<PAGE>
FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended September 30, 1999 Commission File Number 333-46013
TUESDAY MORNING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2398532
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14621 INWOOD RD., ADDISON, TEXAS 75001
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 387-3562
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_______
-----
Common stock outstanding as of September 30, 1999: 38,810,446 shares
<PAGE>
TUESDAY MORNING CORPORATION
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 - Financial Statements Page No.
-------
<S> <C>
Consolidated Balance Sheets as of September 30, 1999,
September 30, 1998 and December 31, 1998 1
Consolidated Statements of Operations for the
Three Months and Nine Months
Ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 10
</TABLE>
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Balance Sheets
In Thousands (except for share data)
<TABLE>
<CAPTION>
Unaudited Unaudited Audited
September 30, September 30, Dec. 31,
ASSETS 1999 1998 1998
------------- ------------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 11,448 $ 1,250 $ 20,282
Cash restricted (1)............................................... - 7,187 -
Inventories....................................................... 194,513 168,821 96,743
Prepaid expenses.................................................. 2,476 1,572 1,114
Other current assets.............................................. 352 330 466
Income taxes receivable........................................... - 770 -
Deferred income taxes............................................. 354 - 354
------------- ------------- ---------
Total current assets....................................... 209,143 179,930 118,959
------------- ------------- ---------
Property and equipment, at cost........................................ 70,199 59,987 60,355
Less accumulated depreciation & amortization...................... (37,677) (34,960) (36,263)
------------- ------------- ---------
Net property and equipment................................. 32,522 25,027 24,092
------------- ------------- ---------
Other assets, at cost:
Due from officers................................................. - 3,298 3,345
Deferred financing costs.......................................... 6,143 8,895 8,452
Other assets...................................................... 319 289 471
------------- ------------- ---------
Total Assets............................................... $ 248,127 $ 217,439 $ 155,319
============= ============= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Installments of mortgages......................................... $ 1,671 $ 1,021 $ 1,021
Revolving credit facility......................................... 55,850 49,500 -
Installments of notes payable..................................... 5,405 4,110 3,398
Installments of capital lease obligation.......................... - 218 161
Accounts payable.................................................. 38,534 34,037 23,081
Accrued liabilities
Sales taxes.................................................... 2,039 1,692 3,039
Interest expense............................................... 2,999 5,607 2,195
Other.......................................................... 9,039 4,908 6,712
Deferred income taxes............................................. - 55 -
Income taxes payable.............................................. 2,193 - 8,845
------------- ------------- ---------
Total current liabilities.................................. 117,730 101,148 48,452
------------- ------------- ---------
Mortgages on land, buildings and equipment............................. 7,474 2,807 2,552
Notes payable, excluding current installments.......................... 162,522 205,890 198,065
Revolving credit facility excluding current portion.................... 15,000 15,000 -
Deferred income taxes.................................................. 2,211 2,771 2,209
Dividends payable on Jr. Preferred..................................... - 5,504 7,435
------------- ------------- ---------
Total Liabilities.......................................... 304,937 333,120 258,713
------------- ------------- ---------
Senior exchangeable redeemable preferred stock,
par value $.01 per share, authorized 1,000,000 shares,
283,891 issued at December 31, 1998; aggregate liquidation
preference $28,558 and 274,733 issued at September 30,
1998; aggregate liquidation preference $27,473.................... - 27,290 28,231
Junior redeemable preferred stock, par value $.01 per share,
authorized 150,000 shares, 85,998 issued at December 31,
1998 and September 30, 1998; aggregate liquidation
preference $85,998................................................ - 85,998 85,998
Shareholders' equity
Junior perpetual preferred stock, authorized 2,500 shares, 1,930
issued at December 31, 1998 and September 30, 1998; par value
$.01 per share; aggregate liquidation preference $1,930........... - 1,930 1,930
Common stock par value $.01 per share, authorized 100,000,000
shares; issued 26,563,782 shares at December 31, 1998, 26,522,986
shares at September 30, 1998 and 38,810,446 at September 30, 1999. 388 259 266
Additional paid-in capital........................................ 171,947 5,421 5,423
Retained deficit.................................................. (229,145) (236,579) (225,242)
------------- ------------- ---------
Total Shareholders' Equity............................... (56,810) (228,969) (217,623)
------------- ------------- ---------
Total Liabilities and Shareholders' Equity............................. $ 248,127 $ 217,439 $ 155,319
============= ============= =========
</TABLE>
(1) Cash received from sale of land. It's use was restricted to the purchase of
a new warehouse or paying principal of term notes and was actually used to
pay down Term Notes A and B.
-1-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Operations
Unaudited In Thousands
(except per share data)
<TABLE>
<CAPTION>
Three Months Year to date as of
Ended September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................. $ 113,493 $ 78,485 $ 292,935 $ 222,125
Cost of sales............................................. 72,141 47,709 187,631 141,662
--------- -------- --------- ---------
Gross profit...................................... 41,352 30,776 105,304 80,463
Selling, general and administrative expenses.............. 28,609 22,981 78,144 64,978
--------- -------- --------- ---------
Operating income ................................. 12,743 7,795 27,160 15,485
--------- -------- --------- ---------
Other income (expense):
Interest income........................................ 11 77 315 258
Interest expense....................................... (5,479) (6,887) (16,345) (19,620)
Gain on sale of land .................................. - 1,329 - 1,329
Other income .......................................... 132 195 511 819
--------- -------- --------- ---------
(5,336) (5,286) (15,519) (17,214)
--------- -------- --------- ---------
Income (Loss) before income taxes and
extraordinary item 7,407 2,509 11,641 (1,729)
Income tax expense (benefit).............................. 2,815 897 4,402 (673)
--------- -------- --------- ---------
Net income (loss) before extraordinary item....... 4,592 1,612 7,239 (1,056)
Extraordinary item related to debt
extinguishment (net of tax) - - (3,048) -
--------- -------- --------- ---------
Net income (loss)................................. $ 4,592 $ 1,612 $ 4,191 $ (1,056)
========= ======== ========= =========
Net income (loss) before extraordinary item............... $ 4,592 $ 1,612 $ 7,239 $ (1,056)
Dividends on and accretion of preferred stocks.... - (2,808) (3,748) (8,094)
Premium on redemption of senior preferred stock... - - (4,395) -
--------- -------- --------- ---------
Income (loss) available to common shareholders ........... $ 4,592 $ (1,196) $ (904) $ (9,150)
Extraordinary item related to debt
extinguishment (net of tax) - - (3,048) -
--------- -------- --------- ---------
Net income (loss) available to common shareholders ....... $ 4,592 $ (1,196) $ (3,952) $ (9,150)
========= ======== ========= =========
Earnings per Share
- ------------------
Net Income (loss) per Common Share - Basic
Income (loss) available to common shareholders ... $ 0.12 $ (0.05) $ (0.03) $ (0.35)
Extraordinary item related to debt
extinguishment (net of tax)..................... - - (0.09) -
--------- -------- --------- ---------
Net income (loss) available to
common shareholders.............................. $ 0.12 $ (0.05) $ (0.12) $ (0.35)
========= ======== ========= =========
Net Income (loss) per Common Share - Diluted
Income (loss) available to common shareholders ... $ 0.11 $ (0.05) $ (0.03) $ (0.35)
Extraordinary item related to debt extinguishment
(net of tax)...................................... - - (0.09) -
--------- -------- --------- ---------
Net income (loss) available to common
shareholders ................................... $ 0.11 $ (0.05) $ (0.12) $ (0.35)
========= ======== ========= =========
Weighted average number of common shares
and common share equivalents outstanding:
Basic ............................................... 38,805 26,250 33,658 26,250
Diluted ............................................. 40,641 26,250 33,658 26,250
Pro forma Earnings per Share
- ----------------------------
Net income (loss) before extraordinary item............... $ 4,592 $ 1,612 $ 7,239 $ (1,056)
Add: Reduction of interest expense from $31 million
notes payment, net of tax.............. - 555 852 1,667
--------- -------- --------- ---------
Pro forma income (loss) available to common shareholders .. $ 4,592 $ 2,167 $ 8,091 $ 611
========= ======== ========= =========
Net income (loss) per common share
Basic ................................................. $ 0.12 $ 0.06 $ 0.21 $ 0.02
========= ======== ========= =========
Diluted ............................................... $ 0.11 $ 0.06 $ 0.20 $ 0.02
========= ======== ========= =========
Weighted average number of common shares
and common share equivalents outstanding:
Basic ................................................. 38,155 37,597 38,146 37,597
Diluted ............................................... 39,991 39,239 39,962 39,238
</TABLE>
-2-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited In Thousands
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net cash flows from operating activities:
Net income (loss) $ 4,191 $ (1,056)
Depreciation and amortization 3,833 4,081
Amortization of financing fees 1,031 1,037
Extraordinary item 3,048 -
(Gain) Loss on disposal of fixed assets 13 (1,337)
Change in operating assets and liabilities:
Income taxes receivable - (752)
Inventories (97,770) (69,635)
Prepaid expenses (1,362) (513)
Other current assets 114 244
Other assets 152 384
Accounts payable 15,453 11,784
Accrued liabilities 2,131 (25,837)
Income taxes payable (5,010) -
------------- -------------
Total adjustments (78,367) (80,544)
------------- -------------
Net cash used in operating activities (74,176) (81,600)
------------- -------------
Net cash flows from investing activities:
Repayments of loans from officers 3,345 345
Proceeds from sale of assets 32 7,187
Capital expenditures (12,308) (4,318)
------------- -------------
Net cash (used in) provided by investing activities (8,931) 3,214
------------- -------------
Net cash flows from financing activities:
Proceeds from revolving credit facility 70,850 64,500
Financing fees - (303)
Payment of debt and mortgages (3,465) (766)
Mortgage on warehouse 6,500 -
Partial redemption of Senior Subordinated Note & prepayment premium (34,410) -
Principal payments under capital lease obligation (161) (165)
Proceeds from exercise of common
stock options/stock purchase plan 56 56
Redeem Junior Preferred Stocks (7,382) -
Redeem Senior Exchangeable Redeemable Preferred Stock (33,855) -
Net proceeds from IPO 76,140 -
------------- -------------
Net cash provided by financing activities 74,273 63,322
------------- -------------
Net change in cash and cash equivalents (8,834) (15,064)
Cash and cash equivalents at beginning of period 20,282 23,501
------------- -------------
Cash and cash equivalents at end of period $ 11,448 $ 8,437
============= =============
Supplemental cash flow information:
Non-cash items:
Conversion of : Jr. perpetual preferred stock 553 -
Jr. redeemable preferred stock 89,903 -
</TABLE>
At September 30,1999, see IPO note in MD&A discussion. As of September 30, 1999,
our Senior Credit Facility and the Senior Subordinated Notes both limit the
Company's ability to pay cash dividends, accordingly dividends have not been
paid in cash. This statement does not reflect the accrual of $5,504 in 1998 for
dividends on the Junior Preferred Stocks or the issuance of $2,629 of additional
Senior Preferred Stock in 1998, as a dividend to the holders of the Senior
Preferred Stock.
-3-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. On December 29, 1997, Madison Dearborn Capital Partners II, L.P., certain
members of management and certain unaffiliated investors acquired all of the
outstanding capital stock of the Company. This transaction has been
accounted for as a recapitalization and, as such, has no impact on the
historical basis of assets and liabilities. Refer to the consolidated
financial statements and notes thereto for the fiscal year ended
December 31, 1998 for more details of the transaction.
2. The consolidated interim financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These unaudited financial statements
include all adjustments, consisting only of those of a normal recurring
nature, which in the opinion of management, are necessary to present fairly
the results of the Company for the interim periods presented and should be
read in conjunction with the consolidated financial statements and notes
thereto in the Company's Form 10K filing.
3. Notes payable under the terms of the Company's revolving line of credit
agreement are classified between current and long term in accordance with
the terms of the agreement. This agreement is discussed in more detail in
Liquidity and Capital Resources on the page 7.
4. 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, which occurred on April 22, 1999. The Company used the net proceeds
of $76.1 million as described in the Initial Public Offering note in the
MD&A discussion.
5. In connection with the redemption of a portion of the Senior Subordinated
Notes, the Company incurred an extraordinary charge, net of income taxes, of
$3.0 million in the second quarter of 1999.
-4-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The consolidated interim financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited financial statements include all adjustments,
consisting only of those of a normal recurring nature, which in the opinion of
management, are necessary to present fairly the results of the Company for the
interim periods presented and should be read in conjunction with the
consolidated financial statements and notes thereto in the Company's Form 10K
filing.
Results of Operations
The following table sets forth certain financial information from the Company's
consolidated statements of operations expressed as a percentage of net sales.
There can be no assurance that the trends in sales growth or operating results
will continue in the future.
<TABLE>
<CAPTION>
Quarter Ended Sept. 30 Year to date, Sept. 30
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.6 60.8 64.0 63.8
----- ----- ----- -----
Gross profit 36.4 39.2 36.0 36.2
Selling, general and administrative expense 25.2 29.3 26.7 29.2
----- ----- ----- -----
Operating income 11.2 9.9 9.3 7.0
Gain from sale of land - 1.7 - 0.6
Net interest expense and other income (4.7) (8.4) (5.3) (8.4)
----- ----- ----- -----
Earnings (loss) before income taxes and
extraordinary item 6.5 3.2 4.0 (0.8)
Net earnings (loss) before extraordinary item 4.1 2.0 2.5 (0.5)
Net earnings 4.1% 2.0% 1.4% (0.5)%
</TABLE>
Three Months Ended September 30, 1999
Compared to the Three Months Ended September 30, 1998
During the third quarter of 1999 sales increased 45.0%. Same store sales
increased 16.7% for the fourth and fifth sales events, which began August 3 and
ended September 18. The 45% increase in third quarter sales is due to
comparable store sales increases of $12.3 million and $22.7 million of new store
and non-comparative sales days. Average store sales for the fourth and fifth
sale events increased from $226 thousand to $261 thousand. The increase in
comparable sales was comprised of a 5.7% increase in the number of transactions
and a 10.4% increase in the average transaction amount. The primary factors in
our strong comparable store sales growth include our buying organization's
experience in providing value to customers. Our unique niche as the nation's
only high-end closeout retailer of home furnishings and gifts and the strong
economy also contributed to the strong sales. In addition, we featured some
higher quality higher price merchandise.
-5-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Gross profit increased $10.6 million from $30.8 million to $41.4 million
primarily as a result of the increased sales mentioned above. Our gross profit
percentage decreased 2.8% compared with last year. Our initial markup on
products purchased improved by 0.6%, however, this was offset by increased
buying and distribution expenses of 1.4% and markdown expense which increased by
2.0% as markdowns were taken early to create more space for new seasonal
product. Historically, these markdowns would have been taken in the fourth
quarter.
Selling, general, and administrative expense benefited from the leverage
resulting from increased sales. These expenses increased $5.6 million due
primarily to the addition of new stores and inflationary increases. These
expenses, as a percentage of sales, decreased to 25.2% from 29.3% due to the
leverage resulting from comparable store sales increases and non-comparative
sales days.
Interest expense decreased due to an early paydown of Term A and B notes in
October 1998 and early paydown of senior subordinated debt which is more fully
explained in the Initial Public Offering discussion.
EBITDA increased from $9.4 million to $13.9 million due to the factors mentioned
above.
Nine Months Ended September 30, 1999
Compared to the Nine Months Ended September 30, 1998
For the first nine months of 1999 sales increased 31.9% due primarily to
comparable store sales increases of 15.7% and $37.1 million of sales from new
stores and non-comparative sale days. Average store sales for the nine months
increased from $662 thousand to $759 thousand. The increase in comparable sales
was comprised of an 9.4% increase in the number of transactions and a 5.9%
increase in the average transaction amount. The increase was primarily the
result of our buying organization's continued improvement in merchandise
selection, pricing, and mix, as well as some higher quality higher price point
merchandise. Our unique niche as the nation's only high-end closeout retailer
of home furnishings and gifts and the strong economy also contributed to our
strong sales.
Gross profit increased $24.8 million from $80.5 million to $105.3 million
primarily as a result of the increased sales mentioned above. The gross profit
percentage decreased by 0.2% due primarily to increased buying and distribution
expense.
Selling, general, and administrative expense increased $13.2 million due
primarily to the addition of new stores and inflationary increases. These
expenses as a percentage of sales decreased to 26.7% from 29.3% due primarily to
the leverage resulting from comparable store sales increases and non-comparative
sales days.
Interest expense decreased due to an early paydown of Term A and B notes in
October 1998, an early paydown of senior subordinated debt which is more fully
explained in the Initial Public Offering discussion and decreased borrowings
against the revolver.
-6-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
EBITDA increased from $20.6 million to $31.9 million due to the factors
previously mentioned.
Liquidity and Capital Resources
We have historically financed our operations with funds generated from operating
activities and borrowings under the revolving credit facilities.
Net cash used in operating activities for the nine months ended September 1999
and 1998 was $74.2 million and $81.6 million respectively. These amounts were
due primarily to the seasonal buildup of inventory and, in 1998, the payment of
fees and expenses related to the recapitalization. Cash and cash equivalents as
of September 30, 1999 and 1998 were $11.4 million and $8.4 million respectively.
In June of 1999, we purchased a warehouse for $6.5 million that we had been
leasing. This was financed through a ten-year mortgage with a floating interest
rate, currently at 7.114%. Excluding the purchase of the warehouse, capital
expenditures principally associated with new store openings and warehouse
equipment were $5.8 million and $4.3 million for the nine months ending
September, 1999 and 1998, respectively. We expect to spend approximately $1.3
million for capital expenditures for the remainder of 1999.
As part of the recapitalization, discussed in detail in the December 31, 1998
financial statements, the Company entered into the Senior Credit Facility, which
is comprised of the $110.0 million Term Loans and the $90.0 million Revolving
Credit Facility. Subject to compliance with the terms of the Senior Credit
Facility and the Indenture, borrowings under the Revolving Credit Facility may
be increased by $25.0 million to accommodate future growth and for certain other
purposes. At September 30, 1999, the Company had $98.9 million outstanding
under the Term Loans and $70.9 million outstanding under the Revolving Credit
Facility, with $18.9 million of remaining availability thereunder. The Term
Loan A loans and the Revolving Credit Facility loans mature in five years, and
the Term Loan B loans mature in seven years. For 30 consecutive days during
each twelve-month period, beginning April 1998, the aggregate principal amount
of loans outstanding under the Revolving Credit Facility is not to exceed $15.0
million.
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.
See the Initial Public Offering note on page 8 for a discussion on the paydown
of the notes and the redemption of preferred stock.
-7-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Upon consummation of the recapitalization, our total debt and interest charges
increased significantly. Interest payments on the Notes, under the Senior
Credit Facility and on the Exchange Debentures, represent significant liquidity
requirements. The Notes require semi-annual interest payments, and interest on
the loans under the Senior Credit Facility is due quarterly. We anticipate that
cash flow generated from operations and borrowings under the Senior Credit
Facility will be sufficient to fund our working capital needs, planned capital
expenditures, and scheduled interest payments (including interest payments on
the Notes and amounts outstanding under the Senior Credit Facility).
The instruments governing the Company's indebtedness, the Senior Credit Facility
and the Indenture contain financial and other covenants that restrict, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of substantially all
of the assets of the Company. Such limitations, together with our highly
leveraged nature could limit corporate and operating activities, including our
ability to invest in opening new stores.
Initial Public Offering
On March 12, 1999, we filed a Form S-1 registration statement with the
Securities and Exchange Commission for the sale of shares of common stock, which
occurred on April 22, 1999. A total of 7,590,000 shares of common stock were
registered and sold to the public. This includes 5,515,000 sold by the company
and 2,075,000 shares sold by other shareholders. As shown below, proceeds
received by the Company have been used to redeem a portion of the Junior
redeemable preferred stock and Junior perpetual preferred stock. The remaining
Junior stock shares were converted to common stock. The Senior exchangeable
redeemable preferred stock was redeemed on May 14, 1999 and $31.0 million of
Senior subordinated debt was paid on May 18, 1999. These transactions resulted
in an extraordinary charge of $3.0 million, net of tax.
<TABLE>
<CAPTION>
(Amounts in 000's)
<S> <C>
Net proceeds from IPO $ 76,140
Redemption of Junior Preferred Stock (7,382)
Redemption of Senior Preferred Stock (33,855)
Partial paydown of Senior Subordinated Note (34,410)
Includes prepayment premium of $3.4 million
Interest Income 179
---------
Increase in working capital $ 672
=========
</TABLE>
-8-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Inventory
The Company's inventory increased from $96.7 million at year-end to $194.5
million at September 30, 1999, for an increase of $97.8 million from
December 31, 1998. As reflected on the chart on page 12, the increase in
warehouse inventory is due to the seasonal nature of our business in which
inventory levels increase from the beginning of the year to September 30. The
Company plans a third sale event for this year's fourth quarter versus two in
the past. This additional event causes the pattern of the merchandise shipments
to the stores to be somewhat different than in the past. For 1999, a smaller
percentage of fourth quarter merchandise was in the stores than in 1998. This
results in the decrease in average inventory at the stores and increases in the
average held in the warehouse.
The decrease in inventory at the stores from September 30, 1999 to September 30,
1998 is the result of sales for the year in excess of shipments. Store level
inventory in excess of six months old is down over 20%.
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, 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, point of
sales, shipping and receiving, sales reporting, financial reporting and cash
management systems are Y2K compliant. Our remaining system upgrade requirements
have been identified, tested and completed, including all file servers. 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. These systems are all now Y2K compliant.
-9-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 which has
been completed. The failure of one or more of our third party service providers
to resolve Y2K issues could also result 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 revenue, 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 sale 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
totaled $110,000 (excluding scheduled upgrades).
Quantitative and Qualitative Disclosures about Market Risk
The market risk of the Company's financial instruments as of September 30, 1999
has not materially changed since December 31, 1998. The market risk profile on
December 31, 1998 is disclosed in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
This document contains forward-looking statements, which are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation Act of 1995.
Actual results may differ substantially from such forward-looking statements.
Forward-looking statements involve risks and uncertainties including, but not
limited to, continued acceptance of the Company's products in the marketplace,
the success of new store openings and the availability of new store locations,
competitive factors, access to merchandise in a variety of foreign countries,
economic trends, and other risks detailed in the Company's periodic report
filings with the Securities and Exchange Commission.
-10-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Year to date as of
September 30 September 30
--------- --------- --------- ------------
1999 1998 1999 1998
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Earnings Per Common Share
Net income (loss) $ 4,592 $ 1,612 $ 4,191 $ (1,056)
Add: Extraordinary item related to debt
extinguishment (net of tax) - - 3,048 -
-------- --------- --------- ------------
Net income (loss) before extraordinary item $ 4,592 $ 1,612 $ 7,239 $ (1,056)
Less:
Junior preferred dividends $ - $ (1,892) $ (2,469) $ (5,465)
Senior preferred dividends - (909) (1,269) (2,607)
Senior preferred accretion - (7) (10) (22)
Premium on redemption of senior
preferred stock - - (4,395) -
-------- --------- --------- ------------
Income (loss) available to common shareholders $ 4,592 $ (1,196) $ (904) $ (9,150)
Extraordinary item related to debt extinguishment
(net of tax) - - (3,048) -
-------- --------- --------- ------------
Net income (loss) available to common shareholders $ 4,592 $ (1,196) $ (3,952) $ (9,150)
======== ========= ========= ============
Net Income (loss) per Common Share - Basic
Income (loss) available to common shareholders $ 0.12 $ (0.05) $ (0.03) $ (0.35)
Extraordinary item related to debt extinguishment
(net of tax) - - (0.09) -
-------- --------- --------- ------------
Net income (loss) available to common
shareholders $ 0.12 $ (0.05) $ (0.12) $ (0.35)
======== ========= ========= ============
Net Income (loss) per Common Share - Diluted
Income (loss) available to common shareholders $ 0.11 $ (0.05) $ (0.03) (0.35)
Extraordinary item related to debt extinguishment
(net of tax) - - (0.09) -
Net income (loss) available to common
shareholders $ 0.11 $ (0.05) $ (0.12) $ (0.35)
======== ========= ========= ============
Effect of dilutive securities:
Weighted average common equivalent shares from
stock options 1,836 1,642 (1) 1,816 (1) 1,642 (1)
Weighted average common shares outstanding 38,805 26,250 33,658 26,250
-------- --------- --------- ------------
Weighted average common shares and common
stock equivalents outstanding 40,641 (2) 26,250 (2) 33,658 (2) 26,250 (2)
======== ========= ========= ============
</TABLE>
(1) Not included in calculation, because of anti-dilutive effect
(2) Reflects seven for one stock split effective March 25, 1999
-11-
<PAGE>
Tuesday Morning Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total Inventory Levels by Location
($ millions)
<TABLE>
<CAPTION>
9/30/99 9/30/98 12/31/98 12/31/97
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Stores $ 105.4 $ 108.6 $ 58.8 $ 61.5
Warehouse 89.1 60.2 37.9 37.7
-------- -------- --------- ---------
Total $ 194.5 $ 168.8 $ 96.7 $ 99.2
======== ======== ========= =========
</TABLE>
Per Store Inventory Levels by Location
($ thousands)
<TABLE>
<CAPTION>
9/30/99 9/30/98 12/31/98 12/31/97
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Stores $ 287 $ 326 $ 169 $ 195
Warehouse 242 181 109 120
-------- -------- --------- ---------
Total $ 529 $ 507 $ 278 $ 315
======== ======== ========= =========
Store Count 368 333 347 315
</TABLE>
Store Openings/Closings
<TABLE>
<CAPTION>
Nine Months Nine Months
Ending Ending FYE
Sept. 30, 1999 Sept. 30, 1998 12/31/98
-------------- -------------- --------
<S> <C> <C> <C>
Stores Open at
Beginning of Period 347 315 315
Stores Opened 30 21 36
Stores Closed (9) (3) (4)
--- ---
Stores Open at End
of Period 368 333 347
=== === ===
</TABLE>
-12-
<PAGE>
TUESDAY MORNING CORPORATION
PART II - OTHER INFORMATION
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUESDAY MORNING CORPORATION
(Registrant)
DATE: November 5, 1999 /s/ Mark E. Jarvis
----------------------------------------
Mark E. Jarvis, Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 11,418 11,418
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 194,513 194,513
<CURRENT-ASSETS> 209,143 209,143
<PP&E> 70,199 70,199
<DEPRECIATION> (37,677) (37,677)
<TOTAL-ASSETS> 248,127 248,127
<CURRENT-LIABILITIES> 117,730 117,730
<BONDS> 169,996 169,996
0 0
0 0
<COMMON> 388 388
<OTHER-SE> (57,198) (57,198)
<TOTAL-LIABILITY-AND-EQUITY> 248,127 248,127
<SALES> 113,493 292,935
<TOTAL-REVENUES> 113,493 292,935
<CGS> 72,141 187,631
<TOTAL-COSTS> 28,609 78,144
<OTHER-EXPENSES> (143) (826)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,479 16,345
<INCOME-PRETAX> 7,407 11,641
<INCOME-TAX> 2,815 4,402
<INCOME-CONTINUING> 4,592 7,239
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (3,048)
<CHANGES> 0 0
<NET-INCOME> 4,592 4,191
<EPS-BASIC> (.12) (.12)
<EPS-DILUTED> (.11) (.12)
</TABLE>
