to a consolidated operating loss of $16.9 million
for the nine months April 30, 2001, a decrease of $11.3 million (or a decrease
of $4.7 million excluding the effects of the Restructuring Plan). The
improvement in operations was primarily attributable to decreases in selling,
general and administrative expenses and reductions in restructuring and
impairment costs, as previously discussed.
INTEREST EXPENSE
Net interest expense increased to $20.1 million for the nine months ended April
30, 2002 from $19.4 million for the nine months ended April 30, 2001, an
increase of 3.6 %. The increase was due to higher borrowing costs under the
Company's amended Credit Facility.
FOREIGN CURRENCY TRANSLATION LOSS
A non-cash foreign currency translation loss of $188,000 was recognized for the
nine months ended April 30, 2002, compared to $5.5 million for the nine months
ended April 30, 2001. The loss primarily represents the volatility of currencies
in countries in which the Company does business.
INCOME TAXES
A pre-tax operating loss resulted in an income tax provision for the nine months
ended April 30, 2002 of $971,000 compared to an income tax benefit of $1.5
million for the nine months ended April 30, 2001. Tax provisions and benefits
are based upon management's estimate of the Company's annualized effective tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital needs,
to open new stores, to refurbish and expand existing stores, and to continue
development of the Company's technological
14
infrastructure.
Net cash provided by operating activities was $67,000 and $31.5 million for the
nine months ended April 30, 2002 and 2001, respectively. The net decrease in
cash flow from operations for the nine months ended April 30, 2002 was primarily
due to the decrease in accounts payable and the culmination of other initiatives
associated with the Company's Restructuring Plan. For the nine months ended
April 30, 2002, net decrease in inventory was $4.0 million, excluding a $11.2
million write-down of inventory related to the Restructuring Plan. Net decrease
in inventory was $13.4 million for the nine months ended April 30, 2001. The
decrease in inventory was primarily the result of working capital initiatives
associated with the Restructuring Plan.
Net cash used in investing activities for the nine months ended April 30, 2002
was focused primarily on store maintenance and capital expenditure requirements,
including store relocations, refurbishment and technology investments totaling
approximately $7.5 million, with an additional $868,000 used for video rental
acquisition. During the nine months ended April 30, 2002, the Company opened
five stores in the U.S.
Net cash provided by financing activities for the nine months ended April 30,
2002 was $13.9 million, resulting principally from proceeds from life insurance
loans and net borrowings under the Company's Credit Facility. Net borrowings
under the Company's Credit Facility were $10.2 million for the nine months ended
April 30, 2002, excluding the effects of foreign exchange rates. Net cash
provided by financing for the nine months ended April 30, 2001 was $24.8
million, which resulted primarily from net borrowings under the Company's Credit
Facility.
Total funded debt decreased to $299.1 million as of April 30, 2002 from $323.1
million as of April 30, 2001. Outstanding debt under the Company's Credit
Facility was $180.0 million on April 30, 2002, compared to $202.3 million on
April 30, 2001. The decrease in bank debt outstanding was the result of the
effects of the Restructuring Plan implemented in fiscal 2001.
Interest payments on the senior subordinated notes and under the Credit Facility
will continue to impose significant liquidity demands upon the Company. In
addition to its debt service obligations, the Company will require liquidity for
capital expenditures, lease obligations and general working capital needs. Total
capital expenditures for fiscal 2002 are expected to be approximately $11.5
million, of which approximately $10.2 million will be related to maintenance and
required technological and capital improvements.
In April 2002, the Company completed an amendment of its Credit Facility,
extending the maturity of the Credit Facility to June 23, 2002. Also in April
2002, the Company entered into a stock purchase agreement, pursuant to which the
Company agreed to sell its Japanese operations to a corporation wholly-owned by
Nikko Principal Investments Japan Ltd. for an aggregate purchase price of 16
billion Japanese yen (approximately $124 million at current exchange rates). The
stock purchase agreement was amended to change the target closing date for the
transaction from May 23, 2002 to June 19, 2002, although the Company anticipates
that the closing date will be further extended to coincide with the closing date
of the refinancing of the Credit Facility. The amendment to the stock purchase
agreement also provides that the agreement will terminate if not closed prior to
August 15, 2002. The Company anticipates that net proceeds from the sale of its
Japanese operations will be used to pay down a significant portion of the Credit
Facility and the balance of the facility will be refinanced. On June 5, 2002,
the Company received a commitment letter from CIT Group/Business Credit, Inc.
("CIT") committing to an amount of $125 million, based upon a collateral formula
that may fluctuate at close to refinance a substantial portion of the balance of
the Credit Facility following application of the proceeds from the sale of the
Company's Japanese operations. The Company is also negotiating supplemental
financing to refinance any remaining balance on the Credit Facility. In
addition, the Company is in negotiations with the lenders under the Credit
Facility to extend the maturity of the Credit Facility beyond June 23, 2002 in
order to accommodate the closing schedule for the sale of the Japanese
operations and the refinancing.
15
As extended and restated in April 2001, further amended in October 2001, with
the maturity extended to June 23, 2002, the Company's Credit Facility provided
for initial maximum borrowings of up to $225.0 million, consisting of two
sub-facilities (one for an initial maximum of $98.4 million and one for an
initial maximum Japanese yen of (Yen)15,596,828,718, which was equivalent to
$126.6 million at inception). In accordance with the terms of the Credit
Facility, maximum borrowings under the Credit Facility declined $30.0 million
between July and December 2001. Maximum borrowings under the Credit Facility are
subject to a borrowing base formula, maximum leverage ratio tests and
maintaining a minimum rolling quarterly EBITDA. As of April 30, 2002,
approximately $190.3 million was available under the Credit Facility, of which
$180.0 million had been drawn. The $180.0 million includes a decrease of $2.8
million due to Japanese yen debt translated back to U.S. dollars at the spot
rate on April 30, 2002.
Upon completion of a long-term refinancing of its Credit Facility, the Company
believes that the cash flow generated from its operations, together with amounts
available from other financing alternatives, will be sufficient to fund its debt
service requirements, lease obligations, working capital needs, its currently
anticipated capital expenditures and other operating expenses for the next
twelve months. However, The Company's ability to complete a long-term
refinancing of its Credit Facility will be subject to the Company's ability to
complete the sale of its Japanese operations and the transaction contemplated by
the CIT commitment letter. In addition, the Company's ability to service it
senior subordinated notes is subject to the successful completion of a long-term
refinancing of the Company's Credit Facility, future economic conditions and
financial, business and other factors, many of which are beyond the Company's
control. Although the Company believes that it will be able to close the sale of
its Japanese operations and refinance the Credit Facility, no assurance can be
given that the Company will be successful in selling its Japanese operations and
refinancing the Credit Facility or that any refinancing will be on terms that
are favorable to the Company. Consummation of the sale of its Japanese
operations is subject to conditions, including the purchaser's completion of
financing for the acquisition and the Company's satisfactory refinancing of the
Credit Facility. In addition, the commitment letter received by the Company from
CIT is subject to numerous conditions precedent, including the negotiation and
execution of final definitive agreements, completion of the sale of the Japanese
operations and the successful refinancing of any remaining balance on the Credit
Facility. If the Company is unable to complete the sale of its Japanese
operations and a long-term refinancing of its Credit Facility or if the Company
is unable to refinance the Credit Facility on terms that are favorable to the
Company, the Company's business, financial condition and results of operations
would be materially and adversely affected.
The Credit Facility and the senior subordinated notes impose certain
restrictions on the Company's ability to make capital expenditures and limit the
Company's ability to incur additional indebtedness. Such restrictions could
limit the Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Credit Facility and
the senior subordinated notes also, among other things, limit the ability of the
Company to dispose of assets, repay indebtedness or amend other debt
instruments, pay distributions, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances and make
acquisitions.
The Company leases substantially all of its retail stores, warehouses and
administrative facilities pursuant to operating leases that expire on dates
through 2024 and generally have renewal options of one to 20 years. The terms of
the leases provide for fixed or minimum payments plus, in some cases, contingent
rents based on the consumer price index, or percentages of sales in excess of
specified minimum amounts or other specified increases. The Company is generally
responsible for maintenance, insurance and property taxes. The Company's minimum
obligations in fiscal 2002 on non-cancelable operating leases are expected to be
$39.7 million. Total rental expense (including taxes and maintenance, when
included in rent, contingent rents and accruals to recognize minimum rents on
the straight-line basis over the term of the lease) relating to all operating
leases for fiscal 2002 is expected to be $76.0 million.
16
SEASONALITY
Retail music sales in the United States are typically higher during the fourth
calendar 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 fourth calendar quarter to achieve annual sales and profitability
results. The Company's deep-catalog approach to prerecorded music appeals to
customers who purchase music on a year-round basis. Consequently, the Company
has historically had reduced seasonal reliance. In addition, international
markets exhibit less fourth quarter seasonality than U.S. markets and the
Company's international presence has historically further reduced this reliance
on the U.S. holiday shopping season. Nevertheless, sales during the Company's
second fiscal quarter (November 1 through January 31) accounted for
approximately 30% of annual sales.
INFLATION
The Company believes that the recent low rates of inflation in the United
States, Japan and the United Kingdom, where it primarily operates, have not had
a significant effect on its net sales or operating results. The Company attempts
to offset the effects of inflation through the management of controllable
expenses. However, there can be no assurance that during a period of significant
inflation, the Company's results of operations would not be adversely affected.
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 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
significantly affected by changes in currency exchange rates. The Company
believes that the matching of revenues and expenses in local currency, as well
as its foreign exchange hedging activities and borrowings in foreign currencies,
mitigate the effect of fluctuating currency exchange rates. Nonetheless, changes
in certain exchange rates could adversely affect the Company's business,
financial condition and results of operations. See "Quantitative and Qualitative
Disclosures about Market Risk."
NEW ACCOUNTING POLICIES
In July 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 142
changes the accounting for goodwill, including goodwill recorded in past
business combinations. SFAS 142 requires, among other things, that companies no
longer amortize goodwill, but instead periodically test goodwill for impairment.
The previous accounting principles governing goodwill generated from a business
combination will cease upon adoption of SFAS 142. Currently, the Company is
assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities". The provisions of SFAS 133 require all
derivative instruments to be recognized on the balance sheet as assets or
liabilities at fair value. The Company adopted SFAS 133, as amended, on August
1, 2000. The Company records its derivatives on the balance sheet at fair value
and reported adjustments to fair value through income.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest-rate changes and foreign
exchange rate fluctuations. The Company does not enter into market risk
sensitive instruments for trading purposes. In the ordinary course of its
business, the Company enters into debt instruments, including instruments with
short-term maturities. The Company could be exposed to a higher interest rate at
the time such debt instruments are renewed or refinanced. Certain of the
Company's debt instruments contain terms that permit the Company to cap the
interest rate at a maximum rate. In the past, the Company has purchased interest
rate hedges to manage the risk associated with interest rate variations.
The Company is subject to risks resulting from interest rate fluctuations
because interest on the Company's borrowings under its Credit Facility are based
on variable rates. If the base borrowing rates (primarily a combination of LIBOR
and TIBOR) were to increase 1% in fiscal 2002 as compared to the rate at July
31, 2001, the Company's interest expense related to its Credit Facility for
fiscal 2002 would increase approximately $1.8 million based on the outstanding
balance of the Company's Credit Facility at April 30, 2002. A substantial
majority of the Company's revenues, expenses and capital purchasing activities
are transacted in U.S. dollars. However, the Company does enter into these
transactions in other foreign currencies, primarily Japanese yen. The Company
uses forward exchange contracts to hedge intercompany transactions with foreign
subsidiaries and affiliates, and in connection with certain of its Japanese
subsidiary's purchases of product from third parties. Such instruments are
short-term instruments entered into in the ordinary course of the Company's
business, in order to reduce the impact of exchange rate fluctuation on net
income and shareholder's equity. At April 30, 2002, the Company had no
outstanding forward exchange contracts.
To finance expansion and operations in Japanese markets, the Company has entered
into yen-denominated borrowing arrangements. Unrealized gains and losses
resulting from the impact of foreign exchange rate movements on these debt
instruments are recognized as other income or expense in the period in which the
exchange rates change. Historically, the Company has not entered into foreign
exchange contracts to manage the risk associated with such currency
fluctuations, but it may do so from time to time in the future.
The Company engaged a third party to analyze the sensitivity of the Company's
operations to fluctuations in the exchange rate between U.S. dollars and
Japanese yen. The analysis made various assumptions for exchange rates, and
assumed that the results of the Japanese operations would remain consistent with
recent history. According to this analysis, the Japanese operation provides a
natural hedge against any impact of changes in foreign exchange rates on the
company's yen denominated debt. Based on the results of this analysis, the
Company concluded that a change in exchange rates from year-end levels would not
materially affect the Company's results of operations.
18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-
The Company is party to various claims, legal actions and complaints arising in
the ordinary course of its business. The Company was named and served as a
co-defendant in six antitrust actions following the May 10, 2000 announcement
that the major music distributors (EMI Music Distribution, Bertelsmann Music
Group, Inc., Warner-Elektra-Atlantic Corporation, Sony Music Entertainment,
Inc., Universal Music and Video Distribution Corp.) had entered into a
settlement agreement (consent decree) with the Federal Trade Commission ("FTC")
in response to the FTC's investigation into the implementation of minimum
advertised pricing ("MAP") programs by the major record companies. The first of
these antitrust actions, entitled Arnold Samotny et al vs. BMG Music, et al, was
filed on June 2, 2000 in the United States District Court for the Northern
District of Illinois Eastern Division. The second action, filed on August 8,
2000, is entitled State of Florida et al vs. BMG et al and is a consumers'
antitrust action brought by 45 States Attorneys General in a consolidated action
in the United States District Court Southern District of New York. The third
case, Allison Lacy et al vs. BMG Music et al was filed September 14, 2000 in the
United States District Court for the Eastern District of Tennessee. These six
antitrust lawsuits allege that co-defendant music distributors, retailers and
the Company were engaged in a conspiracy to fix the prices of CDs, in violation
of federal and state antitrust, unfair trade practices, and consumer protection
statutes.
The above actions were consolidated and coordinated for pretrial purposes with
venue set in Portland, Maine before Federal Judge D. Brock Hornsby, who has
issued discovery orders in the coordinated action, captioned Compact Disc
Minimum Advertised Price Antitrust Litigation, MDL Docket No. 1361. An answer
was filed on behalf of the Company, in April 2001. The Company attended a
settlement conference on April 30, 2002 and reached a settlement with all
plaintiffs, for an amount that will not have a material financial impact on the
Company. The settlement agreement is being finalized, and thereafter, the case
against the Company will be dismissed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Exhibit
Number Description of Document
------ -----------------------
10.9 Letter Amendment dated May 21, 2002
to Stock Purchase Agreement, dated
as of April 11, 2002, by and
between the Registrant and Valtuna
Holding B.V.
10.10 Third Amendment and waiver, dated as
of April 30, 2002, to the Amended
and Restated Credit Agreement,
dated as of April 27, 2001 and
amended as of October 5, 2001 and
April 1, 2002, by and among the
registrant, TRKK, the Lenders party
thereto and JPMorgan Chase Bank as
Administrative Agent.
19
(b) Report on Form 8-K
On April 22, 2002, the Company filed a report on Form 8-K relating to
an announcement of the Company's execution of a stock purchase agreement
providing for the sale of its Japanese operations and the Company's execution of
an amendment to its credit facility extending the maturity date thereof, as
presented in a press release dated April 11, 2002.
20
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
By:
Dated: June 14, 2002 /s/ DeVaughn D. Searson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
Exhibit Index
Exhibit
Number Description of Document
------ -----------------------
10.9 Letter Amendment dated May 21, 2002
to Stock Purchase Agreement, dated
as of April 11, 2002, by and
between the Registrant and Valtuna
Holding B.V.
10.10 Third Amendment and waiver, dated as
of April 30, 2002, to the Amended
and Restated Credit Agreement,
dated as of April 27, 2001 and
amended as of October 5, 2001 and
April 1, 2002, by and among the
registrant, TRKK, the Lenders party
thereto and JPMorgan Chase Bank as
Administrative Agent.