EXHIBIT 13
[LOGO OF TUESDAY MORNING APPEARS HERE]
Tuesday Morning Corporation
1996 Annual Report
The Tuesday Morning Story. We sell quality & price. The Tuesday Morning story is
a unique one. In part, because we have no direct competition. Among closeout
retailers, no one offers the level of discounted price, quality and merchandise
selection that our customers find at Tuesday Morning.
Just imagine a true shopping adventure: an exciting treasure hunt for
quality, name brand gifts at deep-discount, closeout prices. That is the
experience of visiting a Tuesday Morning store during one of our four sales
events. With each visit, customers discover a new collection of treasures at up
to 90% off department store regular prices and always at 50% to 80% below
commonly advertised prices.
Over the years, we have achieved a leadership position in the gift closeout
industry. And for good reason. For middle to high end gifts at closeout prices,
we are the largest retailer in the world. The secret to our success is rooted in
several areas. Our three-tier price tag clearly showcases the significant
savings and value Tuesday Morning offers on each purchase. We continuously
refine our buying focus by targeting specific merchandise categories that we
know are successful for us. Our experienced buying team travels the globe,
taking advantages of the marketplace and buys an array of merchandise which is
unsurpassed in quality and value.
Our "event" shopping approach has created one of the most loyal customer
bases in the entire retailing industry. Customers often line up outside our
stores long before our 8:00 AM openings just to take advantage of our impressive
savings.
And through our carefully calculated expansion strategy, we will continue to
grow the business by opening new stores across the United States and increasing
the amount of sales we generate. Judging from our solid 1996 results, we fully
expect our strategy to be on target for the future.
Table of Contents
Financial Highlights 2
Markets 4
Shareholders Letter 6
The Price Story 10
The Product Story 12
The Buying Story 14
The Event Story 16
The Technology Story 18
The Customer Story 20
The Store Growth Story 22
Financial Review 24
1996 ANNUAL REPORT 1
FINANCIAL HIGHLIGHTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996 and 1995
(in thousands, except share data)
1996 1995 1994
............................................... --------- -------- --------
Operations --
Years Ended December 31
Net sales $ 256,756 210,265 190,081
Net earnings 11,516 4,773 2,651
Net earnings per common share and share equivalents 1.40 0.60 0.34
Net earnings as a percent of net sales 4.49% 2.27% 1.39%
Weighted average shares and share equivalents
outstanding 8,215 7,997 7,890
Balance Sheet --
As of December 31
Cash and cash equivalents $ 10,754 6,276 4,535
Inventories 75,493 52,367 46,815
Total assets 121,757 94,243 89,403
Mortgages on land, buildings and equipment-excluding
current installments 4,594 5,615 4,952
Shareholders' equity 75,528 63,648 58,630
Working capital 49,568 39,115 32,593
Current ratio 2.29 2.86 2.55
2 TUESDAY MORNING CORPORATION
NET SALES NET EARNINGS EARNINGS PER SHARE
Millions 1994 $190.0 Millions 1994 $2.6 Dollars 1994 $0.34
1995 $210.3 1995 $4.8 1995 $0.60
1996 $256.8 1996 $11.5 1996 $1.40
COMP STORE SALES STORE TOTAL
1994 4.0% 1994 246
1995 6.0% 1995 260
1996 14.0% 1996 286
1996 ANNUAL REPORT 3
[MAP APPEARS HERE]
4 TUESDAY MORNING CORPORATION
[MAP APPEARS HERE]
With corporate headquarters, warehouse and shipping operations based in Dallas,
Tuesday Morning Corporation oversees 286 stores in metropolitan markets in 33
states across the country. In 1997, our Company plans to surpass the three
hundred store mark.
1996 ANNUAL REPORT
Quality & Price: A Success Story
Dear Shareholders: The past year was a record-setting one for Tuesday Morning
Corporation. We are pleased to report that the positive surge in sales which
began in 1994 continued this year, with 1996 sales the best in the history of
our Company. Sales for the year increased 22% to $256.8 million from $210.3
million in 1995. Comparable store sales increased 14% for the year. Profits
increased from $4.8 million to $11.5 million, a 140% increase over last year. It
has been a great year for Tuesday Morning.
Three key factors were major contributors to our success in 1996. First, we
expanded the selection of gifts throughout the stores, with a special emphasis
in the upper-end gift categories. A key reason that our product selection
improved over the past two years was the talented and experienced buying team at
Tuesday Morning.
Since 1994, we more than doubled the number of buyers, from ten to
twenty-two, increasing each buyer's opportunity to select better quality product
at the very lowest price. Our buyers can be extremely selective in negotiating
their buys, giving us better product selection, increased sales and less
markdowns.
Our customers have always looked to us for quality, name brand gifts at the
very best closeout prices and we haven't disappointed them this year. Their
response was very positive to this broader, and higher end, merchandise
selection with increased sales and profits a clear validation of our move in
this direction.
A positive result: our gross profit has improved 1.0% during 1996 and we plan
Normally retailing for
$70 in department stores, Pierre Cardin gift-boxed pen and pencil sets were
closeout priced at $4.99. Over 140,000 sets were sold in six days.
6 TUESDAY MORNING CORPORATION
Tuesday Morning sold
over 1.7 million silver-
plated frames in 1996.
Pictured: Jerry M. Smith,
President and Chief
Operating Officer, and Lloyd. L. Ross,
Chairman and Chief Executive Officer,
talk to a few
of the hundreds of
customers in line on opening morning of
our Christmas sale.
1996 ANNUAL REPORT 7
on continuing this momentum in the coming years.
Second, through our three tier pricing strategy which appears on all price
tags, we clearly and quickly communicated to every shopper the incredible
Tuesday Morning savings on each item in our stores. The price tag shows the
Department Store Regular (usually inflated) price, their "Sale" price and
Tuesday Morning's 50% to 80% closeout price. With this expanded information, our
customers can quickly determine the true pricing value and discount being
offered.
And thirdly, Tuesday Morning continues to reap the benefits of the
streamlining of our operations which we have aggressively worked on the past few
years. These moves boosted efficiencies throughout the Company, the results of
which will be positively felt for years to come.
Successful completion of our five-year technology overhaul, two years ahead
of schedule, has translated directly into improved bottom-line profits and
performance. And improvements will continue to be made as new technology
enhancements are introduced. We now have the flexibility to receive product in
our warehouse and "quick turn" ship to all 286 stores within one day if
necessary. This is an accomplishment that is unheard of in the gift closeout
industry.
Our "point of sale" system also provides us with instant inventory
information allowing us complete control of regional and store level inventories
and the flexibility to move merchandise, resulting in the need for less costly
mark downs. In our humble opinion, we believe that Tuesday
Tuesday Morning
bought a collection
of "Hug Me" plush
pets by famous maker Madame Alexander.
Because of the deep-discount
pricing and first quality product,
16,000 bears were sold in about
three hours.
8 TUESDAY MORNING CORPORATION
Morning's information systems technology is the best in the retail
industry.
Tuesday Morning has created and holds a singular niche in the gift
retailing industry that is unmatched by any competitor. We are "event" sellers,
opening our stores for four event selling periods each year. With this selling
strategy, we have created an anticipation and level of excitement among our
customers that is unheard of. They know that when Tuesday Morning opens, they
are embarking on a great treasure hunt. No wonder we can sell 41,000 Limoges
boxes worth over $2 million, in a little over one hour.
We have grown to become the largest closeout gift retailer in the world and
we can assure you that it is a position we are determined to maintain.
Our 1996 success would not have been achieved without the total dedication
of our entire Tuesday Morning family and we extend a heart felt thanks to each
and every one of them. Please be assured that our goal is to continue to
increase profits and enhance shareholders' value in the years to come.
Sincerely,
/s/ Lloyd L. Ross
- -----------------
Lloyd L. Ross
Chairman and Chief Executive Officer
/s/ Jerry M. Smith
- ------------------
Jerry M. Smith
President and Chief Operating Officer
Tuesday Morning is
the largest closeout retailer of hand-decorated Limoges boxes from France.
Normally priced from $75 to $225 in department stores, they were closeout
priced from $29.99 to $89.99 and our customers bought $2 million worth in
about one hour.
1996 ANNUAL REPORT 9
Quality & Price: A Success Story
The Price Story. At Tuesday Morning, our customers know exactly what they're
getting, and more importantly, exactly how much they're saving. Our three-tier
price ticket illustrates the significant difference between our true closeout
price and the regular retail and sale prices.
Our pricing approach reflects a strategy that has been refined and perfected
over the years. The result? Tuesday Morning has created a unique niche in the
retail industry. We offer first quality, name brand gifts and home accessories
at incredibly deep discounted, closeout prices.
This deep discount message is reinforced in everything we do. We have built
our foundation by discounting everything at least 50% to 80%. Our customers know
that when they shop at any of our 286 stores across the country that the Tuesday
Morning price is an honest price. Guaranteed.
We offer our customers a 100% refund on any returned item. We stand
behind what we sell. Quality, value and price are of utmost importance to
Tuesday Morning and we deliver that to our customers.
Decorative cast iron
lanterns, part of our
expanded lawn and
garden product category,
sold in department
stores at triple the
Tuesday Morning price.
Savvy customers
recognized the value,
buying 14,000 lanterns
in about six hours.
10 TUESDAY MORNING CORPORATION
Tuesday Morning shoppers
bought 65,000 canvas
folding lawn chairs in
about five hours. Over
$15 million in lawn and
garden items were sold
during the second quarter
sales event in 1996.
1996 ANNUAL REPORT 11
Quality & Price: A Success Story
In 1996, Tuesday Morning was the world's largest closeout retailer of Farberware
Quality Cookware, purchasing approximately $13 million directly from the
manufacturer.
The Product Story. It's been said that a visit to Tuesday Morning is like an
amazing treasure hunt. No doubt it's because while most retailers sell the same
merchandise all the time, we're always offering new, different and exciting
items. Our products vary by season, and also by the opportunities our buyers
discover with vendors across the United States and around the world.
Our merchandise mix covers a variety of product categories and includes fine
china and gifts, glass and crystal, decorative accessories, linens and
domestics, toys, luggage, men's and women's accessories and seasonal items
including holiday trim. After a successful four year test period in forty
stores, we are rolling out a fine jewelry "store within a store" to 150 Tuesday
Morning locations during the next couple of years.
While the merchandise will always change, our commitment to offering
the very best name brand gifts will not. There are never any irregulars, factory
rejects, seconds or damaged items. We sell only famous maker, first quality
merchandise at closeout prices.
Tuesday Morning carries familiar brand names that educated consumers
know and trust. Famous makers like Oneida, Martex, Ralph Lauren, Anne Klein,
Samsonite, Fisher-Price, Spode and Steiff, just to name a few. We also regularly
carry top of the line items like Daum French crystal, Couristan area rugs,
Frette Italian linens and Madame Alexander toys.
12 TUESDAY MORNING CORPORATION
Ceramic pie savers, crafted and hand-painted in Portugal, sold at Tuesday
Morning for $9.99, 75% below the department store price. In about two hours,
over 12,500 pieces were sold.
1996 ANNUAL REPORT 13
Quality & Price: A Success Story
Tuesday Morning bought 200,000 pieces of brass product in 1996 including over
forty different styles of candlesticks.
The Buying Story. Buying merchandise for our stores presents a unique challenge
and a tremendous opportunity for Tuesday Morning. Other retailers return time
and again to the same suppliers and manufacturers. To meet our strict buying
criteria, we travel the world, searching factory showrooms and "out of the way"
warehouses to find the best merchandise at a price and value we can pass on to
our customers. We primarily focus on manufacturers' end-of-the-line products.
In fact, many upscale vendors regularly liquidate their excess inventory only
through Tuesday Morning. We also take advantage of merchandise which did not
meet the manufacturers' sales projections in the normal retail marketplace by
purchasing it at dramatically below wholesale prices.
The Tuesday Morning team of twenty-two experienced buyers spends over
two-thirds of the year traveling the globe to discover and purchase the exciting
closeout merchandise found in our stores. From the United States to Brazil,
Hungary to India, England to the Czech Republic, Korea to Indonesia, China to
Japan, we are ever vigilant in finding unique gifts and merchandise that will
please our customers.
That's why our inventory is constantly new and continuously expanding.
Tuesday Morning has developed a reputation among quality manufacturers as a
reputable source for overruns and end-of-line product. From essential household
items like cookware and luggage to decorative accessories such as framed prints
made from 150-year-old engravings, we continue to provide the best quality
merchandise at unmatched closeout prices.
14 TUESDAY MORNING CORPORATION
Tuesday Morning is the largest closeout retailer in the United States of
European mouth-blown, hand-cut crystal.
1996 ANNUAL REPORT 15
Quality & Price: A Success Story
French Corolle dolls are some of the most cherished, sought-after collectible
dolls available today. Tuesday Morning sold over 7,000 dolls in just four
hours.
The Event Story. Our "sales event" philosophy is a unique retail concept: open
only four times a year for events which last from six to twelve weeks each. The
sales events are scheduled beginning with the peak retail selling periods of
February, May, August and October. This unusual, but highly effective approach
to retailing has created a special mystique with mid-to-upper class shoppers and
has catapulted Tuesday Morning to the forefront of the closeout gift industry.
Our entire operation is built around the single concept of doing business
when the profit potential is the greatest. By closing stores during the slower
shopping periods, we keep overhead to a minimum. This retail downtime also
allows us to concentrate on re-stocking shelves with new merchandise for the
next exciting sales event.
Tuesday Morning sales events provide a win-win scenario for both our Company
and our customer. Shoppers look forward to winning at the checkout counter, and
they arrive every time, readied for the deep-discount treasure hunt.
Direct mail and newspaper advertising campaigns are two key marketing
components of our sales event strategy. Tuesday Morning's mailing list has
topped four million and has grown 12% a year. This is a qualified list of
mid-to-upper class consumers who have requested that their names be included in
our mailings. And, it's a list that remains with us and is never sold to other
companies.
Our four-color, eight to twelve page direct mail pieces highlight new
merchandise and the values found with every item. Product showcased in these
mailings often sell out on opening day. In fact, some have sold out in a matter
of minutes.
16 TUESDAY MORNING CORPORATION
Seasonal items sell quickly at Tuesday Morning. Customers purchased 65,000
hand-painted wood Christmas trains in the first two days of our October 1996
sales event.
1996 ANNUAL REPORT 17
Quality & Price: A Success Story
Normally retailing for $135 in department stores, luxury chenille throws were
closeout priced at $29.99. In about two hours, over 12,000 pieces were sold.
The Technology Story. At Tuesday Morning, we continue to utilize leading-edge
technology to streamline operations and boost overall productivity. Over the
last three years, we engineered, programmed, installed and interconnected three
new technology systems: a local area network (LAN) for our corporate
headquarters; an inventory tracking/processing system for our warehouse; and
point of sale and electronic surveillance tracking systems.
With a completely computerized tracking system, our Company can immediately
locate any piece of merchandise in the warehouse or on the store shelves.
Because of this technological upgrade, the process of preparing new stores for
future openings is more efficient than ever before. In addition, new items can
move from the warehouse loading dock to any store in the country within hours,
if necessary.
Technological advances are found in every facet of the warehouse operation
including onboard scanners and computer terminals which have been installed in
our entire fleet of forklifts. Warehouse capacity has doubled, worker
productivity has tripled and store paperwork costs have been reduced by 40%. We
are extremely pleased with these results.
18 TUESDAY MORNING CORPORATION
Tuesday Morning sold the largest collection of European fine linens offered to
U.S. consumers at closeout prices. Quality-conscious shoppers purchased over
$1 million of these linens in two days.
1996 ANNUAL REPORT 19
Quality & Price: A Success Story
Tuesday Morning is
one of the top three importers of fine quality, hand-knotted and hand-hooked
Oriental rugs from China and India.
The Customer Story. It's a fact: offer customers something new, something
wonderful that they haven't seen before at 50% to 80% off retail prices and
they'll come back for more. Again and again.
That's a major draw of Tuesday Morning. The ever-changing inventory and
sales event selling strategy spurs a curiosity that other retailers simply
cannot match. Savvy customers already know that closeout merchandise is often
limited, so when they find an item they like, they must buy it immediately or
risk missing out entirely. With our deep discount pricing, it's no surprise that
shoppers will often spend hundreds of dollars during a single visit. Hundreds of
customers will often wait in line at 8:00 AM on opening day just to have the
opportunity to find a Tuesday Morning treasure.
Preferred customers receive advance mailings alerting them to the next sales
event. These upscale bargain hunters are a special breed of shoppers. One
shopper remarked: "If you really like the thrill of the hunt, you can't beat
Tuesday Morning for exciting shopping. Every time you go, there's always
something new." Another shopper rescheduled her daughter's wedding rather than
miss the first day of a sales event. And a big bonus to us is that word of mouth
advertising has elevated customer loyalty to a near cult level.
The Tuesday Morning customer is primarily female between the ages of 25 and
54, a professional or married to one, with a median annual family income of
close to $65,000. She also is a knowledgeable shopper, often frequenting five or
more national retailers, so she immediately recognizes the first quality, name
brand merchandise at closeout prices found at Tuesday Morning. And that is why
our customers keep coming back.
20 TUESDAY MORNING CORPORATION
Customers view Tuesday Morning home accessories as unique treasures. Over 14,000
Tiffany style lamps, closeout priced at $49.99 were sold in about four hours.
1996 ANNUAL REPORT 21
Quality & Price: A Success Story
Deep-discounted at 80% off the normal department store retail price, over 12,000
collectible Hummel pendant watches were sold in about one hour.
The Store Growth Story. Tuesday Morning opened its first store in 1974. At the
end of 1996, we had 286 stores in 33 states. We have taken a realistic, but
calculated approach with our expansion plans. On average, we currently open
between twenty-five and thirty new stores a year and we plan on continuing a 10%
to 15% increase in store growth over the next several years. Our research
indicates that it will be many years before Tuesday Morning reaches market
saturation.
In 1997, we will look to expand our store base on the east and west coasts
as well as in smaller, but carefully targeted markets. In addition, we will open
new stores in existing markets where we see the demand. At Tuesday Morning, our
real estate experience continues to indicate that the prime locations for our
stores is amid high concentrations of white collar professionals.
One reason for our successful store growth is that we keep real estate costs
far below what traditional retailers normally spend. By opening stores in retail
strip centers and warehouse zone locations, we are able to secure leases at far
below market rates, often less than half of what it costs other retailers. In
fact, the overall cost to open one of our stores is quite modest as compared to
the retailing norm. We spend approximately $70,000 for fixtures and start-up
costs, plus an additional $120,000 in inventory.
22 TUESDAY MORNING CORPORATION
From carry-ons to pullmans to garment and duffel bags, luggage is a mainstay at
Tuesday Morning sales events. For example, more than 14,000 pieces of Ciao
luggage were sold in about five hours.
1996 ANNUAL REPORT 23
Financial Review
Consolidated
Balance Sheets 25
Consolidated Statements
of Operations 26
Consolidated Statements
of Shareholders' Equity 27
Consolidated Statements
of Cash Flows 28
Notes to Consolidated
Financial Statements 29
Independent
Auditors' Report 37
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations 38
Shareholder Information 44
Markets 46
24 TUESDAY MORNING CORPORATION
CONSOLIDATED BALANCE SHEETS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996 and 1995
(in thousands, except share data)
Assets 1996 1995
---------------------------------------------- --------- --------
Current assets:
Cash and cash equivalents $ 10,754 $ 6,276
Inventories 75,493 52,367
Prepaid expenses 1,048 993
Other current assets 726 458
--------- --------
Total current assets 88,021 60,094
--------- --------
Property, plant and equipment (notes 5 and 6):
Land 8,356 8,356
Buildings 13,926 12,989
Furniture and fixtures 17,658 15,584
Equipment 14,469 13,433
Leasehold improvements 2,082 1,967
--------- --------
56,491 52,329
Less accumulated depreciation and amortization (26,104) (21,267)
--------- --------
Net property, plant and equipment 30,387 31,062
--------- --------
Due from Officer (note 2) 2,679 2,211
Other assets (note 2) 670 876
--------- --------
Total Assets $ 121,757 $ 94,243
========= ========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of mortgage (note 5) $ 1,021 $ 1,021
Current installments of capital lease obligation (note 6) 625 755
Accounts payable 22,543 12,707
Accrued expenses:
Sales tax 2,105 1,662
Other 5,637 2,467
Deferred income taxes (note 8) 57 231
Income taxes payable (note 8) 6,465 2,136
--------- --------
Total current liabilities 38,453 20,979
--------- --------
Mortgage on land, buildings and equipment, excluding
current installments (note 5) 4,594 5,615
Capital lease obligations, excluding current installments (note 6) 382 1,007
Deferred income taxes (note 8) 2,800 2,994
Shareholders' equity (note 7):
Preferred stock of $1 par value per share
Authorized 2,000,000 shares, none issued -- --
Common stock of $.01 par value per share
Authorized 20,000,000 shares; issued
8,181,036 shares at December 31, 1996 and
8,143,586 shares at December 31, 1995 82 81
Additional paid-in capital 18,640 18,277
Retained earnings 58,834 47,318
Less: treasury stock (274,500 shares in 1996 and in 1995) (2,028) (2,028)
--------- --------
Total shareholders' equity 75,528 63,648
--------- --------
Commitments and contingencies (notes 3, 10 and 12)
Total Liabilities and Shareholders' Equity $ 121,757 $ 94,243
========= ========
See accompanying notes to consolidated financial statements.
1996 ANNUAL REPORT 25
CONSOLIDATED STATEMENTS OF OPERATIONS
Tuesday Morning Corporation and Subsidiaries
Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
1996 1995 1994
................................................. -------- -------- --------
Net sales $256,756 210,265 190,081
Cost of sales 165,189 137,427 126,931
-------- -------- --------
Gross profit 91,567 72,838 63,150
Selling, general and administrative expenses 71,167 63,040 57,523
-------- -------- --------
Operating income 20,400 9,798 5,627
Other income (expense):
Interest income 275 204 198
Interest expense (2,767) (3,330) (2,458)
Other, net 600 592 649
-------- -------- --------
(1,892) (2,534) (1,611)
-------- -------- --------
Earnings before income taxes 18,508 7,264 4,016
Income tax expense (note 8) 6,992 2,491 1,365
-------- -------- --------
Net earnings $ 11,516 4,773 2,651
======== ======== ========
Net earnings per share and share equivalents $ 1.40 0.60 0.34
======== ==== ====
See accompanying notes to consolidated financial statements.
26 TUESDAY MORNING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Tuesday Morning Corporation and Subsidiaries
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
Common stock Additional Treasury stock Total
-------------------- paid-in Retained -------------------- shareholders'
Shares Amount capital earnings Shares Amount equity
............................................. -------- -------- ----------- --------- -------- --------- ------------
Balance at
December 31, 1993 8,060 $81 $18,091 $39,894 (330) $(2,342) $55,724
Net earnings -- -- -- 2,651 -- -- 2,651
Shares issued in connection with employee
stock option plan (note 7) 40 -- 140 -- -- -- 140
Treasury shares sold to employee stock
purchase plan (note 7) -- -- (60) -- 30 175 115
-------- -------- ----------- --------- -------- --------- ------------
Balance at
December 31, 1994 8,100 81 18,171 42,545 (300) (2,167) 58,630
Net earnings -- -- -- 4,773 -- -- 4,773
Shares issued in connection with employee
stock option plan (note 7) 44 -- 162 -- -- -- 162
Treasury shares sold to employee stock
purchase plan (note 7) -- -- (56) -- 25 139 83
-------- -------- ----------- --------- -------- --------- ------------
Balance at
December 31, 1995 8,144 81 18,277 47,318 (275) (2,028) 63,648
Net earnings -- -- -- 11,516 -- -- 11,516
Shares issued in connection with employee
stock option plan (note 7) 37 1 382 -- -- -- 383
Treasury shares sold to employee stock
purchase plan (note 7) -- -- (19) -- -- -- (19)
-------- -------- ----------- --------- -------- --------- ------------
Balance at
December 31, 1996 8,181 $82 $18,640 $58,834 (275) $(2,028) $75,528
======== ======== =========== ========= ======== ========= ============
See accompanying notes to consolidated financial statements.
1996 ANNUAL REPORT 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Tuesday Morning Corporation and Subsidiaries
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
- ----------------------------------------------------------- --------- ---------- ---------
Cash flows from operating activities:
Cash received from customers $256,756 $210,265 $190,081
Cash paid to suppliers and employees (240,814) (199,448) (177,676)
Interest received 275 204 198
Interest paid (2,767) (3,330) (2,458)
Income taxes (paid) refunded (2,858) (1,362) 1,911
--------- ---------- ---------
Net cash provided by operating activities (note 9) 10,592 6,329 12,056
--------- ---------- ---------
Cash flows from investing activities:
Loans to officer (note 2) (742) (497) (2,605)
Payments from officer (note2) 274 85 207
Proceeds from sale of property, plant and equipment -- -- 99
Capital expenditures (4,233) (2,692) (5,693)
--------- ---------- ---------
Net cash used by investing activities (4,701) (3,104) (7,992)
--------- ---------- ---------
Cash flows from financing activities:
Payment of mortgages (1,021) (1,063) (1,298)
Principal payments under capital lease obligation (754) (666) (214)
Proceeds from exercise of common stock
options/stock purchase plan 362 245 255
--------- ---------- ---------
Net cash used by financing activities (1,413) (1,484) (1,257)
--------- ---------- ---------
Net increase in cash and cash equivalents 4,478 1,741 2,807
Cash and cash equivalents at beginning of period 6,276 4,535 1,728
--------- ---------- ---------
Cash and cash equivalents at end of period $ 10,754 $ 6,276 $ 4,535
========= ========== =========
See accompanying notes to consolidated financial statements.
28 TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation--The consolidated financial statements include the
accounts of Tuesday Morning Corporation and its wholly-owned subsidiaries:
TMI Holdings, Inc., TMIL Corporation, Tuesday Morning, Inc. and Friday
Morning, Inc., (collectively "the Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company owned and operated 286 deep discount retail stores in 33 states
at December 31, 1996, (260 and 246 stores at December 31, 1995 and 1994,
respectively). The Company sells closeout housewares and related gift
merchandise, which it purchases at prices below wholesale prices. Company
stores are open for four sales events each year.
(b) Cash and Cash Equivalents--The Company's policy is to invest cash in
excess of operating requirements in income producing investments. Cash
equivalents of $8,352,000 in 1996 and $4,707,000 in 1995 are investments in
money market funds. The Company considers all short-term investments with
original maturities of three months or less to be cash equivalents.
(c) Inventories--Inventories are stated at the lower of average cost or
market using the retail inventory method for the stores' inventory and the
cost method for warehouse inventory. Buying, distribution and freight costs
are capitalized as part of inventory.
(d) Property, Plant and Equipment--Property, plant and equipment are stated
at cost. Buildings, furniture and fixtures, and equipment are depreciated on
a straight-line basis over the estimated useful lives of the assets as
follows:
Depreciable lives
----------------------------------------------------
Buildings 30 years
Furniture and fixtures 7 years
Equipment 5 to 7 years
Improvements to leased premises are amortized on a straight-line basis over
the shorter of their useful lives or the expected term of the related lease.
(e) Income Taxes--Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(f) Earnings (loss) per Common Share and Share Equivalent--Earnings (loss)
per common share is based on the weighted average number of common shares,
and when dilutive, share equivalents (note 7) outstanding during the period.
The weighted average number of common shares and share equivalents
outstanding for 1996, 1995 and 1994 were 8,215,000, 7,997,000 and 7,890,000,
respectively.
(g) Pre-opening Costs--The Company capitalizes certain costs directly
related to opening new stores. Effective August 1, 1995, the Company revised
its policy for capitalizing and amortizing preopening costs associated with
the opening of new stores. The amortization period was reduced from 24
months to 12 months. The impact of the change in accounting policy did not
have a material impact on the Company's consolidated financial statements.
(h) Advertising--Costs for newspaper, television, radio and other media are
expensed as the advertised events take place. Advertising expense for 1996,
1995 and 1994 was $16,475,000, $15,317,000 and $13,652,000, respectively.
1996 ANNUAL REPORT 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(i) Estimates--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(j) Foreign Currency Transactions--The Company has entered into foreign
exchange contracts to hedge its foreign currency transactions related to
specific purchase orders for merchandise. Gains and losses on these
contracts have been minimal and are deferred until the related merchandise
is received.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of--The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position, results
of operations, or liquidity.
(l) Stock Option Plan--Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the previsions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
(2) RECEIVABLES FROM OFFICERS
At December 31, 1996 and 1995, Other Assets included a receivable from an
officer of the Company of $124,000 and $114,000, respectively. This loan was
initiated in 1992. It bears interest at the prime rate and is secured with
Company stock.
Due from Officer at December 31, 1996 and 1995 is $2,679,000 and $2,211,000,
respectively. This unsecured loan was initiated in 1994 and bears interest
at prime.
(3) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising from the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
30 TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(4) LINES OF CREDIT
The Company had no balances outstanding related to their line of credit at
December 31, 1996 or 1995. As of December 31, 1996 and 1995, the Company had
outstanding letters of credit of $9,819,000 and $6,186,000, respectively,
primarily for inventory purchases.
In July 1994, the Company entered into a three-year $45,000,000 revolving
line of credit with a new bank. This agreement is secured by a pledge of
substantially all the Company's assets. Borrowings were limited to the
lesser of $45,000,000 or 50% (60% for up to 120 days each year) of eligible
inventory, as defined. The availability is further reduced by the aggregate
undrawn amount of outstanding letters of credit and a reserve for the
foreign currency contracts, discussed in Note 12. At the Company's option,
the amount borrowed bore interest at either the Reference Rate plus 0.75% or
the Eurodollar Rate plus 2.50%. An Unused Line Fee of 0.25%, per annum, was
paid on the difference between $45,000,000 and the average total of the
amount borrowed and letters of credit outstanding.
During 1996, this agreement was further amended to extend the term through
July 1999 and to increase the borrowing capacity to $55,000,000 for the
period beginning July 1 and ending October 31 of each year. This amendment
allows the Company, at its option, to borrow at either the Reference Rate or
the Eurodollar Rate plus 2.00%. The maximum amount of outstanding and unused
Letters of Credit was also increased to $12,000,000.
The weighted-average interest rates were 8.38% and 8.88% during 1996 and
1995, respectively.
In connection with this line of credit, the Company is required to maintain
a minimum net worth and comply with other financial covenants including
limitations on dividends, indebtedness and capital expenditures. At December
31, 1996, the Company is in compliance with these covenants.
(5) MORTGAGE ON PROPERTY, PLANT AND EQUIPMENT
During 1995, the Company entered into a seven-year agreement with a bank to
refinance and consolidate its mortgages on land and buildings. The amount of
the note was $7,146,000, the proceeds of which were used to pay the previous
mortgage notes. The note is secured by land and buildings and bears interest
at LIBOR plus 2.125%, (7.755% at December 31, 1996) with principal and
interest due monthly. It matures on June 10, 2002.
Mortgages consist of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
-------- --------
Note payable to bank, in monthly
installments of $85 plus interest $5,615 6,636
Less current installments (1,021) (1,021)
-------- --------
$4,594 5,615
======== ========
In connection with this mortgage, the Company is required to maintain minimum
net worth and comply with other financial covenants. At December 31, 1996, the
Company is in compliance with these covenants.
The maturities of the mortgage are as follows (in thousands):
Year Amount
-------------------------------------------
1997 $1,021
1998 1,021
1999 1,021
2000 1,021
2001 1,021
Later years 510
1996 ANNUAL REPORT 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(6) CAPITAL LEASE
During September 1994, the Company entered into a capital lease with a
financial institution to finance part of the acquisition of Point of Sale
registers and Electronic Article Surveillance equipment. The amount financed
under the capital lease totaled $2,642,000. Depreciation expense during 1996
and 1995 was $528,000 per year.
This lease is for five years and contains a bargain purchase option that the
Company would be expected to exercise. This lease bears an implicit interest
rate of approximately 12.5%.
The following is a schedule of future minimum lease payments under the
capital lease together with the present value of the net minimum lease
payments as of December 31, 1996 (in thousands):
Year Amount
--------------------------------------------
1997 $707
1998 256
1999 170
------
Total minimum lease payments 1,133
Less: Amount representing
interest (126)
------
Present value of net minimum
lease payments 1,007
Less: Current installments (625)
Long term capital lease ------
obligation $382
======
(7) SHAREHOLDERS' EQUITY
On May 5, 1992, the Board of Directors of the Company approved the purchase
of the Company's stock in open market purchases to be effected from time to
time. There are no plans for purchases at this time.
The Company has a stock option plan ("the Plan") covering 2,160,500 shares
of the Company's common stock which may be granted to employees of the
Company. Under the Plan, stock options are granted at fair market value and
vest over varying periods not to exceed 10 years.
At December 31, 1996, 829,000 shares were available for grant under the
Plan. The per share weighted-average fair value of stock options granted
during 1995 was $3.09 on the date of the grant using the Black Scholes
option-pricing model with the following assumptions: expected dividend yield
of 0%, risk-free interest rate of 6.1%, an expected life of 5 years and an
expected volatility of 0.506. There were no options granted during 1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1996 1995
-------- --------
Net earnings As reported $ 11,516 4,773
Pro forma 11,321 4,772
Earnings per share As reported $ 1.40 0.60
Pro forma 1.38 0.60
Pro forma amounts reflect only options granted in 1996 and 1995. The full
impact of calculating compensation cost for stock options under SFAS No. 123
is not reflected in the pro forma amounts presented above because
compensation cost is recognized over the vesting period and compensation
cost for options granted prior to January 1, 1995 is not considered.
32 TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
Following is a summary of transactions relating to the Plan's options for
the three years ended December 31, 1996:
Number Weighted-Average
of Shares Exercise Price
------------- ------------------
Outstanding at
December 31, 1993 996,600 $ 6.53
Exercised during year (40,000) 3.54
Canceled during year (1,800) 9.63
Granted during year 100,000 3.63
------------- ------------------
Outstanding at
December 31, 1994 1,054,800 6.36
Exercised during year (44,000) 3.71
Canceled during year (184,500) 8.69
Granted during year 102,500 6.00
------------- ------------------
Outstanding at
December 31, 1995 928,800 5.98
Exercised during year (37,450) 4.72
Canceled during year (1,500) 9.63
Granted during year 0 --
------------- ------------------
Outstanding at
December 31, 1996 889,850 $ 6.03
============= ==================
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.38 - $9.75 and 5.2
years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was 835,000
and 847,000, respectively, and the weighted-average exercise price of these
options was $5.88 and $5.80, respectively.
In May 1993 the Board of Directors approved a stock purchase plan for
Company employees. It was implemented October 1, 1993. The Company matches
the employee contribution at a rate of 25% up to the first $5,000 per year
of individual employee contributions. Stock is purchased monthly at the
average price of the shares traded during the month. The expense of the
Company match was immaterial.
(8) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994 consists of (in thousands):
Current Deferred Total
---------- -------- -------
Year ended December 31, 1996
U.S. Federal $ 6,606 (129) 6,478
State, local and other 754 (240) 514
---------- -------- -------
Total 7,360 (368) 6,992
========== ======== =======
Year ended December 31, 1995
U.S. Federal 2,390 80 2,470
State, local and other 99 (78) 21
---------- -------- -------
Total 2,489 2 2,491
========== ======== =======
Year ended December 31, 1994
U.S. Federal 1,086 279 1,365
State, local and other (34) 34 --
---------- -------- -------
Total $ 1,052 313 1,365
========== ======== =======
A reconciliation of the expected Federal income tax expense to actual tax
expense follows (based upon a tax rate of 35% for 1996 and 34% for 1995 and
1994, in thousands).
1996 1995 1994
-------- ------- -------
Expected income tax expense $ 6,478 2,470 1,365
State income taxes, net of
related Federal tax effect 378 90 (16)
Other, net 136 (69) 16
-------- ------- -------
$ 6,992 2,491 1,365
======== ======= =======
1996 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows (in thousands):
1996 1995
------ -----
Deferred tax assets:
Compensated absences $ 169 134
Accrued expenses, principally due
to items not yet deductible for
income tax purposes 499 93
Other 224 151
------ -----
Total gross deferred assets 892 378
------ -----
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation and capitalized
interest 3,024 3,107
Inventory costs 473 231
Other 252 265
------ -----
Total gross deferred tax liabilities 3,749 3,603
------ -----
Net deferred tax liability $2,857 3,225
====== =====
Management expects the deferred tax assets at December 31, 1996 to be
recovered through the reversal during the carry-forward period of existing
taxable temporary differences giving rise to the deferred income tax
liability. Accordingly, no valuation allowances for deferred tax assets were
considered necessary as of December 31, 1996 or December 31, 1995.
(9) SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net earnings to net cash provided by operating
activities for the years ended December 31, 1996, 1995 and 1994 is as
follows (in thousands):
1996 1995 1994
------- ----- -----
Net earnings $11,516 4,773 2,651
------- ----- -----
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 4,907 4,583 3,862
Deferred income taxes (369) 2 313
Loss on sale of fixed assets -- -- 12
Changes in operating assets
and liabilities:
Income taxes receivable -- -- 2,133
Inventories (23,127) (5,552) 6,736
Prepaid expenses (55) 681 (683)
Other current assets (268) 191 597
Other assets 207 102 (251)
Accounts payable 9,836 (209) (2,943)
Accrued expenses 3,616 610 (1,359)
Income taxes payable 4,329 1,148 988
------- ----- -----
Total adjustments (924) 1,556 9,405
------- ----- -----
Net cash provided by
operating activities $10,592 6,329 12,056
======= ===== ======
A capital lease obligation of $2,642,000 was incurred when the Company
entered into a lease for new equipment in 1994.
34 TUESDAY MORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(10) OPERATING LEASES
The Company leases substantially all store locations under noncancellable
operating leases. New store leases do, however, allow the Company to
terminate a lease after 12-18 months if the store does not achieve sales
expectations. Future minimum rental payments under leases are as follows (in
thousands):
Year Amount
------------------------------------------
1997 $15,931
1998 13,996
1999 10,604
2000 8,501
2001 5,649
Later years 2,003
-------
Total minimum rental
payments $56,684
=======
In the normal course of business, management expects to renew or replace
leases for store locations as they expire. Rental expense for 1996, 1995 and
1994 was $14,564,000, $13,124,000 and $12,323,000, respectively.
(11) PROFIT SHARING PLAN
The Company has a 401(K) profit sharing plan for the benefit of its
employees. Under the plan, eligible employees may request the Company to
deduct and contribute from 1% to 15% of their salary to the plan. The
Company also contributes 1% of total compensation for all plan participants,
and matches a portion of each participant's contribution up to 6% of the
participant's compensation. The Company expensed contributions of $403,000,
$327,000, and $330,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
(12) FINANCIAL INSTRUMENTS
As of December 31, 1996 and 1995, the Company had approximately $4,042,000
and $474,000 respectively, of net foreign exchange contracts outstanding
which are expected to be exercised by September of each following year. The
Company's risk that counterparties to these contracts may be unable to
perform is minimized by limiting the counterparties to major financial
institutions.
The following table represents the carrying amounts and estimated fair
values of the Company's notes receivable, variable rate long-term debt and
foreign exchange contracts as of December 31, 1996 and 1995 (in thousands):
1996 1995
------------------ -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ----- -------- -----
Assets - notes receivable $2,878 2,878 2,567 2,567
Liabilities:
Foreign exchange
contracts:
unrealized (gain) -- (32) -- (22)
unrealized loss -- 14 -- --
Variable rate long-term
debt 5,615 5,615 6,636 6,636
The carrying values of the Company's variable rate long-term debt and notes
receivable approximate the estimated fair values since the obligations bear
interest at current market rates. The fair values of the foreign exchange
contracts are based on the exchange rates existing at the balance sheet
dates.
1996 ANNUAL REPORT 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tuesday Morning Corporation and Subsidiaries
December 31, 1996, 1995 and 1994
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1996 and 1995 follows (in
thousands, except per share amounts):
Quarters ended
------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
--------- -------- --------- --------
Net sales $35,740 54,286 48,537 118,193
Comparable store
sales increase 11.5% 6.7% 18.0% 16.1%
Gross profit $ 3,397 18,218 18,750 41,203
Net earnings (loss) $ (676) 434 698 11,060
Net earnings (loss)
per common
share and
share equivalent $ (0.09) 0.05 0.08 1.33
Weighted-average
number of common
shares and share
equivalents
outstanding 7,851 8,319 8,370 8,343
Quarters ended
------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
--------- -------- --------- --------
Net sales $29,958 47,977 38,240 94,090
Comparable store
sales increase 15.2% 10.3% (5.6%) 7.4%
Gross profit $10,349 15,927 14,863 31,699
Net earnings (loss) $(2,046) (155) (336) 7,310
Net earnings (loss)
per common
share and
share equivalent $ (0.26) (0.02) (0.04) 0.92
Weighted-average
number of common
shares and share
equivalents
outstanding 7,797 7,836 7,840 7,980
36 TUESDAY MORNING CORPORATION
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
Independent Auditors' Report
December 31, 1996, 1995 and 1994
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TUESDAY MORNING CORPORATION:
We have audited the accompanying consolidated balance sheets of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 21, 1997
1996 ANNUAL REPORT 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1996 COMPARED TO 1995:
During 1996, the Company's performance continued to improve dramatically.
Sales rose 22% to $256.8 million. Significant leverage from these additional
sales resulted in a 140% increase in net income which rose from $4.8 million
in 1995 to $11.5 million in 1996.
The Company's comparable store sales (sales of stores open one year or more)
rose 14% during the year. The primary reason for this strong performance is
attributable to continued improvement in merchandise selection, pricing and
mix. At year end, the Company had 22 buyers versus 10 in 1993. Many of these
buyers were added in 1994 and 1995. The rate of sale of new products
reflects this staff of more seasoned buyers. New buyers typically have at
least 10 years experience in their product categories and have knowledge of
the manufacturing process and costs. Buyers travel extensively with senior
buyers and the Company's Chairman, Lloyd Ross, for at least one year to
learn the nature of the closeout business and Tuesday Morning's unique
niche. This "seasoning" is reflected in the strong comparable store sales
mentioned above.
The Company has obtained operating leverage from several areas:
a) Distribution costs are relatively fixed. Additional business in 1996
caused these costs to drop as a percentage of sales and was the major
contributor in the increased gross profit achieved during 1996. Gross
profit margins increased to 35.7% from 34.6% during the year.
b) Store level expenses also tend to be relatively fixed and are the primary
contributor to selling, general and administrative expenses. As a
percentage, these expenses improved to 27.7% of sales from 30.0% of sales
due to the increased sales volume on a per store basis.
Interest expense declined approximately $563,000 due to reduced average
borrowings in 1996, which was the result of cash flow from 1995 operations,
and reduced interest rates negotiated during 1996.
1995 COMPARED TO 1994:
During 1995 the Company continued to improve its performance reporting a
profit of $4.8 million compared to a profit of $2.7 million during 1994.
These improvements came in several areas as follows:
a) Product selection, pricing and mix continued to improve due to the
increased number and expertise of our new buyers which we added in 1994.
Our buyers have increased their travel throughout the world to obtain
better values and eliminate middlemen.
Buyers are now able to focus on areas where they have significant
experience and are better able to find the bargains that allow the
Company to provide tremendous value to its customers. In addition, the
Company was able to improve its product selection in areas where buyers
had individual expertise. As examples, the Company added buyers with
expertise in rugs, sporting goods and toys, seasonal items, housewares,
and lawn and garden which allowed for expansion of these categories.
The Company offers a broad selection of items and has found that its
performance improves when this selection is diverse with limited
quantities of individual items. The increased number of buyers and their
expanded expertise is necessary to improve this product diversity.
b) The Point of Sale system which we installed during 1994 continues to
provide us with timely information regarding the rate of sale of our
products and to allow us to monitor and more accurately plan markdowns,
thus more effectively utilizing these dollars.
38 TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
c) Shrinkage continued to improve during 1995 after the 1994 installation of
Electronic Article Surveillance equipment and is now significantly lower
than the Company's recent historical rate and somewhat lower than
industry averages.
d) Our integrated warehouse systems allow for a seamless flow of product.
Improved planning and processing have continued to reap productivity
gains in this area.
In 1995, sales increased 10.6% to $210.3 million from $190.1 million in
1994. Comparable store sales increased 7.4% which was comprised of a 2.7%
increase in transactions and a 4.4% increase in average ticket. The
continuing increase in transactions is especially pleasing as it signifies a
continual growth in our customer base. The increase in average ticket is
primarily attributable to changes in product mix.
The Company's gross profit percentage increased 1.4% to 34.6% from 33.2%.
The increase is the result of several factors, primarily improved product
mix and pricing. Other factors which also impacted the increase were
improvements in shrinkage and improved warehouse efficiencies.
Selling, general and administrative expenses vary based on several factors
such as store count, product shipments, store location, advertising level,
etc. In general, these factors are affected by sales volume such that SG&A
tends to vary as sales volume and differences from planned sales vary. In
1995, these expenses increased $5.5 million to $63.0 million from $57.5
million. As a percent of sales these expenses improved slightly, decreasing
0.3%.
Other income and expense is composed of (a) interest expense which increased
substantially during the year due to market interest rate increases and an
increase in average borrowings and (b) interest and other income which,
during 1995, was comprised of approximately 50% non-recurring items.
As a result of these factors, net income increased $2.1 million from $2.7
million ($0.34 per share) in 1994 to $4.8 million ($0.60 per share) in 1995.
1996 ANNUAL REPORT 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share data) Years Ended December 31,
---------------------------------------------------- -------------------------------------------------------------------
Selected Consolidated Financial Data 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Net sales $ 256,756 210,265 190,081 175,790 160,075
Cost of sales 165,189 137,427 126,931 123,148 104,581
---------- ---------- ---------- ---------- ----------
Gross profit 91,567 72,838 63,150 52,642 55,494
Selling, general and administrative expenses 71,167 63,040 57,523 54,895 45,315
Net interest income (expense) and other income (1,892) (2,534) (1,611) (319) 36
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income tax 18,508 7,264 4,016 (2,572) 10,215
Income tax expense (benefit) 6,992 2,491 1,365 (956) 3,643
---------- ---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of changes
in accounting principles 11,516 4,773 2,651 (1,616) 6,572
Cumulative effect to December 31, 1992 of change
in accounting for income taxes -- -- -- 564 --
Cumulative effect to December 31, 1991 of change
in accounting for inventories (net of tax) -- -- -- -- 1,599
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 11,516 4,773 2,651 (1,052) 8,171
========== ========== ========== =========== ==========
Net earnings (loss) per common share and share equivalents:
Earnings (loss) before cumulative effect of changes
in accounting principles $ 1.40 0.60 0.34 (0.19) 0.72
Cumulative effect of change in accounting for
income tax -- -- -- 0.07 --
Cumulative effect of change in accounting for
inventories -- -- -- -- 0.17
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 1.40 0.60 0.34 (0.12) 0.89
========== ========== ========== =========== ==========
Earnings (loss) before cumulative effect of changes
in accounting principles as a percent of net sales 4.49% 2.27% 1.39% (0.92%) 4.11%
========== ========== ========== =========== ==========
Years Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Weighted-average common shares and share
equivalents outstanding 8,215 7,997 7,890 8,513 9,185
Working capital $ 49,568 39,115 32,593 36,765 48,053
Current ratio 2.29 2.86 2.55 2.61 3.22
Cash and cash equivalents $ 10,754 6,276 4,535 1,728 1,527
Inventories $ 75,493 52,367 46,815 53,551 64,498
Total assets $ 121,757 94,243 89,403 88,967 97,175
Mortgage debt and capital lease, excluding current
installments $ 4,976 6,622 6,773 7,595 8,893
Shareholders' equity $ 75,528 63,648 58,630 55,724 64,564
40 TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1996, the Company did not have any bank indebtedness
outstanding other than mortgages which have maturity dates in subsequent
years. The Company had a secured line of credit of up to $45 million
available at various interest rates ranging from 7.50% to 9.25% throughout
the year for letters of credit and borrowings. This agreement was amended in
July 1996 to allow for an increased borrowing capacity to $55 million for
the period July 1 to October 31 of each year. This amendment also extended
the term to July 1999. The Company's utilization of the line of credit is
seasonal and peaks before the opening of each sale event. Maximum
utilization occurred in August 1996 at $45.5 million in cash borrowings and
$8.5 million in outstanding letters of credit. On December 31, 1996,
outstanding letters of credit amounted to $9.8 million. Based on the line of
credit agreement, the Company had the ability to utilize $21.8 million in
borrowings and letters of credit at December 31, 1996. The line of credit is
secured by substantially all of the Company's assets and availability under
the line fluctuates based on inventory level changes.
The Company's working capital on December 31, 1996 was $49.6 million. Based
on anticipated new store openings and the expected inventory requirements,
the Company believes its working capital and lines of credit are sufficient
to meet 1997 requirements. The Company's current ratio at the end of 1996
was 2.29 to 1. This is a decrease in the Company's current ratio from the
end of 1995, and is primarily attributable to the increase in the Company's
inventory at December 31, 1996, and the corresponding increase in related
payables. The total debt to net worth ratio at the end of 1996 was 0.61 to
1.
If amounts had been outstanding, the interest rate on the line of credit at
December 31, 1996 would have been at the adjusted reference rate of 8.25% or
at 7.688% using the adjusted eurodollar rate as compared to the
weighted-average interest rate in 1996 of 8.379%. If interest rates remain
at the 1996 year-end levels throughout 1997, the Company will incur
approximately the same interest expense as in 1996. The Company believes it
has sufficient resources to meet its interest requirements.
Historically, the Company's principal capital requirement has been the
funding of the development of new stores and the resulting increase in
inventory requirements. The Company plans to open approximately 25 to 35
stores during 1997. The Company estimates that its cash requirements to open
a new store will range from $180 to $200 thousand dollars. These
requirements include approximately $60 thousand for store fixtures,
equipment and leasehold improvements, $11 thousand in preopening expenses
and $120 thousand in new store inventory investments.
Cash flow provided by operations in 1996 was $10.6 million compared to $6.3
million in 1995. The positive cash flow from operations during 1996 was
caused by net income of $11.5 million which included depreciation and
amortization of $4.9 million, an increase in accounts payable of $9.8
million, in accrued expenses of $3.6 million and in income taxes payable of
$4.3 million. This increase in cash flow was offset by an increase in
inventory of $23 million.
1996 ANNUAL REPORT 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
The Company's business is highly seasonal, with its greatest sales occurring
during the fourth quarter of each year. For each of the last three years,
more than 40% of the Company's net sales occurred during its fourth quarter.
The following table sets forth the Company's net sales for each of the
quarters during the three years ended December 31, 1996:
1996 1995 1994
-------- ------- -------
(in thousands)
Quarter
1st $ 35,740 29,958 25,570
2nd 54,286 47,977 41,474
3rd 48,537 38,240 38,849
4th 118,193 94,090 84,188
-------- ------- -------
Total $256,756 210,265 190,081
======== ======= ========
1996 1995 1994
-------- ------- --------
(percent of year's total)
Quarter
1st 13.9% 14.2% 13.5%
2nd 21.2 22.8 21.8
3rd 18.9 18.2 20.4
4th 46.0 44.8 44.3
--------- ------- --------
Total 100.0% 100.0% 100.0%
========= ======= ========
The Company's selling, general and administrative expenses are incurred
relatively uniformly throughout the year. As a result, the Company has
historically generated most (or all) of its net earnings during the fourth
quarter of each year.
The following table sets forth net earnings (loss) of the Company for each
quarter during the two years ended December 31, 1996:
Years Ended December 31,
------------------------
1996 1995
-------- --------
(in thousands)
Quarter
1st $ (676) (2,046)
2nd 434 (155)
3rd 698 (336)
4th 11,060 7,310
------- -------
Total $11,516 4,773
======= =======
42 TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVENTORY
The Company's inventory increased $23.1 million during 1996 to $75.5 million
as the Company increased its store count by 26 to a total of 286 locations.
Inventory in the warehouse at December 31, 1996 was $16.3 million higher
than at December 31, 1995. In order to accommodate system enhancements in
the warehouse scheduled for early 1997, more of the processing of
merchandise intended for the first sale in 1997 was done in the later months
of 1996. An analysis of inventory levels is below:
Total Inventory Levels by Location
(in millions)
12/31/96 12/31/95 12/31/94
-------- -------- --------
Stores $43.1 36.3 30.8
Warehouse 32.4 16.1 16.0
-------- -------- --------
Total $75.5 52.4 46.8
======== ======== ========
Inventory on a per store basis at December 31, 1996 is consistent with
historical levels at the store and is higher, as discussed above, at the
warehouse. This is analyzed below:
Per Store Inventory Levels by Location
(in thousands)
12/31/96 12/31/95 12/31/94
-------- -------- --------
Stores $151 139 125
Warehouse 113 62 65
-------- -------- --------
Total $264 201 190
======== ======== ========
Number of Stores 286 260 246
With the new inventory system and data, markdowns are typically taken based
on rate of sale information and the need to adjust inventory mix. Markdowns
are anticipated at normal levels for 1997.
Forward-looking statements in this document are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that actual results may differ substantially from
such forward-looking statements. Forward-looking statements involve risks
and uncertainties including, but not limited to: continued acceptance of the
Company's products in the marketplace, competitive factors, the availability
of closeout merchandise, consumer spending patterns, general economic
trends, the availability of new store locations, and other risks detailed in
the Company's periodic report filings with the Securities and Exchange
Commission.
1996 ANNUAL REPORT 43
SHAREHOLDER INFORMATION
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 11:00 a.m., Tuesday, May
13, 1997, at the Corporate Offices, 14621 Inwood Road, Dallas, Texas 75244.
Shareholders unable to attend in person are urged to mail their proxy
promptly in order to assure representation at the meeting.
FORM 10-K ANNUAL REPORT
A copy of the Form 10-K annual report filed with the Securities and Exchange
Commission will be furnished free of charge on written request to the
Investor Relations Department, Tuesday Morning Corporation, 14621 Inwood
Road, Dallas, Texas 75244.
CORPORATE HEADQUARTERS
Tuesday Morning Corporation
14621 Inwood Road
Dallas, Texas 75244
972/387-3562
FAX 972/387-2344
Internet Home Page: http://www.tuesdaymorning.com
TRANSFER AGENT & REGISTRAR
ChaseMellon Shareholder Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
1/800-635-7270
AUDITORS
KPMG Peat Marwick LLP
Dallas, Texas 75201
COUNSEL
Crouch & Hallett, L.L.P.
Dallas, Texas 75201
STOCK MARKET INFORMATION
(TUES: NASDAQ)
1996 1995
--------------- ----------------
Quarter High Low High Low
------ ----- ------- -----
1st $ 8.63 5.50 $ 6.75 5.38
2nd 14.13 8.50 6.88 5.50
3rd 14.75 11.00 6.50 5.50
4th 24.13 16.88 6.38 5.13
The Company had approximately 3,600 beneficial owners of its common stock,
as well as approximately 135 which were of record, as of February 28, 1997.
DIVIDENDS
The Company has not paid cash dividends and has no plans to do so in the
immediate future.
44 TUESDAY MORNING CORPORATION
SHAREHOLDER INFORMATION
OFFICERS AND DIRECTORS
Lloyd L. Ross
Chairman of the Board and
Chief Executive Officer
Jerry M. Smith
President, Chief Operating Officer
and Director
James A. Mabry
Director
Vice President, Retired
Horchow Mail-Order, Inc.
H. Russell Potts, Jr.
Director
Virginia State Senator
President, Sports Productions, Inc.
William C. Saunders
Director
President and Chief Executive Officer
Highway Master Corporation
G. Michael Anderson
Senior Vice President
Buying Group
Mark E. Jarvis
Senior Vice President and
Chief Financial Officer
Karen T. Costigan
Vice President
Real Estate
Rebecca Gully
Vice President
Buying, Crystal
Duane A. Huesers
Vice President
Finance
William H. Kendall
Vice President
Buying, Textiles
Stella Knable
Vice President
Buying, Home Furnishings
Richard E. Nance
Vice President
Information and Communications
Andy Paris
Vice President
Store Operations
Terrance Ross
Vice President
Buying, Seasonal
1996 ANNUAL REPORT 45
MARKETS
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46 TUESDAY MORNING CORPORATION
[LOGO OF TUESDAY MORNING APPEARS HERE]
Tuesday Morning Corporation
14621 Inwood Road
Dallas, Texas 75244
972-387-3562
Fax: 972-387-2344