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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Commission File Number
Ended December 31, 1998 0-19658
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TUESDAY MORNING CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 75-2398532
(State of Incorporation) (I.R.S. Employer Identification No.)
14621 Inwood Road
Addison, Texas 75001
(972) 387-3562
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 1, 1999, there were 3,826,604 outstanding shares of Common
Stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
Item 1. Business
General
We are the leading closeout retailer of upscale home furnishings, gifts
and related items in the United States. We opened our first store in 1974 and
currently operate 354 stores in 36 states. We operate our stores during seven
annual "sales events," each of which lasts from four to seven weeks, while
closing them for the remaining weeks of the year. We specialize in first
quality, brand name merchandise such as Ralph Lauren bed linens, Waterman pens,
Limoges hand-decorated boxes, Steinbach collectible nutcrackers, Steiff stuffed
animals, Royal Dalton china and giftware, Farberware cookware, Martex bath
towels, Samsonite luggage, Spode china, Madame Alexander dolls and many others.
We do not sell seconds, irregulars or factory rejects. We purchase our
merchandise at closeout and sell it at prices that are 50% to 80% below those
generally charged by department and specialty stores. While we offer our
customers consistent merchandise categories, each sales event features new
products within these categories, creating a "treasure hunt" atmosphere in our
stores. We believe that our event-based selling strategy, combined with high
quality, reasonably priced merchandise, attracts upscale customers with strong
loyalty to us.
Business Strategy
In 1998, Tuesday Morning recorded sales of $396.1 million and operating
income of $44.1 million, representing compounded annual growth of 23.5% and
65.1%, respectively, since 1995. Our sales growth has been driven by new store
openings as well as annual increases in comparable store sales of 13.7%, 18.3%
and 12.1% in 1996, 1997 and 1998, respectively. Tuesday Morning's success is
based on the following strengths:
. Unique Event-Based Format. We distinguish ourselves from other
retailers with a unique "event-based" selling strategy, creating
the equivalent of seven "grand openings" each year. Products are
available in limited quantities and generally are not replenished
during a sales event. We believe that the closing and reopening of
our stores and the limited availability of products heightens
customers' expectations of finding new, undiscovered merchandise
and intensifies their sense of urgency to buy our products during
the first few days of a sales event. As a result, we typically
realize approximately 40% of an event's total sales in the first
five days of the event.
. Strong Vendor Relationships. We employ a talented and experienced
buying team, which has grown from ten buyers in 1993 to 24 buyers
in 1998, with an average of nearly 21 years of retail experience.
Our buyers and our reputation as a preferred, reliable purchaser
have enabled us to establish long-term relationships with a
diverse group of top-of-the-line vendors. In many cases, we are
the retailer of choice to liquidate inventory due to our ability
to sell rapidly large quantities of merchandise without disrupting
the manufacturers' traditional distribution channels and our
ability to make purchasing decisions quickly. We obtain our
merchandise primarily by purchasing from manufacturers their end-
of-line products which did not meet their sales expectations, or
merchandise made available from cancellations of orders placed by
other retailers. We also obtain merchandise by contracting for
production from manufacturers during periods of lower production.
. Loyal, Upscale Customer Base. We have developed and currently
maintain a proprietary mailing list of over 4,800,000 preferred
customers who have visited our stores and requested mailings in
advance of our sales events. These direct mailings offer customers
the opportunity
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to purchase merchandise prior to the advertising of a sales event
to the general public. The fact that a substantial amount of our
sales occur in the first several days of an event is evidence of
our customer loyalty and customers' awareness of the timing of our
sales event. Our customers are primarily women, typically ranging
in age from 25 to 54, from households headed by professionals and
having a median annual family income of over $60,000.
. Strong Store Level Economics. For stores opened during 1998, first
year cash on cash return on investment averaged in excess of 50%.
Our stores are destination-oriented and therefore can be located
in secondary locations of major suburban markets, such as strip
malls and warehouse zones, near our upscale target customers. We
are able to obtain favorable lease terms because of our
flexibility on site selection and our no-frills format which
allows us to effectively use a wide variety of space
configurations. As a result of this opportunistic approach to site
selection, our real estate costs, averaging approximately $8.50
per square foot, are significantly lower than those of many other
retailers. The size of our stores generally range from 5,000 to
10,000 square feet and average approximately 6,800 square feet. Of
our new stores opened in 1998, on average we spent approximately
$65,000 per store for fixture and start-up costs, plus an
additional $251,000 in on-hand inventory. Average sales per store
and store level operating income in 1998 were $1,171,000 and
$133,000, respectively. Store level operating income excludes
allocation of corporate overhead but includes warehouse,
distribution and advertising expenses. Although the dynamics of
our store model may change to accommodate different market
environments, the overall return on investment level has proven
consistent in various economic regions, including our stores
located in the relatively expensive real estate markets of
California and the northeastern U.S.
. Integrated Management Information Systems and Inventory
Controls. We believe our management information systems are among
the most advanced in the retail industry. These systems enable us
to maintain SKU-level inventory control from the time merchandise
is ordered until it is sold. We are therefore able to manage in
excess of 100,000 SKUs from approximately 1,100 vendors on a real-
time basis in order to make timely and accurate purchasing,
distribution and merchandising decisions. We have integrated our
proprietary merchandising and inventory control systems, point of
sale systems and state-of-the-art distribution management system
with our financial reporting systems, providing our buyers with a
significant degree of control over inventory levels, distribution
and sales performance.
Growth Strategy
Our objective is to continue to expand our leadership position in the
industry and to enhance our productivity and operating performance by
implementing the following growth strategies:
. Continue New Store Openings. We have identified as potential
locations for future stores approximately 500 additional sites
near our targeted customers. We added 32 stores to our store base
in 1998 after adding 29 stores in 1997 and plan to increase our
store base, in both new and existing markets, by at least 35
stores in 1999 and at least 40 stores in 2000.
. Enhance Sales Productivity. We have achieved average comparable
store sales growth of 13.7%, 18.3% and 12.1% in 1996, 1997 and
1998, respectively. Tuesday Morning continues to refine its
merchandise mix and improve the quality of its product offerings,
resulting in an increase in the number of customer transactions
and the average transaction value per customer.
. Capitalize on Favorable Industry Dynamics. Tuesday Morning
believes that it is benefitting from broad consumer trends,
including an increase in investment for the home and a growing
emphasis on value. In addition, we are benefitting from current
trends in the retail
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industry. As inventory risks shift from retailer to manufacturer
and new products and packaging proliferate, closeout retailers are
becoming an integral part of manufacturers' overall distribution
strategies. As a result, manufacturers are increasingly looking
for larger, more sophisticated closeout retailers that can
purchase large and varied quantities of merchandise and control
the distribution and advertising of specific products to minimize
disruption to the manufacturers' traditional distribution
channels.
. Leverage Technology and Workforce. We believe that our investments
in information systems and inventory control technology and the
doubling of our staff of experienced, specialized buyers over the
last four years will bolster future growth in the breadth of our
product offerings and will provide the support necessary for new
store openings for the foreseeable future. We have been able to
leverage our investments in infrastructure over a higher sales
base. Our selling, general and administrative expenses have
declined as a percentage of net sales from 30.3% in 1994 to 23.9%
in 1998 primarily as a result of this leverage.
Industry Trends
As a leading retailer of home furnishings, gifts and related items, we
believe we are well positioned to benefit from favorable consumer trends,
including an increase in investment in the home and a growing emphasis on
value. According to a leading trade publication, sales in the home furnishings
market (including furniture, textiles and other household equipment) were $141
billion in 1997 and have grown at a compound annual rate of 7.9% between 1992
and 1997.
Closeout merchandise is available to closeout retailers at low prices for
a variety of reasons, including the inability of a manufacturer to sell
merchandise through regular channels, the discontinuance of merchandise due to
a style or color change, the cancellation of orders placed by other retailers
and the termination of business by a manufacturer or wholesaler. Occasionally,
the closeout retailer may be able to purchase closeout merchandise because a
manufacturer has excess raw materials or production capacity. Closeout
retailers typically have lower merchandise costs than general merchandisers.
Lower capital expenditures and operating costs allow them to deliver superior
financial performance and deliver higher customer value.
Tuesday Morning is distinguishable from its competitors in several
respects. Most retailers in the closeout retailing industry are either general
merchandisers or focus on apparel, while Tuesday Morning's focus is on upscale
home furnishings and related items. In addition, most closeout retailers focus
on lower and middle income consumers, while Tuesday Morning generally caters to
higher-income customers. Finally, unlike other closeout retailers which operate
on a year-round basis, Tuesday Morning operates on an event sale basis. Tuesday
Morning believes that its periodic schedule of openings creates a sense of
urgency and excitement on the part of its customers because they know the store
is only open for a short period of time and that the availability of
merchandise in our stores is limited.
As a closeout retailer of high quality merchandise, Tuesday Morning also
benefits from several trends in the retailing industry. The increase in just-
in-time inventory management techniques and the rise in retailer consolidations
have both resulted in a shift of inventory risk from retailers to
manufacturers. Department stores and other traditional general merchandisers
increasingly focus on their most productive merchandising categories. This
change in focus causes department stores to exit certain categories,
specifically home furnishings and gift items, creating opportunities for us.
Furthermore, in response to an increasingly competitive market, manufacturers
are introducing new products and new packaging more frequently. Tuesday Morning
believes that these trends have helped make the closeout retailer an integral
part of manufacturers' overall distribution strategies. As a result,
manufacturers are increasingly looking for larger, more sophisticated
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closeout retailers such as us that can purchase larger and more varied
quantities of merchandise and can control the distribution and advertising of
specific products in order to minimize disruption to the manufacturers'
traditional distribution channels.
Tuesday Morning believes the aging of baby boomers--those born between
1947 and 1964--has a positive impact on the home decor market. Home ownership
among 35 to 44 year olds was 66.9% in 1995 versus 36.2% for 25 to 29 year olds
and 53.6% for 30 to 34 year olds. The rate climbs to 75.7% as people move into
the 45 to 54 year old category. According to U.S. Census estimates, over the
next ten years, the number of people within the 45 to 54 age group will become
the largest age group in our population, resulting in a probable increase in
expenditures on home decor. This age group also is at the peak of household
income levels and spends a high percentage of their income on home furnishings
(25.0%). In addition, the size of new single family homes is growing. In 1971,
9% of new homes built were over 2,400 square feet compared to 30% in 1996. This
benefits the home decor market as people purchase more items to fill these
larger homes.
Merchandise
Tuesday Morning sells upscale home furnishings, gifts and related items.
We do not sell seconds, irregulars or factory rejects. Our merchandise
primarily consists of lamps, rugs, crystal, dinnerware, silver serving pieces,
gourmet housewares, bathroom, bedroom and kitchen accessories, linens, luggage,
Christmas trim, toys, stationery and silk plants. We specialize in first
quality, brand name merchandise such as Ralph Lauren bed linens, Waterman pens,
Limoges hand-decorated boxes, Steinbach collectible nutcrackers, Steiff stuffed
animals, Royal Dalton china and giftware, Farberware cookware, Martex bath
towels, Samsonite luggage, Spode china, Madame Alexander dolls and many others.
We maintain in excess of 100,000 SKUs from approximately 1,100 vendors.
Tuesday Morning differs from discount retailers in that it does not stock
continuing lines of merchandise. We offer a continuity of merchandise
categories with ever-changing individual product offerings, thus providing our
customers a higher proportion of new merchandise than general merchandisers.
Since its inception, Tuesday Morning has not experienced any significant
difficulty in obtaining high quality closeout merchandise in adequate volumes
and at suitable prices. For the year ended December 31, 1998, Tuesday Morning's
top ten vendors accounted for approximately 20.9% of total purchases, with no
one vendor accounting for more than 5%.
Pricing
Tuesday Morning's pricing policy is to sell all merchandise at 50% to 80%
below the retail prices generally charged by department and specialty stores.
Prices are determined centrally and are uniform at all Tuesday Morning stores.
Once a price is determined for a particular item, labels displaying Tuesday
Morning's three-tiered pricing strategy are affixed to the product. A typical
price tag displays a competitor's "regular" price, a competitor's "sale" price
and the Tuesday Morning closeout price. Tuesday Morning's management and buyers
verify retail prices by reviewing prices published in advertisements and
catalogues and manufacturers' suggested retail price lists and by visiting
department or specialty stores selling similar merchandise. Our advanced
management information systems help us control product pricing, and the
availability of daily sales and inventory information enables us to markdown
unsold merchandise on a timely and systematic basis and thereby more
effectively manage inventory levels.
Advertising
Tuesday Morning plans and implements an advertising program for each
sales event. Prior to each sales event, Tuesday Morning initiates a direct
mailing to its 4,800,000 preferred customers. These direct mailings offer
customers the opportunity to purchase merchandise prior to the advertising of a
sales event to the general public. After the first three days of each sales
event, Tuesday Morning commences an advertising campaign in local newspapers in
each of its markets, emphasizing the significant price reductions available to
customers and the high quality of the merchandise offered. During a sales
event, we also use in-store promotion banners.
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Store Operations
As of March 15, 1999, Tuesday Morning operated 354 stores in 36 states.
Tuesday Morning does not keep its stores open throughout the year, but instead
opens them seven times a year to conduct approximately four to seven week sales
events during the retailing industry's peak selling seasons. These events
generally occur during the last six weeks of the first quarter, the last eight
weeks of the second and third quarters (which includes two events each) and the
last 12 weeks of the fourth quarter (which also includes two events). To
encourage new and repeat shopping visits for each sales event, Tuesday Morning
has increased the frequency of merchandise shipments during a sales event.
During each shipment, new items are delivered, stocked and promoted in every
Tuesday Morning store. Tuesday Morning stores are closed to the public between
sales events, and are used in these periods only to carry-over inventory and to
restock new merchandise for the next sales event.
Tuesday Morning utilizes a "no-frills" approach to presenting
merchandise. We have designed our stores to be functional, with little emphasis
placed upon fixtures and leasehold improvements. We display all merchandise at
each store by type and size on racks or counters, and we maintain a minimum
inventory in stockrooms. We sell most merchandise in its original shipping
carton. Because we sell most merchandise on a self-service basis, Tuesday
Morning does not employ people solely to assist customers in locating
merchandise or making selections.
Store Management
Each store has a manager who is responsible for recruiting, training and
supervising store personnel and assuring that the store is managed in
accordance with company guidelines and established procedures. Store managers
are full-time employees. When sales events are not in progress, these employees
review store inventory and supervise restocking activities in preparation for
the next sales event. Tuesday Morning employs temporary employees at each
Tuesday Morning store to serve as cashiers and to assist in stocking during
each sales event. These temporary employees generally return to work in
subsequent sales events, reducing the need for new hiring prior to each sales
event. Typically, Tuesday Morning will employ more temporary employees during
the first few days of a sale, when customer traffic is highest.
Tuesday Morning management and area managers visit selected stores while
sales are in progress to review inventory levels and presentation, personnel
performance, expense controls, security and adherence to company procedures. In
addition, regional and area managers periodically meet with management to
review store policies and to discuss purchasing, merchandising and advertising
strategies for future sales events.
Site Selection
We added 32 stores to our store base in 1998 and plan to increase our
store base by at least 35 stores in 1999 and at least 40 stores in 2000. New
stores will be located in both new and existing markets. We expect the new
stores to be similar in size, appearance and operation to existing stores.
Through our opportunistic real estate strategies, we have identified as
potential locations for future stores approximately 500 additional sites near
our targeted customers.
When selecting sites for new store locations, Tuesday Morning reviews
detailed demographic information for each new market area and generally limits
its potential store locations to upper middle class communities. In order to
reduce rental expense, Tuesday Morning does not select prime real estate sites.
We believe that our customers are attracted to our stores principally by event
selling, advertising and direct mail marketing initiatives that emphasize the
large assortment of high quality merchandise and low prices, rather than by
location. Tuesday Morning has generally selected sites where there is a
suitable existing building requiring minimal refurbishing.
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Store Locations
Tuesday Morning currently operates 354 stores in 36 states. The size of
our stores generally range from 5,000 to 10,000 square feet and average
approximately 6,800 square feet. The table below sets forth the location of
Tuesday Morning stores by market:
MINNESOTA
ALABAMA GEORGIA Minn/St. Paul (7) PENNSYLVANIA
Birmingham (3) Albany Rochester Harrisburg (2)
Huntsville Philadelphia (2)
Athens
Mobile (2)
Atlanta (11) MISSISSIPPI
Augusta Gulfport (2) SOUTH CAROLINA
ARIZONA Columbus Hattiesburg Charleston (3)
Phoenix (4) Macon Jackson Columbia (2)
Tucson (2) Greenville
Savannah
MISSOURI Myrtle Beach
ARKANSAS
ILLINOIS Columbia
Fayetteville Bloomington Kansas City (2) SOUTH DAKOTA
Little Rock (3) Chicago (12) St. Louis (6) Sioux Falls
Ft. Smith
Springfield
Pine Bluff TENNESSEE
INDIANA
Evansville NEBRASKA Chattanooga
CALIFORNIA Indianapolis (4) Lincoln Knoxville (2)
Fresno (2) Omaha (2) Memphis (3)
Los Angeles (23) Nashville (2)
IOWA
Palm Springs
Des Moines NEVADA
Sacramento (3) Cedar Rapids Las Vegas (4) TEXAS
San Diego (4) Abilene
San Francisco (9)KANSAS NEW JERSEY Amarillo
Santa Barbara Kansas City (3) Monmouth (3) Austin (3)
Beaumont
Topeka
COLORADO Wichita (2) NEW MEXICO Corpus Christi
Boulder (2) Albuquerque (2) Dallas (15)
Col. Springs KENTUCKY Santa Fe El Paso (2)
Denver (7) Ft. Worth (9)
Lexington
Fort Collins Louisville (3) NORTH CAROLINA Houston (15)
Owensboro Asheville Longview
CONNECTICUT Charlotte (3) Lubbock
Danbury LOUISIANA Durham Midland
Fairfield Alexandria Greensboro San Antonio (6)
Hartford (3) Baton Rouge (2) Raleigh (3) Tyler
New Haven Lafayette Wilmington Waco
Lake Charles Winston-Salem
DELAWARE UTAH
New Orleans (4)
Wilmington (2) Shreveport OHIO Orem
Cincinnati (4)
FLORIDA MARYLAND Cleveland (4) VIRGINIA
Boca Raton Annapolis (2) Columbus (4) Charlottesville
Ft. Lauderdale (5) Roanoke
Baltimore (6)
Gainesville OKLAHOMA Richmond (3)
Washington, D.C. (4)
Jacksonville (3) Oklahoma City (3) Washington, D.C. (9)
Miami (5)
MICHIGAN Norman
Ocala Detroit (5) Tulsa WISCONSIN
Orlando (4) Appleton
Grand Rapids (2)
Pensacola Lansing OREGON Madison
Palm Beach (7) Portland Milwaukee (3)
Tallahassee Oshkosh
Tampa (3)
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Warehousing and Distribution
An important aspect of Tuesday Morning's success involves its ability to
warehouse and distribute merchandise quickly and efficiently. Virtually all
merchandise is received by Tuesday Morning at its central warehouse and
distribution facilities in the Dallas, Texas metropolitan area, where it is
inspected, counted, priced, ticketed and designated for individual stores.
Tuesday Morning warehouses merchandise until shortly before each sale, at which
time merchandise is distributed to individual Tuesday Morning stores, where it
usually remains until sold at that sale or later sales. We generally carry
similar merchandise in each of our stores. The amount of inventory carried by
any single store varies depending upon the size and projected sales for that
store. Consistent with our sales event strategy, we do not maintain
replenishment inventory in our warehouse and distribution facilities.
Restocking of merchandise occurs only in successive sales events or in
scheduled merchandise shipments during a sales event, but does not occur in
response to sales activity within individual stores.
Tuesday Morning has an automated warehouse processing system which
includes high-speed bar code scanners and radio frequency terminals installed
in its forklifts which facilitate efficient sorting and loading of high
merchandise volumes for immediate store delivery. With this technology, we can
instantly locate a piece of merchandise within our 910,000 square feet of
warehousing space. Tuesday Morning also utilizes third party warehousing in
California and Illinois for forward staging of processed merchandise in order
to reduce restocking lead times as well as to reduce the size of stock rooms in
the areas where real estate costs are expensive and store sizes are relatively
small. See "Management Information Systems."
Tuesday Morning utilizes a leased fleet of trucks and trailers to
distribute merchandise to its stores. In addition, at peak stocking periods,
Tuesday Morning uses common and contract carriers to distribute merchandise to
stores.
Management Information Systems
We maintain a corporate local area network computer system which fully
integrates purchase orders, imports, transportation, distribution, point of
sale and financial systems. Tuesday Morning has invested over $11.5 million
over the last seven years in computers, bar code scanners and radio frequency
terminals, software programming and related equipment, technology and training.
No significant expenditures for management information systems are anticipated
in the foreseeable future.
All of the hardware and software for our systems have been replaced or
rewritten since 1992. As these systems were replaced or rewritten, they were
designed to be Y2K compliant if available. Our distribution systems track
inventory in each of our warehouses using bar coded labels and scanners which
are linked through a radio frequency to an IBM 6000 computer and are connected
to the corporate network.
Product allocation is suggested by a sophisticated computer system and
approved or overriden by the buyer responsible for the merchandise. Bar coded
price tickets are attached to individual pieces of merchandise and bar coded
carton labels are used for tracking merchandise to the stores. Daily sales
information at the SKU level is collected at more than 1,100 IBM computer-based
registers which are polled each evening to update the corporate systems. Sales
information, inventory information, open to buy, and warehouse production
information is distributed daily to all levels of management. Other reports are
distributed to the individuals or groups that have responsibility for specific
segments of the business. These reports are, however, available to anyone in
management.
Trademarks and Tradenames
We have registered the name "Tuesday Morning" as a service mark with the
United States Patent and Trademark office.
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Competition
Tuesday Morning currently competes against a diverse group of retailers,
including department and discount stores, which sell, among other products,
home furnishing products similar and often identical to those Tuesday Morning
sells and at times at reduced prices. Tuesday Morning also competes in
particular markets with a substantial number of retailers that specialize in
one or more types of home furnishing products that Tuesday Morning sells.
Certain of these competitors have substantially greater financial resources
that may increase their ability to purchase inventory at lower costs or to
initiate and sustain predatory price competition.
Unlike our competitors, which primarily offer continuing lines of
merchandise, we offer changing lines of merchandise depending on availability
at suitable prices. In addition, we distinguish ourselves from other retailers
by using an event based selling strategy. Tuesday Morning is distinguishable
from its competitors in several respects. Most retailers in the closeout
retailing industry are either general merchandisers or focus on apparel, while
Tuesday Morning's focus is on upscale home furnishings and related items. In
addition, most closeout retailers focus on lower and middle income consumers,
while Tuesday Morning generally caters to higher-income customers. Finally,
unlike other closeout retailers which operate on a year-round basis, Tuesday
Morning operates on an event sale basis. Tuesday Morning believes that its
periodic schedule of openings creates a sense of urgency and excitement on the
part of its customers because they know the store is only open for a short
period of time and that the availability of merchandise in our stores is
limited. We compete with other retail establishments by offering a higher
proportion of new merchandise which provides the customer with a greater
variety and selection of high quality merchandise at prices which we believe
the customer will recognize as significant values.
Employees
At December 31, 1998, Tuesday Morning employed 980 persons on a full-time
basis and 3,229 individuals on a part-time basis. Our employees are not
represented by any union. We have not experienced any work stoppage due to
labor disagreements and we believe that our employee relations are good.
Cautionary Notice Regarding Forward-Looking Statements
Forward-looking statements in this release 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 risk and
uncertainties including, but not limited to: continued acceptance of the
company's products in the marketplace, competitive factors, the availability of
close-out 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.
Item 2. Properties
Tuesday Morning owns one store located adjacent to its corporate offices
in the Dallas, Texas metropolitan area. All of our other stores are leased from
unaffiliated parties. The leases for the stores open on December 31, 1998
provide for rentals which ranged from $1.88 to $22.56 per square foot per year,
with an average annual rental of $8.50 per square foot. The annual rent per
store is generally below $50,000 and store rent, as a percent of net sales, was
4.7% for the year ended December 31, 1998. At December 31, 1998, the remaining
maturities of such leases ranged from three months to approximately ten years,
with the average term of a store lease being approximately five years. New
store leases typically include "kick clauses," which allow Tuesday Morning to
exit the lease after 18 to 21 months after entering into the lease if the store
does not achieve sales expectations or another location appears superior. These
kick clauses, when combined with our inexpensive and portable store fixtures,
provide Tuesday Morning with significant downside protection in opening new
stores by allowing it to quickly and cheaply vacate a site that does not meet
sales expectations. As a result, we seldom operate locations with negative
store level operating income.
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Tuesday Morning owns approximately 400,000 square feet of building space
in the Dallas, Texas metropolitan area. This space houses our corporate
offices, our main warehouse distribution facility and one store. Tuesday
Morning also leases 230,000 square feet of warehouse space in the same area and
is currently negotiating the purchase of this warehouse. In addition, Tuesday
Morning has entered into a five-year lease for 280,000 square feet of warehouse
space in the same area which commenced in May 1997. Beginning August 1, 1999,
Tuesday Morning has an option to lease an additional 282,000 square feet of
warehouse space near its corporate headquarters. These current distribution
facilities, supplemented with short term rentals for peak times each year, are
considered adequate to meet warehouse space requirements for the next several
years.
Item 3. Legal Proceedings
We are not aware of any legal proceedings pending or threatened against
us that we expect would have a material adverse effect on our financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Tuesday
Morning during the quarter ended December 31, 1998.
PART II
Item 5. Market Price of Registrant's Common Stock and Related Shareholder
Matters
Tuesday Morning's Senior Subordinated Notes, Senior Exchangeable
Preferred and a portion of its common stock trade on the PORTAL system through
rule 144A. There were approximately 36 holders of common stock as of March 1,
1999.
We have never declared or paid any cash dividends on our common stock.
Tuesday Morning currently intends to retain all earnings for the operation and
expansion of its business and does not anticipate paying any dividends on our
common stock in the foreseeable future. In addition, our senior credit facility
prohibits the payment of dividends and the indenture governing our senior
subordinated notes limits the payment of dividends. See Note 7 to Notes to
Consolidated Financial Statements.
Since March 12, 1996, the Company has sold or issued the following
unregistered securities:
1. On December 29, 1997, the connection with the recapitalization (the
"Recapitalization") of substantially all of the Company's common stock,
certain members of the Company's management team invested for an aggregate
purchase of $7.5 million in shares of junior preferred stock and common
stock of the Company. In issuing such securities, the Company relied on the
exemption from the registration and prospectus delivery requirements of the
Securities Act provided by Section 4(2) of the Securities Act.
2. On December 29, 1997, in connection with the Recapitalization, Madison
Dearborn Capital Partners, II, L.P. acquired 3,216,030 shares of the
Company's common stock and 80,794 shares of Junior Redeemable Preferred
Stock of the Company for an aggregate purchase price of $85.4 million. In
issuing such securities, the Company relied on the exemption from the
registration and prospectus delivery requirements of the Securities Act
provided by Section 4(2) of the Securities Act.
3. On December 29, 1997, in connection with financing the Recapitalization
consideration, the Company issued 11% Senior Subordinated Notes (which were
subsequently exchanged for 11% Series B senior notes in a registered
exchange offering) for an aggregate purchase price of $100 million. In
issuing such securities, the Company relied on the exemption from the
registration and prospectus delivery requirements of the Securities Act
provided by Rule 144A of the Securities Act.
9
<PAGE>
4. On December 29, 1997, in connection with financing the Recapitalization
consideration, the Company issued 250,000 units, each unit consisting of one
share of the Company's common stock and one share of the Company's Senior
Exchangeable Redeemable Preferred Stock for an aggregate purchase price of
$25 million. In issuing such securities, the Company relied on the exemption
from the registration and prospectus delivery requirements of the Securities
Act provided by Rule 144A of the Securities Act.
5. On December 29, 1997, the Company granted options to one person to purchase
an aggregate of 125,000 shares of common stock. On February 15, 1998, the
Company granted options to 31 persons to purchase an aggregate of 218,758
shares of common stock. On November 15, 1998, the Company granted options to
9 persons to purchase an aggregate of 20,667 shares of common stock. All of
these options were granted pursuant to the Company's 1997 Long-Term Equity
Incentive Plan for purchase prices ranging from $1.43 to $10.00 per share.
In issuing such securities, the Company relied on the exemption from the
registration and prospectus delivery requirements of the Securities Act
provided by Rule 701 of the Securities Act.
10
<PAGE>
Item 6. Selected Financial Data
The selected consolidated financial and operating data presented below
for, and as of each of the fiscal years in the five-year period ended December
31, 1998, is derived from the audited Consolidated Financial Statements of
Tuesday Morning. The selected consolidated financial and operating data should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto, "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................... $190,081 $210,265 $256,756 $327,307 $396,095
Cost of sales............... 126,931 137,427 165,189 208,432 257,037
-------- -------- -------- -------- --------
Gross profit................ 63,150 72,838 91,567 118,875 139,058
Selling, general and
administrative expenses.... 57,523 63,040 71,167 82,939 94,843
Recapitalization fees and
expenses (1)............... -- -- -- 33,960 129
-------- -------- -------- -------- --------
Operating income............ 5,627 9,798 20,400 1,976 44,086
Net interest and other
income (expense)........... (1,611) (2,534) (1,892) (2,294) (22,726)
-------- -------- -------- -------- --------
Income (loss) before income
taxes...................... 4,016 7,264 18,508 (318) 21,360
Income tax expense.......... 1,365 2,491 6,992 3,246 8,208
-------- -------- -------- -------- --------
Net income (loss)........... 2,651 4,773 11,516 (3,564) 13,152
Preferred dividends......... -- -- -- (57) (10,966)
-------- -------- -------- -------- --------
Net income (loss) available
to common.................. $ 2,651 $ 4,773 $ 11,516 $ (3,621) $ 2,186
Earnings (loss) per share:
(2)
Basic....................... $ (0.83) (0.60) 0.13 (1.49) 0.58
Diluted..................... (0.83) (0.60) 0.12 (1.49) 0.55
Weighted average shares
outstanding
Basic....................... 9,227 9,314 9,348 9,342 3,767
Diluted..................... 9,227 9,314 9,772 9,342 3,975
Operating Data:
Number of stores:
Beginning of period......... 235 246 260 286 315
Opened during period........ 22 32 33 31 35
Closed during period........ (11) (18) (7) (2) (3)
-------- -------- -------- -------- --------
Open at end of period....... 246 260 286 315 347
======== ======== ======== ======== ========
Comparable store sales
increase (3)............... 4.2% 6.4% 13.7% 18.3% 12.1%
Average annual sales per
store (4).................. $ 792 $ 829 $ 925 $ 1,066 $ 1,171
Average square feet per
store...................... 6,908 6,403 6,427 6,591 6,826
Balance Sheet Data (at period
end):
Working capital............. $ 32,593 $ 39,115 $ 49,568 $ 61,233 $ 70,507
Total assets................ 89,403 94,243 121,757 168,924 155,319
Total debt, including
current portion ........... 10,127 8,398 6,622 214,977 205,197
Senior exchangeable
redeemable preferred
stock...................... -- -- -- 24,661 28,231
Junior redeemable preferred
stock...................... -- -- -- 85,998 85,998
Junior perpetual preferred
stock...................... -- -- -- 1,930 1,930
Total shareholders' equity
(deficit).................. 58,630 63,648 75,528 (219,874) (217,623)
</TABLE>
- --------
(1) Recapitalization fees and expenses are related to the acquisition of our
stock in December 1997 by Madison Dearborn Capital Partners II, L.P.,
certain unaffiliated investors and certain members of management and
consisted of compensation paid in lieu of options of $25.0 million and fees
and expenses of $9.0 million.
11
<PAGE>
(2) Basic and diluted earnings per share have replaced primary and fully
diluted earnings per share in accordance with SFAS 128. See Note 16 to the
consolidated financial statements for the calculation of earnings per share
for 1996, 1997 and 1998. The company used the same computation/methodology
for calculating 1994 and 1995 earnings per share as was used in calculating
1996 and 1997 earnings per share.
(3) Comparable store sales are computed by comparing sales for stores open
during the same sales event in the current and previous year. Stores are
open for the full event whereas store openings and closings generally occur
between events.
(4) Average annual sales per store is the sum of the average of the sales per
store for each quarter.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Tuesday Morning is the leading closeout retailer of upscale home
furnishings, gifts and related items in the United States. We opened our first
store in 1974 and, over the next 25 years, have grown nationwide, increasing
our store base to 354 stores in 36 states.
Our stores are destination-oriented and can therefore be located in
secondary locations of major suburban markets, such as strip malls and
warehouse zones, near our upscale target customers. We are able to obtain
favorable lease terms because of our flexibility in site selection and our no-
frills format which allows us to use a wide variety of space configurations
effectively. As a result of this opportunistic approach to site selection, our
real estate costs, averaging approximately $8.50 per square foot, are
significantly lower than those of many other retailers. Of the new stores
opened in 1998, we spent approximately $65,000 per store for fixture and start-
up costs, plus an additional $251,000 for on-hand inventory. Average sales per
store and store level operating income in 1998 were $1,171,000 and $133,000,
respectively. Store level operating income excludes allocation of corporate
overhead but includes warehouse, distribution and advertising expenses.
In the early 1990's, we instituted a number of strategic initiatives that
would allow us to better manage our business and improve our operating
performance. The initiatives included appointing Jerry Smith as our President
and Chief Operating Officer, doubling our buying staff, re-engineering our
warehouse, and making substantial investments in our management information
systems including adding point of sale registers in all our stores. Our
investment in management information systems of over $11.5 million since 1992
has given our buying staff improved access to inventory and sales data and
allowed us to offer better merchandise and improved pricing. We believe that
our management information systems are among the most advanced in the retail
industry. Tuesday Morning's results since 1995 reflect these initiatives. In
1998, Tuesday Morning recorded net sales of $396.1 million and operating income
of $44.1 million, representing compounded annual growth of 23.5% and 65.1%,
respectively, since 1995. Our sales growth has been driven by new store
openings as well as annual increases in comparable store sales of 13.7%, 18.3%
and 12.1% in 1996, 1997 and 1998, respectively.
Between 1986 and 1997, Tuesday Morning was a publicly traded company. On
December 29, 1997, Madison Dearborn Capital Partners II, L.P. ("Madison
Dearborn"), certain unaffiliated investors and certain members of our
management acquired substantially all of our outstanding capital stock. The
financing of the acquisition consideration of $324.9 million net of fees
included aggregate equity investments of $117.9 million from Madison Dearborn,
such investors and management, borrowings under a $200.0 million senior credit
facility and the proceeds from the sale of our $100.0 million principal amount
of senior subordinated notes.
Despite significant leverage, we have continued to operate profitably
(excluding recapitalization fees and expenses in 1997) and to expand our store
base, adding 32 stores in 1998 and seven stores to date in 1999. Additionally,
we anticipate adding a total of at least 35 stores to our store base in 1999
and at least 40 stores in 2000.
12
<PAGE>
Tuesday Morning has adopted an accounting policy related to expensing
pre-opening costs effective January 1, 1999 and now expenses pre-opening costs
as incurred. This change in accounting policy will not have a material impact
on our financial results.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of net sales, as well
as the number of stores open at the end of each period. We cannot assure you
that the trends in sales growth or operating results will continue in the
future.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net sales................. 100.0% 100.0% 100.0%
Cost of sales............. 64.3 63.7 64.9
------- ------- -------
Gross profit............ 35.7 36.3 35.1
Selling, general and
administrative expenses.. 27.7 25.3 23.9
Recapitalization fees and
expenses................. -- 10.4 0.0
------- ------- -------
Operating income........ 7.9 0.6 11.1
Net interest and other
income (expense)......... (0.7) (0.7) (5.7)
------- ------- -------
Income (loss) before
income taxes........... 7.2 (0.1) 5.4
Income tax expense........ 2.7 1.0 2.1
------- ------- -------
Net income (loss)....... 4.5% (1.1)% 3.3%
======= ======= =======
Number of stores open at
end of period............ 286 315 347
</TABLE>
1998 Compared to 1997
Net sales increased $68.8 million or 21.0% to $396.1 million in 1998 from
$327.3 million in 1997. The increase in net sales was the result of $32.7
million in sales from new stores and a 12.1% increase in comparable store
sales. Average annual sales per store increased $105,000 or 9.8% to $1,171,000
in 1998 from $1,066,000 in 1997. The growth of our comparable store sales rose
due to increases in the number of customer transactions and the average
transaction value per customer.
Gross profit increased $20.2 million or 17.0% to $139.1 million in 1998
from $118.9 million in 1997. Gross profit as a percentage of net sales declined
to 35.1% in 1998 from 36.3% in 1997. This 1.2% decline was comprised of
improvements in product cost of 0.4% offset by markdown increases of 1.1% and
increases in the cost of buying, distribution and freight of 0.5%. Markdowns
increased primarily due to the liquidation of our fine jewelry inventory in
conjunction with our decision to exit this product category at the time of the
December 1997 recapitalization. This category decreased from 55 jewelry centers
at the beginning of 1998 to three at the beginning of 1999. Increases in
buying, distribution and freight were attributable to the addition of a second
warehouse shift and the addition of warehouse space in anticipation of future
growth.
Selling, general and administrative expenses increased $11.9 million or
14.4% to $94.8 million in 1998 from $82.9 million in 1997. This percentage
increase was significantly less than our 21.0% increase in net sales. As a
result, our selling, general and administrative expenses declined as a
percentage of net sales to 23.9% in 1998 from 25.3% in 1997.
Net interest and other income (expense) increased $20.4 million to $22.7
million in 1998 from $2.3 million in 1997 due primarily to the interest expense
incurred in 1998 as a result of the Recapitalization on December 29, 1997, as
discussed in more detail below.
13
<PAGE>
Income tax expense increased $5.0 million to $8.2 million in 1998 from
$3.2 million in 1997. This increase was due to higher levels of income in 1998
as compared to 1997, somewhat offset by certain nondeductible transaction fees
and expenses incurred during 1997 in connection with the December 1997
Recapitalization. Our effective income tax rate was 38.4% in 1998 and was not
meaningful in 1997 due to the nondeductible fees and expenses referred to above
and the lower level of earnings in 1997.
1997 Compared to 1996
Net sales increased $70.5 million or 27.5% to $327.3 million in 1997 from
$256.8 million in 1996. The increase in net sales was the result of $25.2
million in sales from new stores and an 18.3% increase in comparable store
sales. Average annual sales per store increased $141,000 or 15.2% to $1,066,000
in 1997 from $925,000 in 1996.
Gross profit increased $27.3 million or 29.8% to $118.9 million in 1997
from $91.6 million in 1996. Gross profit as a percentage of net sales increased
to 36.3% in 1997 from 35.7% in 1996, primarily due to our ability to leverage
certain buying and distribution costs over a higher sales base.
Selling, general and administrative expenses also benefitted from similar
leverage. These expenses increased $11.8 million or 16.5% to $82.9 million in
1997 from $71.2 million in 1996 due to the addition of 29 stores to our store
base and inflationary and wage increases. However, these expenses declined as a
percentage of net sales to 25.3% in 1997 from 27.7% in 1996 due to the leverage
resulting from increased net sales.
Recapitalization fees and expenses consisted of compensation paid in lieu
of options of $25.0 million and fees and expenses of $9.0 million incurred in
connection with the transaction. Fees and expenses of $9.5 million relating to
the debt incurred in connection with the Recapitalization were capitalized and
will be amortized over the life of the debt.
Net interest and other income (expense) increased from $1.9 million in
1996 to $2.3 million in 1997 due to a slight increase in borrowings related to
an increase in our average borrowings associated with our growth.
Income tax expense decreased $3.8 million to $3.2 million in 1997 from
$7.0 million in 1996. This decrease was due to the lower levels of income in
1997 as compared to 1996, somewhat offset by certain nondeductible transaction
fees and expenses incurred in the Recapitalization in 1997. Our effective
income tax rate was not meaningful in 1997 due to the nondeductible fees and
expenses referred to above and the lower level of earnings. Our effective tax
rate was 37.8% in 1996.
Seasonality
We expect to continue to experience seasonal fluctuations in our
business, with a significant percentage of our net sales and most of our
operating income being generated in the fourth quarter, which includes the
Christmas selling season. Net sales in the fourth quarter accounted for over
44% of annual net sales in each of the last three years, and operating income
excluding recapitalization fees and expenses for the fourth quarters of 1996,
1997 and 1998 accounted for approximately 89.1%, 71.5% and 64.8%, respectively,
of annual operating income for such years.
The following tables set forth certain quarterly financial data as
percentages of net sales, other than number of stores open at end of period,
for the eight quarters ended December 31, 1998. The quarterly information is
unaudited but has been prepared on the same basis as the audited financial
statements included elsewhere in this Form 10-K. In the opinion of management,
all necessary adjustments (consisting only of normal recurring adjustments)
have been included to present fairly the unaudited quarterly results when read
in
14
<PAGE>
conjunction with Tuesday Morning's Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. The results of operations for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0%
Gross profit............... 38.0 32.2 39.2 33.7
Recapitalization fees and
expenses.................. -- -- -- --
Operating income........... 5.9 5.0 9.9 16.4
Net income (loss).......... (2.5) (1.4) 2.1 8.2
Number of stores open at
end of period............. 323 333 333 347
<CAPTION>
Three months ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0%
Gross profit............... 37.7 34.1 39.8 35.4
Recapitalization fees and
expenses.................. -- -- -- 22.9
Operating income (loss).... 3.0 4.7 8.8 (5.6)
Net income (loss).......... 1.6 2.5 4.5 (6.0)
Number of stores open at
end of period............. 291 298 304 315
</TABLE>
Our quarterly results of operations may fluctuate based upon such factors
as the number and timing of store openings, the amount of net sales contributed
by new and existing stores, the mix of products sold, pricing, store closings
or relocations, competitive factors and general economic conditions. The timing
of sales events could impact the weighting of sales between quarters. For
example, the opening day of our sixth sales event will fall in the third
quarter of 1999, whereas in 1998 the opening day of that sales event fell in
the fourth quarter.
Inflation
In our opinion, inflation has not had a material adverse effect on our
results of operations. We cannot assure you, however, that inflation will not
materially affect us in the future.
Liquidity and Capital Resources
We have historically financed our operations with funds generated from
operating activities and borrowings under our revolving credit facility.
Net cash flows from operating activities in 1996, 1997 and 1998 were
$10.6 million, $1.2 million and $4.0 million, respectively. Net cash flows from
operating activities declined in 1997 due primarily to charges incurred in the
December 1997 recapitalization. The increase in 1998 was attributable to an
increase in operating income partially offset by an increase in interest
expense resulting from Tuesday Morning's leveraged capital structure. Cash and
cash equivalents as of December 31, 1996, 1997 and 1998 were $10.8 million,
$23.5 million and $20.3 million, respectively.
Capital expenditures, principally associated with new store openings and
warehouse systems enhancements, were $4.2 million, $5.3 million and $4.7
million for 1996, 1997 and 1998, respectively. We expect to spend approximately
$12 million for capital expenditures in 1999, including approximately $6.5
million related to the anticipated purchase of a warehouse we are currently
leasing.
15
<PAGE>
As part of the Recapitalization on December 29, 1997, we entered into the
senior credit facility, which is comprised of $110.0 million in term loans and
a $90.0 million revolving credit facility. Subject to compliance with the terms
of the senior credit facility and the indenture for our senior subordinated
notes, borrowings under the revolving credit facility may be increased by $25.0
million to accommodate future growth and for certain other purposes. At
December 31, 1998, we had outstanding $101.5 million under the term loans and
no amounts outstanding under the revolving credit facility, with $40.6 million
of remaining availability based on eligible inventory. The term A loan ($35.6
million at December 31, 1998) and the revolving credit facility loans mature in
December 2002, and the term B loan ($65.9 million at December 31, 1998) will
mature in December 2004. For 30 consecutive days during each 12 month period
beginning on April 1 of each year, the aggregate principal amount of loans
outstanding under the revolving credit facility may not exceed $15.0 million.
The instruments governing Tuesday Morning's indebtedness, including the
senior credit facility and the indenture for our senior subordinated notes,
contain financial and other covenants that restrict, among other things, the
ability of Tuesday Morning and its subsidiaries to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, make capital expenditures, 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 their assets.
On March 12, 1999, the Company filed a Form S-1 registration statement
with the Securities and Exchange Commission for the sale of shares of common
stock. The Company intends to use estimated net proceeds of $80.2 million to
redeem 35% of their Senior Subordinated Notes, all of the outstanding shares of
Senior Preferred Stock and a portion of the Junior Preferred Stocks. Also, in
conjunction with the stock offering, the Company intends to convert all of the
remaining shares of Junior Preferred Stocks into common stock. In connection
with the redemption of a portion of the Senior Subordinated Notes, the Company
expects to incur an extraordinary charge, net of income taxes, of approximately
$3.3 million in the second quarter of 1999.
Irrespective of the success of the offering, we anticipate that our net
cash flows from operations and borrowings under our revolving credit facility
will be sufficient to fund our working capital needs, planned capital
expenditures and scheduled interest payments through 2000.
Year 2000
We recognize that our business could be adversely affected by hardware
and software errors arising from calculations using the Year 2000 and beyond
("Y2K"). Y2K could adversely affect our ability to obtain, distribute and
process merchandise, run our stores, deal with our customers and handle daily
business functions, and receive payment from our customers and utilize these
funds in our business.
We have taken various steps in each of these areas to minimize the risk
that our business will be adversely affected. Our ability to obtain merchandise
is dependent on vendors, freight companies, ports of entry and U.S. Customs. We
have informally polled our largest vendors and, based on the information we
have obtained, believe that their systems are, or will be, Y2K compliant. In
addition, we have contacted our primary freight companies and, based on the
information we have obtained, believe that their systems are also Y2K
compliant. U.S. Customs has stated on its website that its systems are Y2K
compliant.
In order to determine that our internal operations are Y2K compliant we
have taken an inventory of all computer software programs and hardware. We have
determined that our merchandise purchasing, inventory management, shipping and
receiving, sales reporting, financial reporting and cash management systems are
Y2K compliant. Our remaining system upgrade requirements have been identified,
tested and scheduled for installation or completion by August 1, 1999. One of
our four file servers has been updated, and the remaining three will be updated
by July 15, 1999. A third party vendor will upgrade our point-of-sale software
to the
16
<PAGE>
latest version by August 1, 1999 and we will update point-of-sale hardware by
July 31, 1999. Direct expenditures and internal costs for these upgrades and
updates have been and are expected to remain immaterial to our operations. We
have evaluated our non-information technology systems, such as our general
office security systems, store security systems, corporate access systems,
environmental systems and phone systems. We have found that they are Y2K
compliant with the exception of the corporate access system. This system will
be upgraded by July 31, 1999.
Our ability to receive payment from our customers and utilize these funds
in our business is dependent on credit card processing companies and banks. We
have contacted these companies and have been assured that their systems are, or
will be, Y2K compliant.
We recognize that our failure to resolve internal Y2K issues could
result, in the worst case, in our inability to distribute merchandise to our
stores and to process our daily business for some period of time. However, we
presently believe that scenario is unlikely based on our Y2K remediation plan.
The failure of one or more of our third party service providers to resolve Y2K
issues could also result, in a worst case scenario, in a business interruption.
In addition, the failure of one or more of our merchandise suppliers to resolve
their own Y2K issues could negatively affect us. The lost revenues, if any,
resulting from a worst case scenario would depend on the length of time during
which such failure goes uncorrected and on how widespread the impact.
Our Y2K exposure is mitigated by the following factors: (1) no vendor
accounts for more than 5% of our purchases; (2) we will receive substantially
all of our merchandise for the first sales event of 2000 before January 1,
2000; (3) our first sales event of 2000 is scheduled to begin six weeks after
January 1, 2000; and (4) there is neither a contractual nor business reason for
us to buy a specific product from a specific vendor.
In order to further mitigate any business interruption caused by third
parties, we believe that we can easily change vendors, freight companies or
ports of entry if we find that we are unable to receive merchandise from
specific vendors. We plan to test credit card processing in January 2000 and
will change processors if
necessary. Our cash management is handled by several banks and if necessary can
be shifted if one or more of these banks will not permit us to access our
funds.
Although Y2K issues or unanticipated or undiscovered Y2K compliance
problems could impact our operations, we believe that it is unlikely that Y2K
issues or problems will significantly adversely affect us. Our Y2K compliance
costs have totalled $110,000 (excluding scheduled upgrades).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Tuesday Morning is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the
potential loss arising from adverse changes in market prices and rates, such as
foreign currency exchange and interest rates. Tuesday Morning does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
The objective of our financial risk management is to minimize the
negative impact of foreign currency exchange and interest rate fluctuations on
our earnings, cash flows and equity. Tuesday Morning enters into financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates. The counterparties are major financial institutions. We enter
into forward foreign currency contracts to hedge the currency fluctuations in
transactions denominated in foreign currencies, thereby limiting our risks that
would otherwise result from changes in exchange rates. During 1998, the only
transactions hedged by us were for inventory purchase orders placed with
foreign vendors for which the purchase order had to be settled in the foreign
vendor's currency. The periods for the forward foreign exchange contracts
correspond to the periods of the hedged transactions. Gains and losses on
forward foreign exchange contracts are reflected in the income
17
<PAGE>
statement and were immaterial to us as a whole in 1998. At December 31, 1998,
we had outstanding forward foreign currency contracts to purchase approximately
$4.7 million of various currencies with maturities ranging between 30 and 210
days.
The estimated fair value of foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1998, the difference
between the fair value of all outstanding contracts and the face amount of such
contracts was immaterial. A large fluctuation in exchange rates for these
currencies could have a material impact on their fair value. However, because
we use these forward foreign currency contracts to hedge future inventory
purchases at a fixed price in the vendor's foreign currency at the time the
purchase order is made, any fluctuations in the exchange rate should not
materially impact us.
See Notes 2 and 12 to Notes to Consolidated Financial Statements for a
discussion of the accounting policies for our forward foreign currency
contracts and information on financial instruments, respectively.
We have both fixed-rate and variable-rate debt as of December 31, 1998.
We do not hold any derivatives related to interest rate exposure for any of our
debt facilities.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate
debt will increase as interest rates fall and decrease as interest rates rise.
The estimated fair value of our total long-term fixed rate and our floating-
rate debt approximates fair value. See Notes 7 and 12 to Notes to Consolidated
Financial Statements for further information on our debt.
Based on our market risk sensitive instruments outstanding at December
31, 1998, we have determined that there was no material market risk exposure to
our consolidated financial position, results of operations or cash flows as of
such date.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements of the Tuesday Morning
and supplementary data are included as pages F-1 through F-23 on the Form 10-K.
<TABLE>
<CAPTION>
Page
Index Number
----- ------
<S> <C>
Reports of Independent Public Accountants........................... F-2
Consolidated Balance Sheets......................................... F-4
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Shareholders' Equity..................... F-6
Consolidated Statements of Cash Flows............................... F-7
Notes to Consolidated Financial Statements.......................... F-8
</TABLE>
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information regarding a change in Tuesday Morning's accountants was
previously reported in Form 8-K filed with the Commission April 24, 1998.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following tables set forth certain information with respect to the
executive officers, directors and certain key employees of Tuesday Morning:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lloyd L. Ross........... 63 Chairman of the Board
Jerry M. Smith.......... 62 President, Chief Executive Officer and Director
Mark E. Jarvis.......... 47 Senior Vice President, Chief Financial Officer and Secretary
G. Michael Anderson..... 46 Senior Vice President, Buying Group
Duane A. Huesers........ 43 Vice President, Finance
Richard Nance........... 52 Vice President, Information Systems
Karen Costigan.......... 49 Vice President, Real Estate
Andrew Paris............ 40 Vice President, Store Operations
William J. Hunckler,
III.................... 45 Director
Benjamin D. Chereskin... 40 Director
Robin P. Selati......... 32 Director
</TABLE>
Mr. Ross is the founder of Tuesday Morning. Until 1997, Mr. Ross devoted
his full time to the organization and operation of Tuesday Morning. He served
as Chairman of the Board and Chief Executive Officer from its incorporation in
1974 until 1997. On December 29, 1997, Mr. Ross resigned as Chief Executive
Officer but continues to serve as Chairman of the Board. While Mr. Ross has
provided consulting services to Tuesday Morning since 1997, he is expected to
end his active involvement with Tuesday Morning in December 1999.
Mr. Smith joined Tuesday Morning in 1984, was elected Vice President--
Advertising/ Public Relations and Store Operations in 1986 and was elected
Senior Vice President--Advertising/Public Relations and Store Operations in
1989. He was elected Executive Vice President and appointed a director in
November 1992. In September 1994, Mr. Smith was elected President and Chief
Operating Officer. On December 29, 1997, Mr. Smith became Tuesday Morning's
Chief Executive Officer.
Mr. Jarvis joined Tuesday Morning in September 1992 as Senior Vice
President and Chief Financial Officer. From 1988 to 1992, he served in several
capacities, most recently as Vice President and Treasurer, for Pier 1 Imports,
Inc., a specialty retailer.
Mr. Anderson joined Tuesday Morning in September 1989 as a buyer. In
1991, he was appointed Vice President, Buying, Smallwares Division. Mr.
Anderson was elected Senior Vice President, Buying Group in December 1996.
Prior to joining Tuesday Morning, Mr. Anderson was a buyer for Affiliated Foods
and Merchandise Manager for Fox-Meyer Drug Company.
Mr. Huesers joined Tuesday Morning in 1992 as Vice President, Finance.
Prior to joining Tuesday Morning, Mr. Huesers served as Senior Vice President
and Chief Financial Officer of Bookstop, Inc., a chain of book superstores.
Mr. Nance joined Tuesday Morning in 1992 as Vice President, Information
Systems. Prior to joining Tuesday Morning, Mr. Nance was part of the
information systems consulting group hired by Tuesday Morning in 1991.
Ms. Costigan joined Tuesday Morning in 1982 as a Regional Manager of
Store Operations, and became head of the real estate division in 1988. Ms.
Costigan was elected Vice President, Real Estate in 1991. Prior to joining
Tuesday Morning, Ms. Costigan was Assistant Managing Director of Lord & Taylor
in Chicago and Dallas.
19
<PAGE>
Mr. Paris joined Tuesday Morning in 1990 as Regional Manager of Store
Operations. He was elected Vice President, Store Operations in 1996. Prior to
joining Tuesday Morning, Mr. Paris was Manager of Ramp Operations at People
Express/Continental Airlines.
Mr. Hunckler has served as a director of Tuesday Morning since December
29, 1997. Mr. Hunckler is a managing director of Madison Dearborn Partners,
Inc. which he co-founded in 1993. Prior to 1993, Mr. Hunckler was with First
Chicago Venture Capital for 13 years. Mr. Hunckler currently serves on the
board of directors of Beverages and More, Inc., The Cornerstone Investments
Group, Inc., NWL Holdings, Inc. and Peter Piper, Inc.
Mr. Chereskin has served as a director of Tuesday Morning since December
29, 1997. Mr. Chereskin is a managing director of Madison Dearborn Partners,
Inc. which he co-founded in 1993. Prior to 1993, Mr. Chereskin was with First
Chicago Venture Capital for nine years. Mr. Chereskin currently serves on the
board of directors of Beverages and More, Inc., The Cornerstone Investments
Group, Inc., NWL Holdings, Inc. and Carrols Holdings Corporation.
Mr. Selati has served as a director of Tuesday Morning since December 29,
1997. Mr. Selati is a managing director of Madison Dearborn Partners, Inc. and
has been with the firm since 1993. His prior experience was with Alex. Brown &
Sons Incorporated as a Financial Analyst in the consumer/retailing investment
banking group. Mr. Selati currently serves on the board of directors of Peter
Piper, Inc., NWL Holdings, Inc. and Carrols Holdings Corporation.
Item 11. Executive Compensation
Summary Compensation Table. The following table and accompanying
explanatory footnotes include annual and long-term compensation information for
(i) Tuesday Morning's Chief Executive Officer and (ii) the next four highest
paid executive officers who received total annual salary and bonus in excess of
$100,000, for services rendered in all capacities during 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------- --------------- All Other
Name and Fiscal Other Annual Compen-
Principal Position Year Salary Bonus Compensation (1) Options Granted sation (2)
------------------ ------ -------- -------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jerry M. Smith......... 1998 $475,000 $237,500 -0- -- $8,876
President and Chief 1997 370,833 -0- $13,333,267 125,000 11,198
Executive Officer 1996 300,000 -0- -0- -- 5,215
Mark E. Jarvis......... 1998 $198,875 -0- -0- 20,833 $6,210
Senior Vice President 1997 182,250 -0- $ 376,312 -- 7,317
and
Chief Financial 1996 167,800 -0- -0- -- 5,370
Officer
G. Michael Anderson.... 1998 $228,750 -0- -0- 31,250 $6,210
Senior Vice President 1997 210,000 -0- $ 104,996 -- 6,770
(3)
1996 129,167 -0- -0- -- 3,815
Duane A. Huesers....... 1998 $158,125 -0- -0- 10,417 $5,805
Vice President, 1997 142,104 -0- $ 101,279 -- 6,125
Finance
1996 130,625 -0- -0- -- 4,377
Richard Nance.......... 1998 $158,025 -0- -0- 10,417 $6,758
Vice President, 1997 144,000 -0- $ 37,166 -- 6,545
Information Systems 1996 134,142 -0- -0- -- 4,733
</TABLE>
20
<PAGE>
- --------
(1) Amounts represent cash payments in lieu of option cancellations paid in
connection with the recapitalization.
(2) The amounts indicated reflect the aggregate value of Tuesday Morning's
contributions for each of the named executive officers to Tuesday Morning's
401(k) defined contribution plan, group term life insurance and Tuesday
Morning's stock purchase plan.
(3) Mr. Anderson was promoted to the position of Senior Vice President, Buying
Group, in December 1996.
The following table sets forth certain information with respect to the
options granted during 1998 to each executive officer of Tuesday Morning listed
in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates of
Percent of Stock Price
Total Options Appreciation
Granted to Exercise or for Option Term (1)
Options Employees in Base Price Expiration --------------------
Name Granted # Fiscal Year $/Sh Date 5% ($) 10% ($)
---- --------- ------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mr. Smith -0- -- -- -- -- --
Mr. Jarvis 20,833 8.7 $1.43 12/29/2002 $ 18,736 $ 47,479
Mr.
Anderson 31,250 13.1 1.43 12/29/2002 28,104 71,220
Mr. Huesers 10,417 4.4 1.43 12/29/2002 9,368 23,741
Mr. Nance 10,417 4.4 1.43 12/29/2002 9,368 23,741
</TABLE>
- --------
(1) These amounts represent assumed rates of appreciation in value from the
date of grant until the end of the option term, at the rates set by the
Securities and Exchange Commission and, therefore, are not intended to
forecast possible future appreciation, if any, in the shares of the common
stock.
The following table sets forth certain information with respect to the
options exercised by the executive officers named above during 1998 or held by
such persons at year end.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options (2)
Shares Options at Dec. 31, 1998 at Dec. 31, 1998
Acquired Value ------------------------- -------------------------
Name on Exercise Realized (1)(2) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Smith 20,875 $178,899 21,020 83,105 $180,141 $712,210
Mr. Jarvis 2,083 17,851 2,083 16,667 17,851 142,836
Mr. Anderson 3,125 26,781 3,125 25,000 26,781 214,250
Mr. Huesers 1,563 13,395 520 8,334 4,456 71,422
Mr. Nance 1,042 8,930 1,041 8,334 8,921 71,422
</TABLE>
- --------
(1) The named executives exercised options to purchase stock during 1998 but
have not sold the shares purchased.
(2) The value is calculated based on estimated market value of $10.00 at
December 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of Tuesday Morning's common stock as of March 1, 1999, and
as adjusted to reflect the sale of the common stock being offered hereby
(assuming no exercise of the underwriters' over-allotment options) by (1) each
person (or group of affiliated persons) who is known by Tuesday Morning to own
beneficially more than 5% of the common stock, (2) each of Tuesday Morning's
directors, (3) each of Tuesday Morning's executive officers, (4) all directors
and executive officers of Tuesday Morning as a group and (5) the selling
shareholders. Except as
21
<PAGE>
otherwise noted and subject to community property laws, the persons or entities
in this table have sole voting and investment power with respect to all the
shares of common stock owned by them.
<TABLE>
<CAPTION>
Shares Beneficially
Owned (1)
-----------------------
Name Number Percent
- ---- ------------ ----------
<S> <C> <C>
Madison Dearborn Capital Partners II, L.P. 3,216,030 84.0%
Three First National Plaza
Chicago, IL 60602
Lloyd L. Ross (2)....................................... 207,149 5.4%
Jerry M. Smith.......................................... 105,083 2.7%
Mark E. Jarvis.......................................... 11,205 *
G. Michael Anderson..................................... 10,216 *
Duane A. Huesers........................................ 6,544 *
Richard Nance........................................... 6,544 *
Benjamin D. Chereskin (3)............................... -- --
William J. Hunckler, III (3)............................ -- --
Robin P. Selati (3)..................................... -- --
All directors and executive officers as a
group (9 persons)...................................... 346,741 9.0%
</TABLE>
- --------
* Denotes ownership of less than one percent.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. The number of shares
beneficially owned by a person includes shares of common stock that are
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of March 1, 1999. Such shares are
deemed outstanding for the purpose of computing the percentage of
outstanding shares owned by such person. Such shares are not deemed
outstanding, however, for the purposes of computing the percentage ownership
of any other person.
(2) The address of Mr. Ross is the address of Tuesday Morning.
(3) All of the shares indicated are held of record by Madison Dearborn Capital
Partners II, L.P. Messrs. Chereskin, Hunckler and Selati are managing
directors of Madison Dearborn Partners, Inc., the general partner of
Madison Dearborn Partners, L.P., which in turn is the general partner of
Madison Dearborn Capital Partners II, L.P., and therefore may be deemed to
beneficially own the shares owned by Madison Dearborn Capital Partners II,
L.P. Messrs. Chereskin, Hunckler and Selati disclaim beneficial ownership
of such shares. The address of each of Messrs. Chereskin, Hunckler and
Selati is Three First National Plaza, Chicago, Illinois 60602.
22
<PAGE>
Item 13. Certain Relationships and Related Transactions
In the December 1997 Recapitalization, Madison Dearborn and Tuesday
Morning entered into a management service agreement pursuant to which Madison
Dearborn renders certain management and advisory services to Tuesday Morning.
The management service agreement has an initial five year term. Under the terms
of this agreement, Madison Dearborn receives a fee in the amount of $350,000
per year.
In connection with the Recapitalization, Madison Dearborn, the Management
Group and Tuesday Morning entered into a Stockholders Agreement which provides
for, among other things, certain restrictions on the transfer of the junior
redeemable preferred stock, the junior perpetual preferred stock and the common
stock held by the Management Group (collectively, the "Management Shares"), the
right of Tuesday Morning to sell or cause to be sold all or a portion of the
Management Shares in connection with a sale of Tuesday Morning, the right of
Tuesday Morning to repurchase certain shares of common stock and options held
by any member of the Management Group upon the termination of such member's
employment for cause, certain rights by the Management Group to participate in
certain sales of common stock by Madison Dearborn under certain circumstances,
certain demand registration rights in favor of Madison Dearborn by which it may
cause Tuesday Morning to register all or part of the common stock held by it
under the Securities Act, and certain "piggyback" registration rights in favor
of Madison Dearborn and the Management Group.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements
The list of financial statements required by this item is set forth in
Item 8.
2. Index to Financial Statement Schedules
All financial statements and financial statement schedules for which
provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions, are not
material or are not applicable and, therefore, have been omitted or are
included in the consolidated financial statements or noted thereto.
3. Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 12, 1997, by
and among the Company, Merger Sub and MDP. (1)
2.2 Amendment to the Agreement and Plan of Merger, dated as of
December 26, 1997 by and among Company, Merger Sub and MDP. (1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Designation of the Company. (1)
3.3 By-Laws of the Company (1)
4.1 Indenture, dated as of December 29, 1997, by and between the
Company and the Subsidiary Guarantors and Harris Trust and
Savings Bank, as trustee, including form of note. (1)
</TABLE>
23
<PAGE>
<TABLE>
<C> <S>
4.2 Indenture, dated as of December 29, 1997, by and between the
Company and the Subsidiary Guarantors and United States Trust
Company of New York, as trustee. (1)
4.3 Credit Agreement, dated as of December 29, 1997, among the
Company, as Borrower, the Subsidiary Guarantors, as Guarantors,
each of the Lenders that is a signatory thereto, BT Alex. Brown,
as Agent and Fleet National Bank, as Administrative Agent. (1)
4.4 Security Agreement, dated as of December 29, 1997, by and among
the Company, the Subsidiary Guarantors and Fleet National Bank,
as Administrative Agent. (1)
4.5 Registration Rights Agreement, dated as of December 29, 1997, by
and among the Company, the Subsidiary Guarantors and the Initial
Purchasers. (1)
10.1 Subscription Agreement, dated as of December 26, 1997, by and
between Merger Sub and each of the investors listed on the
Schedule of Subscribers attached thereto. (1)
10.2 Subscription Agreement, dated as of December 29, 1997, by and
between the Company and Madison Dearborn. (1)
10.3 Employment Agreement, dated as of December 29, 1997, by and
between the Company and Jerry M. Smith. (1)
10.4 Consulting and Non-Competition Agreement, dated as of December
29, 1997, by and between the Company and Lloyd L. Ross. (1)
10.5 Employment Put Agreement, dated as of December 29, 1997, by and
between the Company and Jerry M. Smith. (1)
10.6 Term Put Agreement, dated as of December 29, 1997, by and among
the Company, Madison Dearborn and Lloyd L. Ross. (1)
10.7 Stock Pledge Agreement, dated as of December 29, 1997, by and
between the Company and Jerry M. Smith. (1)
10.8 Stock Pledge Agreement, dated as of December 29, 1997, by and
between the Company and Lloyd L. Ross. (1)
10.9 1997 Long-Term Equity Incentive Plan of the Company. (1)
10.10 Stock Option Agreement, dated as of December 29, 1997, by and
between the Company and Jerry M. Smith. (1)
10.11 Stockholders Agreement, dated as of December 29, 1997, by and
among the Company, Madison Dearborn and the executives listed on
Schedule I attached thereto. (1)
10.12 1999 Employee Stock Purchase Plan (2)
21.1 Subsidiaries of the Company (3)
27.1 Financial Data Schedule. (3)
</TABLE>
- --------
24
<PAGE>
(1) Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-46017) and incorporated herein by reference.
(2) Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-74365) and incorporated herein by reference.
(3) Filed herewith.
4. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
25
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Reports of Independent Public Accountants............................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997......... F-4
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996............................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.................................... F-6
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................. F-7
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996.................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Tuesday Morning Corporation:
We have audited the accompanying consolidated balance sheet of Tuesday
Morning Corporation (a Delaware corporation) and subsidiaries as of December
31, 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1998 and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Tuesday Morning Corporation:
We have audited the accompanying consolidated balance sheet of Tuesday
Morning Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1997. 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, 1997 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG LLP
Dallas, Texas
February 20, 1998
F-3
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 20,282 $ 23,501
Inventories............................................ 96,743 99,187
Prepaid expenses....................................... 1,114 1,059
Other current assets................................... 466 592
Deferred income taxes (note 3)......................... 354 --
--------- ---------
Total current assets................................... 118,959 124,339
--------- ---------
Property and equipment, at cost (notes 4 & 5)........... 60,355 61,612
Less accumulated depreciation & amortization........... (36,263) (30,972)
--------- ---------
Net property and equipment............................ 24,092 30,640
--------- ---------
Other assets, at cost:
Due from officers (note 6)............................. 3,345 3,643
Deferred financing costs............................... 8,452 9,629
Other assets........................................... 471 673
--------- ---------
Total assets........................................... $ 155,319 $ 168,924
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Installments of mortgages (note 5)..................... $ 1,021 $ 1,021
Installments of notes payable (note 7)................. 3,398 1,350
Installments of capital lease obligation (note 5)...... 161 383
Accounts payable....................................... 23,081 22,253
Accrued liabilities
Sales taxes............................................ 3,039 2,812
Interest expense....................................... 2,195 146
Recapitalization expenses (note 1)..................... -- 30,279
Other.................................................. 6,712 4,807
Deferred income taxes (note 3)......................... -- 55
Income taxes payable (note 3).......................... 8,845 --
--------- ---------
Total current liabilities.............................. 48,452 63,106
--------- ---------
Mortgages on land, buildings and equipment (note 5)..... 2,552 3,573
Notes payable, excluding current installments (note 7).. 198,065 208,650
Deferred income taxes (note 3).......................... 2,209 2,771
Dividends payable on Jr. Preferred...................... 7,435 39
--------- ---------
Total liabilities...................................... 258,713 278,139
--------- ---------
Senior exchangeable redeemable preferred stock, (note 8)
par value $.01 per share, authorized 1,000,000 shares,
283,891 issued at December 31, 1998; aggregate
liquidation preference $28,558; 250,000 issued at
December 31, 1997; aggregate liquidation preference
$25,000................................................ 28,231 24,661
Junior redeemable preferred stock, par value $.01 per
share, authorized 150,000 shares, 85,998 issued at
December 31, 1998 and December 31, 1997; aggregate
liquidation preference $85,998 (note 8)................ 85,998 85,998
Commitments and contingencies (notes 7, 10, 12, 14, and
15)
Shareholders' equity (note 9)
Junior perpetual preferred stock, authorized 2,500
shares, 1,930 issued at December 31, 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 3,794,826 shares at
December 31, 1998 and 3,749,993 at December 31,1997... 38 37
Additional paid-in capital............................. 5,651 5,587
Retained deficit....................................... (225,242) (227,428)
--------- ---------
Total shareholders' equity............................ (217,623) (219,874)
--------- ---------
Total liabilities and shareholders' equity............ $ 155,319 $ 168,924
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales............................... $396,095 $327,307 $256,756
Cost of sales........................... 257,037 208,432 165,189
-------- -------- --------
Gross profit.......................... 139,058 118,875 91,567
Selling, general and administrative
expenses............................... 94,843 82,939 71,167
Recapitalization fees and expenses (note
1)..................................... 129 33,960 --
-------- -------- --------
Total expenses........................ 94,972 116,899 71,167
-------- -------- --------
Operating income...................... 44,086 1,976 20,400
-------- -------- --------
Other income (expense):
Interest income....................... 441 325 275
Interest expense...................... (25,619) (3,215) (2,767)
Gain on sale of land.................. 1,329 -- --
Other income.......................... 1,123 596 600
-------- -------- --------
(22,726) (2,294) (1,892)
-------- -------- --------
Income (loss) before income taxes..... 21,360 (318) 18,508
Income tax expense (note 3)............. 8,208 3,246 6,992
-------- -------- --------
Net income (loss)..................... 13,152 (3,564) 11,516
Less: Dividends on and accretion of
preferred stocks..................... (10,966) (57) --
-------- -------- --------
Net income (loss) available to common
shareholders......................... $ 2,186 $ (3,621) $ 11,516
======== ======== ========
Net income (loss) per common share:
(notes 2 & 16)
Basic................................. $ .58 (1.49) .13
======== ======== ========
Diluted............................... $ .55 (1.49) .12
======== ======== ========
Weighted average number of common shares
and common share equivalents
outstanding:
Basic................................. 3,767 9,342 9,348
Diluted............................... 3,975 9,342 9,772
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
Junior
Perpetual
Preferred
Common Stock Additional Stock Retained Treasury Stock Total
--------------- Paid-In ------------- Earnings -------------- Shareholders'
Shares Amount Capital Shares Amount (Deficit) Shares Amount Equity
------- ------ ---------- ------ ------ --------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 12,216 $ 122 $18,236 -- $ -- $ 47,318 (412) $(2,028) $ 63,648
Net income.............. -- -- -- -- -- 11,516 -- -- 11,516
Shares exercised in
connection with
Employee Stock Option
Plan................... 56 1 382 -- -- -- -- -- 383
Treasury shares sold in
connection with Stock
Purchase Plan.......... -- -- (19) -- -- -- -- -- (19)
------- ----- ------- --- ------ --------- ---- ------- ---------
Balance at December 31,
1996................... 12,272 123 18,599 -- -- 58,834 (412) (2,028) 75,528
Net loss................ -- -- -- -- -- (3,564) -- -- (3,564)
Exercise of options..... 77 1 519 -- -- -- -- -- 520
Shares exercised in
connection with
Employee Stock Option
Plan................... 86 1 416 -- -- -- -- -- 417
Treasury shares sold in
connection with Stock
Purchase Plan.......... -- -- (114) -- -- -- -- -- (114)
Redeem shares from
shareholders........... (12,435) (125) (19,153) -- -- (282,641) 412 2,028 (299,891)
Issuance of common
shares................. 3,500 35 4,965 -- -- -- -- -- 5,000
Issuance of junior
perpetual preferred
shares................. -- -- -- 2 1,930 -- -- -- 1,930
Issuance of common
shares to senior
preferred
shareholders........... 250 2 355 -- -- -- -- -- 357
Dividends on junior
preferred stocks....... -- -- -- -- -- (39) -- -- (39)
Dividends on senior
exchangeable redeemable
preferred stock........ -- -- -- -- -- (18) -- -- (18)
------- ----- ------- --- ------ --------- ---- ------- ---------
Balance at December 31,
1997................... 3,750 37 5,587 2 1,930 (227,428) 0 0 (219,874)
Net income.............. -- -- -- -- -- 13,152 -- -- 13,152
Dividends on junior
preferred stocks....... -- -- -- -- -- (7,396) -- -- (7,396)
Dividends on senior
exchangeable redeemable
preferred stock........ -- -- -- -- -- (3,540) -- -- (3,540)
Accretion of discount on
senior exchangeable
redeemable preferred
stock.................. -- -- -- -- -- (30) -- -- (30)
Shares exercised in
connection with
Employee Stock Option
Plan................... 45 1 64 -- -- -- -- -- 65
------- ----- ------- --- ------ --------- ---- ------- ---------
Balance at December 31,
1998................... 3,795 $ 38 $ 5,651 2 $1,930 $(225,242) 0 $ 0 $(217,623)
======= ===== ======= === ====== ========= ==== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income (loss).............................. $ 13,152 $ (3,564) $ 11,516
Depreciation and amortization.................. 5,395 5,058 4,906
Amortization of financing fees................. 1,499 189 145
Deferred income taxes.......................... (971) (32) (368)
Gain on sale of land........................... (1,329) -- --
Change in operating assets and liabilities:
Inventories.................................... 2,444 (23,694) (23,127)
Prepaid expenses............................... (55) (98) (172)
Other current assets........................... 126 152 (268)
Other assets and liabilities................... 202 (327) 190
Accounts payable............................... 828 (290) 9,836
Accrued liabilities............................ (26,098) 30,302 3,616
Income taxes payable........................... 8,845 (6,483) 4,329
-------- --------- --------
Total adjustments............................. (9,114) 4,777 (913)
-------- --------- --------
Net cash provided by operating activities...... 4,038 1,213 10,603
-------- --------- --------
Net cash flows from investing activities:
Loans to officers.............................. -- (2,259) (752)
Payments from officers......................... 298 1,419 274
Proceeds from sale of property and equipment... 7,187 -- --
Capital expenditures........................... (4,705) (5,310) (4,233)
-------- --------- --------
Net cash provided by (used in) investing
activities.................................... 2,780 (6,150) (4,711)
-------- --------- --------
Net cash flows from financing activities:
Proceeds from term notes and senior
subordinated debt............................. -- 210,000 --
Proceeds from shareholders..................... -- 117,928 --
Payments to shareholders....................... -- (299,891) --
Financing fees................................. (322) (9,531) (1)
Payment of debt and mortgages.................. (9,558) (1,021) (1,021)
Principal payments under capital lease
obligation.................................... (222) (624) (754)
Proceeds from exercise of common stock
options/stock purchase plan................... 65 823 362
-------- --------- --------
Net cash provided by (used in) financing
activities.................................... (10,037) 17,684 (1,414)
-------- --------- --------
Net change in cash and cash equivalents......... (3,219) 12,747 4,478
Cash and cash equivalents at beginning of
period......................................... 23,501 10,754 6,276
-------- --------- --------
Cash and cash equivalents at end of period...... $ 20,282 $ 23,501 $ 10,754
======== ========= ========
Supplemental cash flow information:
Interest paid.................................. $ 23,455 $ 3,026 $ 2,622
Income taxes paid.............................. $ 398 $ 9,703 $ 2,858
Non-cash equity information:
Dividends Declared
Junior Preferred Stocks........................ $ 7,396 $ 39 $ --
Senior Exchangable Redeemable Preferred Stock.. $ 3,540 $ 18 $ --
Senior Exchangeable Redeemable Preferred Stock
accretion..................................... $ 30 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(1) RECAPITALIZATION
On December 29, 1997, Madison Dearborn Capital Partners II, L.P.
("Madison Dearborn"), certain members of management, and certain unaffiliated
investors acquired all of the outstanding capital stock of the Company for an
equity investment of $117,928 ("Recapitalization"). The equity investment
consisted of (i) an $85,388 investment by Madison Dearborn (comprised of $4,594
of common stock of the Company, and $80,794 of Junior Redeemable Preferred
Stock of the Company), (ii) a $7,540 investment by certain members of
management of the Company (comprised of $406 in common stock and $7,134 in
Junior Preferred Stock), and (iii) a $25,000 investment by certain unaffiliated
investors in units consisting of Senior Exchangeable Redeemable Preferred Stock
and common stock. The Company used the proceeds from the equity investment and
approximately $225,905 of aggregate proceeds from the financing described below
(i) to pay $324,896 as Recapitalization consideration and (ii) to pay $18,937
in transaction fees and expenses.
The financing consisted of (i) $100,000 from the sale of Senior
Subordinated Notes, and (ii) a $200,000 credit facility comprised of a $110,000
term loan facility, and a $90,000 revolving credit facility which, subject to
certain conditions, can be increased up to $115,000, of which there was no loan
balance at December 31, 1998, and 1997. In 1998, $15,905 was drawn in
connection with the Recapitalizaton.
The sources and uses of funds related to the Recapitalization are set
forth as follows:
<TABLE>
<S> <C>
Sources of Funds:
Term loans..................................................... $110,000
Revolving credit facility...................................... 15,905
Senior Subordinated Notes...................................... 100,000
Senior Exchangeable Preferred Stock............................ 25,000
Junior Redeemable Preferred Stock.............................. 85,998
Junior Perpetual Preferred Stock............................... 1,930
Common stock................................................... 5,000
--------
Total........................................................ $343,833
========
Uses of Funds:
Recapitalization consideration................................. $299,891
Payment to option holders...................................... 25,005
Fees and expenses.............................................. 18,937
--------
Total........................................................ $343,833
========
</TABLE>
Payments to option holders of $25,005 were expensed in the year ended
December 31, 1997. Fees and expenses of $18,937 consisted of $9,084 which were
expensed and $9,853 which were capitalized as deferred financing costs. Total
expense was $129 and $33,960 for 1998 and 1997, respectively; total fees
capitalized were $322 and $9,531 in 1998 and 1997, respectively. The
acquisition has been accounted for as a recapitalization and, as such, has no
impact on the historical basis of assets and liabilities.
F-8
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(2) 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., Nights of the
Week, Inc. (NOWI), Days of the Week, Inc. (DOWI), Tuesday Morning Partners,
LTD. (TMP), and Friday Morning, Inc. (collectively the "Company"). As of
December 31, 1998, TMIL Corporation merged into TMP. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company owned and operated 347 deep discount retail stores in 36
states at December 31, 1998 (315 and 286 stores at December 31, 1997 and 1996,
respectively). The Company sells close-out housewares and related gift
accessories, which it purchases at below wholesale prices. Company stores are
open for seven 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 $17,105 in 1998 and $22,312 in 1997 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 cost or market
using the retail inventory method for the stores' inventory and the average
cost method for warehouse inventory. Buying, distribution, and freight costs
are capitalized as part of inventory.
(d) Property and Equipment--Property and equipment are stated at cost.
Buildings, furniture, fixtures, and equipment are depreciated on a straight-
line basis over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Depreciable lives
-----------------
<S> <C>
Buildings............................................... 30 years
Furniture and fixtures.................................. 7 years
Equipment............................................... 5 to 7 years
</TABLE>
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) Deferred Financing Costs--Deferred financing costs represent fees
paid in connection with obtaining bank and other long-term financing. These
fees are amortized over the term of the related financing using the effective
interest method.
(f) 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-9
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(g) Pre-opening Costs--The Company capitalized certain costs directly
related to opening new stores and amortized these costs over twelve months. In
April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," requiring, among other
things, companies to expense on a current basis previously capitalized start-up
costs. As of December 31, 1998, the Company had $227 of unamortized capitalized
start-up costs. This SOP is effective for financial statements for fiscal years
beginning after December 15, 1998, unless adopted earlier. The Company plans to
adopt this new accounting standard in January, 1999, at which time all
remaining unamortized capitalized start-up costs will be expensed.
(h) Advertising--Costs for newspaper, radio, and other media are expensed
as the advertised events take place. Advertising expense for 1998, 1997 and
1996 was $20,550, $18,438, and $16,475 respectively.
(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. Net gains for 1998 totaled $78 while
net losses totaled $159 for 1997. Prior year losses are primarily due to
canceling foreign exchange contracts entered into under the Company's former
bank relationship that had to be terminated as a result of the
Recapitalization.
(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. This statement has not had a material impact on the Company's financial
position, results of operations, or liquidity for the years presented.
(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 provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
F-10
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(m) Net income (loss) per common share--Basic net income (loss) per
common share for the year ended December 31, 1998 is calculated by dividing
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding for each period. Diluted net income (loss)
per common share for the year ended December 31, 1998 is calculated by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares and share equivalents, unless anti-dilutive,
outstanding for each period. For the years ended December 31, 1997 and 1996
for the purposes of this calculation the weighted average number of shares and
net income available to common shareholders have been adjusted to reflect the
Recapitalization. The difference between the Company's basic and diluted
weighted average common shares outstanding is due to dilutive common stock
options outstanding. See Note 16.
(n) Reclassifications--Certain prior year amounts have been reclassified
to conform to the current period presentation.
(3) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1998
U.S. Federal.................................... $7,916 $(837) $7,079
State, local and other.......................... 1,263 (134) 1,129
------ ----- ------
Total........................................... $9,179 $(971) $8,208
====== ===== ======
Year ended December 31, 1997
U.S. Federal.................................... $2,944 $ (82) $2,862
State, local and other.......................... 334 50 384
------ ----- ------
Total........................................... $3,278 $ (32) $3,246
====== ===== ======
Year ended December 31, 1996
U.S. Federal.................................... $6,606 $(128) $6,478
State, local and other.......................... 754 (240) 514
------ ----- ------
Total........................................... $7,360 $(368) $6,992
====== ===== ======
</TABLE>
A reconciliation of the expected Federal income tax expense (benefit) to
actual tax expense follows (based upon a tax rate of 35% for 1998, 34% for
1997, and 35% for 1996).
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Expected Federal income tax expense (benefit)..... $7,476 $ (108) $6,478
Recapitalization expenses not deductible for
Federal taxes.................................... (60) 3,029 --
State income taxes, net of related Federal tax
effect........................................... 824 425 378
Other, net........................................ (32) (100) 136
------ ------ ------
$8,208 $3,246 $6,992
====== ====== ======
</TABLE>
F-11
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Compensated absences...................................... $ 219 $ 190
NOL carryforward.......................................... 172 143
Other accrued liabilities................................. 803 487
------ ------
Total gross deferred assets............................. $1,194 $ 820
====== ======
Deferred tax liabilities:
Property and equipment.................................... $2,366 $2,886
Inventory costs........................................... 314 425
Other..................................................... 369 335
------ ------
Total gross deferred tax liabilities.................... 3,049 3,646
------ ------
Net deferred tax liability............................. $1,855 $2,826
====== ======
</TABLE>
Management expects the deferred tax assets at December 31, 1998 to be
recovered through the reversal during the carryforward 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, 1998 or December 31, 1997.
(4) PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation, consist of the
following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land................................................... $ 2,498 $ 8,356
Buildings.............................................. 13,952 13,926
Furniture and fixtures................................. 22,838 19,861
Equipment.............................................. 18,446 17,109
Leasehold improvements................................. 2,621 2,360
-------- --------
60,355 61,612
Less accumulated depreciation.......................... (36,263) (30,972)
-------- --------
Total................................................ $ 24,092 $ 30,640
======== ========
</TABLE>
F-12
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(5) MORTGAGE ON LAND, BUILDINGS AND EQUIPMENT/CAPITAL LEASE OBLIGATIONS
The mortgage note is secured by land and buildings and bears interest at
LIBOR plus 2.125% (7.2% at December 31, 1998) with principal and interest due
monthly. It matures on June 10, 2002.
Mortgages consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Note payable to bank, in monthly installments of $85
plus interest........................................ $ 3,573 $ 4,594
Less current installments............................. (1,021) (1,021)
------- -------
$ 2,552 $ 3,573
======= =======
</TABLE>
In connection with this mortgage, the Company is required to maintain
minimum net worth and comply with other financial covenants. At December 31,
1998, the Company is in compliance with these covenants.
The maturities of the mortgage are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999................................................................ $1,021
2000................................................................ 1,021
2001................................................................ 1,021
2002................................................................ 510
------
Total............................................................... $3,573
======
</TABLE>
During 1994, the Company entered into a capital lease with a financial
institution to finance point of sale registers and electronic article
surveillance equipment. The amount financed under the capital lease totaled
$2,642. The remaining balance of the capital lease is $161 which will be fully
paid during 1999. At the end of the lease term, the Company intends to exercise
its bargain purchase option.
(6) DUE FROM OFFICERS
As of December 31, 1998 and 1997, the amount due from officers is $3,345
and $3,643 respectively. These receivables are a continuation of prior years
notes. As of December 31, 1998 and 1997, $3,345 and $3,153 of the amount due
from officers was secured by shares of the Company's common stock and shares of
the Company's Junior Preferred Stock. Effective December 29, 1997, the amounts
accrue interest at the mid-term federal rate of 6.02% as defined by Internal
Revenue Service Code Section 1274(d). Previously these loans bore interest at
prime.
F-13
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(7) NOTES PAYABLE
At December 31, 1998 and 1997, notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Senior Credit Facility................................. $101,463 $110,000
Senior Subordinated Notes.............................. 100,000 100,000
-------- --------
201,463 210,000
Less current portion................................... (3,398) (1,350)
-------- --------
$198,065 $208,650
======== ========
</TABLE>
Senior Credit Facility--In connection with the Recapitalization, the
Company entered into a Senior Credit Facility agreement on December 29, 1997,
which provides for a revolving credit facility of $90,000 which, subject to
certain conditions, can be increased to $115,000 and a term loan facility
totaling $110,000. This agreement is secured by a pledge of substantially all
of the Company's assets.
The revolving credit facility is for a period of five years and requires
a cleandown to less than $15,000 for thirty consecutive days during each twelve
month period beginning April 1, 1998. Borrowings are limited to the lessor of
$90,000 (unless the maximum has been increased to as much as $115,000, as
provided for in the agreement) or 50% (60% from July 1-October 31 of each year)
of eligible inventory, as defined. The availability is further reduced by the
aggregate undrawn amount of outstanding letters of credit. At the Company's
option, the amount borrowed will bear interest at either LIBOR plus 2.50% or
the lender's alternate base rate plus 1.50%. There is a provision within the
agreement to reduce the interest rates as the leverage ratio is reduced. The
interest rate was reduced by 0.25% in early 1999 due to an improvement in the
leverage ratio at December 31, 1998.
The term loan facility consists of two tranches designated A and B.
Tranche A term loans are for $40,000 and mature in five years while Tranche B
term loans are $70,000 and mature in seven years. At the Company's option,
Tranche A term loans bear interest at LIBOR plus 2.50% or the Alternate Base
Rate plus 1.50%. Tranche B term loans bear interest at LIBOR plus 3.00% or the
Alternate Base Rate plus 2.00%. The term loan interest rates will also be
reduced as the leverage ratio is reduced. The interest rate was reduced by
0.25% in early 1999 due to an improvement in the leverage ratio at December 31,
1998.
The Company had no balances outstanding related to the revolving line of
credit at December 31, 1998. The remaining availability under the credit
facility was $40,600 at December 31, 1998. As of December 31, 1998 and 1997 the
Company had outstanding letters of credit of $2,873 and $9,468 for inventory
purchases.
The total outstanding balances of Tranches A and B were $35,568 and
$65,895 at the end of December 31, 1998 and $40,000 and $70,000 at December 31,
1997, respectively. The interest rates on the Tranche A and B term loans at
December 31, 1998 were 7.9% and 8.4%, respectively. The Company incurs
commitment fees of 0.50% on the unused portion of the Revolving Credit
Facility.
F-14
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
Scheduled, mandatory principal payments for the term loans are as
follows:
<TABLE>
<S> <C>
1999............................................................ $ 3,398
2000............................................................ 6,135
2001............................................................ 9,782
2002............................................................ 18,902
2003............................................................ 662
thereafter...................................................... 62,584
--------
$101,463
========
</TABLE>
The Company is allowed under the agreement to make voluntary prepayments
of term loan principal. In addition, the Company is required to make additional
principal payments if there is excess operating cash flow, as defined by the
loan documents.
The Senior Credit Facility agreement contains certain restrictive
covenants which, among other things, require the Company to comply with certain
financial covenants including limitations on dividends, indebtedness, and
capital expenditures. As of December 31, 1998, the Company is in compliance
with the covenants.
Senior Subordinated Notes--The Senior Subordinated Notes bear interest at
11.0% and are due on December 15, 2007. These notes are subordinated to any
amounts outstanding under the Senior Credit Facility. Interest is payable on
June 15 and December 15 of each year. At any time prior to December 15, 2000,
at the option of the Company, up to 35% of the outstanding aggregate face
amount of the Senior Subordinated Notes may be redeemed at a redemption price
of 111.00% using the proceeds of certain equity issuances. Beginning December
15, 2002, the Senior Subordinated Notes will be subject to redemption at the
option of the Company in whole or in part, with proper notice at the redemption
prices set forth below, plus accrued interest.
<TABLE>
<CAPTION>
Twelve Month
Period Percentage of
Beginning December Principal
15 Amount
------------------ -------------
<S> <C>
2002...................................................... 105.50%
2003...................................................... 103.67%
2004...................................................... 101.83%
2005 and thereafter....................................... 100.00%
</TABLE>
The Senior Subordinated Notes contain certain restrictive covenants
which, among other things, limit the Company's ability to incur additional
indebtedness, pay dividends or distributions or make investments. As of
December 31, 1998, the Company is in compliance with the covenants.
(8) REDEEMABLE PREFERRED STOCK
On December 29, 1997, in connection with the Recapitalization, the
Company issued 250,000 units consisting of one share of Senior Exchangeable
Redeemable Preferred Stock ("Senior Preferred Stock") and one share of common
stock. The Senior Preferred Stock and common stock become separately
transferable upon the earlier of (i) a change in control of the Company as
defined, (ii) the date upon which a registration statement under the Securities
Act of 1933 relating to the Senior Preferred Stock is declared effective, (iii)
immediately prior to any redemption of the Senior Preferred Stock by the
Company with the proceeds of a
F-15
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
public offering, or (iv) any earlier date as determined by the underwriter of
the issue. The proceeds of $25,000 were allocated between Senior Preferred
Stock and common stock based on the value of common stock issued on the
transaction date. The Senior Preferred Stock earns cumulative dividends of
13.25% annually, payable quarterly. On or before December 15, 2002, dividends
may, at the option of the Company, be paid either in cash or additional shares
of Senior Preferred Stock. After December 15, 2002, dividends may only be paid
in cash. Each share of Senior Preferred Stock is exchangeable at the Company's
option into debentures, subject to certain conditions, equal to the liquidation
value.
On December 15, 2009, the Company will be required to redeem all
outstanding shares of Senior Preferred Stock at a price equal to liquidation
value. The Company may, at its option, redeem for cash the Senior Preferred
Stock on or after December 15, 2002, at the redemption prices set forth below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002.......................................................... 109.938%
2003.......................................................... 106.625%
2004.......................................................... 103.313%
2005 and thereafter........................................... 100.000%
</TABLE>
In addition, the Company may redeem for cash all the outstanding shares
of Senior Preferred Stock within 20 days of a public offering of the Company's
common stock at a redemption price per share equal to 113.25% of the aggregate
liquidation value.
On December 29, 1997, in connection with the Recapitalization, the
Company issued 85,998 shares of Junior Redeemable Preferred stock (the "Junior
Redeemable Preferred"). The Junior Redeemable Preferred earns cumulative
dividends of 8% annually, accrued quarterly. When paid, dividends must be paid
in cash. The Company has the option to redeem the Junior Redeemable Preferred
at any time without premium or penalty. The Company is required to redeem the
Junior Redeemable Preferred upon the earlier of December 29, 2010 or a sale of
the Company.
In connection with the Recapitalization, the Chairman of the Board of the
Company entered into a put agreement with the Company and Madison Dearborn
which provides him the right on December 29, 1999 to put his 5,204 shares of
Junior Redeemable Preferred to the Company or Madison Dearborn for an amount
equal to liquidation value. In the event the Chairman exercises his put, he
will be required to transfer his shares of common stock to the Company or
Madison Dearborn for no additional consideration and his loan will become due.
(See Note 6).
In connection with the Recapitalization, the Company's President entered
into a put agreement with the Company and Madison Dearborn which provides him
the right on or after December 31, 2000 (earlier in certain circumstances) to
put 946 shares of Junior Perpetual Preferred Stock ("Junior Perpetual Stock")
and 37,663 shares of common stock to the Company at liquidation value and fair
market value, as defined in the agreement, respectively. Under the put
agreement, the Company has the option to pay for the shares 25% in cash and 75%
by the issuance of a subordinated promissory note payable in three equal annual
installments. These puttable instruments are not classified outside of
shareholders' equity because the balances are not deemed significant and the
put features will be eliminated with the public stock offering, as discussed
further in Note 17.
F-16
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(9) SHAREHOLDERS' EQUITY
On December 29, 1997, in connection with the Recapitalization, the
Company repurchased and retired all outstanding common stock and stock options.
All treasury shares were cancelled. New common shares totaling 3,749,993 were
issued to Madison Dearborn, certain members of management and certain
unaffiliated investors. Junior Perpetual Preferred totaling 1,930 shares were
issued to certain members of management. The Junior Perpetual Preferred earns
cumulative dividends of 8% annually, accrued quarterly. When paid, dividends
must be paid in cash.
After the Recapitalization, the Company established a stock option plan
(the "New Plan") which allows the Company's Board of Directors to grant stock
options to directors, officers, key employees and other key individuals
performing services for the Company. The New Plan authorizes grants of options
to purchase up to 416,666 shares of authorized, but unissued common stock.
Stock options are granted with an exercise price, terms and vesting determined
by the Compensation Committee of the Board with certain limitations.
Options granted under the New Plan have vesting periods from three to
five years. The exercise prices of the options at the grant date range between
$1.43 and $10.00 which approximates fair value of the shares of common stock
into which such options are exercisable. At December 31, 1998, there were
73,753 additional shares available for grant under the New Plan.
Following is a summary of transactions relating to the New Plan's options
for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted-Average
of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996............... -- --
Exercised during year......................... -- --
Canceled during year.......................... -- --
Granted during year........................... 125,000 $1.43
------- -----
Outstanding at December 31, 1997............... 125,000 1.43
Exercised during year......................... (44,835) 1.43
Canceled during year.......................... (21,512) 1.43
Granted during year........................... 239,425 2.17
------- -----
Outstanding at December 31, 1998............... 298,078 $2.02
======= =====
</TABLE>
As of December 31, 1998 and 1997, 38,867 and 228, respectively, of
options outstanding were exercisable.
Prior to the effective date of Recapitalization, the Company had a stock
option plan (the "Old Plan") covering 2,160,500 shares of the Company's common
stock which could be granted to employees of the Company. Under the Old Plan,
stock options were granted at fair market value and vested over varying periods
not exceeding 10 years. No options were granted in 1997 or 1996 under the Old
Plan.
F-17
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
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 earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss)................... As reported $13,152 $(3,564) $11,516
Pro forma 13,126 (3,567) 11,321
Net income (loss) per common share-
diluted............................ As reported $ .55 (1.49) .12
Pro forma .54 (1.49) .10
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted
average assumptions used for options granted in fiscal 1998, 1997 and 1996,
respectively: the risk free interest rate of 4.7%, 6.1% and 6.1%, expected
dividend yield of zero for all years, expected lives of 6.5 years, 5.0 years,
and 5.0 years, and expected volatility of zero percent for 1998 and 1997 as the
Company did not have publicly traded stock, and 52% for 1996.
Pro forma net earnings (loss) reflects only options granted since
December 31, 1994. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected over
the options' vesting period of three to five years and compensation cost for
options granted prior to January 1, 1995 is not considered.
Stock option activity in the Old Plan during the periods indicated is as
follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Balance at December 31, 1995.................. 1,393,200 $3.99
Exercised during year....................... (56,175) 3.15
Canceled during year........................ (2,250) 6.42
Balance at December 31, 1996.................. 1,334,775 4.02
Exercised during year....................... (162,512) 2.86
Canceled during year........................ (1,172,263) 4.17
---------- -----
Balance at December 31, 1997.................. -- $ --
========== =====
</TABLE>
F-18
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(10) OPERATING LEASES
The Company leases substantially all store locations under non-cancelable
operating leases. New store leases do, however, typically allow the Company to
terminate a lease after 18 to 21 months if the store does not achieve sales
expectations. Future minimum rental payments under leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C>
1999............................................................ $19,664
2000............................................................ 17,937
2001............................................................ 15,056
2002............................................................ 10,151
2003............................................................ 5,404
thereafter...................................................... 5,330
-------
Total minimum rental payments................................... $73,542
=======
</TABLE>
Rental expense (base minimum rent and rent based on sales) for 1998, 1997
and 1996 was $20,324, $17,614, and $14,564 respectively. Rent expense includes
rent for store locations and warehouses.
Subsequent to the close of 1998, the Company signed an option agreement
to lease additional warehouse space at $800 per year.
(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 $455, $433, and $403 during the
years ended December 31, 1998, 1997 and 1996, respectively.
F-19
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(12) FINANCIAL INSTRUMENTS
As of December 31, 1998 and 1997, the Company had approximately $4,653
and $5,391 respectively, of net foreign exchange contracts. 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 receivables from officers, long-term debt, foreign
exchange contracts, and redeemable stocks as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets--notes receivable............ $ 3,345 $ 3,291 $ 3,643 $ 3,490
Liabilities:
Foreign exchange contracts
unrealized (gain)............... -- (28) -- --
unrealized loss................. -- 55 -- 75
Variable rate long-term debt...... $105,036 $105,036 $114,594 $114,594
Senior Subordinated Notes......... $100,000 $100,000 $100,000 $100,000
Senior Exchangeable Redeemable
Preferred Stock.................. 28,231 28,558 24,661 25,000
Junior Redeemable Preferred
Stock............................ 85,998 85,998 85,998 85,998
</TABLE>
The fair value of the Company's notes receivable at December 31, 1998 and
1997 is less than the carrying value as the notes earn interest at a rate less
than market (See Note 6). The variable rate long-term debt and the Senior
Subordinated Notes approximate estimated fair values. The fair values of the
foreign exchange contracts are based on the exchange rates existing at the
balance sheet dates. The fair value of the Senior Exchangeable Redeemable
Preferred Stock and the Junior Redeemable Preferred Stock are at aggregate
liquidation preference.
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1998 and 1997 follows:
<TABLE>
<CAPTION>
Quarters ended
--------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales........................ $58,811 $84,829 $78,485 $173,970
Comparable store sales........... 14.4% 15.7% 14.8% 8.5%
Gross profit..................... $22,348 $27,339 $30,776 $ 58,595
Operating income................. $ 3,486 $ 4,204 $ 7,795 $ 28,601
Net income (loss)................ $(1,454) $(1,213) $ 1,612 $ 14,207
Net income (loss) available to
common shareholders............. $(4,037) $(3,916) $(1,196) $ 11,335
EPS - Diluted.................... $ (1.08) $ (1.04) $ (.32) $ 2.81
</TABLE>
F-20
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
Quarters ended
--------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales........................ $47,514 $67,377 $64,167 $148,249
Comparable store sales increase.. 23.0% 16.0% 18.0% 17.9%
Gross profit..................... $17,893 $23,008 $25,536 $ 52,437
Operating income (loss).......... $ 1,442 $ 3,160 $ 5,644 $ (8,270)
Net income (loss)................ $ 744 $ 1,715 $ 2,907 $ (8,930)
Net income (loss) available to
common shareholders............. $ 744 $ 1,715 $ 2,907 $ (8,987)
EPS - Diluted.................... $ (.20) $ (.09) $ .03 $ (1.24)
</TABLE>
(14) RELATED PARTY TRANSACTIONS
During 1997, the Company paid Madison Dearborn $3,500 in fees related to
the Recapitalization. In 1998, Madison Dearborn began providing management and
advisory services to the Company under a five year agreement for annual
payments of $350.
On December 29, 1997, the Company entered into a three-year employment
agreement with the Company's President, Chief Executive Officer and Director,
providing for $475 in annual salary, subject to possible increases, in addition
to a maximum annual bonus of up to 50% of base salary. The Company also entered
into a two-year consulting and non-competition agreement with the Company's
founder, to serve as Chairman of the Board of Directors and to facilitate the
Company's relationships with third parties and suppliers. The contract provides
for annual compensation of $250 per year. These agreements also provide for
certain non-compete and non-solicitation covenants and confidentiality
provisions.
(15) 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.
F-21
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
(16) EARNINGS PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires presentation of basic and diluted earnings per share. As
required, the Company adopted the provisions of SFAS No. 128 in the quarter
ended March 31, 1998. All prior periods' weighted average and per share
information has been restated in accordance with SFAS No. 128. Outstanding
stock options issued by the Company represent the only dilutive effect
reflected in diluted weighted average shares.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996
1998 1997 (1) (1)
------- -------- -------
(Amounts in thousands,
except per share
amounts)
<S> <C> <C> <C>
Basic EPS:
Net Income (loss)....................... $13,152 $ (3,564) $11,516
Less:
Junior preferred dividends............ (7,396) (7,034)(1) (7,034)(1)
Senior preferred dividends............ (3,540) (3,313)(1) (3,313)(1)
Senior preferred accretion............ (30) -- --
------- -------- -------
Net income (loss) available to common
shareholders........................... $ 2,186 $(13,911) $ 1,169
======= ======== =======
Weighted average common shares prior to
Recapitalization....................... -- 11,786 (1) 11,833 (1)
Impact for Recapitalization-embedded
stock split............................ -- 0.79 (1) 0.79 (1)
------- -------- -------
-- 9,311 9,348
Weighted average common shares post
Recapitalization....................... 3,767 31 (2) --
------- -------- -------
Weighted average number of common shares
outstanding............................ 3,767 9,342 9,348
======= ======== =======
Net income (loss) per common share...... $ 0.58 $ (1.49) $ 0.13
======= ======== =======
Diluted EPS:
Net earnings available to common
shareholders .......................... $ 2,186 $(13,911) $ 1,169
======= ======== =======
Effect of dilutive securities:
Stock options.......................... 208 -- 537
Impact for recapitalization--embedded
stock split............................ -- -- 0.79 (1)
------- -------- -------
Weighted average common equivalent
shares from stock options.............. 208 -- (3) 424
Weighted average number of common shares
outstanding............................ 3,767 9,342 9,348
------- -------- -------
Weighted average number of common shares
and common stock equivalents
outstanding ........................... 3,975 9,342 9,772
======= ======== =======
Net income (loss) per common share...... $ 0.55 $ (1.49) $ 0.12
======= ======== =======
</TABLE>
F-22
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(In thousands, except for share amounts)
- --------
(1) For the years ended December 31, 1997 and 1996, for the purpose of this
calculation, the net income available to common shareholders and weighted
average number of shares have been adjusted to retroactively reflect the
Recapitalization.
(2) This amount represents the weighted average shares outstanding under the
capital structure after the Recapitalization in 1997.
(3) During 1997, the impact of the stock options are anti-dilutive and
accordingly are not included herein.
(17) SUBSEQUENT EVENT (UNAUDITED)
On March 12, 1999, the Company filed a Form S-1 registration statement
with the Securities and Exchange Commission for the sale of shares of common
stock. The Company intends to use estimated net proceeds of $80.2 million to
redeem 35% of their Senior Subordinated Notes, all of the outstanding shares of
Senior Preferred Stock and a portion of the Junior Preferred Stocks. Also, in
conjunction with the stock offering, the Company intends to convert all of the
remaining shares of junior preferred stocks into common stock. In connection
with the redemption of a portion of the Senior Subordinated Notes, the Company
expects to incur an extraordinary charge, net of income taxes, of approximately
$3.3 million in the second quarter of 1999.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Jerry M. Smith
Date: March , 1999 By: _________________________________
Jerry M. Smith,
Chief Executive Officer,
President and Director (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 18, 1999.
<TABLE>
<CAPTION>
Name Title
---- -----
<C> <S>
/s/ Jerry M. Smith Chief Executive Officer,
______________________________________ President and Director
Jerry M. Smith (Principal Executive
Officer)
/s/ Mark E. Jarvis Sr. Vice President, Chief
______________________________________ Financial Officer
Mark E. Jarvis (Principal financial and
accounting officer)
/s/ Lloyd L. Ross Chairman of the Board of
______________________________________ Directors
Lloyd L. Ross
/s/ William J. Hunckler, III Director
______________________________________
William J. Hunckler, III
/s/ Benjamin D. Chereskin Director
______________________________________
Benjamin D. Chereskin
/s/ Robin P. Selati Director
______________________________________
</TABLE> Robin P. Selati
<PAGE>
EXHIBIT 21.1
TUESDAY MORNING CORPORATION'S SUBSIDIARIES
TMI Holdings, Inc.
Tuesday Morning, Inc.
Tuesday Morning Partners, Ltd.
Friday Morning, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 20,282 20,282
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 96,743 96,743
<CURRENT-ASSETS> 118,959 118,959
<PP&E> 60,355 60,355
<DEPRECIATION> (36,263) (36,263)
<TOTAL-ASSETS> 155,319 155,319
<CURRENT-LIABILITIES> 48,452 48,452
<BONDS> 200,617 200,617
114,229 114,229
1,930 1,930
<COMMON> 38 38
<OTHER-SE> (219,591) (219,591)
<TOTAL-LIABILITY-AND-EQUITY> 155,319 155,319
<SALES> 173,970 396,095
<TOTAL-REVENUES> 173,970 396,095
<CGS> 115,375 257,037
<TOTAL-COSTS> 29,994 94,972
<OTHER-EXPENSES> (486) (2,893)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,998 25,619
<INCOME-PRETAX> 23,089 21,360
<INCOME-TAX> 8,882 8,208
<INCOME-CONTINUING> 14,207 13,152
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,207 13,152
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
