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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 JANUARY 31, 1999
OR
o 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 o
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MTS, INCORPORATED
TABLE OF CONTENTS
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PAGE
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of January 31, 1999, 1998 and
July 31, 1998. 1
Consolidated Statements of Income for the three months ended
January 31, 1999 and 1998 and the six months ended January 31,
1999 and 1998 2
Consolidated Statements of Cash Flows for the six months ended
January 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-10
Part II. Other Information N/A
Signature 11
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<PAGE>
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1999, 1998 AND JULY 31, 1998
(DOLLARS IN THOUSANDS)
ASSETS
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<CAPTION>
UNAUDITED
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JANUARY 31, JULY 31,
----------- --------
1999 1998 1998
------------------ ------------------ ------------------
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Current Assets:
Cash and cash equivalents $29,794 $16,289 $14,609
Receivables, net 26,012 20,748 23,095
Merchandise inventories 268,060 272,364 261,003
Prepaid expenses 8,941 7,863 6,619
Deferred tax assets 11,786 993 4,184
------------------ ------------------ ------------------
Total current assets 344,593 318,257 309,510
Fixed assets, net 201,179 179,329 187,586
Deferred tax assets 12,425 7,525 15,076
Other assets 35,255 33,639 33,219
------------------ ------------------ ------------------
Total assets $593,452 $538,750 $545,391
================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $2,945 $3,217 $2,540
Accounts payable 146,603 133,467 157,443
Accrued liabilities 32,831 28,840 30,422
Income taxes payable 5,216 - 1,422
Deferred revenue, current portion 8,124 7,375 3,251
------------------ ------------------ ------------------
Total current liabilities 195,719 172,899 195,078
Long-term Liabilities:
Long-term debt, less current maturities 270,248 223,021 229,345
Deferred revenue, less current portion 163 177 170
------------------ ------------------ ------------------
Total liabilities 466,130 396,097 424,593
------------------ ------------------ ------------------
Minority equity in subsidiaries - 2,211 -
------------------ ------------------ ------------------
Commitments and contingencies
Shareholders' Equity:
Common stock:
Class A, no par value;5,000,000 shares authorized;
500 shares issued and outstanding at January 31, 1998:
none at January 31, 1999 and July 31, 1998 3 -
Class B, no par value; 10,000,000 shares authorized;
500 shares issued and outstanding at January 31, 1998:
1,000 issued and outstanding at January 31,1999
and July 31, 1998 6 3 6
Additional paid-in capital - 780 -
Retained earnings 127,316 139,656 120,792
------------------ ------------------ ------------------
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Total shareholders' equity 127,322 140,442 120,798
------------------ ------------------ ------------------
Total liabilities and shareholders' equity $593,452 $538,750 $545,391
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
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MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
AND THE SIX MONTHS ENDED JANUARY 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
UNAUDITED
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THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ ----------------
1999 1998 1999 1998
------------------ ------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenue $302,788 $293,442 $536,386 $532,770
Cost of sales 209,769 202,940 364,256 361,707
------------------ ------------------- ------------------ -----------------
Gross profit 93,019 90,502 172,130 171,063
Selling, general and administrative expenses 77,391 75,894 139,031 138,806
Depreciation and amortization 6,285 5,831 11,975 11,476
------------------ ------------------- ------------------ -----------------
Income from operations 9,343 8,777 21,124 20,781
Other income and (expenses):
Interest expense (3,981) (3,469) (8,568) (6,908)
Foreign currency translation gain (loss) 2,404 (522) (9,491) (615)
Other income and (expenses) (2,096) 738 (1,771) 204
------------------ ------------------- ------------------ -----------------
Income before taxes and minority interest 5,670 5,524 1,294 13,462
Provision for income taxes 3,264 2,305 1,304 5,643
------------------ ------------------- ------------------ -----------------
Income (loss) before minority interest 2,406 3,219 (10) 7,819
Minority interest in net income of subsidiaries - 56 - 93
------------------ ------------------- ------------------ -----------------
Net income (loss) $2,406 $3,163 ($10) $7,726
================== =================== ================== =================
Basic and diluted earnings per share:
On net income (loss) $2,406.01 $3,162.80 ($10.21) $7,726.25
================== =================== ================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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<CAPTION>
UNAUDITED
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($10) $7,726
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 14,162 14,123
Provision for losses on accounts receivable 159 67
Loss on disposal of depreciable assets 3,065 975
Exchange loss 11,154 1,929
Other non-cash (income) expense (267) 171
Provision for deferred taxes (4,974) (21)
Minority interests in net income of subsidiaries - 93
(Decrease) increase in cash resulting from changes in:
Accounts receivable (2,917) 302
Inventories (7,057) 9,651
Prepaid expenses (2,322) 1,135
Accounts payable (10,840) (30,489)
Accrued liabilities 6,203 (227)
Deferred revenue 4,866 4,491
------------------------- --------------------------
Net cash provided by operating activities 11,222 9,926
------------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (25,066) (10,100)
Acquisition of investments (1,390) (2,986)
Increase in deposits (78) (1,446)
Refunds of deposits 157 1,384
Increase in intangibles (847) (295)
------------------------- --------------------------
Net cash used in investing activities (27,224) (13,443)
------------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officer and employees - (519)
Proceeds from employee loan repayments 15 68
Trust distributions - (24)
Principal payments under long-term financing (1,219) (12,029)
agreements
Proceeds from issuance of long-term financing 21,982 27,000
agreements
------------------------- --------------------------
Net cash provided by financing activities 20,778 14,496
------------------------- --------------------------
Effect of exchange rate changes on cash 10,409 (1,297)
------------------------- --------------------------
Net increase in cash and cash 15,185 9,682
equivalents
Cash and cash equivalents, beginning of period 14,609 6,607
------------------------- --------------------------
Cash and cash equivalents, end of period $29,794 $16,289
========================= ==========================
Cash paid for interest $8,709 $7,540
========================= ==========================
Cash paid for income taxes $4,038 $4,904
========================= ==========================
</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 January 31, 1999 and the results of its operations
for the three months and six months then ended and cash flows for the six
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
$9.5 million and $0.6 million as of January 31, 1999 and 1998 respectively.
These amounts primarily represent unrealized losses on the Company's
yen-denominated debt and the strengthening of the yen versus the U.S. dollar.
NOTE 3- INCOME TAXES
The effective income tax rates for the six months ended January 31, 1999 and
1998 are based on the federal statutory income tax rate, increased for the
effect of state income taxes, net of federal benefit and foreign taxes.
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
<PAGE>
shareholder's equity. The Company's total comprehensive income for the period
was $6.5 million and $5.4 million as of January 31, 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 31, 1997 (and at the company's
election, before January 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.
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 six month periods
ended January 31, 1999 compared to the three month and six month periods
ended January 31, 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
<PAGE>
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 January 31, 1999 and January 31, 1998.
REVENUES
During the three months ended January 31, 1999, the Company's consolidated
net revenues increased 3.2% to $302.8 million from $293.4 million during the
three months ended January 31, 1998, an increase of $9.4 million. Management
attributed the moderate sales growth primarily to additional new store
expansion and the favorable effects of the U.S. dollar-Japanese yen exchange
rate. The Company's same store sales decreased .7% during the three months
ended January 31, 1999 as compared to the three months ended January 31, 1998.
During the three months ended January 31, 1999, the Company opened three
stores and closed one store, bringing its total number of retail stores to
180 at January 31, 1999.
GROSS PROFIT
During the three months ended January 31, 1999, gross profit increased $2.5
million or 2.8% to $93.0 million from $90.5 million for the three months
ended January 31, 1998. Gross profit as a percentage of net revenues
decreased slightly to 30.7% for the three months ended January 31, 1999 as
compared to 30.8% for the three months ended January 31, 1998. Management
believes that the primary factor contributing to the slight decrease in gross
profit was due to the continued pricing pressures from international vendors
in its Japanese and Asian markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased $1.5 million or 2% to
$77.4 million during the three months ended January 31, 1999 from $75.9 million
for the three months ended January 31, 1998. As a percentage of net revenues,
selling, general and administrative expenses decreased to 25.6% for the three
months ended January 31, 1999 as compared to 25.9% for the three months ended
January 31, 1998. Management attributes the improvement primarily to
continued focus on operating efficiencies and ongoing vendor support.
INCOME FROM OPERATIONS
The Company's consolidated operating profit during the three months ended
January 31, 1999 was $9.3 million compared with a consolidated operating profit
of $8.8 million during the three month period ended January 31, 1998 for an
increase of $0.5 million or 5.7% which reflects primarily improvement in
selling, general and administrative expense.
<PAGE>
INTEREST EXPENSE
Net interest expense increased to $4.0 million during the three months ended
January 31, 1999 from $3.5 million during the three months ended January 31,
1998 for an increase of 14.3%. 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 $2.4 million was recognized for the
three months ended January 31, 1999 as compared to a foreign currency
translation loss of ($0.5 million) for the three months ended January 31, 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 provision for the three months ended January 31, 1999 was
$3.3 million compared with $2.3 million during the three months ended
January 31, 1998. Tax provisions and benefits were based upon management's
estimate of the Company's annualized effective tax rates.
RESULTS OF OPERATION
Six months ended January 31, 1999 and January 31, 1998
REVENUES
During the six months ended January 31, 1999, the Company's consolidated net
revenues increased 0.7% to $536.4 million from $532.8 million during the six
months ended January 31, 1998, an increase of $3.6 million (or an increase of
$8.1 million excluding the unfavorable 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 .7% during the six months ended January 31, 1999 as compared to the
six months ended January 31, 1998.
GROSS PROFIT
During the six months ended January 31, 1999, gross profit increased
$1.1 million or 0.6% to $172.1 million from $171.1 million for the six months
ended January 31, 1998. Gross profit as a percentage of net revenues remained
constant at 32.1% for the six months ended January 31, 1999 as compared to
the six months ended January 31, 1998. Management believes that the primary
factor contributing to the maintenance in gross profit was due to maintaining
stable pricing domestically to offset the effects of Japanese and Asian
margin pressures.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $0.2 million or 2% to
$139.0 million during the six months ended January 31, 1999 from $138.8 million
for the six months ended January 31, 1998. As a percentage of net revenues,
selling, general and administrative expenses decreased to 25.9% for the six
months ended January 31, 1999 as compared to 26.1% for the six months ended
January 31, 1998. Management attributes the improvement primarily to
continued operating efficiencies and ongoing vendor support.
INCOME FROM OPERATIONS
<PAGE>
The Company's consolidated operating profit during the six months ended
January 31, 1999 was $21.1 million compared with a consolidated operating
profit of $20.8 million during the six month period ended January 31, 1998
for an increase of $0.3 million or 1.4% which reflects primarily increased
efficiencies selling and administrative expenses.
INTEREST EXPENSE
Net interest expense increased to $8.6 million during the six months ended
January 31, 1999 from $6.9 million during the six months ended January 31,
1998 for an increase of 24.6%. 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 ($9.5 million) was recognized for the
six months ended January 31, 1999 as compared to a foreign currency translation
loss of ($0.6 million) for the six months ended January 31, 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 six months ended January 31, 1999 was $1.3
million compared with a provision of $5.6 million for the six months ended
January 31, 1998. Tax provisions were 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 January 31, 1999 were
$29.8 million compared with $16.3 million as of January 31, 1998. The Company
used cash primarily for investments in new stores and store
relocations/remodels, computer system enhancements and equipment purchases.
Capital expenditures totaled $25.1 million and $10.1 million during the six
months ended January 31, 1999 and January 31, 1998, respectively.
Total funded debt increased to $273.2 million as of January 31, 1999, from
$226.2 million as of January 31, 1998. Outstandings under the Company's senior
revolving credit facility were $150.5 million on January 31, 1999. The increase
in bank outstandings were largely due to translation of yen denominated debt to
U.S. dollars and financing operating activities. Unused availability under the
$275.0 million revolving senior credit facility as of January 31, 1999 was
$107.2 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
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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 second quarter or in place during the first six
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
<PAGE>
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 80% of the Company's administrative support IT systems
have at least completed the remediation phase. Of this amount, approximately
80% have completed the testing and remediation phase and 80% 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 50% of non-IT systems have completed the remediation, testing
and implementation phases with no material replacements necessary. As of
January 31, 1999, the Company has incurred $.5 million in Year 2000
remediation costs and estimates it will require an additional $.7 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: March 17, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
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27. Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
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0
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