<PAGE>
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 June 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., 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 June 30, 1998: 3,749,993 shares
<PAGE>
TUESDAY MORNING CORPORATION
PART 1 - FINANCIAL INFORMATION
Page No.
Item 1 - Financial Statements --------
Consolidated Balance Sheets as of June 30, 1998,
June 30, 1997 and December 31, 1997 1
Consolidated Statements of Operations for the
Three Months and Six Months
Ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 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
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Balance Sheets
In Thousands
<TABLE>
<CAPTION>
Unaudited Unaudited Audited
June 30, June 30, Dec. 31,
ASSETS 1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 525 $ 1,315 $ 23,501
Inventories ............................................................ 138,966 128,270 99,187
Assets held for sale ................................................... 5,857 -- --
Prepaid expenses ....................................................... 1,600 1,023 1,059
Other current assets ................................................... 347 302 574
Income taxes receivable ................................................ 1,610 -- 18
--------- --------- ---------
Total current assets ............................................ 148,905 130,910 124,339
--------- --------- ---------
Property, plant and equipment, at cost: ..................................... 58,946 59,339 61,612
Less accumulated depreciation & amortization ........................... (33,675) (28,433) (30,972)
--------- --------- ---------
Net property, plant and equipment ............................... 25,271 30,906 30,640
--------- --------- ---------
Other assets, at cost:
Due from Officer ....................................................... 3,253 2,930 3,643
Deferred financing costs ............................................... 9,263 243 9,629
Other assets ........................................................... 285 263 673
--------- --------- ---------
Total Assets ................................................................ $ 186,977 $ 165,252 168,924
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Installments of mortgages .............................................. $ 1,021 $ 1,021 $ 1,021
Revolving credit facility .............................................. 27,375 34,055 --
Installments of notes payable .......................................... 3,405 -- 1,350
Installments of notes payable .......................................... 233 318 220
Accounts payable ....................................................... 30,100 39,281 22,253
Accrued expenses
Sales tax ........................................................... 1,005 596 2,812
Interest expense .................................................... 2,846 22 146
Recapitalization expenses ........................................... -- -- 30,279
Other ............................................................... 5,311 3,730 4,807
Deferred income taxes .................................................. 55 57 55
Income taxes payable ................................................... -- 731 --
--------- --------- ---------
Total current liabilities ....................................... 71,351 79,811 62,943
--------- --------- ---------
Mortgages on land, buildings and equipment .................................. 3,063 4,084 3,573
Notes payable excluding current installments ................................ 206,595 -- 208,650
Revolving credit facility excluding current portion ......................... 15,000 -- --
Capital lease obligation excluding current installments ..................... 41 276 163
Deferred income taxes ....................................................... 2,771 2,800 2,771
Dividend payable on Jr. Preferred ........................................... 3,612 -- 39
--------- --------- ---------
Total Liabilities ........................................................... 302,433 86,971 278,139
Senior exchangeable redeemable preferred stock, par value $.01 per share,
authorized 1,000,000 shares, 265,695 issued at June 30,1998;
aggregate liquidation preference $26,595 ............................... 26,374 -- 24,661
Junior redeemable preferred stock, par value $.01 per share, authorized
150,000 shares, 85,998 issued at June 30, 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
June 30, 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 12,357,466 shares at June 30, 1997
Authorized 10,000,000 shares; issued 3,749,993 shares at
June 30, 1998 .......................................................... 37 123 37
Additional paid-in capital ............................................. 5,587 18,897 5,587
Retained earnings (deficit) ............................................ (235,382) 61,289 (227,428)
Treasury stock 411,750 shares at June 30, 1997 ......................... -- (2,028) --
--------- --------- ---------
Total shareholders' equity (deficit) ............................ (227,828) 78,281 (219,874)
--------- --------- ---------
Total Liabilities and Shareholders' Equity .................................. $ 186,977 $ 165,252 $ 168,924
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
(1)
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Operations
Unaudited - In Thousands
<TABLE>
<CAPTION>
Three Months Ended June 30, Year to Date as of June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 84,829 $ 67,377 $ 143,640 $ 114,891
Cost of sales .............................................. 57,490 44,369 93,953 73,989
--------- --------- --------- ---------
Gross profit ....................................... 27,339 23,008 49,687 40,902
Selling, general and administrative expenses ............... 23,089 19,848 41,947 36,299
Acquisition fees and expenses .............................. 46 -- 50 --
--------- --------- --------- ---------
Operating income ................................... 4,204 3,160 7,690 4,603
--------- --------- --------- ---------
Other income (expense):
Interest income ......................................... 73 78 181 153
Interest expense ........................................ (6,513) (728) (12,733) (1,197)
Other income ............................................ 325 212 624 346
--------- --------- --------- ---------
(6,115) (438) (11,928) (698)
--------- --------- --------- ---------
Income (loss) before income taxes .................. (1,911) 2,722 (4,238) 3,905
Income tax expense (benefit) ............................... (698) 1,007 (1,571) 1,445
--------- --------- --------- ---------
Net income (loss) .................................. $ (1,213) $ 1,715 $ (2,667) $ 2,460
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
(2)
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited In Thousands
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 143,640 $ 114,890
Cash paid to suppliers and employees (192,658) (146,532)
Interest received 181 153
Interest paid (12,733) (1,197)
Income taxes paid (21) (7,122)
--------- ---------
Net cash used in operating activities (61,591) (39,808)
--------- ---------
Cash flows used in investing activities:
Loans to officers 390 (127)
Capital expenditures (3,231) (2,977)
--------- ---------
Net cash used in investing activities (2,841) (3,104)
--------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility 42,375 34,056
Financing fees (300) 44
Payment of mortgages (511) (510)
Principal payments under capital lease obligation (109) (414)
Proceeds from exercise of common
stock options/stock purchase plan -- 297
--------- ---------
Net cash provided by (used in) financing activities 41,455 33,473
--------- ---------
Net change in cash and cash equivalents (22,977) (9,439)
Cash and cash equivalents at beginning of period 23,502 10,754
--------- ---------
Cash and cash equivalents at end of period $ 525 $ 1,315
========= =========
Reconciliation of net income to net cash used
in operating activities:
Net income (loss) $ (2,667) $ 2,458
--------- ---------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,739 2,458
Amortization of financing fees 666 --
Deferred income taxes -- 2
Loss on disposal of fixed assets 4 --
Change in operating assets and liabilities:
Income taxes receivable (1,592) --
Inventories (39,779) (52,777)
Prepaid expense (542) (62)
Other current assets 227 425
Other assets and liabilities 388 83
Accounts payable 7,847 16,738
Accrued expenses (28,882) (3,453)
Income taxes payable -- (5,680)
--------- ---------
Total adjustments (58,924) (42,266)
--------- ---------
Net cash used in operating activities $ (61,591) $ (39,808)
========= =========
</TABLE>
Does not reflect the accrual of $3,573 for dividends on the Junior Preferred
stock or the issuance of $1,713 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)
<PAGE>
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
disclosures 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 page six.
5. Subsequent to the end of the quarter, the Company sold land that was being
held for a future warehouse site. The land was sold in July 1998 for $7.2
million representing a profit of $1.3 million.
6. The Company has assessed the Year 2000 systems issue and has concluded that
the cost to become year 2000 compliant are immaterial.
7. Certain prior year amounts have been reclassed to conform to the current
period presentation.
-4-
<PAGE>
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.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 YEAR TO DATE, JUNE 30
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.8 65.8 65.4 64.4
----- ----- ------ ------
Gross profit 32.2 34.2 34.6 35.6
Selling, general and administrative expense 27.2 29.5 29.2 31.6
----- ----- ------ ------
Operating income 5.0 4.7 5.4 4.0
Net interest and other income (7.2) (0.7) (8.3) (0.6)
----- ----- ------ ------
Earnings (loss) before income taxes (2.2) 4.0 (2.9) 3.4
Net earnings (loss) (1.4)% 2.6% (1.9) 2.1
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997
During the second quarter of 1998 sales increased 25.9% due primarily to
comparable store sales increases of 15.7% and $7.5 million of sales from new
stores. Average store sales for the quarter increased from $225 thousand to
$254 thousand. The Company's unique niche in the retail industry and the
breadth of experience of its buying organization have allowed it to offer value
to its customers which has been the primary factor in its strong comparable
store sales growth.
Gross profit increased $4.3 million from $23.0 million to $27.3 million which
resulted from the increased sales mentioned above. The Company's gross profit
percentage decreased 2.0% compared with last year. The Company's initial markup
on products purchased increased by 0.4%, however, this was offset by increased
markdowns and an increase in shrink.
Selling, general, and administrative expense benefited from the leverage
resulting from increased sales. These expenses increased $3.2 million due to the
addition of new stores and inflationary increases. These expenses, as a
percentage of sales, decreased to 27.2% from 29.5% 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.
EBITDA increased from $4.6 million to $6.0 million due to the factors mentioned
above.
-5-
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
For the first six months of 1998 sales increased 25.0% due primarily to
comparable store sales increases of 15.2% and $12.4 million of sales from new
stores. Average store sales for the quarter increased from $387 thousand to
$435 thousand. The increase in comparable sales was comprised of a 12.6%
increase in the number of transactions and a 2.5% increase in the average
transaction amount. The increase was primarily the result of continued
improvement in merchandise selection, pricing, and mix.
Gross profit increased $8.8 million from $40.9 million to $49.7 million which
resulted from the increased sales mentioned above. The gross profit percentage
decreased by 1.0% due to additional markdowns and shrink, partially offset by
improved product costs.
Selling, general, and administrative expense increased $5.6 million due to the
addition of new stores and inflationary increases. These expenses as a
percentage of sales decreased to 29.2% from 31.6% 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.
EBITDA increased from $7.4 million to $11.2 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 June, 1997 and 1998
was $39.8 million, and $61.6 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 June 30, 1997
and 1998 were $1.3 million, and $0.5 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 June 30, 1998, the Company had $110.0 million outstanding under
the Term Loans and $42.4 million outstanding under the Revolving Credit
Facility, with $11.4 million of remaining availability thereunder. The Term
Loan A loans and the Revolving Credit Facility loans mature in five years, and
the Term Loan B loans mature in seven years. 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.
-6-
<PAGE>
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 payments
(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. Land the
Company was holding for a future warehouse site was subsequently sold in July
for $7.5 million, representing a profit of $1.3 million. It is expected that the
proceeds from the land sale will be used to reduce the Term A and Term B loans.
Due to re-engineering the warehouse in 1994, this land was no longer needed.
The instruments governing the Company's indebtedness and the Senior Exchangeable
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 $139.0
million at June 30, 1998, for an increase of $39.8 million from December 31,
1997. As reflected on the following chart, the increase in inventory reflects
the increase necessary to support the current sales levels. The total increase
in inventory from the year-end is attributed to normal seasonal fluctuations in
inventory levels. Inventory levels typically increase during the year from the
year end low point.
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE MADE PURSUANT TO
THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995.
ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT
LIMITED TO, CONTINUED ACCEPTANCE OF THE COMPANY'S PRODUCTS IN THE MARKETPLACE,
THE SUCCESS OF NEW STORE OPENINGS AND THE AVAILABILITY OF NEW STORE LOCATIONS,
COMPETITIVE FACTORS, ACCESS TO MERCHANDISE IN A VARIETY OF FOREIGN COUNTRIES,
ECONOMIC TRENDS, AND OTHER RISKS DETAILED IN THE COMPANY'S PERIODIC REPORT
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
-7-
<PAGE>
TUESDAY MORNING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
TOTAL INVENTORY LEVELS BY LOCATION
($ millions)
6/30/98 6/30/97 12/31/97
-------- -------- ---------
<S> <C> <C> <C>
Stores $ 62.1 $ 47.6 $ 61.5
Warehouse 76.9 80.7 37.7
-------- -------- ---------
Total $ 139.0 $ 128.3 $ 99.2
======== ======== =========
<CAPTION>
PER STORE INVENTORY LEVELS BY LOCATION
($ thousands)
6/30/98 6/30/97 12/31/97
-------- -------- ---------
<S> <C> <C> <C>
Stores $ 186 $ 160 $ 195
Warehouse 231 271 120
-------- -------- ---------
Total $ 417 $ 431 $ 315
======== ======== =========
Store count 333 298 315
</TABLE>
<TABLE>
<CAPTION>
STORE OPENINGS/CLOSINGS
SIX MONTHS SIX MONTHS
ENDING ENDING FYE
JUNE 30, 1998 JUNE 30, 1997 12/31/97
------------------- -------------------- --------
<S> <C> <C> <C>
Stores Open at
Beginning of Period 315 286 286
Stores Opened 21 14 31
Stores Closed (3) (2) (2)
--- --- ---
Stores Open at End
of Period 333 298 315
=== === ===
</TABLE>
-8-
<PAGE>
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: ________________ 1998 _____________________________________
Mark E. Jarvis, Senior Vice President
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 525 525
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 138,966 138,966
<CURRENT-ASSETS> 148,905 148,905
<PP&E> 58,946 58,946
<DEPRECIATION> (33,675) (33,675)
<TOTAL-ASSETS> 186,977 186,977
<CURRENT-LIABILITIES> 71,351 71,351
<BONDS> 209,658 209,658
112,372 112,372
1,930 1,930
<COMMON> 37 37
<OTHER-SE> 229,795 229,795
<TOTAL-LIABILITY-AND-EQUITY> 186,977 186,977
<SALES> 84,829 143,640
<TOTAL-REVENUES> 84,829 143,640
<CGS> 57,490 93,953
<TOTAL-COSTS> 23,135 41,997
<OTHER-EXPENSES> (398) (805)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,513 12,733
<INCOME-PRETAX> (1,911) (4,238)
<INCOME-TAX> (698) (1,571)
<INCOME-CONTINUING> (1,213) (2,667)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,213) (2,667)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
