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 September 30, 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., ADDISON, TEXAS 75001-3768
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 387-3562
14621 Inwood Rd., Dallas, Texas 75244
(Address of principal executive offices)
(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 September 30, 1998: 3,788,998 shares
TUESDAY MORNING CORPORATION
PART 1 - FINANCIAL INFORMATION
Page No.
Item 1 - Financial Statements _______
Consolidated Balance Sheets as of September 30, 1998,
September 30, 1997 and December 31, 1997 1
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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
In Thousands
Unaudited Unaudited Audited
September 30, September 30, Dec. 31,
ASSETS 1998 1997 1997
------------- ------------- -------------
Current assets:
Cash and cash equivalents ...................................................... $ 1,250 $ 3,030 $ 23,501
Cash restricted ................................................................ 7,187 -- --
Inventories .................................................................... 168,821 159,687 99,187
Prepaid expenses ............................................................... 1,572 1,116 1,059
Other current assets ........................................................... 330 313 574
Income taxes receivable ........................................................ 770 -- 18
------------ ------------ ------------
Total current assets .................................................... 179,930 164,146 124,339
------------ ------------ ------------
Property, plant and equipment, at cost: ............................................. 59,987 61,118 61,612
Less accumulated depreciation & amortization ................................... (34,960) (29,679) (30,972)
------------ ------------ ------------
Net property, plant and equipment ....................................... 25,027 31,439 30,640
------------ ------------ ------------
Other assets, at cost:
Due from Officer ............................................................... 3,298 3,052 3,643
Deferred financing costs ....................................................... 8,895 294 9,629
Other assets ................................................................... 289 284 673
------------ ------------ ------------
Total Assets ........................................................................ $ 217,439 $ 199,215 $ 168,924
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Installments of mortgages ...................................................... $ 1,021 $ 1,021 $ 1,021
Revolving credit facility ...................................................... 49,500 56,127 --
Installments of notes payable .................................................. 4,110 -- 1,350
Installments of capital lease obligation ....................................... 218 213 220
Accounts payable ............................................................... 34,037 45,181 22,253
Accrued expenses
Sales tax ................................................................... 1,692 1,332 2,812
Interest expense ............................................................ 5,607 21 146
Recapitalization expenses ................................................... -- -- 30,279
Other ....................................................................... 4,908 4,883 4,807
Deferred income taxes .......................................................... 55 57 55
Income taxes payable ........................................................... -- 2,318 --
------------ ------------ ------------
Total current liabilities ............................................... 101,148 111,153 62,943
------------ ------------ ------------
Mortgages on land, buildings and equipment .......................................... 2,807 3,828 3,573
Notes payable excluding current installments ........................................ 205,890 -- 208,650
Revolving credit facility excluding current portion ................................. 15,000 -- --
Capital lease obligation excluding current installments ............................. -- 220 163
Deferred income taxes ............................................................... 2,771 2,800 2,771
Dividend payable on Jr. Preferred ................................................... 5,504 -- 39
------------ ------------ ------------
Total Liabilities ................................................................... 333,120 118,001 278,139
Senior exchangeable redeemable preferred stock, par value $.01 per share,
authorized 1,000,000 shares,
274,733 issued at September 30,1998; aggregate liquidation preference $27,473
250,000 issued at December 31, 1997; aggregate liquidation preference $25,000 .. 27,290 -- 24,661
Junior redeemable preferred stock, par value $.01 per share, authorized
150,000 shares, 85,998 issued at September 30, 1998 and December 31,1997;
aggregate liquidation preference $85,998 ....................................... 85,998 -- 85,998
Shareholders' equity (deficit)
Junior perpetual preferred stock, authorized 2,500 shares, 1,930 issued at
September 30, 1998 and December 31, 1997; par value $.01 per share;
aggregate liquidation preference $1,930 ........................................ 1,930 -- 1,930
Common stock par value $.01 per share, authorized 10,000,000 shares;
issued 3,788,998 shares at September 30, 1998 and 3,749,993 at December 31,1997
Authorized 30,000,000 shares; issued 12,357,467 shares at September 30, 1997 ... 37 124 37
Additional paid-in capital ..................................................... 5,643 18,921 5,587
Retained earnings (deficit) .................................................... (236,579) 64,197 (227,428)
Treasury stock 411,750 shares at September 30, 1997 ............................ -- (2,028) --
------------ ------------ ------------
Total shareholders' equity (deficit) .................................... (228,969) 81,214 (219,874)
------------ ------------ ------------
Total Liabilities and Shareholders' Equity .......................................... $ 217,439 $ 199,215 $ 168,924
============ ============ ============
See accompanying notes to consolidated financial statements.
-1-
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Operations
Unaudited - In Thousands
Three Months Year to Date as of
Ended September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales .................................... $ 78,485 $ 64,167 $ 222,125 $ 179,058
Cost of sales ................................ 47,709 38,631 141,662 112,620
--------- --------- --------- ---------
Gross profit ......................... 30,776 25,536 80,463 66,438
Selling, general and administrative expenses.. 22,981 19,892 64,978 56,193
--------- --------- --------- ---------
Operating income ..................... 7,795 5,644 15,485 10,245
--------- --------- --------- ---------
Other income (expense):
Interest income ........................... 77 97 258 250
Interest expense .......................... (6,887) (1,132) (19,620) (2,330)
Gain on sale of land ...................... 1,329 -- 1,329 --
Other income .............................. 195 73 819 420
--------- --------- --------- ---------
(5,286) (962) (17,214) (1,660)
--------- --------- --------- ---------
Income (loss) before income taxes .... 2,509 4,682 (1,729) 8,585
Income tax expense (benefit) ................. 897 1,775 (673) 3,219
--------- --------- --------- ---------
Net income (loss) .................... $ 1,612 $ 2,907 $ (1,056) $ 5,366
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-2-
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited In Thousands
Nine Months Ended
September 30,
----------------------------------------
1998 1997
------------------- ------------------
(In Thousands)
Cash flows from operating activities:
Cash received from customers $ 222,125 $ 179,058
Cash paid to suppliers and employees (284,285) (227,620)
Interest received 258 250
Interest paid (19,621) (2,329)
Income taxes paid (79) (7,310)
------------------- ----------------
Net cash used in operating activities (81,602) (57,951)
------------------- ----------------
Cash flows used in investing activities:
Loans to officers 345 (249)
Proceeds from sale of property, plant & equipment 7,187 -
Capital expenditures (4,318) (4,626)
------------------- ----------------
Net cash used in investing activities 3,214 (4,875)
------------------- ----------------
Cash flows from financing activities:
Proceeds from revolving credit facility 64,500 56,127
Financing fees (303) (7)
Payment of mortgages (766) (766)
Principal payments under capital lease obligation (165) (574)
Proceeds from exercise of common
stock options/stock purchase plan 56 322
------------------- ----------------
Net cash provided by (used in) financing activities 63,322 55,102
------------------- ----------------
Net change in cash and cash equivalents (15,066) (7,724)
Cash and cash equivalents at beginning of period 23,501 10,754
------------------- ----------------
Cash and cash equivalents at end of period (including
resricted cash of $7,187 at September 30, 1998) $ 8,435 $ 3,030
=================== ================
Reconciliation of net income to net cash used in
operating activities:
Net income (loss) $ (1,056) $ 5,366
------------------- ----------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,081 3,575
Amortization of financing fees 1,037 -
(Gain) on disposal of fixed assets (1,337) -
Change in operating assets and liabilities:
Income taxes receivable (753) -
Inventories (69,635) (84,194)
Prepaid expense (513) (155)
Other current assets 244 414
Other assets and liabilities 384 62
Accounts payable 11,784 22,638
Accrued expenses (25,838) (1,565)
Income taxes payable - (4,092)
------------------- ----------------
Total adjustments (80,546) (63,317)
------------------- ----------------
Net cash used in operating activities $ (81,602) $ (57,951)
=================== ================
Does not reflect the accrual of $5,504 for dividends on the Junior Preferred
stock or the issuance of $2,629 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 page six.
5. The restricted cash represents the proceeds from the sale of land the Company
was holding for a future warehouse site. If not reinvested, these funds were
required to be paid on the Company's bank loans. The net proceeds from the
land sale were used to reduce the Term A and B loans on October 15, 1998.
6. 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 SEPT. 30 YEAR TO DATE, SEPT. 30
------------------------------- ---------------------------
1998 1997 1998 1997
-------------- --------------- ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.8 60.2 63.8 62.9
----- ----- ------ ------
Gross profit 39.2% 39.8% 36.2% 37.1%
Selling, general and administrative 29.3 31.0 29.2 31.4
----- ----- ------ ------
Operating income 9.9% 8.8% 7.0% 5.7%
Gain from sale of land 1.7 - 0.6 -
Net interest and other income (8.4) (1.5) (8.4) (0.9)
----- ----- ------ ------
Earnings (loss) before income taxes 3.2% 7.3% (0.8)% 4.8%
Net earnings (loss) 2.0 4.5 (0.5) 3.0
EBITDA 11.9% 10.9% 9.2% 8.1%
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
During the third quarter of 1998, sales increased 22.3% due primarily to
comparable store sales increases of 14.8% and $5.3 million of sales from new
stores. Average store sales for the quarter increased from $210 thousand to
$235 thousand, an increase of 11.9%.
Gross profit increased $5.2 million, from $25.5 million, to $30.8 million which
resulted from the increased sales mentioned above. The Company's gross profit
percentage decreased 0.6% compared with last year. The Company's initial markup
on products purchased increased by 0.2%, however, this was offset primarily by
increased costs in the distribution process.
5
Selling, general, and administrative expenses increased $3.1 million due to the
addition of new stores and inflationary increases. These expenses, as a
percentage of sales, decreased to 29.3% from 31.0% due to the leverage resulting
from comparable store sales increases.
See the Liquidity and Capital Resources section for a more complete discussion
of the sale of land and the increase in interest expense related to the
recapitalization of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
For the first nine months of 1998, sales increased 24.0% due primarily to
comparable store sales increases of 15.0% and $17.7 million of sales from new
stores. Average year-to-date store sales increased from $597 thousand to $670
thousand, an increase of 12.2%. The increase in comparable sales was comprised
of a 12.1% increase in the number of transactions and a 2.8% increase in the
average transaction amount. The increase was primarily the result of continued
improvement in merchandise selection, pricing, and mix.
Gross profit increased $14.0 million from $66.4 million to $80.5 million which
resulted from the increased sales mentioned above. The gross profit percentage
decreased by 0.9% due to additional markdowns and shrink, partially offset by an
improved initial markup.
Selling, general, and administrative expense increased $8.8 million due to the
addition of new stores and inflationary increases. These expenses as a
percentage of sales decreased to 29.3% from 31.4% due to the leverage resulting
from comparable store sales increases.
Interest expense increased due to interest associated with the recapitalization
of the Company which is more fully explained in Liquidity and Capital Resources.
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 nine months ended September, 1997
and 1998 was $57.9 million, and $81.6 million respectively. The increase in cash
used in 1998 is due to expenses related to the recapitalization. Cash and cash
equivalents as of September 30, 1997 and 1998 were $3.0 million, and $1.3
million respectively.
As part of the recapitalization, summarized as follows and discussed in detail
in the December 31, 1997 financial statements, the Company entered into the
following financing arrangements:
6
Nominal Amounts Outstanding
($Millions) at 12/31/97 at 9/30/98
----------- --------------- -----------
Senior Credit Facility:
Term Loans, A and B $110.0 $110.0
Revolving Credit Facility 90.0 64.5
------ ------
Subtotal $200.0 $174.5
Senior Subordinated (Notes) 100.0 100.0
Senior Preferred Stock 25.0 27.3
Junior Redeemable Preferred Stock 86.0 91.4
Junior Perpetual Preferred Stock 1.9 2.0
------ ------
$412.9 $395.2
====== ======
The term loan facility consists of two tranches designated A and B. Tranche A
term loans are for $40.0 million and mature in five years while tranche B term
loans are $70.0 million and mature in seven years.
The revolving credit facility is for a period of five years and requires a
cleandown to less than $15.0 million for thirty consecutive days during each
twelve month period beginning April 1, 1998. Borrowings are limited to the
lesser of $90.0 million (unless the maximum has been increased to as much as
$115.0 million, as provided for in the agreement) or 50% (60% from July 1 -
October 31 of each year) of eligible inventory, as defined. At September 30,
1998 there was $24.6 million of remaining availability.
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, which mature in 2008, require
semi-annual interest payments, and interest payments 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 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 payments
(including interest payments on the Notes and amounts outstanding under the
Senior Credit Facility), and scheduled dividend payments on the Senior Preferred
stock for the foreseeable future.
The Junior Preferred Stock includes accrued dividends of $5.5 million. The terms
of the Senior Credit Facility place restrictions on the Company's ability to pay
dividends and redeem the Junior Preferred. The Company is required to redeem
the Junior Redeemable Preferred Stock no later than December 29, 2010.
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.
Land the Company was holding for a future warehouse site was sold in July for
$7.2 million, representing a
7
profit of $1.3 million. The net proceeds from the land sale, shown on the
Balance Sheet as restricted cash, were used to reduce the Term A and Term B
loans on October 15, 1998. Due to re-engineering the warehouse in 1994, this
land was no longer needed.
The instruments governing the Company's indebtedness and the Senior Preferred
Stock, including the Certificate of Designation, the Exchange Indenture, the
Senior Credit 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 $168.8
million at September 30, 1998, for an increase of $69.6 million from December
31, 1997. As reflected on the chart on page 9, the increase in store inventory
is attributed to early shipments of fourth quarter merchandise. The total
increase in inventory from the year-end is attributed to normal seasonal
fluctuations in inventory levels. Inventory levels typically increase during
the year from the year-end low point.
YEAR 2000 ISSUES
The efficient operation of the Company's business is dependent in part on its
computer software programs and operating systems (Programs and Systems). These
Programs and Systems are used in several key areas of the Company's business,
including merchandise purchasing, inventory management, pricing, shipping,
sales, and financial reporting, as well as in various administrative functions.
The Company has been evaluating its Programs and Systems to identify Year 2000
compliance problems. These actions are necessary to ensure that the Programs
and Systems will recognize and process the year 2000 and beyond. It is
anticipated that minor modifications to some of the Company's internally
developed programs will be necessary. Certain programs provided by third party
vendors will be upgraded to be year 2000 compliant. Operating systems and
microprocessors within the hardware are already year 2000 compliant.
The Company anticipates that it will be in full compliance by the first quarter
of 1999 and that the cost to become compliant will be immaterial to the
operations of the Company. The Company is far enough along with it's
implementation of the software modifications and upgrades that it is very
unlikely the changes will not be in place when they are needed.
8
TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TOTAL INVENTORY LEVELS BY LOCATION
($ millions)
9/30/98 9/30/97 12/31/97
-------- -------- ---------
Stores $ 108.6 $ 91.2 $ 61.5
Warehouse 60.2 68.5 37.7
-------- -------- ---------
Total $ 168.8 $ 159.7 $ 99.2
======== ======== =========
PER STORE INVENTORY LEVELS BY LOCATION
($ thousands)
9/30/98 9/30/97 12/31/97
-------- -------- ---------
Stores $ 326 $ 300 $ 195
Warehouse 181 225 120
-------- -------- ---------
Total $ 507 $ 525 $ 315
======== ======== =========
Store count 333 304 315
STORE OPENINGS/CLOSINGS
NINE MONTHS NINE MONTHS
ENDING ENDING FYE
SEPTEMBER 30, SEPTEMBER 30, 12/31/97
------------- ------------- --------
1998 1997
---- ----
Stores Open at
Beginning of Period 315 286 286
Stores Opened 21 20 31
Stores Closed (3) (2) (2)
--- --- ---
Stores Open at End
of Period 333 304 315
=== === ===
9
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.
THIS DOCUMENT 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.
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: ___________________ /s/Mark E. Jarvis
----------------------------------------
Mark E. Jarvis, Senior Vice President
10