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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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)
CALIFORNIA 94-1500342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DEL MONTE STREET, 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 [ ]
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<PAGE>
MTS, INCORPORATED
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of April 30, 1999, 1998
and July 31, 1998 ..........................................
Consolidated Statements of Income for the three months ended
April 30, 1999 and 1998 and the nine months ended April 30,
1999 and 1998 ..............................................
Consolidated Statements of Cash Flows for the nine months
ended April 30, 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 .............................................................
<PAGE>
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1999, 1998 AND JULY 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
April 30, April 30, July 31,
1999 1998 1998
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ $18,079 $10,685 $14,609
Receivables, net......................... 26,097 20,864 23,095
Merchandise inventories.................. 270,084 265,531 261,003
Prepaid expenses......................... 7,249 6,344 6,619
Deferred tax assets...................... 7,411 6,863 4,184
----------- ----------- -----------
Total current assets................ 328,920 310,287 309,510
Fixed assets, net.......................... 195,074 177,763 187,586
Deferred tax assets........................ 15,727 9,265 15,076
Other assets............................... 36,360 34,325 33,219
----------- ----------- -----------
Total assets........................ $576,081 $531,640 $545,391
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt..... $2,213 $1,892 $2,540
Accounts payable......................... 137,221 130,754 157,443
Accrued liabilities...................... 37,268 29,381 30,422
Income taxes payable..................... 624 0 1,422
Deferred revenue, current portion........ 6,055 3,118 3,251
----------- ----------- -----------
Total current liabilities........... 183,381 165,145 195,078
Long-term Liabilities:
Long-term debt, less current maturities.. 269,161 239,169 229,345
Deferred revenue, less current portion... 161 174 170
----------- ----------- -----------
Total liabilities................... 452,703 404,488 424,593
----------- ----------- -----------
Minority equity in subsidiaries............ -- -- --
----------- ----------- -----------
Commitments and contingencies
Shareholders' Equity:
Common stock:
Class A, no par value; 5,000,000 shares
authorized; no shares issued or
outstanding............................. -- -- --
Class B, no par value; 10,000,000
shares authorized; 1,000 shares issued
and outstanding at April 30, 1999,
April 30, 1998, and July 31, 1999....... 6 6 6
Additional paid-in capital............... -- 780 --
Retained earnings........................ 123,372 126,366 120,792
----------- ----------- -----------
Total shareholders' equity.......... 123,378 127,152 120,798
----------- ----------- -----------
Total liabilities and
shareholders' equity.............. $576,081 $531,640 $545,391
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
AND THE NINE MONTHS ENDED APRIL 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue...................... $242,467 $238,633 $778,853 $771,403
Cost of sales.................... 166,438 163,211 530,694 524,918
----------- ----------- ----------- -----------
Gross profit................... 76,029 75,422 248,159 246,485
Selling, general and
administrative expenses........ 68,072 65,970 207,103 204,776
Depreciation and amortization.... 6,115 6,126 18,090 17,602
----------- ----------- ----------- -----------
Income from operations......... 1,842 3,326 22,966 24,107
Other income and (expenses):
Interest expense............... (4,518) (3,514) (13,086) (10,422)
Foreign currency translation
gain (loss).................. 454 (151) (9,037) (766)
Other income and (expenses).... (775) (96) (2,546) 108
----------- ----------- ----------- -----------
Income before taxes and
minority interest............ (2,997) (435) (1,703) 13,027
Provision for income taxes....... (384) (196) 920 5,447
----------- ----------- ----------- -----------
Income (loss) before
minority interest............ (2,613) (239) (2,623) 7,580
Minority interest in net
income of subsidiaries........ -- 46 -- 139
----------- ----------- ----------- -----------
Net income (loss)......... ($2,613) ($285) ($2,623) $7,441
=========== =========== =========== ===========
Basic and diluted earnings
per share:
On net income (loss).......... ($2,613.00) ($285.00) ($2,622.68) $7,440.62
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... ($2,623) $7,441
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.......................... 21,426 21,229
Provision for losses on accounts receivable........... 112 (17)
Loss on disposal of depreciable assets................. 4,043 1,514
Exchange loss.......................................... 10,432 2,831
Other non-cash (income) expense........................ 347 357
Provision for deferred taxes........................... (3,402) (1,415)
Minority interests in net income of subsidiaries....... -- 140
(Decrease) increase in cash resulting from changes in:
Accounts receivable................................. (3,002) (149)
Inventories......................................... (9,081) 16,484
Prepaid expenses.................................... (630) 2,654
Accounts payable.................................... (20,222) (33,202)
Accrued liabilities................................. 6,048 (1,228)
Deferred revenue.................................... 2,795 (231)
---------- ----------
Net cash provided by operating activities........ 6,243 16,408
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets............................. (29,847) (16,787)
Acquisition of investments.............................. (1,929) (5,520)
Increase in deposits.................................... (157) (1,491)
Refunds of deposits..................................... 176 1,464
Increase in intangibles................................. (881) (5,740)
---------- ----------
Net cash used in investing activities............ (32,638) (28,074)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officer and employees............ -- (60)
Proceeds from employee loan repayments.................. 42 81
Trust distributions..................................... -- --
Principal payments under long-term financing (1,854)
agreements............................................ 21,562 (207,060)
Proceeds from issuance of long-term financing
agreements............................................ 21,562 231,400
---------- ----------
Net cash provided by financing activities........ 41,312 24,361
---------- ----------
Effect of exchange rate changes on cash.................... 10,115 (8,617)
---------- ----------
Net increase in cash and cash
equivalents.................................... 25,032 4,078
Cash and cash equivalents, beginning of period............. 14,609 6,607
---------- ----------
Cash and cash equivalents, end of period................... $39,641 $10,685
========== ==========
Cash paid for interest..................................... $10,663 $11,279
========== ==========
Cash paid for income taxes................................. $5,116 $4,109
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
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, 1999 and the results of
its operations for the three months and nine months then ended 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 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, 1998.
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 retained
earnings. 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
$9.0 million and $0.8 million for the nine months ended April 30, 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 nine months ended April 30, 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.
NOTE 4- NEW ACCOUNTING PRONOUNCEMENTS
On August 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Comprehensive
income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income includes
net income reported on the income statement and changes in the
cumulative transaction adjustment reported as a separate component of
shareholder's equity. The Company's total comprehensive income for the
period was $2.6 million and $3.2 million as of April 30, 1999 and 1998,
respectively.
In June 1997, statement of Financial Accounting Standards (SFAS) No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
WAS ISSUED. SFAS No. 131 requires that the Company report financial and
descriptive information about its reportable operating segments using
the "management approach" model. Under the management approach model,
segments are defined based on the way the Company's management
internally evaluates segment performance and decides how to allocate
resources to segments. The Company is in the process of evaluating the
impact of this pronouncement on its segment disclosures, and will adopt
the statement on its effective date, which will be in the Company's
fiscal year ending July 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning
June 16, 1998 and thereafter). Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 30, 1997 (and at the company's election, before April 1, 1998).
The Company has not yet quantified the impacts of adopting Statement 133
on its financial statements nor determined the timing of or method of
our adoption of Statement 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following is management's discussion and analysis of certain
significant factors affecting the consolidated operating results,
financial condition and liquidity of MTS, INCORPORATED for the three
month and nine month periods ended April 30, 1999 compared to the three
month and nine month periods ended April 30, 1998. This discussion
should be read in conjunction with the unaudited interim consolidated
financial statements and the notes thereto included in Item 1 of this
Quarterly Report of Form 10-Q in addition to the consolidated financial
statements and notes thereto for the fiscal year ended July 31, 1998
included in the Company's 10-K and Form S-4 filed with the United States
Securities and Exchange Commission.
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "intends," "plans,"
and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995. 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. 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, effects
of competition including the Internet and digital downloading of music,
restrictive debt covenants, changing economic conditions including
decreased consumer spending, risks relating to international operations
and foreign exchange, increased or unanticipated costs or effects
associated with Year 2000 compliance by the Company or its service or
supply providers, higher interest rates and other factors which may be
outside of the Company's control. There are a number of factors that
could cause the Company's actual results to differ materially from those
indicated by such forward-looking statements.
Readers should also carefully review the risk factors described in the
other documents the Company has filed from time to time with the United
States Securities and Exchange Commission including the Company's Form
S-4, among others, and the Company assumes no obligation to update any
such forward-looking statements.
RESULTS OF OPERATIONS
Three months ended April 30, 1999 and April 30, 1998.
REVENUES
During the three months ended April 30, 1999, the Company's consolidated
net revenues increased 1.6 % to $242.5 million from $238.6 million
during the three months ended April 30, 1998, an increase of $3.9
million (or a decrease of $2.2 million excluding the favorable effects
of the U.S. dollar-Japanese yen exchange rate movements). Management
attributes the slight overall sales decline (on a functional currency
basis) to additional new store expansion being offset by declining
same store sales in the Northeast U.S. region which has been impacted by
increased competition in the area and to a lesser extent, lost revenues
on closed stores. The Company's same store sales decreased 1.96% during
the three months ended April 30, 1999 as compared to the three months
ended April 30, 1998.
During the three months ended April 30, 1999, the Company closed one store,
bringing its total number of retail stores to 179 at April 30, 1999.
GROSS PROFIT
During the three months ended April 30, 1999, gross profit increased $.6
million or .1% to $76.0 million from $75.4 million for the three
months ended April 30, 1998. Gross profit as a percentage of net
revenues decreased slightly to 31.3% for the three months ended April
30, 1999 as compared to 31.6% for the three months ended April 30, 1998.
Management believes that the primary factor contributing to the slight
decrease in gross profit margin as a percentage of net revenues was due
to discounting of Internet product in an effort to further promote the
Company's online presence and the continued effects of margin pressures
from the Japanese and Asian market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased $2.1 million or
2% to $68.1 million during the three months ended April 30, 1999 from
$66.0 million for the three months ended April 30, 1998. As a percentage
of net revenues, selling, general and administrative expenses increased
to 28.1% for the three months ended April 30, 1999 as compared to 27.6%
for the three months ended April 30, 1998. 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 three months
ended April 30, 1999 was $1.8 million compared with a consolidated
operating profit of $3.3 million during the three month period ended
April 30, 1998 for a decrease of $1.5 million or 44.6% which reflects
primarily an increase in selling, general and administrative expense.
INTEREST EXPENSE
Net interest expense increased to $4.5 million during the three months
ended April 30, 1999 from $3.5 million during the three months ended
April 30, 1998 for an increase of 28.6%. Reductions in the average
interest rate on borrowings under the Senior Credit Facility were offset
against increases in the Company's funded debt and a higher fixed rate
on its $110 million senior
subordinated notes.
FOREIGN CURRENCY TRANSLATION GAIN/LOSS
A foreign currency translation gain of $.5 million was recognized for
the three months ended April 30, 1999 as compared to a foreign currency
translation loss of ($0.2 million) for the three months ended April 30,
1998. 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.
PROVISION FOR INCOME TAXES
The income tax benefit for the three months ended April 30, 1999 was $.4
million compared with an income tax benefit of $.2 million during the
three months ended April 30, 1998. Tax provisions and benefits were
based upon management's estimate of the Company's annualized effective
tax rates.
RESULTS OF OPERATION
Nine months ended April 30, 1999 and April 30, 1998
REVENUES
During the nine months ended April 30, 1999, the Company's consolidated
net revenues increased approximately 1% to $778.9 million from $771.4
million during the nine months ended April 30, 1998, an increase of $7.5
million (or an increase of $1.4 million excluding the favorable effects
of the U.S. dollar-Japanese yen exchange rate movements). Management
attributed the modest sales growth primarily to additional store
expansion. The Company's same store sales decreased .93% during the nine
months ended April 30, 1999 as compared to the nine months ended April
30, 1998.
GROSS PROFIT
During the nine months ended April 30, 1999, gross profit increased $1.7
million or 0.7% to $248.2 million from $246.5 million for the nine
months ended April 30, 1998. Gross profit as a percentage of net
revenues remained constant at 31.9% for the nine months ended April 30,
1999 as compared to the nine months ended April 30, 1998. Management
believes that the primary factor contributing to the maintenance in
gross profit was due to maintaining stable pricing domestically which
offset the effects of the Company's online product discounting and
margin pressures in the Japanese and Asian market.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $2.3 million or
1.1% to $207.1 million during the nine months ended April 30, 1999 from
$204.8 million for the nine months ended April 30, 1998. As a percentage
of net revenues, selling, general and administrative expenses increased
to 26.6% for the nine months ended April 30, 1999 as compared to 26.5%
for the nine months ended April 30, 1998. 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, 1999 was $23.0 million compared with a consolidated operating
profit of $24.1 million during the nine month period ended April 30,
1998 for a decrease of $1.1 million or 4.7% which reflects primarily an
increase in overall operating expenses.
INTEREST EXPENSE
Net interest expense increased to $13.1 million during the nine months
ended April 30, 1999 from $10.4 million during the nine months ended
April 30, 1998 for an increase of 25.6%. The increase in interest
expense was due to an increase in borrowings under the Senior Credit
Facility coupled with a higher cost of borrowing under the Company's
fixed rate $110 million senior subordinated notes.
FOREIGN CURRENCY TRANSLATION GAIN/LOSS
A foreign currency translation loss of ($9.0 million) was recognized for
the nine months ended April 30, 1999 as compared to a foreign currency
translation loss of ($0.8 million) for the nine months ended April 30,
1998. The swing in the account primarily represents non-cash losses and
gains due to yen denominated bank debt and the volatility of the
Japanese yen in relation to the U.S. dollar.
PROVISION FOR INCOME TAXES
The income tax provision for the nine months ended April 30, 1999 was
$.9 million compared with a provision of $5.4 million for the nine
months ended April 30, 1998. 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, 1999 were $18.1
million compared with $10.7 million as of April 30, 1998. The Company
used cash primarily for investments in new stores and store
relocations/remodels, computer system enhancements and equipment
purchases. Capital expenditures totaled $29.8 million and $16.8 million
during the nine months ended April 30, 1999 and April 30, 1998,
respectively.
Total funded debt increased to $271.4 million as of April 30, 1999,
from $241.0 million as of April 30, 1998. Outstandings under the
Company's senior revolving credit facility were $149.2 million on April
30, 1999. 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, 1999 was $95.1 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.
OTHER MATTERS
SEASONALITY AND COMPETITION
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. However, in 1999, Internet sales played a larger role in holiday
music retail sales in the United States than in years past and it is
unknown what future effect the Internet and the introduction of digital
downloading may have on the Company or the industry in the future.
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 third
quarter or in place during the first nine months of fiscal 1999 were not
material to the Company's results of operations or its financial position.
YEAR 2000 COMPLIANCE
Many currently installed information technology and non-information
technology systems and 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 and recognize four digit entries to
distinguish 21st century dates from 20th century dates. MTS uses a
number of computer software programs and embedded operating systems that
were not originally designed to process dates beyond the year 1999. The
Company is continuing 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 check list,
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 disruptions 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 results of operations will not be adversely impacted by a failure of its
systems or the systems of others.
To date, approximately 90% of the Company's administrative support IT
systems have at least completed the remediation phase. Of this amount,
approximately 90% have completed the testing and remediation phase and
90% 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 60% of non-IT systems have
completed the remediation, testing and implementation phases with no
material replacements necessary. As of April 30, 1999, the Company has
incurred $.7 million in Year 2000 remediation costs and estimates it
will require an additional $.5 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 "offline"
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.
<PAGE>
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: /s/ DeVaughn D. Searson
------------------------
DeVaughn D. Searson
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Dated: June 11, 1999
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEETS,
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 18,079
<SECURITIES> 0
<RECEIVABLES> 26,097
<ALLOWANCES> 0
<INVENTORY> 270,084
<CURRENT-ASSETS> 328,920
<PP&E> 195,074
<DEPRECIATION> 0
<TOTAL-ASSETS> 576,081
<CURRENT-LIABILITIES> 183,381
<BONDS> 269,161
0
0
<COMMON> 6
<OTHER-SE> 123,372
<TOTAL-LIABILITY-AND-EQUITY> 576,081
<SALES> 778,853
<TOTAL-REVENUES> 778,853
<CGS> 530,694
<TOTAL-COSTS> 530,694
<OTHER-EXPENSES> 225,193
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,086
<INCOME-PRETAX> (1,703)
<INCOME-TAX> 920
<INCOME-CONTINUING> (2,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,623)
<EPS-BASIC> (2,622.68)
<EPS-DILUTED> (2,622.68)
</TABLE>
