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MTS Inc – ‘10-Q’ for 10/31/01

On: Friday, 12/14/01 · For: 10/31/01 · Accession #: 891618-1-502617 · File #: 333-54035

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

12/14/01  MTS Inc                           10-Q       10/31/01    1:41K                                    Bowne - Palo Alto/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Form 10-Q Quarter Ending October 31, 2001             17     80K

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 Quantitative and Qualitative Disclosures about Market Risk
1	1st Page - Filing Submission
3	Item 1. Financial Statements
10	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
15	Item 3. Quantitative and Qualitative Disclosures about Market Risk
16	Item 6. Exhibits and Reports on Form 8-K

10-Q 1st Page of 17 TOC ↑Top Previous Next ↓Bottom Just 1st
 
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, 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)

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:                            

             Class                             Outstanding at October 31, 2001
Class B Common Stock, no par value                      1,000 shares            

10-Q 2nd Page of 17 TOC 1st Previous Next ↓Bottom Just 2nd
 MTS, INCORPORATED
 TABLE OF CONTENTS

                                                        [Enlarge/Download Table]


                                                                                                         PAGE

                                                                                                             
Part I. Financial Information..........................................................................      
   Item 1. Consolidated Financial Statements...........................................................      
           Consolidated Balance Sheets as of October 31, 2001 and 2000 and July 31, 2001...............   3  
           Consolidated Statements of Income for the three months ended October 31, 2001                     
             and 2000..................................................................................   4  
           Consolidated Statements of Cash Flows for the three months ended October 31, 2001                 
             and 2000..................................................................................   5  
           Consolidated Statements of Comprehensive Income for the three months ended October 31, 2001       
           and 2000....................................................................................   6  
           Notes to Consolidated Financial Statements..................................................  7-9 
   Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10-14
   Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................   15 
Part II. Other Information ............................................................................      
   Item 5. Other Information...........................................................................   16 
   Item 6. Exhibits and Reports on Form 8-K............................................................   16 
Signature..............................................................................................   17 

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 PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS                                                    

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

                                                        [Enlarge/Download Table]


                                                                  UNAUDITED    UNAUDITED              
                                                                 -----------  -----------             
                                                                 OCTOBER 31,  OCTOBER 31,   JULY 31,  
                                                                     2001         2000        2001    
                                                                 -----------  -----------  ---------  
                                     Assets                                                           
                                                                                                      
Current Assets:                                                                                       
    Cash and cash equivalents                                     $  29,486    $  19,347    $  32,075 
    Receivables, net                                                 30,090       35,577       31,805 
    Merchandising inventories                                       268,078      323,622      249,128 
    Prepaid expenses                                                 10,507       14,462        8,970 
    Deferred tax assets                                                  --       12,762           -- 
                                                                  ---------    ---------    --------- 
        Total current assets                                        338,161      405,770      321,978 
Fixed assets, net                                                   173,816      208,032      178,021 
Deferred tax assets                                                      --        9,634           -- 
Other assets                                                         22,651       39,153       26,976 
                                                                  ---------    ---------    --------- 
        Total assets                                              $ 534,628    $ 662,589    $ 526,975 
                                                                  =========    =========    ========= 

                           Liabilities and Shareholder's Equity                                       

 Current Liabilities:                                                                                 
    Current maturities of long-term debt                          $ 189,487    $ 209,198    $ 179,374 
    Accounts payable                                                173,072      185,680      163,336 
    Reserve for restructuring costs                                     481           --        2,225 
    Accrued liabilities                                              41,801       38,118       39,399 
    Income taxes payable                                                 --          757           -- 
    Deferred revenue, current portion                                 2,326        2,632        2,780 
                                                                  ---------    ---------    --------- 
        Total current liabilities                                   407,167      436,385      387,114 

Long-term Liabilities:                                                                                
    Long-term debt, less current maturities                         117,801      119,662      118,341 
    Deferred revenue, less current portion                              128          141          131 
                                                                  ---------    ---------    --------- 
        Total liabilities                                           525,096      556,188      505,586 
                                                                  ---------    ---------    --------- 

Shareholder's Equity:                                                                                 
    Common stock:                                                                                     

    Class B, no par value; 10,000,000 shares authorized;                                              
       1,000 shares issued and outstanding at October 31, 2001,                                       
       October 31, 2000 and July 31, 2001                                 6            6            6 
   Retained earnings                                                 24,576      125,405       35,848 

   Accumulated other comprehensive income                           (15,050)     (19,010)     (14,465)
                                                                  ---------    ---------    --------- 
        Total shareholder's equity                                    9,532      106,401       21,389 
                                                                  ---------    ---------    --------- 
      Total liabilities and shareholder's equity                  $ 534,628    $ 662,589    $ 526,975 
                                                                  =========    =========    ========= 

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 OCTOBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
 (UNAUDITED)

                                                                [Download Table]

                                                     THREE MONTHS ENDED   
                                                   ---------------------- 
                                                         OCTOBER 31,      
                                                      2001         2000   
                                                   ---------    --------- 
                                                                          
Net revenue                                        $ 226,694    $ 255,388 

Cost of sales (a)                                    156,181      171,011 
                                                   ---------    --------- 
    Gross Profit                                      70,513       84,377 

Selling, general and administrative expenses (b)      66,678       70,344 

Restructuring and asset impairment costs                  88           -- 

Depreciation and amortization                          7,339        7,512 
                                                   ---------    --------- 

    (Loss)/income from operations                     (3,592)       6,521 

Other expenses:                                                           

    Interest Expense                                  (7,663)      (5,689)

    Foreign currency translation loss                   (740)        (704)

    Other income /(expenses)                             859         (175)
                                                   ---------    --------- 

    Loss before taxes                                (11,136)         (47)

    Provision for income taxes                           136          686 
                                                   ---------    --------- 

    Net loss                                       $ (11,272)   $    (733)
                                                   =========    ========= 

Basic and diluted loss per share                 $(11,272.41)   $ (732.78)
                                                 ===========    ========= 

(a)  Includes $1.5 million of inventory write-downs related to the    
Restructuring Plan in fiscal year 2002.                     

(b)  Includes $1.4 million in professional fees related to the        
Restructuring Plan in fiscal year 2002.                     

The accompanying notes are an integral part of these statements.

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 MTS, INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                      UNAUDITED       
                                                                     OCTOBER 31,      
                                                                ----------------------
                                                                   2001        2000   
                                                                ---------   ----------
                                                                                      
CASH FLOWS FROM OPERATING ACTIVITIES:                                                 

    Net loss                                                    $(11,272)   $   (733) 
    Adjustments to reconcile net loss to net cash used in                             
       operating activities:                                                          
       Depreciation and amortization                               7,665       8,162  
       Restructuring and asset impairment costs                     (381)         --  
       (Recovery)/provision for losses on accounts receivable        (72)         58  
       Loss on disposal of depreciable assets                        301         389  
       Exchange (gain)/loss                                         (603)        761  
       Other non-cash expense                                        228          35  
       Increase/(decrease) in cash resulting from changes in:                         
         Accounts receivable                                       1,715      (4,120) 
         Inventories                                             (20,422)    (30,193) 
         Prepaid expenses                                         (1,537)     (1,734) 
         Accounts payable                                          9,736      19,979  
         Accrued liabilities and taxes payable                     2,402        (676) 
         Deferred revenue                                           (457)       (330) 
                                                                --------    --------  
           Net cash used in operating activities                 (12,697)     (8,402) 
                                                                --------    --------  

CASH FLOWS FROM INVESTING ACTIVITIES:                                                 

      Acquisition of fixed assets                                 (2,455)     (8,072) 
      Acquisition of investments                                    (140)       (693) 
      Increase in deposits                                          (121)       (168) 
      Refunds of deposits                                            167           9  
      Increase in intangibles                                       (963)       (139) 
                                                                --------    --------  
           Net cash used in investing activities                  (3,512)     (9,063) 
                                                                --------    --------  

CASH FLOWS FROM FINANCING ACTIVITIES:                                                 

      Proceeds from life insurance loans                           3,526          --  
      Proceeds from employee loan payments                           105           6  
      Principal payments under long-term financing agreements    (20,253)       (884) 
      Proceeds from issuance of long-term financing agreements    30,607      17,734  
                                                                --------    --------  
           Net cash provided by financing activities              13,985      16,856  
                                                                --------    --------  
Effect of exchange rate changes on cash                             (365)     (1,530) 
                                                                --------    --------  
           Net decrease in cash and cash equivalents              (2,589)     (2,139) 
Cash and cash equivalents, beginning of period                    32,075      21,486  
                                                                --------    --------  
Cash and cash equivalents, end of period                        $ 29,486    $ 19,347  
                                                                ========    ========  
Cash paid for interest                                          $  5,244    $  3,006  
                                                                ========    ========  
Cash paid for income taxes                                      $     --    $     41  
                                                                ========    ========  

The accompanying notes are an integral part of these statements.

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 MTS, INCORPORATED
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

                                                                [Download Table]

                                                              UNAUDITED      

                                                       ----------------------
                                                         2001           2000 
                                                       --------        ------

                                                                             
Net Loss                                               $(11,272)       $(733)

Other comprehensive income, net of tax                                       
      Foreign currency translation                         (585)        (226)
                                                       --------        ------
Comprehensive Loss                                     $(11,857)       $(959)
                                                       ========        ===== 

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 October 31, 2001 and
the results of its operations and cash flows for the three months then ended.   
The significant accounting policies and certain financial information which are 
normally included in financial statements prepared in accordance with generally 
accepted accounting principals, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying unaudited            
consolidated financial statements should be read in conjunction with the        
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2001.   

NOTE 2 -- TRANSLATION OF FOREIGN CURRENCY                                       

The value of the U.S. dollar rises and falls day-to-day on foreign currency     
exchanges. Since the Company does business in several foreign countries, these  
fluctuations affect the Company's financial position and results of operations. 
In accordance with SFAS No. 52, Foreign Currency Translation, all foreign assets
and liabilities have been translated at the exchange rates prevailing at the    
respective balance sheets dates, and all income statement items have been       
translated using the weighted average exchange rates during the respective      
years. The net gain or loss resulting from translation upon consolidation into  
the financial statements is reported as a separate component of shareholder's   
equity. Some transactions of the Company and its foreign subsidiaries are made  
in currencies different from their functional currency. Translation gains and   
losses from these transactions are included in income as they occur. The Company
recorded a net transaction loss of $0.7 million for the three months ended      
October 31, 2001 and October 31, 2000. These amounts primarily represent the    
volatility of currencies in international countries in which the Company does   
business.                                                                       

NOTE 3 -- INCOME TAXES                                                          

The effective income tax rates for the three months ended October 31, 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                            

At July 31, 2001 the Company recorded pre-tax restructuring charges of $46.7    
million as a result of steps the Company is taking that are intended to improve 
the Company's operations and improve cash flows. For the three month period     
ended October 31, 2001, the Company's pre-tax restructuring charges were an     
additional $3.0 million.                                                        

At July 31, 2001 the Company had recorded a restructuring liability in the      
amount of $2.2 million. For the three month period ended October 31, 2001, the  
restructuring liability was $0.5 million. The change in the restructuring       
liability is due to the following:                                              

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 MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

                                                        [Enlarge/Download Table]

                    INVENTORY                   LEASEHOLD       LEASE        EMPLOYEE                        
                      WRITE-    PROFESSIONAL   IMPROVEMENTS  TERMINATION    TERMINATION                      
 (IN MILLIONS)        DOWNS        FEES         WRITE-OFFS      COSTS          COSTS      OTHER      TOTAL   
-------------------------------------------------------------------------------------------------------------
                                                                                                             
RESTRUCTURING       $    -       $    -         $ 1,023         $ 813         $ 225       $164    $ 2,225    
LIABILITY AT                                                                                                 
JULY 31, 2001                                                                                                
-------------------------------------------------------------------------------------------------------------

CHANGES IN          $    -       $    -         $(1,023)        $(522)        $(199)      $  -    $(1,744)   
RESTRUCTURING                                                                                                
LIABILITY                                                                                                    
ESTIMATES:                                                                                                   
-------------------------------------------------------------------------------------------------------------
TOTAL               $    -       $    -         $     -         $ 291         $  26       $164    $   481    
RESTRUCTURING                                                                                                
LIABILITY AT                                                                                                 
OCTOBER 31,                                                                                                  
2001                                                                                                         
-------------------------------------------------------------------------------------------------------------

The change in the restructure reserve estimates is primarily due to the closure 
of the last Canadian store in October 2001.                                     

In connection with its restructuring plan, the Company continues to monitor     
under performing stores and assets in addition to evaluating its ongoing working
capital commitments. As such, the Company anticipates that it will continue to  
incur restructuring and asset impairment charges through fiscal year 2002.      

NOTE 5 -- DEBT                                                                  

In October 2001, the Company entered into an amendment (Amendment) to the Credit
Facility dated as of October 5, 2001, and effective September 30, 2001. Pursuant
to the Amendment, the maximum borrowings under the Credit Facility are required 
to be reduced by $5 million in October 2001 and $10 million in December 2001,   
instead of $15 million in October 2001 and $95 million in December 2001. The    
Amendment also eliminates certain provisions of the Credit Facility,            
specifically those requiring the Company to (1) provide firm commitments by     
October 1, 2001 for financing or sale of assets that will reduce the commitments
to $100,000,000 by December 31, 2001 and (2) receiving proceeds of such         
financing or sale that actually reduce the commitments to $100,000,000 by       
December 31, 2001. In addition, the Amendment reduces the EBITDA and leverage   
ratio amounts that the Company is required to meet. Pursuant to the Amendment,  
the Company paid a 0.0375% amendment fee to the lenders. The recorded value of  
the Credit Facility approximates fair value at October 31, 2001 due to the      
variable nature of rates.                                                       

The Company's future operating performance and ability to service or refinance  
its senior subordinated notes and the Credit Facility will be subject to the    
Company's ability to refinance its Credit Facility maturing April 23, 2002,     
future economic conditions and financial, business and other factors, many of   
which are beyond the Company's control. There can be no assurance or guaranty   
that the Company will be successful in refinancing the Credit Facility or that  
any renewal will be on terms that are favorable to the Company. In the event the
Company is unable to refinance the Credit Facility, the Company's business,     
financial condition and results of operations would be materially and adversely 
affected.                                                                       

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 MTS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

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

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10-Q 10th Page of 17 TOC 1st Previous Next ↓Bottom Just 10th
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS                                                   

The following information should be read in conjunction with the unaudited      
interim consolidated financial statements and the notes thereto included in Item
1 of this Quarterly Report on Form 10-Q in addition to the consolidated         
financial statements and notes thereto for the fiscal year ended July 31, 2001  
included in the Company's Annual Report on Form 10-K filed with the Securities  
and Exchange Commission.                                                        

FORWARD-LOOKING STATEMENTS                                                      

The following discussion should be read in conjunction with historical          
consolidated financial information and the consolidated financial statements of 
the Company and the notes thereto included elsewhere in this Form 10-Q. The     
results shown herein are not necessarily indicative of the results to be        
expected in any future period. The following discussion contains forward-looking
statements that involve known and unknown risks and uncertainties. Use of the   
words "anticipates," "believes," "estimates," "expects," "intends," "plans" and 
similar expressions are intended to identify forward-looking statements. A      
variety of factors could cause the Company's actual results to differ materially
from the anticipated results expressed in such forward-looking statements,      
including among other things: (i) consumer demand for the Company's products,   
which is believed to be related to a number of factors, including overall       
consumer spending patterns, weather conditions and new releases available from  
suppliers; (ii) an increase in competition, including Internet competition and  
competition resulting from electronic or other alternative methods of delivery  
of music and other products to consumers, or unanticipated margin or other      
disadvantages relative to competitors; (iii) the continued availability and cost
of adequate capital to fund the Company's operations; (iv) higher than          
anticipated interest, occupancy, labor, distribution and inventory shrinkage    
costs; (v) unanticipated adverse litigation expenses or results; (vi) higher    
than anticipated costs associated with the implementation of the Company's      
Restructuring Plan and/or lower than anticipated resulting operations and cash  
flow benefits; (vii) unanticipated increases in the cost of merchandise sold by 
the Company; (viii) changes in foreign currency exchange rates and economic and 
political risks; (ix) the adverse effects of acts or threats of war, terrorism  
or other armed conflict on the United States and international economies; (x)   
the ability of the Company to comply with the ongoing monthly affirmative and   
negative covenants as prescribed by the Company's Amended and Restated Credit   
Agreement, as amended; (xi) the ability of the Company to meet the mandatory    
commitment reductions under the Company's Amended and Restated Credit Agreement,
as amended; (xii) the ability of the Company to refinance or extend its credit  
facility prior to the maturity thereof; and (xiii) the ability of the Company to
successfully defend itself in ongoing and future litigation. All forward-looking
statements included in this Form 10-Q are based on information available to the 
Company on the date hereof, and the Company assumes no obligation to update any 
such forward-looking statements. Please refer to the Risk Factors section of the
Company's Annual Report Form 10-K for further information on other factors,     
which could affect the financial results of the Company and such forward-looking
statements.                                                                     

RESULTS OF OPERATIONS                                                           

THREE MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THREE MONTHS ENDED OCTOBER 31,  
2000                                                                            

REVENUES                                                                        

For the three months ended October 31, 2001, the Company's consolidated net     
revenues were $226.7 million versus $255.4 million, a decrease of $28.7 million 
(or a decrease of $19.3 million excluding the effects of U.S. dollar foreign    
translation fluctuations). The Company's net revenues were derived from U.S.    
revenues of $126.4 million and international revenues of $100.3 million for the 
three months ended October 31, 2001 compared to $147.9 million in the U.S. and  
$107.5 million internationally for the three months ended October 31, 2000. The 
overall decrease in total Company revenues for the three months ended October   
31, 2001 was driven primarily                                                   

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by the closing of unprofitable stores associated with the Company's worldwide   
restructuring efforts in fiscal 2001 and a decline in consumer spending         
attributed to the events of September 11, 2001.                                 

GROSS PROFIT                                                                    

For the three months ended October 31, 2001, gross profit decreased $13.9       
million to $70.5 million from $84.4 million for the three months ended October  
31, 2000 (or a decrease of $9.1 million excluding the effects of the U.S. dollar
foreign translation fluctuations and the impact of the Company's Restructuring  
Plan). Management attributes the decline in gross profit, excluding the effect  
of inventory write downs related to the restructuring charge, principally to the
decrease in revenues as previously discussed, weaker margins associated with    
competitive pricing pressure in the United States and Great Britain and adverse 
fluctuations in foreign translation rates. Gross profit as a percentage of net  
revenues decreased to 31.1% for the three months ended October 31, 2001, as     
compared to 33.0% for the three months ended October 31, 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 industry pricing pressure in the United States and    
Great Britain.                                                                  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE                                     

Selling, general and administrative expenses, excluding the effects of the $1.4 
million in professional fees related to the restructuring charge and            
depreciation and amortization, decreased by $5.0 million to $65.3 million during
the three months ended October 31, 2001 from $70.3 million for the three months 
ended October 31, 2000. Excluding the effect of professional fees related to the
restructuring charge, decreases in personnel, occupancy and other cost savings  
initiatives resulting from the Company's restructuring plan contributed         
primarily to the reduction in overall operating costs. As a percentage of net   
revenues, selling, general and administrative expenses, excluding the effects of
the professional fees related to the restructuring charge and depreciation and  
amortization, increased to 28.8% for the three months ended October 31, 2001 as 
compared to 27.5% for the three months ended October 31, 2000. Management       
attributes the percentage increase (excluding the effect of professional fees   
related to the restructuring charge) primarily to the overall reduction in      
revenues during the period.                                                     

RESTRUCTURING AND IMPAIRMENT COSTS                                              

The Company recorded pre-tax restructuring and asset impairment charges of $3.0 
million during the three months ended October 31, 2001, as related to the       
implementation of the Restructuring Plan. Of the $3.0 million in total pre-tax  
restructuring and asset impairment charges, $1.5 million related to inventory   
write downs was recorded in cost of sales and $1.4 million related to           
professional fees was recorded in selling, general and administrative expenses. 
The remaining $0.1 million of total pre-tax restructuring and asset impairment  
charges were reported separately.                                               

DEPRECIATION AND AMORTIZATION                                                   

Depreciation and amortization expense was $7.3 million for the three months     
ended October 31, 2001 compared to $7.5 million for the three months ended      
October 31, 2000, a decrease of $0.2 million. The decrease was primarily due to 
the closing of unprofitable stores associated with the Company's worldwide      
restructuring efforts in fiscal 2001, offset by fiscal year 2001 asset          
additions.                                                                      

LOSS FROM OPERATIONS                                                            

The Company's consolidated operating loss during the three months ended October 
31, 2001 was $3.6 million compared with consolidated operating income of $6.5   
million during the three-month period ended October 31,                         

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2000, for a decrease of $10.1 million. The decrease was primarily attributable  
to the decreases in revenues and gross profit as discussed above.               

INTEREST EXPENSE                                                                

Net interest expense increased to $7.7 million during the three months ended    
October 31, 2001 from $5.7 million during the three months ended October 31,    
2000. The increase was due primarily to higher borrowing costs.                 

FOREIGN CURRENCY TRANSLATION LOSS                                               

A foreign currency translation loss of $0.7 million was recognized for the three
months ended October 31, 2001 and October 31, 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 provision for both the three months    
ended October 31, 2001 and October 31, 2000. Tax provisions and benefits are    
based upon management's estimate of the Company's annualized effective tax      
rates.                                                                          

LIQUIDITY AND CAPITAL RESOURCES                                                 

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

Net cash used in operating activities was $12.7 million and $8.4 million for the
three months ended October 31, 2001 and 2000, respectively. For the three months
ended October 31, 2001, net increase in inventory was $20.4 million, which      
included a $1.5 million write-down of inventory related to the Company's        
restructuring plan. Net increase in inventory was $30.2 for the three months    
ended October 31, 2000. The increase in inventory is due to the Company's       
increased needs through the holiday season. The net decrease in cash flow from  
operations for the three months ended October 31, 2001 compared to October 31,  
2000 was primarily due to the net loss incurred.                                

Net cash used for investing activities was focused primarily on store           
maintenance and capital expenditure requirements including store relocations,   
refurbishment and technology investments totaling approximately $2.1 million    
with an additional $0.3 million used for video rental acquisition. During the   
three months ended October 31, 2001, the Company opened 1 store domestically.   

Net cash provided by financing activities in 2001 was $14.0 million, resulting  
principally from proceeds from life insurance loans and net borrowings under the
Company's credit facility. Net borrowings under the Company's credit facility   
increased $10.1 million for the three months ended October 31, 2001, excluding  
the effects of foreign currency exchange rates. Net cash provided by financing  
for the three months ended October 31, 2000 was $16.9 million, which resulted   
primarily from net borrowings under the Company's credit facility.              

Total funded debt decreased to $307.3 million as of October 31, 2001 from $328.9
million as of October 31, 2000. Outstandings under the Company's senior         
revolving credit facility were $187.2 million on October 31, 2001 compared to   
$206.2 million on October 31, 2000. The decrease in bank outstandings was the   
result of the effects of the restructuring plan implemented in fiscal year 2001.

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Interest payments 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 2002 are expected to be approximately $15.0     
million, of which approximately $11.9 million will be related to maintenance and
required technological and capital improvements.                                

The Company's Senior Credit Facility expires April 23, 2002. The Company intends
to refinance the credit facility prior to expiration and believes that the cash 
flow generated from its operations, together with amounts available from other  
financing alternatives, will be sufficient to fund its debt service             
requirements, lease obligations, working capital needs, its currently expected  
capital expenditures and other operating expenses for the next twelve months.   

In April 2001, the Company extended and restated on a short-term basis its      
outstanding obligations under its senior revolving credit facility. The Credit  
Facility was further amended in October 2001. The Credit Facility provided for  
initial maximum borrowings of up to $225.0 million, consisting of two           
sub-facilities (one for an initial maximum of $98.4 million and one for an      
initial maximum Japanese yen of (Yen)15,596,828,718, which was equivalent to    
$126.6 million at inception), with a maturity date of April 23, 2002. Maximum   
borrowings under the Credit Facility are scheduled to decline during its        
one-year term by $15 million in July 2001, $5.0 million in October 2001, and    
$10.0 million in December 2001.                                                 

Maximum borrowings under the Credit Facility are subject to a borrowing base    
formula, maximum leverage ratio tests and maintaining a minimum rolling         
quarterly EBITDA. As of October 31, 2001, approximately $205.0 million was      
available under the Senior Credit Facility, of which $187.2 million had been    
drawn. The $187.2 million includes a decrease of $14.2 million due to yen debt  
translated back to U.S. dollars at the spot rate on October 31, 2001.           

The Company's future operating performance and ability to service or refinance  
its senior subordinated notes and the Credit Facility will be subject to the    
Company's ability to refinance its Credit Facility maturing April 23, 2002,     
future economic conditions and financial, business and other factors, many of   
which are beyond the Company's control. There can be no assurance or guaranty   
that the Company will be successful in refinancing the Credit Facility or that  
any renewal will be on terms that are favorable to the Company. In the event the
Company is unable to refinance the Credit Facility, the Company's business,     
financial condition and results of operations would be materially and adversely 
affected.                                                                       

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

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           

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Company has historically had reduced seasonal reliance. In addition,            
international markets exhibit less fourth quarter seasonality than U.S. markets 
and the Company's international presence has historically further reduced this  
reliance on the U.S. holiday shopping season. Nevertheless, sales during the    
Company's second fiscal quarter (November 1 through January 31) in 2001 and 2000
accounted for approximately 30% of annual sales.                                

INFLATION                                                                       

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

FOREIGN EXCHANGE MANAGEMENT                                                     

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

NEW ACCOUNTING POLICIES                                                         

In July 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other      
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method  
of accounting and prohibits the use of the pooling-of-interests method of       
accounting for business combinations initiated after June 30, 2001. SFAS 141    
also requires that the Company recognize acquired intangible assets apart from  
goodwill if the acquired intangible assets meet certain criteria. SFAS 142      
changes the accounting for goodwill, including goodwill recorded in past        
business combinations. SFAS 142 requires, among other things, that companies no 
longer amortize goodwill, but instead periodically test goodwill for impairment.
The previous accounting principles governing goodwill generated from a business 
combination will cease upon adoption of SFAS 142. Currently, the Company is     
assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142  
will impact its financial position and results of operations.                   

In June 1998, the Financial Accounting Standards Board issued Statement of      
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative           
Instruments and Hedging Activities". The provisions of SFAS 133 require all     
derivative instruments to be recognized on the balance sheet as assets or       
liabilities at fair value. The Company adopted SFAS 133, as amended, on August  
1, 2000. The Company records its derivatives on the balance sheet at fair value 
and reported adjustments to fair value through income.                          

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK              

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

The Company is subject to risks resulting from interest rate fluctuations       
because interest on the Company's borrowings under its credit facility are based
on variable rates. If the base borrowing rates (primarily a combination of LIBOR
and TIBOR) were to increase 1% in fiscal 2002 as compared to the rate at July   
31, 2001, the Company's interest expense related to its credit facility for     
fiscal 2002 would increase approximately $1.9 million based on the outstanding  
balance of the Company's credit facility at October 31, 2001. A substantial     
majority of the Company's revenues, expenses and capital purchasing activities  
are transacted in U.S. dollars. However, the Company does enter into these      
transactions in other foreign currencies, primarily Japanese yen. The Company   
uses forward exchange contracts to hedge intercompany transactions with foreign 
subsidiaries and affiliates, and in connection with certain of its Japanese     
subsidiary's purchases of product from third parties. Such instruments are      
short-term instruments entered into in the ordinary course of the Company's     
business, in order to reduce the impact of exchange rate fluctuation on net     
income and shareholder's equity. At October 31, 2001, the Company had           
outstanding forward exchange contracts maturing on dates through April 2002, to 
buy approximately $3,000,000 in foreign currency (355 billion yen at the        
contract rate). The fair value of the contracts as of October 31, 2001 was 367  
billion yen.                                                                    

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

The Company engaged a third party to analyze the sensitivity of the Company's   
operations to fluctuations in the exchange rate between U.S. dollars and        
Japanese yen. The analysis made various assumptions for exchange rates, and     
assumed that the results of the Japanese operations would remain consistent with
recent history. According to this analysis, the Japanese operation provides a   
natural hedge against any impact of changes in foreign exchange rates on the    
company's yen denominated debt. Based on the results of this analysis, the      
Company concluded that a change in exchange rates from year-end levels would not
materially affect the Company's results of operations.                          

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PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a) Exhibits                                                    

                                                                [Download Table]

EXHIBIT NO.                 DESCRIPTION                                 

                                                                        
   10.6     First Amendment, dated as of October 05, 2001, to the       
            Amended and Restated Credit Agreement, dated as of April 27,
            2001, between the Company and The Chase Manhattan Bank.     
            (Previously filed with the Company's report on Form 8-K     
            filed October 10, 2001).                                    

(b) Reports on Form 8-K.                                        

                                                                [Download Table]

FORM         ITEM NO.     DESCRIPTION                         FILING DATE     

                                                                              
8-K             5         Report on Amendment                 October 10, 2001
                          of Credit Agreement among                           
                          the Company, Tower Records                          
                          Kabushiki Kaisha, the lenders                       
                          Party thereto and The Chase                         
                          Manhattan Bank                                      


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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:

Dated: December 14, 2001                        DeVaughn D. Searson         
                                        Executive Vice President and Chief
                                       Financial Officer
                                  (Principal Financial and
                                       Accounting Officer)

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Dates Referenced Herein and Documents Incorporated by Reference

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

	4/23/02	8	13
	12/31/01	8
Filed on:	12/14/01	17
For Period End:	10/31/01	1	15
	10/10/01	16		8-K
	10/5/01	8	16
	10/1/01	8
	9/30/01	8
	9/11/01	11
	7/31/01	2	15	10-K
	6/30/01	14
	4/27/01	16
	10/31/00	2	12	10-Q
	8/1/00	14
				List all Filings

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MTS Inc – ‘10-Q’ for 10/31/01

On: Friday, 12/14/01 · For: 10/31/01 · Accession #: 891618-1-502617 · File #: 333-54035

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Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q
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