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MTS Inc · 10-Q · For 4/30/01

Filed On 6/14/01 4:31pm ET · SEC File 333-54035 · Accession Number 891618-1-501196

  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 6/14/01  MTS Inc                           10-Q        4/30/01    2:116                                    Bowne of Palo Alto/FA

Quarterly Report · Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Mts, Inc. Form 10-Q 4/30/2001                         18     86K 
 2: EX-10.5     Material Contract                                     98    327K

10-Q · Mts, Inc. Form 10-Q 4/30/2001
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Exhibits and Reports on Form 8-K Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Quantitative and Qualitative Disclosures about Market Risk
1	1st Page - Filing Submission
3	Item 1. Financial Statements
9	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
15	Item 3. Quantitative and Qualitative Disclosures about Market Risk
17	Part II. Other Information
"	Item 6. Exhibits and Reports on Form 8-K

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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 APRIL 30, 2001

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)

                                                                [Download Table]
                                                               
           CALIFORNIA                           94-1500342     
(State or other jurisdiction of              (I.R.S. Employer  
 incorporation or organization)             Identification No.)

2500 DEL MONTE, WEST SACRAMENTO, CA 95691 
(Address of principal executive office) 

916-373-2500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during 
the preceding 12 months (or for such shorter period that the registrant was     
required to file such reports), and (2) has been subject to such filing         
requirements for the past 90 days.   Yes [X]     No [ ]                         

Shares outstanding of the Registrant's common stock:                            

                                                                [Download Table]
                                                                            
              Class                            Outstanding at April 30, 2001
Class B Common Stock, no par value                      1,000 shares        

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 MTS, INCORPORATED
 TABLE OF CONTENTS

                                                        [Enlarge/Download Table]

                                                                                                      PAGE
                                                                                                      ----
                                                                                                          
Part I. Financial Information.......................................................................      
   Item 1. Consolidated Financial Statements........................................................      
         Consolidated Balance Sheets as of April 30, 2001 and 2000 and July 31, 2000................     3
         Consolidated Statements of Income for the three months ended April 30, 2001 and                  
           2000 and the nine months ended April 30, 2001 and 2000...................................     4
         Consolidated Statements of Cash Flows for the nine months ended April 30, 2001 and 2000....     5
         Consolidated Statements of Comprehensive Income for the nine months ended                        
           April 30, 2001 and 2000..................................................................     6
         Notes to Consolidated Financial Statements.................................................   7-8
   Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....  9-15
   Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 15-16
Part II. Other Information .........................................................................      
   Item 5. Other Information........................................................................    17
   Item 6. Exhibits and Reports on Form 8-K.........................................................    17
Signature...........................................................................................    18

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 PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS                                                    

 MTS, INCORPORATED
 CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2001, 2000 AND JULY 31, 2000
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                               UNAUDITED  UNAUDITED          
                                                               ---------  ---------          
                                                               APRIL 30,  APRIL 30,  JULY 31,
                                                                 2001       2000       2000  
                                                               --------   --------   ------- 
                                                                                             
                                 Assets                                                      
Current Assets:                                                                              
    Cash and cash equivalents                                    36,653     22,290    21,486 
    Receivables, net                                             33,162     30,118    31,457 
    Merchandising inventories                                   275,655    288,996   293,429 
    Prepaid expenses                                              8,561     13,317    12,728 
    Deferred tax assets                                          14,377      8,397    12,694 
                                                                -------    -------   ------- 
        Total current assets                                    368,408    363,118   371,794 
Fixed assets, net                                               185,499    208,389   207,440 
Deferred tax assets                                              10,456      9,794     9,648 
Other assets                                                     38,975     37,971    38,396 
                                                                -------    -------   ------- 
        Total assets                                            603,338    619,272   627,278 
                                                                =======    =======   ======= 

                  Liabilities and Shareholder's Equity                                       
 Current Liabilities:                                                                        
    Current maturities of long-term debt                        204,611    180,558   191,325 
    Accounts payable                                            161,906    161,365   165,701 
    Reserve for restructuring costs                               3,318         --        -- 
    Accrued liabilities                                          40,267     40,723    39,456 
    Income taxes payable                                             91      1,808        95 
    Deferred revenue, current portion                             2,593      2,409     2,959 
                                                                -------    -------   ------- 
        Total current liabilities                               412,786    386,863   399,536 
Long-term Liabilities:                                                                       
    Long-term debt, less current maturities                     118,466    120,123   120,238 
    Deferred revenue, less current portion                          134        148       144 
                                                                -------    -------   ------- 
        Total liabilities                                       531,386    507,134   519,918 
                                                                -------    -------   ------- 

Shareholder's Equity:                                                                        
    Common stock:                                                                            
    Class B, no par value; 10,000,000 shares authorized;                                     
       1,000 shares issued and outstanding at April 30, 2001,                                
       April 30, 2000 and July 31, 2000                               6          6         6 
    Retained earnings                                            85,566    132,603   126,138 

    Accumulated other comprehensive income                      (13,620)   (20,471)  (18,784)
                                                                -------    -------   ------- 
        Total shareholder's equity                               71,952    112,138   107,360 
                                                                -------    -------   ------- 
        Total liabilities and shareholder's equity              603,338    619,272   627,278 
                                                                =======    =======   ======= 

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 APRIL 30, 2001 AND 2000
 AND THE NINE MONTHS ENDED APRIL 30, 2001 AND 2000
 (DOLLARS IN THOUSANDS, EXCEPTS PER SHARE INFORMATION)
 (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                      THREE MONTHS ENDED          NINE MONTHS ENDED     
                                                           APRIL 30,                  APRIL 30,         
                                                  -------------------------   ------------------------- 
                                                     2001            2000        2001           2000    
                                                  ----------      ---------   ----------      --------- 
                                                                                                        
Net revenue                                          255,098        255,042      833,474        842,151 

Cost of sales (a)                                    184,175        169,601      583,369        573,141 
                                                  ----------      ---------   ----------      --------- 

    Gross Profit                                      70,923         85,441      250,105        269,010 

Selling, general and administrative expenses (b)      70,901         74,004      226,152        226,013 

Restructuring and asset impairment costs              17,789             --       17,789             -- 

Depreciation and amortization                          7,353          6,783       23,017         19,523 
                                                  ----------      ---------   ----------      --------- 

    (Loss)/income from operations                    (25,120)         4,654      (16,853)        23,474 

Other expenses:                                                                                         

    Interest Expense                                  (6,291)        (5,549)     (18,601)       (14,832)

    Foreign currency translation loss                 (2,123)        (1,547)      (5,542)        (7,409)

    Other expenses                                      (844)        (1,873)      (1,044)        (3,011)
                                                  ----------      ---------   ----------      --------- 

    Loss before taxes                                (34,378)        (4,315)     (42,040)        (1,778)

    (Benefit)/provision for income taxes                  --            (62)      (1,468)         1,897 
                                                  ----------      ---------   ----------      --------- 

    Net loss                                         (34,378)        (4,253)     (40,572)        (3,675)
                                                  ==========      =========   ==========      ========= 

Basic and diluted loss per share:                                                                       

    On net loss                                   (34,377.57)     (4,253.50)  (40,572.07)     (3,675.34)
                                                  ==========      =========   ==========      ========= 

(a)    Includes $4.4 million of inventory write downs related to restructuring  
in 2001 (see note 4).                                             

(b)    Includes $1.6 million of professional fees related to restructuring      
charges in 2001 (see note 4).                                     

The accompanying notes are an integral part of these statements.

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 MTS, INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTHS ENDED APRIL 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                               UNAUDITED       
                                                                               APRIL 30,       
                                                                         --------------------- 
                                                                           2001         2000   
                                                                         -------       ------- 
                                                                                               
CASH FLOWS FROM OPERATING ACTIVITIES:                                                          

    Net loss                                                             (40,572)       (3,675)
    Adjustments to reconcile net loss to net cash provided by operating                        
    activities:                                                                                
    Depreciation and amortization                                         25,226        22,977 
    Restructuring and asset impairment costs                              21,438            -- 
    Provision for losses on accounts receivable                               57           114 
    Loss on disposal of depreciable assets                                 3,573         5,126 
    Exchange loss                                                          7,393         6,063 
    Other non-cash expense                                                   320           197 
    Provision for deferred taxes                                           1,554           767 
    (Decrease) increase in cash resulting from changes in:                                     
      Accounts receivable                                                 (1,705)       (3,740)
      Inventories                                                         13,369       (17,283)
      Prepaid expenses                                                     4,167        (2,105)
      Accounts payable                                                    (3,795)       11,033 
      Accrued liabilities and taxes payable                                  807         8,803 
      Deferred revenue                                                      (376)         (698)
                                                                         -------       ------- 
           Net cash provided by operating activities                      31,456        27,579 
                                                                         -------       ------- 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                          

      Acquisition of fixed assets                                        (23,213)      (27,798)
      Acquisition of investments                                          (1,710)       (1,327)
      Increase in deposits                                                  (262)         (169)
      Refunds of deposits                                                     38            29 
      Increase in intangibles                                             (2,092)         (358)
                                                                         -------       ------- 
           Net cash used in investing activities                         (27,239)      (29,623)
                                                                         -------       ------- 

CASH FLOWS FROM FINANCING ACTIVITIES:                                                          

      Loans to shareholder, officers and employees                            --          (334)
      Proceeds from employee loan payments                                    93           378 
      Principal payments under long-term financing agreements            (35,803)      (60,550)
      Proceeds from issuance of long-term financing agreements            60,482        67,000 
                                                                         -------       ------- 
           Net cash provided by financing activities                      24,772         6,494 
                                                                         -------       ------- 
Effect of exchange rate changes on cash                                  (13,822)       (6,865)
                                                                         -------       ------- 
           Net increase/(decrease) in cash and cash equivalents           15,167        (2,415)
Cash and cash equivalents, beginning of period                            21,486        24,705 
                                                                         -------       ------- 
Cash and cash equivalents, end of period                                  36,653        22,290 
                                                                         =======       ======= 
Cash paid for interest                                                    16,250        12,508 
                                                                         =======       ======= 
Cash paid for income taxes                                                 2,010         8,139 
                                                                         =======       ======= 

The accompanying notes are an integral part of these statements.

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 MTS, INCORPORATED
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 FOR THE NINE MONTHS ENDED APRIL 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)

                                                                [Download Table]

                                                        UNAUDITED         
                                                ------------------------- 
                                                  2001              2000  
                                                -------            ------ 
                                                                          
Net Loss                                        (40,572)           (3,675)

Other comprehensive income, net of tax                                    

      Foreign currency translation                5,164               111 
                                                -------            ------ 
Comprehensive Loss                              (35,408)           (3,564)
                                                =======            ====== 

The accompanying notes are an integral part of these statements.

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 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 and restructuring and asset impairment charges) necessary 
to present fairly its consolidated financial position as of April 30, 2001 and  
the results of its operations and cash flows for the nine months then ended. The
significant accounting policies and certain financial information which are     
normally included in financial statements prepared in accordance with generally 
accepted accounting principals, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying unaudited            
consolidated financial statements should be read in conjunction with the        
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 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 $5.5 million and $7.4 million for the nine   
months ended April 30, 2001 and 2000, respectively. These amounts primarily     
represent unrealized losses on the Company's yen-denominated debt in 2000 and   
the volatility of currencies in international countries in which the Company    
does business.                                                                  

NOTE 3 - INCOME TAXES                                                           

The effective income tax rates for the nine months ended April 30, 2001 and 2000
are based on the federal statutory income tax rate, increased for the effect of 
state income taxes, net of federal benefit and foreign taxes and decreased due  
to the creation of a valuation account related to the net operating loss and    
certain deferred tax assets.                                                    

NOTE 4 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES                             

In the third quarter, the Company recorded pre-tax restructuring and asset      
impairment charges of $23.8 million, as a result of steps the Company is taking 
that are intended to improve the Company's operations and improve cash flows. Of
the $23.8 million in total pre-tax restructuring and asset impairment charges,  
$4.4 million related to inventory write downs was recorded in cost of sales and 
$1.6 million related to professional fees was recorded in selling, general and  
administrative expenses. The remaining $17.8 million of the total pre-tax       
restructuring and asset impairment charges were reported separately. Included in
the $17.8 million is $13.6 million for the write down of leasehold improvements 
and various other property in stores to be closed, $3.2 million for accrual of  
lease termination and other costs, and $1.0 million of involuntary termination  
and benefits. The involuntary termination benefits include amounts that have    
been either paid or accrued for and cover                                       

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 MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

approximately 250 employees at both the retail and corporate level, from clerks 
to management.                                                                  

NOTE 5 - DEBT                                                                   

In April 2001, the Company amended and restated on a short-term basis its       
outstanding obligations under its senior revolving credit facility (Credit      
Facility). The Credit Facility now provides for initial maximum borrowings of up
to $225.0 million, consisting of two sub-facilities (one for an initial maximum 
of $98.4 million and one for an initial maximum Japanese yen of                 
(Yen)15,596,828,718, which was equivalent to $126.6 million at inception), and  
it matures in April 2002. Maximum borrowings under the Credit Facility will     
decline during its one year term by $15 million in each of July and October 2001
and an additional $95 million in December 2001. Maximum borrowings under the    
Credit Facility are also subject to a borrowing base formula, maximum leverage  
ratio tests and maintaining a minimum rolling quarterly EBITDA. Borrowings are  
collateralized by substantially all of the Company's assets and the capital     
stock of its subsidiaries. The Credit Facility bears interest at various        
variable rates, including (as defined in the agreements) a Money Market Rate,   
ABR Rate, Yen Base Rate and Euro Rate, plus an annual facility fee payable by   
the Company. There are various restrictive terms and covenants relating to the  
occurrence of material adverse financial operating conditions, balance sheet    
coverage ratio, certain debt and certain limitations on additional indebtedness,
sale-leaseback transactions, liens or encumbrances on substantially all of the  
Company's assets, cash management arrangements, long-term transactions, capital 
expenditures, investments, acquisitions and new retail locations, mandatory     
commitment reductions and issuance of capital stock.                            

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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 Annual Report on Form 10-K filed with the Securities  
and Exchange Commission.                                                        

FORWARD-LOOKING STATEMENTS                                                      

The following discussion should be read in conjunction with historical          
consolidated financial information and the unaudited consolidated financial     
statements of the Company and the notes thereto included elsewhere in this Form 
10-Q. The results shown herein are not necessarily indicative of the results to 
be expected in any future period. The following discussion contains             
forward-looking statements that involve known and unknown risks and             
uncertainties. Use of the words "anticipates," "believes," "estimates,"         
"expects," "intends," "plans" and similar expressions is intended to identify   
forward-looking statements. A variety of factors could cause the Company's      
actual results to differ materially from the anticipated results expressed in   
such forward-looking statements, including among other things: (i) consumer     
demand for the Company's products, which is believed to be related to a number  
of factors, including overall consumer spending patterns, weather conditions and
new releases available from suppliers; (ii) an 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 implementation of the Company's restructuring plan and/or lower than   
anticipated resulting operations and cash flow benefits; (vii) unanticipated    
increases in the cost of merchandise sold by the Company; (viii) changes in     
foreign currency exchange rates and economic and political country risk; (ix)   
the ability of the Company to comply with the ongoing monthly affirmative and   
negative covenants as prescribed by the Company's Amended and Restated Credit   
Agreement; (x) the ability of the Company to arrange for alternative debt or    
equity financing commitments as required under the terms of the Company's       
Amended and Restated Credit Agreement; (xi) the ability of the Company to raise 
the cash necessary to meet the mandatory commitment reductions under the        
Company's Amended and Restated Credit Agreement; and (xii) the ability of the   
Company to successfully defend itself in ongoing and future litigation. All     
forward-looking statements included in this Form 10-Q are based on information  
available to the Company on the date hereof, and the Company assumes no         
obligation to update any such forward-looking statements. Please refer to the   
Risk Factors section of the Company's Annual Report on Form 10-K for further    
information on other factors, which could affect the financial results of the   
Company and such forward-looking statements.                                    

RESULTS OF OPERATIONS                                                           

THREE MONTHS ENDED APRIL 30, 2001 COMPARED TO THREE MONTHS ENDED APRIL 30, 2000 

REVENUES                                                                        

For the three months ended April 30, 2001, the Company's consolidated net       
revenues were stable at $255.1 million versus $255.0 million, an increase of $.1
million (or an increase of $10.3 million excluding the effects of U.S. dollar   
foreign translation fluctuations). The Company's net revenues were derived from 
U.S. revenues of $148.7 million and international revenues of $106.4 million for
the three months ended April 30, 2001 compared to $148.5 million in the U.S. and
$106.5 million internationally for the three months ended April 30, 2000. The   
overall increase in total Company revenues for the three months ended April 30, 
2001 was driven                                                                 

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primarily by new store revenues and improving comparable store performance      
offset by the adverse fluctuations in foreign currency exchange rates, the loss 
of one operating day in 2001 due to 2000 being a leap year and the closing of   
under performing stores. During the three months ended April 30, 2001, the      
Company opened one store and closed ten stores, bringing its total number of    
owned and operated retail stores to 185.                                        

GROSS PROFIT                                                                    

For the three months ended April 30, 2001, gross profit decreased $14.5 million 
to $70.9 million from $85.4 million for the three months ended April 30, 2000   
(or a decrease of $11.7 million excluding the effects of the U.S. dollar foreign
translation fluctuations). Management attributes the decline in gross profit,   
excluding the effect of inventory write downs related to the restructuring      
charge (see note 4), principally to weaker domestic margins associated with the 
liquidation of inventory from closed stores, adverse fluctuations in foreign    
currency exchange rates and the reconciliation of the perpetual inventory       
records of the Company's foreign subsidiaries. Improved margins from the        
Company's domestic core music operations were impacted by higher product costs  
associated with international operations due to the strengthening of the U.S.   
dollar against international currencies. Gross profit as a percentage of net    
revenues decreased to 27.8% for the three months ended April 30, 2001 as        
compared to 33.5% for the three months ended April 30, 2000. Management         
attributes the percentage decrease primarily to liquidation of inventory        
associated with certain store closures in connection with the Company's         
restructuring efforts and the reconciliation of international inventories as    
discussed above.                                                                

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE                                     

Selling, general and administrative expenses, excluding depreciation and        
amortization, decreased by $3.1 million to $70.9 million during the three months
ended April 30, 2001 from $74.0 million for the three months ended April 30,    
2000. Excluding the effect of professional fees related to the restructuring    
charge (see note 4), decreases in personnel, occupancy, advertising and other   
cost savings initiatives resulting from the Company's restructuring program     
contributed primarily to the reduction in overall operating costs. As a         
percentage of net revenues, selling, general and administrative expenses        
decreased to 27.8% for the three months ended April 30, 2001 as compared to     
29.0% for the three months ended April 30, 2000. Management attributes the      
percentage decrease excluding the effect of professional fees related to the    
restructuring charge (see note 4) primarily to the overall reductions in        
operating costs as previously discussed.                                        

DEPRECIATION AND AMORTIZATION                                                   

Depreciation and amortization expense was $7.4 million for the three months     
ended April 30, 2001 compared to $6.8 million for the three months ended April  
30, 2000, an increase of $0.6 million. This increase was primarily due to       
reducing the useful lives of the Company's technology and intangible assets and 
ongoing investments in depreciable assets.                                      

LOSS FROM OPERATIONS                                                            

The Company's consolidated operating loss during the three months ended April   
30, 2001 was $25.1 million compared with consolidated operating income of $4.7  
million during the three-month period ended April 30, 2000, a decrease of $29.8 
million. Excluding the effects of the $23.8 million in total restructuring and  
asset impairment costs incurred during the three months ended April 30, 2001,   
this decrease reflects primarily the decrease in gross profit and increase in   
depreciation offset by the reduction in selling, general and                    

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administrative expenses as previously discussed.                                

INTEREST EXPENSE                                                                

Net interest expense was $6.3 million for the three months ended April 30, 2001 
compared to $5.5 million for the three months ended April 30, 2000, an increase 
of 14.6%. The increase was due primarily to increased amounts outstanding under 
the Company's senior credit facility.                                           

FOREIGN CURRENCY TRANSLATION LOSS                                               

A foreign currency translation loss of $2.1 million was recognized for the three
months ended April 30, 2001 compared to a foreign currency translation loss of  
$1.5 million for the three months ended April 30, 2000. The account primarily   
represents the volatility of foreign currency fluctuations against the U.S.     
dollar in foreign countries in which the Company does business.                 

INCOME TAXES                                                                    

Pre-tax losses resulted in an income tax benefit for the three months ended     
April 30, 2001 of $0 million compared with an income tax benefit of $0.1 million
for the three months ended April 30, 2000. Tax provisions and benefits are based
upon management's estimate of the Company's annualized effective tax rates.     

NINE MONTHS ENDED APRIL 30, 2001 COMPARED TO NINE MONTHS ENDED APRIL 30, 2000   

REVENUES                                                                        

For the nine months ended April 30, 2001, the Company's consolidated net        
revenues were $833.5 million compared to $842.2 million for the nine months     
ended April 30, 2000, a decrease of $8.7 million (or an increase of $12.6       
million excluding the effects of U.S. dollar foreign translation fluctuations). 
The Company's net revenues were derived from U.S. revenues of $489.7 million and
international revenues of $343.8 million for the nine months ended April 30,    
2001 compared to $498.9 million in the U.S. and $343.3 million internationally  
for the nine months ended April 30, 2000. The overall decrease in total revenues
for the nine months ended April 30, 2001 was driven primarily by the adverse    
fluctuations in foreign currency exchange rates and a decrease in domestic same 
store sales of 3.6% generally associated with weak new releases and diminishing 
consumer demand for compact disc singles and cassettes. During the nine months  
ended April 30, 2001, the Company opened 12 stores and closed 15 stores,        
bringing its total number of owned and operated retail stores to 185.           

GROSS PROFIT                                                                    

For the nine months ended April 30, 2001, gross profit was $250.1 million       
compared to $269.0 million for the nine months ended April 30, 2000, a decrease 
of $18.9 million (or a decrease of $12.3 million excluding the negative effects 
of U.S. dollar foreign translation fluctuations). Management attributes the     
decrease in gross profit, excluding the effects of inventory write downs related
to the restructuring charge (see note 4), principally to the decrease in        
domestic same store sales, weaker domestic margins associated with the          
liquidation of inventory from closed stores and the impact of foreign currency  
fluctuations on international purchases and margins. Gross profit as a          
percentage of net revenues decreased to 30.0% for the nine months ended April   
30, 2001 compared to 31.9% for the nine months ended April 30, 2000. Management 
believes that the primary factors contributing to the decrease in gross profit  
as a percentage of net revenues was due to ongoing industry pricing pressures,  
the liquidation of closed stores associated with the Company's restructuring    
initiatives and the reconciliation of the perpetual                             

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inventory records of the Company's foreign subsidiaries.                        

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE                                     

Selling, general and administrative expenses, excluding depreciation and        
amortization, were $226.2 million for the nine months ended April 30, 2001      
compared to $226.0 million for the nine months ended April 30, 2000, an increase
of $.2 million. Excluding the effects of professional fees related to the       
restructuring charge (see note 4), decreases in personnel and other cost savings
resulting from the Company's restructuring program were offset by increases in  
distribution, store occupancy, and advertising and marketing costs. As a        
percentage of net revenues, selling, general and administrative expenses        
increased to 27.1% for the nine months ended April 30, 2001 compared to 26.8%   
for the nine months ended April 30, 2000. Excluding the effects of professional 
fees related to the restructuring charge (see note 4), management attributes the
percentage increase primarily to the decrease in net revenues.                  

DEPRECIATION AND AMORTIZATION                                                   

Depreciation and amortization expense was $23.0 million for the nine months     
ended April 30, 2001 compared to $19.5 million for the nine months ended April  
30, 2000, an increase of $3.5 million. The increase was primarily due to        
reducing the useful lives of technology and intangible assets and ongoing       
investments in depreciable assets.                                              

LOSS FROM OPERATIONS                                                            

The Company's consolidated operating loss for the nine months ended April 30,   
2001 was $16.9 million compared with consolidated operating income of $23.5     
million for the nine-month period ended April 30, 2000, a decrease of $40.4     
million. This decrease (excluding the effects of $23.8 million in restructuring 
and asset impairment costs) reflects primarily the decrease in gross profit and 
the increase in depreciation offset by the reduction in selling, general and    
administrative expenses as discussed above.                                     

INTEREST EXPENSE                                                                

Net interest expense was $18.6 million for the nine months ended April 30, 2001 
compared to $14.8 million for the nine months ended April 30, 2000, an increase 
of $3.8 million or 25.7%. The increase was due primarily to increased amounts   
outstanding under the Company's senior credit facility combined with higher     
borrowing costs.                                                                

FOREIGN CURRENCY TRANSLATION LOSS                                               

The Company recognized a foreign currency translation loss of $5.5 million for  
the nine months ended April 30, 2001 compared to a foreign currency translation 
loss of $7.4 million for the nine months ended April 30, 2000. The account      
primarily represents non-cash losses due to outstanding yen denominated bank    
debt in 2000 and the volatility of currencies in international countries in     
which the Company does business.                                                

INCOME TAXES                                                                    

A pre-tax operating loss resulted in an income tax benefit for the nine months  
ended April 30, 2001 of $1.5 million compared with an income tax expense of $1.9
million for the nine months ended April 30, 2000. Tax benefits and provisions   
are based upon management's estimate of the Company's annualized effective tax  
rates.                                                                          

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RESTRUCTURING AND ASSET IMPAIRMENT COSTS                                        

During the third quarter of the Company's 2001 fiscal year, the Company         
commenced a business plan and restructuring process and retained a consulting   
firm to assist the Company in its efforts. These efforts produced a three-year  
restructuring plan that was adopted by the Company in February 2001.            

The restructuring plan contains several initiatives designed to improve the     
Company's operations, including closing and liquidating most stand-alone and    
combination bookstores, canceling nearly all future commitments for bookstores  
and book departments, entering into a joint venture relationship for the        
Company's Hong Kong and Singapore operations, selling or closing the Company's  
Canadian and Argentinean operations, closing up to nine under performing        
domestic record, outlet and frame/gallery stores, and monitoring an additional  
nine stores for possible future closure. The restructuring plan also contains   
several initiatives intended to improve cash flow, including substantially      
eliminating new store openings and remodeling plans, reducing capital           
expenditures until internally generated cash flow will support further growth,  
and reducing working capital.                                                   

The Company began implementing its restructuring plan shortly after its         
adoption. Since the plan was implemented, the Company has closed all but one of 
its stand-alone book stores identified in the plan and has liquidated most of   
its book inventories. The Company has also closed several of its under          
performing record and outlet stores and had arranged for the sale of two of its 
frame/gallery stores. Consistent with the restructuring plan, the Company is    
still monitoring additional stores for possible future closure.                 

In the third quarter, the Company recorded pre-tax restructuring and asset      
impairment charges of $23.8 million, as a result of steps the Company is taking 
that are intended to improve the Company's operations and improve cash flows. Of
the $23.8 million in total pre-tax restructuring and asset impairment charges,  
$4.4 million related to inventory write downs was recorded in cost of sales and 
$1.6 million related to professional fees was recorded in selling, general and  
administrative expenses. The remaining $17.8 million of the total pre-tax       
restructuring and asset impairment charges were reported separately. Included in
the $17.8 million is $13.6 million for the write down of leasehold improvements 
and various other property in stores to be closed, $3.2 million for accrual of  
lease termination costs, and $1.0 million of involuntary termination and        
benefits. The involuntary termination benefits include amounts that have been   
either paid or accrued for and cover approximately 250 employees at both the    
retail and corporate level, from clerks to management.                          

The Company expects to substantially complete implementation of the remainder of
its restructuring initiatives by the end of the first quarter of the Company's  
2002 fiscal year. The Company will continue to record charges to operations for 
restructuring costs, asset impairments and inventory reserves in the future. Due
to these additional restructuring charges, the Company anticipates that net     
income for the fourth quarter of fiscal 2001 will be lower than previously      
anticipated.                                                                    

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Company's principal capital requirements are to fund working capital needs, 
the refurbishment and expansion of existing stores, and continued development of
the Company's technological infrastructure.                                     

Net cash provided by operating activities was $31.4 million and $27.6 million   
for the nine months ended April 30, 2001 and 2000, respectively. For the nine   
months ended April 30, 2001, net cash provided by working capital was $12.4     
million versus $4.0 million applied to working capital for the nine months ended
April 30, 2000, and was primarily related to changes in inventories, prepaids,  
payables and accruals. The increase in cash flow from operations for the nine   
months ended April 30, 2001 versus the nine months ended April 30, 2000 was     
primarily due to increases in cash provided from operating activities and       
reductions in working capital requirements.                                     

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Net cash used for investing activities was primarily geared to capital          
expenditures on stores, including the opening of five stores in the United      
States, seven stores internationally along with store relocations,              
refurbishments and technology investments totaling approximately $21.3 million  
with an additional $1.9 million used for video rental acquisitions.             

Cash provided by financing activities for the nine months ended April 30, 2001  
was $60.5 million, resulting principally from borrowings under the Company's    
credit facility. Cash expended for financing activities for the nine months     
ended April 30, 2001 was $35.8 million, which resulted primarily from reductions
under the Company's credit facility.                                            

Interest payments and required debt reduction on the senior subordinated notes  
and on the credit facility will continue to impose significant liquidity demands
upon the Company. In addition to its debt service obligations, the Company will 
require liquidity for capital expenditures, lease obligations and general       
working capital needs. Total capital expenditures for fiscal 2001 are expected  
to be approximately $29.0 million, of which approximately $15.0 million will be 
related to maintenance and required technological capital improvements.         

The Company entered into an amended and restated credit agreement in April 2001 
pursuant to which the Company's senior credit facility will be extended for one 
year. The amended revolving credit facility initially provides the Company with 
available borrowings up to an aggregate amount of $225.0 million, of which      
approximately $126.6 million can be borrowed in Japanese yen, subject to        
compliance with the borrowing base formula and a maximum leverage test. The     
amount available under the facility will decline to $210 million in July 2001,  
$195 million in October 2001 and $100 million in December 2001. As of April 30, 
2001, the Company had drawn $202.3 million on the credit facility, net of a     
$13.2 million translation gain on yen debt translated in U.S. dollars at the    
spot rate on April 30, 2001.                                                    

The Company believes that it will require further external financing to fund the
mandatory commitment reductions together with the Company's lease obligations,  
working capital requirements, operating expenses and other debt service         
obligations. Adverse foreign currency fluctuations could also increase the cash 
needed by the Company to reduce its borrowings under the credit facility. In    
addition, the Company is required under the terms of the credit facility to     
deliver to its lenders by October 1, 2001 firm commitments from financial       
institutions for debt or equity financings necessary to meet the December 2001  
mandatory reduction under the credit facility. There can be no assurance that   
the Company will be able to obtain firm financing commitments by that date, if  
at all, or that the terms of those financing commitments will be favorable to   
the Company or its debt or equity holders. If the Company is unable to satisfy  
its obligations under the credit facility, the Company will be in default under 
the terms of the amended and restated credit agreement.                         

The credit facility and the senior subordinated notes impose certain            
restrictions on the Company's ability to make capital expenditures and limit the
Company's ability to incur additional indebtedness. Such restrictions could     
limit the Company's ability to respond to market conditions, to provide for     
unanticipated capital investments or to take advantage of business or           
acquisition opportunities. The amended covenants contained in the credit        
facility and the senior subordinated notes also, among other things, limit the  
ability of the Company to dispose of assets, repay indebtedness or amend other  
debt instruments, pay distributions, create liens on substantially all of the   
Company's assets, enter into sale and leaseback transactions, make investments, 
loans or advances and make acquisitions. Substantially all of the Company's     
tangible and intangible assets have been collateralized against the credit      
facility.                                                                       

The Company's future operating performance and the Company's ability to service 
or refinance the debt outstanding under its senior subordinated notes and its   
credit facility will be subject to the Company's ability to extend the credit   
facility, future economic conditions and financial, business and other factors, 
many of which                                                                   

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are beyond the Company's control.                                               

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's deep-catalog approach to prerecorded music appeals to    
customers who purchase music on a year-round basis. Consequently, the Company   
has historically had reduced seasonal reliance. In addition, international      
markets exhibit less fourth quarter seasonality than U.S. markets and the       
Company's international presence has historically further reduced this reliance 
on the U.S. holiday shopping season.                                            

INFLATION                                                                       

The Company believes that the recent low rates of inflation in the United       
States, Japan and the United Kingdom, where it primarily operates, have not had 
a significant effect on its net sales or operating results. The Company attempts
to offset the effects of inflation through the management of controllable       
expenses. However, there can be no assurance that during a period of significant
inflation, the Company's results of operations would not be adversely affected. 

FOREIGN EXCHANGE MANAGEMENT                                                     

The Company has substantial operations and assets located outside the United    
States, primarily in the United Kingdom and Japan. With respect to international
operations, principally all of the Company's revenues and costs (including      
borrowing costs) are incurred in the local currency, except that certain        
inventory purchases are tied to U.S. dollars. The Company's financial           
performance on a U.S. dollar-denominated basis has historically been            
significantly affected by changes in currency exchange rates. The Company       
believes that the matching of revenues and expenses in local currency, as well  
as its foreign exchange hedging activities and borrowings in foreign currencies,
mitigate the effect of fluctuating currency exchange rates. Nonetheless, changes
in certain exchange rates could adversely affect the Company's business,        
financial condition and results of operations. See "Quantitative and Qualitative
Disclosures about Market Risk."                                                 

ACCOUNTING POLICIES                                                             

In June 1998, the Financial Accounting Standards Board issued Statement of      
Financial Accounting Standards (SFAS)133, "Accounting for Derivative Instruments
and Hedging Activities." The provisions of SFAS 133, require all derivative     
instruments to be recognized on the balance sheet as assets or liabilities at   
fair value. The Company adopted SFAS 133, as amended, on August 1, 2000.        
Commencing in fiscal 2001, the Company records 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 was not material.                                                           

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK              

The Company is exposed to the impact of interest-rate changes and foreign       
currency fluctuations. The Company does not enter into market risk sensitive    
instruments for trading purposes. In the ordinary course of its business, the   
Company enters into debt instruments, including instruments with short-term     
maturities. The Company could be exposed to a higher interest rate at the time  
such debt instruments are renewed or refinanced. Certain of the Company's debt  
instruments contain terms that permit the Company to cap the interest rate at a 
maximum rate.                                                                   

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In the past, the Company has purchased interest rate hedges to manage the risk  
associated with interest rate variations.                                       

Of the Company's current long-term debt, $110 million bears a fixed interest    
rate and is payable in 2005. The Company prepared sensitivity analyses of the   
balance of its financial instruments to determine the impact of hypothetical    
changes in interest rates on the Company's results of operations, cash flows,   
and the fair value of its financial instruments. The interest-rate analysis     
assumed a one hundred basis point adverse change in interest rates on all       
variable rate financial instruments but did not consider the effects of the     
reduced level of economic activity that could exist in such an environment.     
Based on the results of such analysis, the Company concluded that a one hundred 
basis point adverse change in interest rates from year-end 2000 levels would not
materially affect the Company's results of operations, cash flows, or the fair  
value of its financial instruments.                                             

A substantial majority of the Company's revenues, expenses and capital          
purchasing activities are transacted in U.S. dollars. However, the Company does 
enter into these transactions in other foreign currencies, primarily Japanese   
yen. The Company uses forward exchange contracts to hedge intercompany          
transactions with foreign subsidiaries and affiliates, and in connection with   
certain of its Japanese subsidiary's purchases of product from third parties.   
Such instruments are short-term instruments entered into in the ordinary course 
of the Company's business, in order to reduce the impact of fluctuating foreign 
currencies on net income and shareholders' equity.                              

To finance expansion and operations in Japanese markets, the Company has entered
into yen-denominated borrowing arrangements. Unrealized gains and losses        
resulting from the impact of currency exchange rate movements on these debt     
instruments are recognized as other income or expense in the period in which the
exchange rates change. Historically, the Company has not entered into foreign   
exchange contracts to manage the risk associated with such currency             
fluctuations, but it may do so from time to time in the future.                 

The Company prepared sensitivity analyses of its yen-denominated financial      
instruments to determine the impact of hypothetical changes in foreign exchange 
rates on the Company's results of operations, cash flows and the fair value of  
its financial instruments. The analysis assumed a 10% adverse change in exchange
rates on such financial instruments but did not consider other effects on       
economic activity that could exist in such an environment. Based on the results 
of such analysis, the Company concluded such an adverse change in exchange rates
from year-end levels would not materially affect the Company's results of       
operations, cash flows or the fair value of its financial instruments.          

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a)    Exhibits                                                   

                                                                [Download Table]

Exhibit No.                         Description                    
                                                                   
   10.5          Amended and Restated Credit Agreement, dated as of
                 April 27, 2001, between the Company and The Chase 
                 Manhattan Bank.                                   

(b)    Reports on Form 8-K.                                       

None                                                      

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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 14, 2001            

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-Q Filing	Date	First	Last	Other Filings

	4/30/00	2	13	10-Q
	7/31/00	2	9	10-K
	8/1/00	15
	4/27/01	17
For The Period Ended	4/30/01	1	14
Filed On / Filed As Of	6/14/01	18
	10/1/01	14

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MTS Inc · 10-Q · For 4/30/01

Filed On 6/14/01 4:31pm ET · SEC File 333-54035 · Accession Number 891618-1-501196

﻿Quarterly Report · Form 10-QFiling Table of Contents

﻿10-Q · Mts, Inc. Form 10-Q 4/30/2001Document Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

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Filing Table of Contents

10-Q · Mts, Inc. Form 10-Q 4/30/2001
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