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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 October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 333-54035
MTS, INCORPORATED (Exact name of Registrant as specified in its Charter)
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2500 Del Monte Street
West Sacramento, California 95691
(Address of Principal Executive Offices including Zip Code)
916-373-2500
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
MTS, INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Part I. Financial Information
- Consolidated Balance Sheets as of October 31, 2000, 1999 and July 31, 2000
- Consolidated Statements of Income for the three months ended October 31, 2000 and 1999
- Consolidated Statements of Cash Flows for the three months ended October 31, 2000 and 1999
- Consolidated Statements of Comprehensive Income for the three months ended October 31, 2000 and 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MTS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2000, 1999 AND JULY 31, 2000
(DOLLARS IN THOUSANDS)
UNAUDITED
OCTOBER 31 OCTOBER 31 JULY 31,
2000 1999 2000
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ASSETS
Current Assets:
Cash and cash equivalents................ $19,347 $24,439 $21,486
Receivables, net......................... 35,577 27,910 31,457
Merchandise inventories.................. 323,622 308,145 293,429
Prepaid expenses......................... 14,462 8,965 12,728
Deferred tax assets...................... 12,762 13,092 12,694
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Total current assets................ 405,770 382,551 371,794
Fixed assets, net.......................... 208,032 207,098 207,440
Deferred tax assets........................ 9,634 9,536 9,648
Other assets............................... 39,153 38,986 38,396
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Total assets........................ $662,589 $638,171 $627,278
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt..... $209,198 $2,827 $191,325
Accounts payable......................... 185,680 171,290 165,701
Accrued liabilities...................... 38,118 40,034 39,456
Income taxes payable..................... 757 1,987 95
Deferred revenue, current portion........ 2,632 2,371 2,959
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Total current liabilities........... 436,385 218,509 399,536
Long-term Liabilities:
Long-term debt, less current maturities.. 119,662 302,361 120,238
Deferred revenue, less current portion... 141 154 144
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Total liabilities................... 556,188 521,024 519,918
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Shareholders' Equity:
Common stock:
Class B, no par value; 10,000,000
shares authorized; 1,000 shares issued
and outstanding at October 31, 2000,
October 31, 1999, and July 31, 2000..... 6 6 6
Retained earnings........................ 125,405 134,849 126,138
Accumulated other comprehensive income.. (19,010) (17,708) (18,784)
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Total shareholders' equity.......... 106,401 117,147 107,360
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Total liabilities and
shareholders' equity.............. $662,589 $638,171 $627,278
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The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
Three Months Ended
October 31,
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2000 1999
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Net revenue........................ $255,388 $251,470
Cost of sales...................... 171,011 166,638
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Gross profit..................... 84,377 84,832
Selling, general and
administrative expenses.......... 70,344 67,168
Depreciation and amortization...... 7,512 6,395
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Income from operations........... 6,521 11,269
Other expenses:
Interest expense................. (5,689) (4,878)
Foreign currency translation
loss........................... (704) (7,557)
Other expenses................... (175) (277)
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Loss before taxes.............. (47) (1,443)
Provision/(benefit) for income
taxes............................ 686 (14)
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Net loss....................... (733) (1,429)
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Basic and diluted loss
per share:
On net loss.................... ($732.78) ($1,429.18)
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The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
OCTOBER 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ ($733) ($1,429)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......................... 8,162 7,404
Provision for losses on accounts receivable........... 58 70
Loss on disposal of depreciable assets................. 389 692
Exchange loss.......................................... 761 7,795
Other non-cash expense (income)........................ 35 (62)
Other non-cash expense (income)........................ -- (4,097)
(Decrease) increase in cash resulting from changes in:
Accounts receivable................................. (4,120) (1,532)
Inventories......................................... (30,193) (36,432)
Prepaid expenses.................................... (1,734) 2,247
Accounts payable.................................... 19,979 20,958
Accrued liabilities and taxes payable............... (676) 8,293
Deferred revenue.................................... (330) (730)
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Net cash (used in)/ provided by operating
activities.................................... (8,402) 3,177
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets............................. (8,072) (13,649)
Acquisition of investments.............................. (693) (71)
Increase in deposits.................................... (168) (36)
Refunds of deposits..................................... 9 --
Increase in intangibles................................. (139) (11)
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Net cash used in investing activities............ (9,063) (13,767)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to shareholders, officer and employees............ -- (334)
Proceeds from employee loan repayments.................. 6 7
Principal payments under long-term financing
agreements............................................ (884) (1,121)
Proceeds from issuance of long-term financing
agreements............................................ 17,734 11,551
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Net cash provided by financing activities........ 16,856 10,103
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Effect of exchange rate changes on cash.................... (1,530) 221
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Net decrease in cash and cash
equivalents................................... (2,139) (266)
Cash and cash equivalents, beginning of period............. 21,486 24,705
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Cash and cash equivalents, end of period................... $19,347 $24,439
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Cash paid for interest..................................... $3,006 $2,627
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Cash paid for income taxes................................. $41 $3,518
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The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
UNAUDITED
2000 1999
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Net Loss................................... ($733) ($1,429)
Other comprehensive (loss)/income, net of tax:
Foreign currency translation............ (226) 2,874
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Comprehensive (Loss)/ Income............... ($959) $1,445
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The accompanying notes are an integral part of these statements.
MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of MTS, Incorporated and its majority and wholly owned subsidiaries (Company). In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of October 31, 2000 and the results of its operations and cash flows for the three months then ended. The significant accounting policies and certain financial information and footnotes 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, 2000.
NOTE 2- TRANSLATION OF FOREIGN CURRENCY
The value of the U.S. dollar rises and falls day-to-day on foreign currency exchanges. Since the Company does business in several foreign countries, these fluctuations affect the Company's financial position and results of operations. In accordance with SFAS No. 52, Foreign Currency Translation, all foreign assets and liabilities have been translated at the exchange rates prevailing at the respective balance sheets dates, and all income statement items have been translated using the weighted average exchange rates during the respective years. The net gain or loss resulting from translation upon consolidation into the financial statements is reported as a separate component of shareholder's equity. Some transactions of the Company and its foreign subsidiaries are made in currencies different from their functional currency. Translation gains and losses from these transactions are included in income as they occur. The Company recorded net transaction losses of $0.7 million and $7.6 million for the three months ended October 31, 2000 and 1999, respectively. In 1999 these amounts primarily represented unrealized losses on the Company's yen-denominated debt and the fluctuations in foreign exchange rates in other international countries in which the Company does business. The related fluctuations in foreign currency exchange rates in fiscal year 2001, are now recorded in other comprehensive income.
NOTE 3- INCOME TAXES
The effective income tax rates for the three months ended October 31, 2000 and 1999 are based on the federal statutory income tax rate, increased for the effect of state income taxes, net of federal benefit and foreign taxes.
NOTE 4- RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133. 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 at fair value. Derivatives that do not qualify as hedges under SFAS 133 must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the underlying assets or liabilities through earnings or recognized in other comprehensive income until the underlying hedged item is recognized in earnings.
The Company adopted SFAS 133, as amended, on August 1, 2000. In fiscal 2001, the Company will record its derivatives on the balance sheet at fair value and reported adjustments to fair value through income. Given the Company's limited use of derivatives, the cumulative effect of adopting SFAS 133 is not material.
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, 2000 included in the Company's 10-K filed with the United States Securities and Exchange Commission.
FORWARD-LOOKING STATEMENTS
This report and other written reports and oral statements made from time to time by the Company may contain so- called forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995, all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as "believes," "anticipates," "estimates," "expects," "intends," "plans," "forecasts" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial performance (including sales and earnings guidance), marketing and expansion plans and similar matters. One must carefully consider any such statement and should understand that many factors could cause actual results and plans to differ from those included in the Company's forward-looking statements. These factors include inaccurate assumptions and a broad variety of risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Although it is not possible to predict or identify all such factors, they may include the following: (i) consumer demand for the Company's products, which is believed to be related to a number of factors, including overall consumer spending patterns, weather conditions and new releases available from suppliers; (ii) an unexpected increase in competition, including Internet competition and competition resulting from electronic or other alternative methods of delivery of music and other products to consumers, or unanticipated margin or other disadvantages relative to our competitors; (iii) the continued availability and cost of adequate capital to fund the Company's operations; (iv) higher than anticipated interest, occupancy, labor, distribution and inventory shrinkage costs; (v) unanticipated adverse litigation expenses or results; (vi) higher than anticipated costs associated with the closing of underperforming stores; (vii) unanticipated increases in the cost of merchandise sold by the Company; (viii) the performance of the Company's new strategic initiatives, including the Internet; (ix) changes in foreign currency exchange rates and economic and political country risk; and (x) the continued ability of the company to locate and develop suitable sites for its expansion program. Actual results or outcomes may differ materially from those expressed or implied by such forward-looking statements as a result of certain risk factors described herein and in other documents filed with the Securities and Exchange Commission. Readers are cautioned that all forward-looking statements involve risks and uncertainty. Readers should also carefully review the risk factors described in the Company's report on form 10-K and other documents filed from time to time with the United States Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year.
RESULTS OF OPERATIONS
Three months ended October 31, 2000 compared to three months ended October 31, 1999.
REVENUES
During the three months ended October 31, 2000, the Company's consolidated net revenues increased 1.6 % to $255.4 million from $251.5 million during the three months ended October 31, 1999, an increase of $3.9 million (or an increase of $4.7 million excluding the effects of U.S. dollar foreign translation fluctuations). The Company's net revenues were derived from U.S. revenues of $147.9 million and international revenues of $107.5 million for the three months ended October 31, 2000 compared to $143.7 million in the U.S. and $107.8 million internationally for the three months ended October 31, 1999. The overall increase in total Company revenues for the three months ended October 31, 2000 was driven primarily by additional new store growth, expansion of existing stores square footage and growth of the Company's internet business since October 31, 1999. Revenues in the first quarter were impacted by weak comparable store sales. Comparable store sales results decreased by 1.78% during the three months ended October 31, 2000 as compared to the three months ended October 31, 1999. Management attributes the decline in comparable store sales to weak new releases of music product. The Company realized substantial increases in comparable domestic Internet revenues, up 145.57% for the three months ended October 31, 2000 compared to the three months ended October 31, 1999. During the three months ended October 31, 2000, the Company opened seven stores and closed two stores, bringing its total number of owned and operated retail stores to 192 at October 31, 2000.
GROSS PROFIT
During the three months ended October 31, 2000, gross profit decreased $0.4 million to $84.4 million from $84.8 million for the three months ended October 31, 1999. The Company had gross profit increases resulting from incremental revenue growth that were offset by a more competitive pricing structure implemented to stimulate first quarter revenues. Gross profit as a percentage of net revenues decreased to 33.1% for the three months ended October 31, 2000 as compared to 33.7% for the three months ended October 31, 1999. Management believes that the primary factors contributing to the decline in gross profit as a percentage of net revenues were the growth in the Company's domestic Internet sales and increased marketing efforts during the three months ended October 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses, excluding depreciation and amortization, increased $3.1 million to $70.3 million during the three months ended October 31, 2000 from $67.2 million for the three months ended October 31, 1999. Expenditures for the Company's e-commerce operations and related distribution, increases in store occupancy and personnel costs contributed primarily to the increase. As a percentage of net revenues, selling, general and administrative expenses increased to 27.6% for the three months ended October 31, 2000 as compared to 26.7% for the three months ended October 31, 1999. Management attributes the percentage increase primarily to the decrease in comparable store sales coupled with start-up costs involved in establishing the Company's Latin American division in Argentina and stores in Canada and additional costs associated with expanding the Company's Internet site and presence online.
Depreciation and amortization expense was $7.5 million for the three months ended October 31, 2000 compared to $6.4 million for the three months ended October 31, 1999, an increase of $1.1 million, primarily due to a change in useful lives of its technology and intangible assets.
INCOME FROM OPERATIONS
The Company's consolidated operating income during the three months ended October 31, 2000 was $6.5 million compared with consolidated operating income of $11.3 million during the three month period ended October 31, 1999 for an decrease of $4.8 million which reflects primarily the increases in selling, general and administrative costs and depreciation.
INTEREST EXPENSE
Net interest expense increased to $5.7 million during the three months ended October 31, 2000 from $4.9 million during the three months ended October 31, 1999 for an increase of 16.3%. The increase was due primarily to increased borrowings on the Company's senior Credit Facility combined with higher borrowing costs.
FOREIGN CURRENCY TRANSLATION LOSS
A non-cash foreign currency translation loss of $0.7 million was recognized for the three months ended October 31, 2000 as compared to a non-cash foreign currency translation loss of $7.6 million for the three months ended October 31, 1999. The account primarily represents non-cash gains and losses due to outstanding yen denominated bank debt and the volatility of currencies in other international countries in which the Company does business. As of August 1, 2000, the Company has adopted SFAS 133, the result of which has been reflected in other expenses.
INCOME TAXES
The income tax expense for the three months ended October 31, 2000 was $0.7 million compared with an immaterial tax benefit for the three months ended October 31, 1999. Tax provisions and benefits are based upon management's estimate of the Company's annualized effective tax rates.
LIQUIDITY AND CAPITAL RESOURSES
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 October 31, 2000 were $19.3 million compared with $24.4 million as of October 31, 1999. The Company used cash primarily for investments in new stores and store relocations and remodels, computer system enhancements and equipment purchases. Capital expenditures totaled $8.1 million and $13.6 million during the three months ended October 31, 2000 and 1999, respectively.
Included in capital expenditures were $.9 million and $1.0 million of video rental acquisitions for the three months ended October 31, 2000 and 1999, respectively.
Total funded debt increased to $328.9 million as of October 31, 2000, from $305.2 million as of October 31, 1999. Outstandings under the Company's senior revolving credit facility were $206.2 million on October 31, 2000 compared to $184.2 million on October 31, 1999. The increase in bank outstandings was largely due to the financing of operating activities and capital expenditures. Unused availability under the $275.0 million revolving senior credit facility as of October 31, 2000 was $81.3 million.
The Company's Senior Credit Facility expires in April 2001. The Company intends to renew the credit facility prior to expiration and believes that the cash flow generated from current operating levels, together with amounts available under the renewed credit facility, will be sufficient to fund its working capital and debt service requirements, lease obligations, operating expenses and support its currently expected capital expenditures for at least the next twelve months. However, credit availability will continue to depend on numerous factors, including growth of the business, additional infrastructure needs and future results of operations.
There can be no assurance or guaranty that the Company will be successful in renewing or extending its Senior Credit facility or that any renewal or extension will be on terms that are favorable to the Company. In the event the Company is unable to renew its credit facility, the Company's business, financial condition and results of operations would be materially and adversely affected.
Seasonality
Retail music sales in the United States are typically higher during the calendar fourth quarter as a result of consumer purchasing patterns due to increased store traffic and impulse buying by holiday shoppers. As a result, the majority of U.S. music retailers and, more specifically, the mall-based retailers rely heavily on the calendar fourth quarter to achieve annual sales and profitability results. The Company has had reduced seasonal reliance due to its deep catalog merchandising approach. In addition, international markets exhibit less fourth quarter seasonality than U.S. markets and the Company's international presence has historically reduced this reliance on the U.S. holiday shopping season.
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 first quarter or in place during the first three months of fiscal 2001 were not material to the Company's results of operations or its financial position.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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(b) Reports on Form 8-K.
None
MTS, INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MTS, INCORPORATED |
| (Registrant) |
| By: | /s/ DeVaughn D. Searson |
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| DeVaughn D. Searson | |
| EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER | |
| (Principal Financial and Accounting Officer) |
| Date: December 12, 2000 |
EXHIBIT INDEX
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