FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended March 31, 1998 Commission File Number 333-46013
TUESDAY MORNING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2398532
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14621 INWOOD RD., DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 387-3562
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Common stock outstanding as of March 31, 1998: 3,749,993 shares
TUESDAY MORNING CORPORATION
PART 1 - FINANCIAL INFORMATION
Page No.
Item 1 - Financial Statements --------
Consolidated Balance Sheets as of March 31, 1998,
March 31, 1997 and December 31, 1997 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Tuesday Morning Corporation and Subsidiaries
Consolidated Balance Sheets
Unaudited Unaudited Audited
Mar 31, Mar 31, Dec. 31,
ASSETS 1998 1997 1997
------------- ------------ ------------
(In Thousands)
Current assets:
Cash and cash equivalents................................................. 1,602 3,151 23,501
Inventories............................................................... 134,124 111,069 99,187
Prepaid expenses.......................................................... 1,455 1,114 1,059
Other current assets...................................................... 480 245 574
Income taxes receivable................................................... 924 - 18
------------- ------------ ------------
Total current assets............................................... 138,585 115,579 124,339
------------- ------------ ------------
Property, plant and equipment, at cost: 63,676 57,955 61,612
Less accumulated depreciation & amortization.............................. (32,303) (27,317) (30,972)
------------- ------------ ------------
Net property, plant and equipment.................................. 31,373 30,638 30,640
------------- ------------ ------------
Other assets, at cost:
Due from Officer.......................................................... 3,215 2,863 3,643
Deferred financing costs.................................................. 9,407 264 9,629
Other assets.............................................................. 290 273 673
------------- ------------ ------------
Total Assets................................................................... 182,870 149,617 168,924
============= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Installments of mortgages................................................. 1,021 1,021 1,021
Revolving credit facility................................................. 18,001 24,369 -
Installments of notes payable............................................. 2,700 - 1,350
Installments of capital lease obligation.................................. 228 474 220
Accounts payable.......................................................... 32,238 33,721 22,253
Accrued expenses
Sales tax.............................................................. 977 804 2,812
Interest expense....................................................... 4,977 24 146
Recapitalization expenses.............................................. - - 30,279
Other.................................................................. 4,812 4,588 4,807
Deferred income taxes..................................................... 55 57 55
Income taxes payable...................................................... - 568 -
------------- ------------ ------------
Total current liabilities.......................................... 65,009 65,626 62,943
------------- ------------ ------------
Mortgages on land, buildings and equipment..................................... 3,318 4,339 3,573
Notes payable excluding current installments................................... 207,300 - 208,650
Revolving credit facility excluding current portion............................ 15,000 - -
Capital lease obligation excluding current installments........................ 102 330 163
Deferred income taxes.......................................................... 2,771 2,800 2,771
Dividend payable on Jr. Preferred.............................................. 1,798 - 39
Senior exchangeable redeemable preferred stock, par value $.01 per share,
authorized 1,000,000 shares, 250,000 issued at December 31, 1997,
aggregate liquidation preference $25,000; 258,281.25 issued at
March 31, 1998, aggregate liquidation preference $25,828 ................. 25,485 - 24,661
Junior redeemable preferred stock, par value $.01 per share, authorized
150,000 shares, 85,998 issued at December 31, 1997 and
March 31, 1998; aggregate liquidation preference $85,998.................. 85,998 - 85,998
Shareholders' equity (deficit)
Junior perpetual preferred stock, authorized 2,500 shares, 1,930
issued at December 31, 1997 and March 31, 1998; par value $.01
per share, aggregate liquidation preference $1,930 ....................... 1,930 - 1,930
Common stock par value $.01 per share,
authorized 30,000,000 shares; issued 12,316,254 shares at March 31, 1997.
Authorized 10,000,000 shares; issued 3,749,993 shares at
December 31, 1997 and March 31, 1998..................................... 37 123 37
Additional paid-in capital ............................................... 5,587 18,851 5,587
Retained earnings (deficit)............................................... (231,465) 59,576 (227,428)
Treasury stock................................................................. - (2,028) -
------------- ------------ ------------
Total shareholders' equity (deficit)............................... (223,911) 76,522 (219,874)
------------- ------------ ------------
Total Liabilities and Shareholders' Equity..................................... 182,870 149,617 168,924
============= ============ ============
See accompanying notes to consolidated financial statements.
-1-
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Operations
Unaudited
Three Months Ended March 31,
--------------------------------
1998 1997
--------------- --------------
(In thousands)
Net sales............................................... 58,811 47,514
Cost of sales........................................... 36,463 29,621
--------------- --------------
Gross profit....................................... 22,348 17,893
Selling, general and administrative expenses............ 18,862 16,451
Operating income................................... 3,486 1,442
--------------- --------------
Other income (expense):
Interest income........................................ 109 74
Interest expense....................................... (6,221) (469)
Other income .......................................... 299 134
--------------- --------------
(5,813) (261)
--------------- --------------
Income (loss) before income taxes.................. (2,327) 1,181
Income tax expense (benefit)............................ (873) 437
--------------- --------------
Net income (loss).................................. (1,454) 744
=============== ==============
See accompanying notes to consolidated financial statements.
-2-
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
Three Months Ended
March 31,
------------------------
1998 1997
---------- ----------
(In Thousands)
Cash flows from operating activities:
Cash received from customers 58,811 47,514
Cash paid to suppliers and employees (105,511) (71,035)
Interest received 109 75
Interest paid (6,221) (469)
Income taxes paid (33) (6,413)
---------- ----------
Net cash used in operating activities (52,845) (30,328)
---------- ----------
Cash flows used in investing activities:
Loans to officers 428 15
Capital expenditures (2,064) (1,473)
---------- ----------
Net cash used in investing activities (1,636) (1,458)
---------- ----------
Cash flows from financing activities:
Proceeds from revolving credit facility 33,001 24,369
Financing fees (112) 22
Payment of mortgages (255) (255)
Principal payments under capital lease obligation (53) (204)
Proceeds from exercise of common
stock options/stock purchase plan - 253
---------- ----------
Net cash provided by (used in) financing activities 32,581 24,185
---------- ----------
Net change in cash and cash equivalents (21,900) (7,601)
Cash and cash equivalents at beginning of period 23,502 10,754
---------- ----------
Cash and cash equivalents at end of period 1,602 3,153
========== ==========
Reconciliation of net income to net
cash used in operating activities:
Net income (loss) (1,454) 745
---------- ----------
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 1,331 1,223
Amortization of financing fees 333 -
Change in operating assets and liabilities:
Income taxes receivable (906) -
Inventories (34,938) (35,576)
Prepaid expense (396) (152)
Other current assets 93 481
Other assets and liabilities 384 (2)
Accounts payable 9,986 11,178
Accrued expenses (27,278) (2,250)
Income taxes payable - (5,976)
---------- ----------
Total adjustments (51,391) (31,074)
---------- ----------
Net cash used in operating activities (52,845) (30,329)
========== ==========
Does not reflect the accrual of $1,798 for dividends on the Junior Preferred
stock or the issuance of $823 of additional Senior Preferred stock as a dividend
to the holders of the Senior Preferred stock. The Senior Credit Facility and the
Senior Subordinated Notes both limit the Company's ability to pay cash
dividends.
See accompanying notes to consolidated financial statements.
-3-
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. On December 29, 1997, Madison Dearborn Capital Partners II, L.P., certain
members of management and certain unaffiliated investors acquired all of
the outstanding capital stock of the Company. This transaction has been
accounted for as a recapitalization and, as such, has no impact on the
historical basis of assets and liabilities.
Refer to the consolidated financial statements and notes thereto for the
fiscal year ended December 31, 1997 for more details of the transaction.
2. The consolidated interim financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These unaudited financial
statements include all adjustments, consisting only of those of a normal
recurring nature, which in the opinion of management, are necessary to
present fairly the results of the Company for the interim periods presented
and should be read in conjunction with the consolidated financial
statements and notes thereto in the Company's S-4 filing.
3. The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
4. Notes payable under the terms of the Company's revolving line of credit
agreement are classified between current and long term in accordance with
the terms of the agreement. This agreement is discussed in more detail in
Liquidity and Capital Resources on the next page.
5. Certain prior year amounts have been reclassed to conform to the current
period presentation.
-4-
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Company for the year ended December 31,
1997.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the Company's
consolidated statements of operations expressed as a percentage of net sales.
There can be no assurance that the trends in sales growth or operating results
will continue in the future.
QUARTER ENDED MARCH 31
----------------------
1998 1997
---- ----
Net sales 100.0% 100.0%
Cost of sales 62.0 62.3
----- -----
Gross profit 38.0 37.7
Selling, general and administrative expense 32.1 34.6
----- -----
Operating income 5.9 3.0
Net interest and other income (9.9) (0.5)
----- -----
Earnings before income taxes (4.0) 2.5
Net earnings (loss) (2.5)% 1.6%
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997
During the first quarter of 1998 sales increased 23.8% due primarily to
comparable store sales increases of 14.4% and $4.9 million of sales from new
stores. Average store sales for the quarter increased from $162 thousand to
$181 thousand. The Company's unique niche in the retail industry and the
breadth of experience of its buying organization have allowed it to offer
tremendous values to its customers which has been the primary factor in its
strong comparable store sales growth.
Gross profit increased $4.4 million from $17.9 million to $22.3 million which
resulted from the increased sales mentioned above and an increase in the gross
profit percentage of 0.3%. The Company's gross profit percentage increased due
to leveraging of distribution costs which remained relatively fixed in relation
to the increases in net sales.
Selling, general, and administrative expense benefited from similar leverage.
These expenses increased $2.4 million due to the addition of new stores and
inflationary increases. These expenses as a percentage of sales decreased to
32.1% from 34.6% due to the leverage resulting from comparable store sales
increases.
-5-
Interest expense increased due to interest associated with the Recapitalization
of the Company which is more fully explained in Liquidity and Capital Resources.
EBITDA increased from $2.8 million to $5.2 million due to the factors mentioned
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with funds generated from
operating activities and borrowings under the revolving credit facilities.
Net cash used by operating activities for the quarters ended March, 1997 and
1998 was $30.3 million, and $52.8 million respectively. These amounts were due
to the seasonal buildup of inventory and, in 1998, the payment of fees and
expenses related to the Recapitalization. Cash and cash equivalents as of March
31, 1997 and 1998 were $3.2 million, and $1.6 million respectively.
As part of the Recapitalization, discussed in detail in the December 31, 1997
financial statements, the Company entered into the Senior Credit Facility, which
is comprised of the $110.0 million Term Loans and the $90.0 million Revolving
Credit Facility. Subject to compliance with the terms of the Senior Credit
Facility and the Indenture, borrowings under the Revolving Credit Facility may
be increased by $25.0 million to accommodate future growth and for certain other
purposes. At March 31, 1998, the Company had $110.0 million outstanding under
the Term Loans and $33.0 million outstanding under the Revolving Credit
Facility, with $20.2 million of remaining availability thereunder. The Term
Loan A loans and the Revolving Credit Facility loans mature on the fifth
anniversary of the Closing, and the Term Loan B loans will mature on the seventh
anniversary of the Closing. For 30 consecutive days during each twelve month
period, beginning April 1998, the aggregate principal amount of loans
outstanding under the Revolving Credit Facility is not to exceed $15.0 million.
Upon consummation of the Recapitalization, the Company's total debt and interest
charges increased significantly. Interest payments on the Notes, under the
Senior Credit Facility and on the Exchange Debentures, represent significant
liquidity requirements for the Company. The Notes require semi-annual interest
payments, and interest on the loans under the Senior Credit Facility are due
quarterly. After December 15, 2002, the Company will be required to pay
dividends on the Senior Exchangeable Preferred Stock in cash. The Company
anticipates that its cash flow generated from operations and borrowings under
the Senior Credit Facility will be sufficient to fund the Company's working
capital needs, planned capital expenditures, scheduled interest payment
(including interest payments on the Notes and amounts outstanding under the
Senior Credit Facility), and scheduled dividend payments on the Senior
Exchangeable Preferred stock for the foreseeable future. The Company has from
time to time received expressions of interest with respect to the property on
which its headquarters is located in Dallas, Texas and in the future may
consider selling such property as means of raising additional cash.
The instruments governing the Company's indebtedness and the Senior Exchangeable
Preferred Stock, including the Certificate of Designation, the Exchange
Indenture, the Senior Credit
-6-
Facility and the Indenture contain financial and other covenants that restrict,
among other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of substantially all
of the assets of the Company. Such limitations, together with the highly
leveraged nature of the Company, could limit corporate and operating activities,
including the Company's ability to invest in opening new stores.
INVENTORY:
The Company's inventory increased from $99.2 million at year end to $134.1
million at March 31, 1998, for an increase of $34.9 million from December 31,
1997. As reflected on the following chart, the increase in warehouse inventory
is attributed to normal seasonal fluctuations in inventory levels. Inventory
levels typically increase during the year from the year end low point.
The increase in inventory at the stores from March 31, 1997 to March 31, 1998
reflects the increase in inventory necessary to support the current sales level.
THIS PRESS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE MADE PURSUANT
TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT OF
1995. ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM SUCH FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES
INCLUDING, BUT NOT LIMITED TO, CONTINUED ACCEPTANCE OF THE COMPANY'S PRODUCTS IN
THE MARKETPLACE, THE SUCCESS OF NEW STORE OPENINGS AND THE AVAILABILITY OF NEW
STORE LOCATIONS, COMPETITIVE FACTORS, ACCESS TO MERCHANDISE IN A VARIETY OF
FOREIGN COUNTRIES, ECONOMIC TRENDS, AND OTHER RISKS DETAILED IN THE COMPANY'S
PERIODIC REPORT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
-7-
TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TOTAL INVENTORY LEVELS BY LOCATION
($ millions)
3/31/98 3/31/97 12/31/97
-------- -------- ---------
Stores $ 61.7 $ 45.9 $ 61.5
Warehouse 72.4 65.2 37.7
-------- -------- ---------
Total $ 134.1 $ 111.1 $ 99.1
======== ======== =========
PER STORE INVENTORY LEVELS BY LOCATION
($ thousands)
3/31/98 3/31/97 12/31/97
-------- -------- ---------
Stores $ 191 $ 158 $ 195
Warehouse 224 224 120
-------- -------- ---------
Total $ 415 $ 382 $ 315
======== ======== =========
Store count 323 291 315
STORE OPENINGS/CLOSINGS
THREE MONTHS THREE MONTHS
ENDING ENDING
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
Stores Open at
Beginning of Period 315 286
Stores Opened 11 7
Stores Closed (3) (2)
--- ---
Stores Open at End
of Period 323 291
=== ===
-8-
TUESDAY MORNING CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits -
27 Financial data schedule
Part II Exhibits -
None
(b) Form 8-K
Form 8-K filed on April 24, 1998 to report a change in the Company's
independent public accountants.
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.
TUESDAY MORNING CORPORATION
(Registrant)
DATE: May 14, 1998 /s/ MARK E. JARVIS
-----------------------------------------
Mark E. Jarvis, Senior Vice President