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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 for the Fiscal Year Ended December 31, 1999.
or
[ ] Transition report pursuant to section 13 or 15 (d) of the Securities
Act of 1934 for the transition period from ---------- to -----------.
Commission File Number 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) (IRS Employer Identification No)
14621 Inwood Road
Addison, Texas 75001
(972) 387-3562
(Address, 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:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required 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 the 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 of this Form 10-K. X
At February 29, 2000, there were 39,058,868 outstanding shares of the
registrant's Common Stock. At March 22, 2000, the total aggregate market value
of the 10,299,929 shares of voting stock held by non-affiliates of the
registrant was $158,361,408, based upon a closing bid of the registrant's common
stock as reported by The Nasdaq Stock Market on that date of $15.375 per share.
The term affiliates is deemed, for this purpose only, to refer to directors,
officers and holders of 5% or more of the Common Stock of the registrant.
Documents Incorporated By Reference:
Portions of the Registrant's 1999 Annual Report to Stockholders -
Parts II and IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 1999 - Part III
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This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
variations of these words and similar expressions are intended to identify these
forward-looking statements. All statements other than statements of historical
facts contained or incorporated by reference in this report, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. We express our expectations, beliefs and
projections in good faith and believe our expectations reflected in these
forward-looking statements are based on reasonable assumptions, however, we
cannot assure you that these expectations, beliefs or projections will prove to
have been correct. Risks, uncertainties and assumptions that could cause actual
results to differ materially from the expectations reflected in the forward-
looking statements include, among other things: (i) the risks associated with
growth; (ii) the ability to purchase merchandise at attractive prices; (iii)
changes in consumer demand and preferences; (iv) possible declines in comparable
store sales; and (v) the seasonality of our business.
Readers are referred to the caption "Risk Factors" appearing at the end
of Item 1 of this report for additional factors that may affect our forward-
looking statements. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed or incorporated by reference in this report
might not occur. We undertake no obligation to update or revise our forward-
looking statements, whether as a result of new information, future events or
otherwise.
PART 1
Item 1. BUSINESS
General
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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 390 stores in 38 states. We operate our stores during eight
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
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In 1999, Tuesday Morning recorded sales of $488.9 million and operating
income of $65.6 million, representing compounded annual growth of 23.9% and
47.6% respectively, since 1996. Our sales growth has been driven by new store
openings as well as annual increases in comparable store sales of 18.3%, 12.1%
and 13.3% in 1997, 1998 and 1999, 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
eight "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
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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 28 buyers in 1999, 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.
Loyal Upscale Customer Base. We have developed and currently maintain a
proprietary mailing list of 5,159,000 preferred customers who have visited
our stores and requested mailings in advance of our sales events. These
direct mailings offer customers the opportunity 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 customer 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 1999, first year
cash on cash return on investment averaged in excess of 60%. 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 in 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 $8.65 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 7,100 square feet. Of our new stores opened in 1999, on
average we spent approximately $75,000 per store for fixture and start-up
costs, plus an additional $174,000 in on-hand inventory. Average sales per
store and store level operating income in 1999 were $1,319,000 and
$196,000, 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 United States.
Integrated Management Information Systems and Inventory Controls. We
believe our management information systems are among the most advanced in
the retailing 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 120,000 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
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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:
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Continue New Store Openings. We have identified as potential locations for
future stores approximately 500 additional sites near our targeted
customers. We added 35 stores to our store base in 1999 after adding 32
stores in 1998 and plan to increase our store base, in both new and
existing markets, by at least 45 stores in 2000 and at least 50 stores in
2001.
Enhance Sales productivity. We have achieved average comparable store
sales growth of 18.3%, 12.1% and 13.3% in 1997, 1998 and 1999,
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 benefiting from broad consumer trends, including an increase in
investment for the home and a growing emphasis on value. In addition, we
are benefiting from current trends in the retail industry. As inventory
risks shift from retailer to manufacturer due to "just in time" inventory
practices 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 30.0% in 1995 to 22.7% in
1999, primarily as a result of this leverage.
Industry Trends
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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 material 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.
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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 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 for the same year. 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, approximately 25%,
of their income on home furnishings. 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
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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 120,000 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, 1999, Tuesday Morning's
top ten vendors accounted for approximately 20.1% of total purchases, with no
one vendor accounting for more than 3.2%.
Pricing
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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
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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
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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 5,159,000 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.
Store Operations
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As of March 15, 2000, Tuesday Morning operated 390 stores in 38 states.
Tuesday Morning does not keep its stores open throughout the year, but instead
opens them eight 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 includes three 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.
Store Management
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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.
Site Selection
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We added 35 stores to our store base in 1999 and plan to increase our
store base by at least 45 stores in 2000 and at least 50 stores in 2001. 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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Warehousing and Distribution
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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. 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 new 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 1,200,000 square feet of warehousing
space. Tuesday Morning also utilizes third party warehousing in California,
Illinois, Minnesota, Florida, Texas, Colorado, Georgia, Maryland and New Jersey
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 tractors/trailers and uses
common and contract carriers to distribute merchandise to stores.
Management Information Systems
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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 $13.4 million since
1992 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. No significant Y2K issues were encountered. 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 over-ridden 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 1,300 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
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We have registered the name "Tuesday Morning" as a service mark with
the United States Patent and Trademark office.
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Competition
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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.
Tuesday Morning is distinguishable from its competitors in several other
respects. Unlike our competitors, which primarily offer continuing lines of
merchandise, we offer changing lines of merchandise depending on availability at
suitable prices. 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
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At December 31, 1999, the Company employed 1,256 persons on a full-time
basis and 6,620 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.
Risk Factors
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The value of our business and an investment in our common stock is
subject to the significant risks inherent in our business. Investors should
consider carefully the risks and uncertainties described below and the other
information in this annual report. If any of the events described below
actually occur, our business, financial condition or operating results could be
adversely affected in a material way. This could cause the trading price of our
Common Stock to decline, perhaps significantly.
This report contains and incorporates by reference forward-looking
statements regarding Tuesday Morning's performance, strategy, plans, objectives,
expectations, beliefs and intentions. When used in this annual report, the words
"intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar
expressions as they relate to us are included to identify forward-looking
statements. All statements other than statements of historical facts contained
in this report, or incorporated by reference herein, including statements
regarding our future financial position, business strategy, budgets, projected
costs and plans and objectives of management for future operations, are forward-
looking statements. The actual outcome of the events described in these forward-
looking statements could differ materially. See "Forward-Looking Statements" on
page 2 of this report. The following is a discussion of some of the factors and
risks that could contribute to those differences.
Risks Associated with Growth. Tuesday Morning's growth strategy depends in
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large part on its ability to open new stores in both existing and new
geographic markets and operate those stores profitably. We may not be able
to achieve our planned expansion. The opening of additional stores in new
geographic markets could present competitive and merchandising challenges
different from those we currently face within our existing geographic
markets. In addition, we
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may incur higher costs related to advertising, administration and
distribution as we enter new markets.
A number of factors could affect our ability to open new stores consistent
with our business plan. These factors could also affect the ability of any
newly opened stores to achieve sales and profitability levels comparable
with our existing stores, or become profitable at all. These factors
include:
. the identification and acquisition of suitable sites and the
negotiation of acceptable leases for these sites;
. the ability to obtain governmental and other third-party
consents, permits and licenses needed to operate our stores;
. the hiring, training and retaining of skilled personnel,
including buying staff;
. the availability of adequate management and financial resources;
. the adaptation of our distribution and other operational and
management systems to an expanded network of stores;
. the ability and willingness of vendors to supply merchandise on a
timely basis at competitive prices; and
. continued consumer demand for our products at levels that can
support acceptable profit margins.
Our continued growth also depends on our ability to increase sales in our
existing stores. The opening of additional stores in an existing market
could result in lower net sales at our existing stores in that market.
Our Success Depends on Purchasing Merchandise at Attractive Prices. The
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success of our business depends upon our ability to identify, locate,
select and purchase high quality merchandise at attractive prices. We have
no long-term contracts to purchase our merchandise. We compete with other
closeout merchandisers and wholesalers for merchandise.
Our Operations May Be Adversely Affected by a Change in Consumer Demand and
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Preferences. Our success depends on our ability to anticipate and respond
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in a timely manner to changes in consumer demand and preferences for
upscale home furnishings, gifts and related items. Consumer spending
patterns, particularly discretionary spending for our products, are
affected by, among other things, prevailing or perceived economic
conditions affecting disposable consumer income such as:
. employment;
. wages and salaries;
. business conditions;
. interest rates;
. availability of credit; and
. taxation.
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A significant decline from the projected demand for our products would
adversely affect us, either from lost sales or lower margins due to the
need to mark down excess inventory. Any sustained failure by us to
identify and respond to changes in consumer demand and preferences would
adversely affect us.
We Face Intense Competition. The retail home furnishings industry is
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highly competitive. We currently compete 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 we sell. We also compete in particular markets with a substantial
number of retailers that specialize in one or more types of home furnishing
products that we sell. In addition, we could face greater competition in
the future from e-commerce retailers. Some of these competitors have
substantially greater financial resources that may increase their ability
to initiate and sustain predatory price competition. A number of different
competitive factors could adversely affect our results of operations and
financial condition, including:
. increased operational efficiencies of competitors;
. competitive pricing strategies;
. expansion by existing competitors;
. entry by new competitors into markets in which we are currently
operating; and
. adoption by new or existing competitors of innovative store
formats or retail sales methods, including emphasis on e-
commerce.
We cannot assure you that we will be able to continue to compete
successfully with our existing or with new competitors.
Possible Declines in Comparable Store Sales May Adversely Affect Stock
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Price. A number of factors have historically affected, and will continue
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to affect, our comparable store sales results, including, among other
factors:
. competition;
. general regional and national economic conditions;
. consumer trends;
. changes in our product mix;
. timing of promotional events;
. new product introductions; and
. our ability to execute our business strategy effectively.
Declines in our comparable store sales results could cause the price of our
common stock to decrease substantially.
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Management Information Systems Are Critical to Our Operations. We have
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invested over $13.4 million since 1992 in computers, bar code scanners,
radio frequency terminals, software and related equipment, technology and
training. No significant expenditures for management information systems
are anticipated in the foreseeable future. The information from our
management information systems allows us to manage the flow of our
inventory on a real-time basis in order to make timely and accurate
purchasing, distribution and merchandising decisions. Our management
information systems are critical to our operations and any failure or
disruption in these systems could jeopardize our ability to manage our
existing operations and planned future growth and could adversely affect
our profitability.
Our Business is Highly Seasonal. Our business is highly seasonal, with a
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significant portion of our net sales and most of our operating income
generated during the fourth quarter, which includes the Christmas selling
season. Net sales in the fourth quarter accounted for over 40% of annual
net sales in each of 1997, 1998 and 1999, and operating income, excluding
recapitalization fees and expenses, for the fourth quarters of 1997, 1998
and 1999 accounted for approximately 71.5%, 64.8% and 58.6%, respectively,
of annual operating income for such years. Because a significant percentage
of our net sales and net income results from operations in the fourth
quarter, we have limited ability to compensate for shortfalls in fourth
quarter sales or earnings by changes in our operations or strategies in
other quarters. A significant shortfall in results for the fourth quarter
of any year will adversely affect our annual results of operations. Our
quarterly results of operations also may fluctuate significantly based on
factors such as:
. the timing of new store openings;
. the amount of net sales contributed by new and existing stores;
. the timing of certain holidays;
. changes in our merchandise;
. general economic, industry and weather conditions that affect
consumer spending; and
. actions of competitors.
We Have Substantial Indebtedness and Our Indebtedness Restricts Our
-------------------------------------------------------------------
Operations. As of December 31, 1999, we had total indebtedness of $239.7
----------
million and a stockholders' deficit of $35.9 million. In addition, we may
incur additional debt from time to time to finance working capital and
capital expenditures and for other general corporate purposes.
Our substantial indebtedness could have important consequences to our
business. For example, it could:
. increase our vulnerability to adverse economic and industry
conditions;
. require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital,
capital expenditures and other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
. place us at a disadvantage compared to our competitors that have
less debt; and
11
<PAGE>
. limit our ability to borrow additional funds.
In addition, failing to comply with our debt covenants could result in an
event of default which, if not cured or waived, could adversely affect us.
Our Largest Stockholder Controls Our Company. Madison Dearborn Capital
--------------------------------------------
Partners II, L.P. owns a majority of our outstanding voting stock, and
accordingly has the power to elect all of our directors and approve any
action requiring the approval of our stockholders, including adopting
amendments to our certificate of incorporation and approving certain
mergers or sales of substantially all of our assets. The interests of
Madison Dearborn Capital Partners II, L.P. may conflict with the interests
of other holders of our common stock.
Loss of Key Personnel Could Adversely Affect Our Business. Our future
---------------------------------------------------------
performance will depend, in large part, upon the efforts and abilities of
our senior management, particularly Jerry M. Smith, our Chief Executive
Officer, and our other key employees, including our buyers. The loss of
service of these persons could adversely affect our business and
development. Mr. Smith's employment agreement expires on December 31,
2000. Although Mr. Smith has indicated that he plans to remain as the Chief
Executive Officer of Tuesday Morning after the expiration of his employment
agreement, we cannot assure you that he will do so.
Purchasing Inventory from Foreign Vendors Could Affect our Business. We
-------------------------------------------------------------------
purchase a significant portion of our inventory from overseas vendors.
Changes in shipping costs, trade regulations, currency fluctuations or
other factors may create shortages and increase the cost of items that we
purchase from foreign vendors. Conversely, significant reductions in the
cost of these items in U.S. dollars may cause a significant reduction in
retail price levels of those products and may limit or eliminate our
ability to differentiate ourselves successfully from our competitors,
thereby adversely affecting our sales, margins and competitive position.
In addition, our shipping costs have increased recently, and these costs
may continue to fluctuate.
We Depend on a Single Distribution Center. All of our inventory is shipped
-----------------------------------------
directly from suppliers to our distribution center in the Dallas, Texas
metropolitan area, where the inventory is processed and then distributed to
our stores. We depend in large part on the orderly operation of this
receiving and distribution process, which depends, in turn, on adherence to
shipping schedules and effective management of the distribution center.
Although we believe that our receiving and distribution process is
efficient and well positioned to support our expansion plans, we cannot
assure you that we have anticipated all of the changing demands which our
expanding operations will impose on our receiving and distribution system
or that events beyond our control, such as disruptions in operations due to
labor disagreements or shipping problems, will not result in delays in the
delivery of merchandise to our stores.
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. We had leases for 381 open stores on December 31, 1999.
The leases for the stores open on December 31, 1999 provide for rentals, which
ranged from $2.04 to $22.57 per square foot per year, with an average annual
rental of $8.65 per square foot. The annual rent per store is generally below
$65,000 and store rent, as a percent of net sales, was 4.57% for the year ended
December 31, 1999. At December 31, 1999, the remaining maturities of such
leases ranged up 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 without penalty 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
12
<PAGE>
in opening new stores by allowing it to quickly and cheaply vacate a site that
does not meet sales expectations. As a result, we do not operate locations with
negative store level operating income.
Tuesday Morning owns approximately 633,000 square feet of building space in
the Dallas, Texas metropolitan area. This space houses our corporate offices,
warehouse distribution facilities and one store. In May 1997, Tuesday Morning
entered into a five-year lease for 280,000 square feet of warehouse space in the
same area. Since May 1999, Tuesday Morning has leased an additional 282,000
square feet of warehouse space near its corporate headquarters. This lease has
a primary term of eight years and three five-year options. These current
distribution facilities are supplemented with short-term rentals during peak
times each year. As Tuesday Morning continues to grow, additional warehouse
space will be required to meet our needs.
Item 3. LEGAL PROCEEDINGS
None.
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 fourth quarter ended December 31, 1999.
PART II
Item 5. MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's common stock have been traded in the over-the-
counter market under the Nasdaq symbol "TUES". The following table summarizes
the highest and lowest reported sale price per share for each fiscal quarter
since going public in April 1999, as reported by Nasdaq.
1999
----
High Low
---- ----
Second Quarter 26.188 15.000
Third Quarter 25.563 18.000
Fourth Quarter 26.750 16.000
The Company had approximately 1,500 beneficial owners of its common stock,
as well as 330 which were of record, as of March 20, 2000.
The Company has not paid cash dividends on its common stock since its
inception. The Board of Directors does not anticipate payment of any cash
dividends in the foreseeable future and intends to continue its present policy
of retaining earnings for reinvestment in the operations of the Company. The
Company's present bank credit agreement restricts the payment of dividends on
its common stock.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference to the
disclosure appearing on page 31 of our 1999 Annual Report to Stockholders.
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item 7 is incorporated by reference to the
disclosure appearing under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" from our 1999 Annual Report to
Stockholders.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is incorporated by reference to
the disclosure appearing under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Quantitative and Qualitative
Disclosures About Market Risk" from our 1999 Annual Report to Stockholders.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the
disclosure appearing on pages 13 to 27 of our 1999 Annual Report to
Stockholders.
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 our report on Form 8-K filed with the Commission on April
24, 1998.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to
the disclosure under the caption "Directors and Executive Officers" in our proxy
statement for the Annual Meeting of Stockholders on May 17, 2000.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the disclosure under the captions "Executive Compensation" and "Report of the
Compensation Committee" in our proxy statement for the Annual Meeting of
Stockholders to be held on May 17, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the disclosure under the caption "Beneficial Ownership of Common Stock" in our
proxy statement for the Annual Meeting of Stockholders to be held on May 17,
2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to
the disclosure under the caption "Certain Relationships and Related
Transactions" in our proxy statement for the Annual Meeting of Stockholders on
May 17, 2000.
14
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
Reference is made to the list on page F-1
of all financial statements filed or
incorporated herein by reference as a part
of this report.
(2) Financial Statement Schedules.
Reference is made to the list on page F-1
of the financial statement schedules filed
or incorporated herein by reference as
a part of this report.
(3) Exhibits
Reference is made to the Exhibit Index on
page E-1 for a list of all exhibits filed
or incorporated herein by reference as a
part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended December 31, 1999.
15
<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
Date: March 28, 2000 By: /s/ Jerry M. Smith
----------------------------------
Jerry M. Smith
Chief Executive Officer, President
and Chairman of the Board
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 28, 2000.
Name Title
---- -----
/s/ Jerry M. Smith Chief Executive Officer, President
- ---------------------------- and Chairman of the Board (Principal
Jerry M. Smith executive officer)
/s/ Mark E. Jarvis Sr. Vice President, Chief
- ---------------------------- Financial Officer (Principal
Mark E. Jarvis financial and accounting officer)
Director
- ----------------------------
William J. Hunckler, III
Director
- ----------------------------
Benjamin D. Chereskin
/s/ Robin P. Selati Director
- ----------------------------
Robin P. Selati
/s/ Sally Frame Kasaks Director
- ----------------------------
Sally Frame Kasaks
/s/ Henry F. Frigon Director
- ----------------------------
Henry F. Frigon
16
<PAGE>
TUESDAY MORNING CORPORATION
Index to Consolidated Financial Statements
and
Financial Statement Schedules
(Item 14(a))
The following is a listing of the consolidated financial statements which
are incorporated herein by reference from the Company's 1999 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
1999 Annual Report
------------------
to Stockholders
---------------
Page(s)
<S> <C>
Reports of Independent Public Accountants 14
Consolidated Balance Sheets as of December 31, 1999 and 1998 15
Consolidated Statements of Operations for the years ended December 31, 16
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the years 17
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 18
1999, 1998 and 1997
Notes to Consolidated Financial Statements for the years ended December 31, 19
1999, 1998 and 1997
</TABLE>
No financial statement schedules have been included in this report since
the required information is not present in amounts sufficient to require
submission of the schedules, or because the information required is included in
the consolidated financial statements or notes thereto.
With the exception of the consolidated financial statements and the
independent accountants' reports thereon listed in the above index, the
information referred to in Items 6, 7 and 7A and the financial information
referred to in Item 8, all of which is included in the Company's 1999 Annual
Report to Stockholders and incorporated by reference into this Form 10-K Annual
Report, the 1999 Annual Report to Stockholders is not to be deemed "filed" as
part of this report.
F-1
<PAGE>
TUESDAY MORNING CORPORATION
Index to Exhibits
(Item 14(a))
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of September 12, 1997, by and
among the Company, Tuesday Morning Acquisition Corp. ("Merger Sub")
and Madison Dearborn Partners, II, L.P. ("MDP") (1)
2.2 Amendment to the Agreement and Plan Merger, dated as of December 26,
1997 by and among the 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)
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)
E-1
<PAGE>
Exhibit
Number Description
- ------ -----------
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, 1998, 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 1
attached thereto. (1)
10.12 1999 Employee Stock Purchase Plan. (2)
13.0 Pages 13 to 33 of the Company's 1999 Annual Report to Stockholders
(3)
21.1 Subsidiaries of the Company. (2)
23.1 Consent of Arthur Andersen LLP (3)
23.2 Consent of KPMG LLP. (3)
27.1 Financial Data Schedule. (3)
(1) Incorporated by reference to the corresponding exhibits of the Company's
Registration Statement on Form S-4 (File No. 333-46017).
(2) Incorporated by reference to the corresponding exhibits of the Company's
Registration Statement on Form S-1 (File No. 333-74365).
(3) Filed herewith.
E-2
<PAGE>
EXHIBIT 13
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 13
- --------------------------------------------------------------------------------
index to financial statements
14
Reports of Independent Public Accountants
15
Consolidated Balance Sheets
as of December 31, 1999 and 1998
16
Consolidated Statements of Operations
for the years ended December 31, 1999, 1998 and 1997
17
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997
18
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
19
Notes to Consolidated Financial Statements
for the years ended December 31, 1999, 1998 and 1997
28
Management's Discussion and Analysis
of Financial Condition and Results of Operations
33
Store Locations
34
Shareholder Information
Separate financial statements of the Subsidiary Guarantors are not presented
herein because the parent company has no operations or assets separate from its
investment in the Subsidiary Guarantors. The Subsidiary Guarantors are wholly
owned and represent all of the direct and/or indirect subsidiaries of the parent
company and the guarantees of the Subsidiary Guarantors are full and
unconditional and joint and several with the other Subsidiary Guarantors.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 14
- --------------------------------------------------------------------------------
Reports of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Tuesday Morning
Corporation:
We have audited the accompanying consolidated balance sheets of Tuesday Morning
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the years 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 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, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 14, 2000
To the Board of Directors and Shareholders of Tuesday Morning Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit), and cash flows of Tuesday Morning Corporation
and Subsidiaries for the year 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 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 results of operations and cash flows of
Tuesday Morning Corporation and Subsidiaries for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 20, 1998, except for the last paragraph of Note 8
as to which the date is March 25, 1999
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 15
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
Tuesday Morning Corporation and Subsidiaries . (In thousands, except for share
data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1999 1998
-----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,795 $ 20,282
Inventories 141,534 96,743
Prepaid expenses 1,913 1,114
Other current assets 1,243 466
Deferred income taxes (note 2) -- 354
--------------------------
Total current assets 164,485 118,959
--------------------------
Property and equipment, at cost (notes 3 & 4) 71,924 60,355
Less accumulated depreciation & amortization (38,838) (36,263)
--------------------------
Net property and equipment 33,086 24,092
--------------------------
Other assets, at cost:
Due from officers (note 5) -- 3,345
Deferred financing costs 5,818 8,452
Other assets 327 471
--------------------------
Total Assets $ 203,716 $ 155,319
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Installments of mortgages (note 4) $ 1,671 $ 1,021
Installments of notes payable (note 6) 11,838 3,398
Installments of capital lease obligation (note 4) -- 161
Accounts payable 39,491 23,081
Accrued liabilities 12,266 11,946
Deferred income taxes (note 2) 547 --
Income taxes payable (note 2) 9,168 8,845
--------------------------
Total current liabilities 74,981 48,452
--------------------------
Mortgages on land, buildings and equipment (note 4) 7,056 2,552
Notes payable, excluding current installments (note 6) 155,227 198,065
Deferred income taxes (note 2) 2,400 2,209
Dividends payable on junior preferred -- 7,435
--------------------------
Total Liabilities 239,664 258,713
--------------------------
Senior exchangeable redeemable preferred stock, (note 7) par value $.01 per
share, authorized 1,000,000 shares, none issued at
December 31, 1999 and 283,891 issued at December 31, 1998 -- 28,231
Junior redeemable preferred stock, par value $.01 per share, authorized
150,000 shares, none issued at December 31, 1999 and 85,998 issued
at December 31, 1998 (note 7) -- 85,998
Commitments and contingencies (notes 6, 9, 11, 12, and 13)
Shareholders' equity (note 8)
Junior perpetual preferred stock, authorized 2,500 shares, none issued at
December 31, 1999 and 1,930 issued at December 31, 1998; par value $.01 per share -- 1,930
Common stock par value $.01 per share, authorized 100,000,000 shares; issued
38,847,326 shares at December 31, 1999 and 26,563,782 at December 31,1998 388 266
Additional paid-in capital 171,789 5,423
Retained deficit (208,125) (225,242)
--------------------------
Total Shareholders' Equity (35,948) (217,623)
--------------------------
Total Liabilities and Shareholders' Equity $ 203,716 $ 155,319
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 16
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
Tuesday Morning Corporation and Subsidiaries . (In thousands, except per share
amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 488,866 $ 396,095 $ 327,307
Cost of sales 312,106 257,037 208,432
-----------------------------------------------
Gross profit 176,760 139,058 118,875
Selling, general and administrative expenses 111,173 94,843 82,939
Recapitalization fees and expenses -- 129 33,960
-----------------------------------------------
Total expenses 111,173 94,972 116,899
-----------------------------------------------
Operating income 65,587 44,086 1,976
-----------------------------------------------
Other income (expense):
Interest income 415 441 325
Interest expense (21,311) (25,619) (3,215)
Gain on sale of land -- 1,329 --
Other income 732 1,123 596
-----------------------------------------------
(20,164) (22,726) (2,294)
-----------------------------------------------
Income (loss) before income taxes and extraordinary item 45,423 21,360 (318)
Income tax expense 17,164 8,208 3,246
-----------------------------------------------
Income (loss) before extraordinary item 28,259 13,152 (3,564)
Extraordinary item related to debt extinguishment,
net of tax benefit of ($1,641) (3,048) -- --
-----------------------------------------------
Net income (loss) $ 25,211 $ 13,152 $ (3,564)
===============================================
Income (loss) before extraordinary item $ 28,259 $ 13,152 $ (3,564)
Dividends on and accretion of preferred stocks (3,749) (10,966) (57)
Premium on redemption of senior preferred stock (4,345) -- --
-----------------------------------------------
Income (loss) available to common shareholders 20,165 2,186 (3,621)
Extraordinary item related to debt extinguishment, net of
tax benefit of ($1,641) (3,048) -- --
-----------------------------------------------
Net income (loss) available to common shareholders $ 17,117 $ 2,186 $ (3,621)
===============================================
Earnings per Share
Net income (loss) per Common Share - Basic
Income (loss) available to common shareholders $ 0.58 $ 0.08 $ (0.21)
Extraordinary item related to debt extinguishment (0.09) -- --
-----------------------------------------------
Net income (loss) available to common shareholders $ 0.49 $ 0.08 $ (0.21)
===============================================
Net income (loss) per Common Share - Diluted
Income (loss) available to common shareholders $ 0.55 $ 0.08 $ (0.21)
Extraordinary item related to debt extinguishment (0.09) -- --
-----------------------------------------------
Net income (loss) available to common shareholders $ 0.46 $ 0.08 $ (0.21)
===============================================
Weighted average number of common shares
and common share equivalents outstanding:
Basic 34,958 26,369 65,394
Diluted 36,750 27,825 65,394
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 17
- --------------------------------------------------------------------------------
Consolidated Statements Of Shareholders' Equity (Deficit)
Tuesday Morning Corporation and Subsidiaries . Years ended December 31, 1999,
1998, and 1997 . (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Junior Perpetual Total
Common Stock Additional Preferred Stock Retained Treasury Stock Shareholders'
----------------- Paid-In ----------------- Earnings ------------------ Equity
Shares Amount Capital Shares Amount (Deficit) Shares Amount (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 85,904 $ 859 $ 17,863 -- $ -- $ 58,834 (2,884) ($2,028) $ 75,528
Net loss -- -- -- -- -- (3,564) -- -- (3,564)
Exercise of options 539 5 515 -- -- -- -- -- 520
Shares issued in connection with
Employee Stock Option Plan 602 6 411 -- -- -- -- -- 417
Treasury shares sold in connection
with Stock Purchase Plan -- -- (114) -- -- -- -- -- (114)
Redeem shares from shareholders (87,045) (870) (18,408) -- -- (282,641) 2,884 2,028 (299,891)
Issuance of common shares 24,500 245 4,755 -- -- -- -- -- 5,000
Issuance of junior perpetual
preferred shares -- -- -- 2 1,930 -- -- -- 1,930
Issuance of common shares to
senior preferred shareholders 1,750 18 339 -- -- -- -- -- 357
Dividends on junior and senior
preferred stock -- -- -- -- -- (57) -- -- (57)
---------------------------------------------------------------------------------------------
Balance at December 31, 1997 26,250 263 5,361 2 1,930 (227,428) -- -- (219,874)
---------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 13,152 -- -- 13,152
Dividends on junior and senior
preferred stock -- -- -- -- -- (10,936) -- -- (10,936)
Accretion of discount on senior
preferred stock -- -- -- -- -- (30) -- -- (30)
Shares issued in connection with
Employee Stock Option Plan 314 3 62 -- -- -- -- -- 65
---------------------------------------------------------------------------------------------
Balance at December 31, 1998 26,564 266 5,423 2 1,930 (225,242) -- -- (217,623)
---------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 25,211 -- -- 25,211
Dividends on junior and senior
preferred stock -- -- -- -- -- (3,739) -- -- (3,739)
Accretion of discount on senior
preferred stock -- -- -- -- -- (10) -- -- (10)
Shares issued in connection with
Employee Stock Option Plan/
Stock Purchase Plan 288 2 84 -- -- -- -- -- 86
Shares issued/fees incurred in
connection with IPO 5,515 55 75,898 -- -- -- -- -- 75,953
Redemption of junior preferred
stock -- -- -- (2) (1,434) -- -- -- (1,434)
Shares issued in connection with
conversion of junior preferred
stock 6,481 65 90,384 _ (496) -- -- -- 89,953
Premium on redemption of
senior preferred stock -- -- -- -- -- (4,345) -- -- (4,345)
---------------------------------------------------------------------------------------------
Balance at December 31, 1999 38,848 $ 388 $ 171,789 -- $ -- ($208,125) -- $ -- ($ 35,948)
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 18
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Tuesday Morning Corporation and Subsidiaries . (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income (loss) $ 25,211 $ 13,152 $ (3,564)
Depreciation
and amortization 4,997 5,395 5,058
Amortization of financing fees 1,356 1,499 189
Extraordinary item, net of tax 3,048 -- --
Deferred income taxes 1,092 (971) (32)
(Gain) Loss on disposal of fixed assets 13 (1,329) --
Change in operating assets and liabilities:
Inventories (44,791) 2,444 (23,694)
Prepaid expenses (799) (55) (98)
Other current assets (777) 126 152
Other assets 144 202 (327)
Accounts payable 16,410 828 (290)
Accrued liabilities 320 (26,098) 30,302
Income taxes payable 1,964 8,845 (6,483)
------------------------------------------
Total adjustments (17,023) (9,114) 4,777
------------------------------------------
Net cash provided by operating activities 8,188 4,038 1,213
------------------------------------------
Net cash flows from investing activities:
Loans to officers -- -- (2,259)
Repayments of loans from officers 3,345 298 1,419
Proceeds from sale of assets 33 7,187 --
Capital expenditures (14,036) (4,705) (5,310)
------------------------------------------
Net cash (used in) provided by investing activities (10,658) 2,780 (6,150)
------------------------------------------
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)
Payment of debt and mortgages (4,745) (9,558) (1,021)
Proceeds from mortgage 6,500 -- --
Partial redemption of Senior Subordinated Note & prepayment premium (34,410) -- --
Principal payments under capital lease obligation (161) (222) (624)
Proceeds from exercise of common
stock options/stock purchase plan 86 65 823
Redeem Junior Preferred Stocks (7,382) -- --
Redeem Senior Exchangeable Redeemable Preferred Stock (33,858) -- --
Net proceeds from IPO 75,953 -- --
------------------------------------------
Net cash (used in) provided by financing activities 1,983 (10,037) 17,684
------------------------------------------
Net change in cash and cash equivalents (487) (3,219) 12,747
Cash and cash equivalents at beginning of period 20,282 23,501 10,754
------------------------------------------
Cash and cash equivalents at end of period $ 19,795 $ 20,282 $ 23,501
==========================================
Supplemental cash flow information:
Interest paid $ 22,691 $ 23,455 $ 3,026
Income taxes paid 14,491 398 9,703
Non-cash equity information:
Dividends Declared
Junior Preferred Stocks 2,469 7,396 39
Senior Exchangeable Redeemable Preferred Stock 1,270 3,540 18
Senior Exchangeable Redeemable Preferred Stock accretion 10 30 --
Premium on redemption of Senior Preferred Stock 4,345 -- --
Non-cash items:
Conversion of Junior Perpetual Preferred Stock 553 -- --
Conversion of Junior Redeemable Preferred Stock 89,400 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 19
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation - The accompanying consolidated financial statements
include the accounts of Tuesday Morning Corporation, a Delaware Corporation, and
its wholly-owned subsidiaries: TMI Holdings, Inc., Tuesday Morning, Inc., Nights
of the Week, Inc., Days of the Week, Inc., Tuesday Morning Partners, LTD., and
Friday Morning, Inc. (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company owned and operated 382 deep discount retail stores in 38 states at
December 31, 1999 (347 and 315 stores at December 31, 1998 and 1997,
respectively). The Company sells close-out housewares and related gift
accessories, which it purchases at below wholesale prices. Company stores are
typically open for eight 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
$17,805 at December 31,1999 and $17,105 at December 31, 1998 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:
Depreciable lives
Buildings 30 years
Furniture and fixtures 7 years
Equipment 5 to 7 years
Improvements to leased premises are amortized on a straight-line basis over the
shorter of their useful lives or the 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.
(g) Pre-opening Costs - The Company previously 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 adopted this new accounting standard in January 1999 at which time all
remaining unamortized capitalized start-up costs were expensed.
(h) Advertising - Costs for newspaper, radio, and other media are expensed as
the advertised events take place. Advertising expense for 1999, 1998 and 1997
was $23,212, $20,550, and $18,438, 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 enters into foreign exchange
contracts to hedge its foreign currency transactions related to specific
purchase orders for merchandise. Net losses for 1999 and 1997 totaled $91 and
$159, respectively, while net gains totaled $78 for 1998.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
The Company adopted the provisions of Statement of Financial Accounting Standard
(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.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 20
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
(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.
(m) Net income (loss) per common share - Basic net income (loss) per common
share for the years ended December 31, 1999 and 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 years ended December 31, 1999 and 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 year ended December 31, 1997, for the
purposes of this calculation, the weighted average number of shares and net
income available to common shareholders has been adjusted to reflect the
Recapitalizaton (See Note 8). The difference between the Company's basic and
diluted weighted average common shares outstanding is due to dilutive common
stock options outstanding. (See Notes 14 and 15.)
(n) Reclassifications - Certain prior year amounts have been reclassified to
conform to the current period presentation.
(2) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997 consists of:
Current Deferred Total
Year ended December 31, 1999
U.S. Federal $ 12,990 $ 775 $ 13,765
State, local and other 1,441 317 1,758
-------- -------- --------
Total $ 14,431 $ 1,092 $ 15,523
======== ======== ========
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
======== ======== ========
A reconciliation of the expected Federal income tax expense (benefit) to actual
tax expense follows (based upon a tax rate of 35% for 1999 and 1998, and 34% for
1997)
1999 1998 1997
Expected Federal income
tax expense (benefit) $ 14,257 $ 7,476 $ (108)
Recapitalization expenses
not deductible
for Federal taxes -- (60) 3,029
State income taxes, net of
related Federal tax effect 1,143 824 425
Other, net 123 (32) (100)
-------- -------- --------
Total tax expense $ 15,523 $ 8,208 $ 3,246
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
1999 1998
Deferred tax assets:
Current:
Compensated absences $ 302 $ 219
Percentage rent 271 166
State NOL carryforward - 172
Other accrued liabilities 445 637
--------- --------
Total gross deferred assets $ 1,018 $ 1,194
========= ========
Deferred tax liabilities:
Current:
Inventory costs $ 775 $ 314
Prepaid supplies 609 304
Other current 181 214
Non-current:
Property and equipment 2,385 2,202
Other non-current 15 15
--------- --------
Total gross deferred liabilities $ 3,965 $ 3,049
--------- --------
Net deferred tax liability $ 2,947 $ 1,855
========= ========
Management expects the deferred tax assets at December 31, 1999 to be fully
recovered and the deferred tax liabilities at December 31, 1999 to be fully
satisfied through the reversal of taxable temporary differences in future years
as a result of normal business activities. Accordingly, no reduction allowances
for deferred tax items were considered necessary as of December 31, 1999 or
1998.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT-- PAGE 21
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
(3) PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation, consist of the
following at December 31, 1999 and 1998:
1999 1998
Land $ 4,374 $ 2,498
Buildings 19,438 13,952
Furniture and fixtures 24,281 22,838
Equipment 20,766 18,446
Leasehold improvements 3,065 2,621
--------- ---------
$ 71,924 $ 60,355
Less accumulated depreciation (38,838) (36,263)
--------- ---------
Total $ 33,086 $ 24,092
========= =========
(4) MORTGAGES ON LAND, BUILDINGS AND EQUIPMENT/CAPITAL LEASE OBLIGATIONS
Mortgages consist of the following at December 31, 1999 and 1998:
1999 1998
Note payable to bank, in monthly
installments of $85 plus interest $ 2,552 $ 3,573
Note payable to bank, in monthly
installments of $54 plus interest 6,175 --
--------- ---------
Total 8,727 3,573
Less current installments (1,671) (1,021)
--------- ---------
Total long term $ 7,056 $ 2,552
========= =========
The mortgage note with a December 31, 1999 balance of $2,552 is secured by land
and buildings and bears interest at LIBOR plus 2.13% (8.59% at December 31,
1999) with principal and interest due monthly. It matures on June 10, 2002.
In June 1999, the Company purchased a warehouse for $6.5 million that it had
been leasing. This was financed through a ten-year mortgage with a floating
interest rate, (7.91% at December 31, 1999) with principal and interest due
monthly. This mortgage with a December 31, 1999 balance of $6,175 matures June
3, 2009.
In connection with these mortgages, the Company is required to maintain a
minimum net worth and comply with other financial covenants. At December 31,
1999, the Company is in compliance with these covenants.
The maturities of the mortgages are as follows:
Year Amount
2000 $ 1,671
2001 1,671
2002 1,160
2003 650
2004 650
2005 and thereafter 2,925
--------
Total $ 8,727
========
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 balance of this capital lease was fully paid during 1999. At the end
of the lease term, the Company exercised its bargain purchase option.
(5) DUE FROM OFFICERS
At December 31, 1998, the amount due from officers was $3,345. These receivables
were a continuation of prior years notes and were paid back in 1999.
(6) NOTES PAYABLE
At December 31, 1999 and 1998, notes payable consisted of the following:
1999 1998
Senior Credit Facility $ 98,065 $ 101,463
Senior Subordinated Notes 69,000 100,000
---------- ----------
Total 167,065 201,463
Less current portion (11,838) (3,398)
---------- ----------
Total long term $ 155,227 $ 198,065
========== ==========
Senior Credit Facility - In connection with the Recapitalization (see Note 8),
the Company entered into a Senior Credit Facility agreement on December 29,
1997, which provides for (i) a revolving credit facility of $90,000 which,
subject to certain conditions, can be increased to $115,000 and (ii) 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 was to 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 has been reduced several times due to the improvement in the
leverage ratio. In early 2000 it was reduced to the lowest rate allowed by the
agreement, LIBOR plus 1.25% or the alternate base rate plus 0.25%.
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 were to 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 has been reduced several times due
to the improvement in the leverage ratio. In early 2000 it was reduced to the
lowest rate
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 22
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
allowed by the agreement, Tranche A term at LIBOR plus 1.25% or the alternate
base rate plus 0.25% and Tranche B at LIBOR plus 2.50% or the alternate base
rate plus 1.50%.
The Company had no balances outstanding related to the revolving line of credit
at December 31, 1999. The remaining availability under the credit facility was
$61,600 at December 31, 1999. As of December 31, 1999 and 1998 the Company had
outstanding letters of credit of $1,452 and $2,873 for inventory purchases.
The total outstanding balances of Tranches A and B were $32,832 and $65,233 at
the end of December 31, 1999 and $35,568 and $65,895 at December 31, 1998,
respectively. The interest rates on the Tranche A and B term loans at December
31, 1999 were 7.97% and 8.97%, respectively. The Company incurs commitment fees
of up to 0.50% on the unused portion of the Revolving Credit Facility. This rate
has also recently been reduced to the lowest rate allowed by the agreement to
0.25% on the unused portion of the Revolving Credit Facility due to the
Company's improved leverage ratio as defined by the loan covenants.
Scheduled, mandatory principal payments for the term loans are as follows:
Year Amount
2000 $ 6,135
2001 9,782
2002 18,902
2003 662
2004 62,584
---------
Total $ 98,065
=========
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. As of December 31, 1999 an excess cash flow payment of $6,220 is
to be made in 2000.
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, 1999, 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. On May 18, 1999, the Company used proceeds
from its Initial Public Offering to redeem $31 million of the notes. 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.
Twelve Month Period Percentage of
Beginning December 15 Principal Amount
2002 105.50%
2003 103.67%
2004 101.83%
2005 and thereafter 100.00%
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, 1999, the
Company is in compliance with the covenants.
(7) REDEEMABLE PREFERRED STOCK
Senior Preferred Stock - On December 29, 1997, in connection with the
Recapitalization (see Note 8), 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 becomeseparately 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 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.
As permitted, on May 14, 1999, the Company redeemed for cash all the outstanding
shares of Senior Preferred Stock within 20 days of its initial public offering
of the Company's common stock at a redemption price per share equal to 113.25%
of the aggregate liquidation value.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 23
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
Junior Preferred Stock - 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, payable 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. On April 22, 1999, in connection
with the Initial Public Offering, the Company redeemed a portion of the Junior
Redeemable Preferred stock and Junior Perpetual Preferred stock. The remaining
Junior stock shares were converted to common stock.
(8) SHAREHOLDERS' EQUITY
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
to pay $324,896 as Recapitalization consideration and to pay $18,937 in
transaction fees and expenses.
On December 29, 1997, in connection with the Recapitalizaton, the Company
repurchased and retired all outstanding common stock and stock options. All
treasury shares were canceled. New common shares totaling 26,249,951 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, payable quarterly. When paid, dividends must be paid
in cash.
The financing consisted of $100,000 from the sale of Senior Subordinated Notes,
and 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,
1999, and 1998. During 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:
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
=========
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.
Initial Public Offering - 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. 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.
The early partial redemption of the Senior Subordinated debt resulted in a
prepayment penalty of approximately $3.4 million and the write-off of related
unamortized deferred financing fees of approximately $1.3 million netting to an
extraordinary charge of approximately $3.0 million, net of tax.
Net proceeds from IPO $ 75,953
Redemption of Junior Preferred Stock (7,382)
Redemption of Senior Preferred Stock (33,858)
Partial paydown of Senior Subordinated Note (34,410)
Includes prepayment premium of $3.4 million
Interest Income 179
--------
Increase in working capital $ 482
========
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 24
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
Stock Option Plan - After the Recapitalization, the Company established a stock
option plan (the "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 Plan authorizes grants of options to
purchase up to 4,800,000 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 Plan have vesting periods from three to five years.
The exercise prices of the options range between $0.20 and $19.13, which
approximates fair value on the grant date of the shares of common stock into
which such options are exercisable. At December 31, 1999, there were 2,308,453
additional shares available for grant under the Plan.
Following is a summary of transactions relating to the Plan's options for the
three years ended December 31, 1999:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding at December 31, 1996 -- --
Exercised during year -- --
Canceled during year -- --
Granted during year 875,000 $ 0.20
------------------------
Outstanding at December 31, 1997 875,000 0.20
Exercised during year (313,845) 0.20
Canceled during year (150,584) 0.20
Granted during year 1,675,975 0.31
------------------------
Outstanding at December 31, 1998 2,086,546 $ 0.29
Exercised during year (243,891) 0.23
Canceled during year (32,604) 0.73
Granted during year 80,000 15.52
------------------------
Outstanding at December 31, 1999 1,890,051 $ 0.93
========================
As of December 31, 1999 and 1998, 600,609 and 272,069, respectively, of options
outstanding were exercisable.
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:
1999 1998 1997
Net income (loss)
As reported $25,211 $ 13,152 $ (3,564)
Pro forma $25,141 13,126 (3,567)
Net income (loss) per
common share diluted
As reported $ 0.46 0.08 (0.21)
Pro forma 0.46 0.08 (0.21)
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 1999, 1998 and 1997,
respectively: the risk free interest rate of 6.5%, 4.7%, and 6.1%, expected
dividend yield of zero for all years, expected lives of 6.2 years, 6.5 years,
and 5.0 years, and expected volatility of 46.0% for 1999 and zero percent for
1998 and 1997 as the Company did not have publicly traded stock.
Stock Split - On March 25, 1999, the Company declared a seven-for-one stock
split effective in the form of a dividend for shareholders of common stock. The
consolidated financial statements and the notes have been adjusted to reflect
the stock split on a retroactive basis.
(9) 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:
Year Amount
2000 $ 22,720
2001 20,104
2002 15,624
2003 11,140
2004 5,997
2005 and thereafter 8,191
----------
Total minimum rental payments $ 83,776
==========
Rental expense (base minimum rent and rent based on sales) for 1999, 1998 and
1997 was $23,466, $20,324, and $17,614 respectively. Rent expense includes rent
for store locations and warehouses. Rent based on sales is not significant to
the Company.
(10) 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 20% 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 $502, $455, and $433 during the years
ended December 31, 1999, 1998 and 1997, respectively.
(11) FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998, the Company had approximately $8,900 and
$4,653 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.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 25
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
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 stock as of December 31, 1999
and 1998:
1999 1998
----------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets
Notes receivable $ -- $ -- $ 3,345 $ 3,291
Liabilities:
Foreign exchange
contracts
Unrealized (gain) -- -- -- (28)
Unrealized loss -- 459 -- 55
Variable rate
long-term debt 106,792 106,792 105,036 105,036
Senior Subordinated
Notes 69,000 69,000 100,000 100,000
Senior Exchangeable
Redeemable
Preferred Stock -- -- 28,231 28,558
Junior Redeemable
Preferred Stock -- -- 85,998 85,998
The fair value of the Company's notes receivable at December 31, 1998 is less
than the carrying value as the notes earn interest at a rate less than market.
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.
(12) 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. This service was discontinued after the Company became public in early
1999.
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. The Chairman retired in September 1999 resulting
intermination of related agreements.
(13) 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.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 26
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
(14) EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (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,
1999 1998 1997
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
Basic EPS:
Income (loss) before extraordinary item $ 28,259 $ 13,152 $ (3,564)
Less:
Junior preferred dividends (3,739) (7,396) (7,034)(1)
Senior preferred dividends (10) (3,540) (3,313)(1)
Senior preferred accretion and premium on redemption
of senior preferred stock (4,345) (30) --
------------------------------------------
Income (loss) available to common shareholders 20,165 2,186 (13,911)
Extraordinary item related to debt extinguishment (net of tax) (3,048) -- --
------------------------------------------
Net income (loss) available to common shareholders $ 17,117 $ 2,186 $(13,911)
------------------------------------------
Weighted average common shares prior to Recapitalization -- -- 82,502(1)
Impact for Recapitalization-embedded stock split -- -- 0.79(1)
-- -- 65,176
Weighted average common shares post Recapitalization 34,958 26,369 218(2)
------------------------------------------
Weighted average number of common shares outstanding 34,958 26,369 65,394
------------------------------------------
Net income (loss) per common share $ 0.49 $ 0.08 $ (0.21)
------------------------------------------
Diluted EPS:
Net income (loss) available to common shareholders $ 17,117 $ 2,186 $(13,911)
------------------------------------------
Effect of dilutive securities:
Weighted average common equivalent shares from stock options 1,792 1,456 (3)
Weighted average number of common shares outstanding 34,958 26,369 65,394
------------------------------------------
Weighted average number of common shares and common stock
equivalents outstanding 36,750 27,825 65,394
------------------------------------------
Net income (loss) per common share $ 0.46 $ 0.08 $ (0.21)
------------------------------------------
</TABLE>
1) For the year ended December 31, 1997, 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
new 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.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 27
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Tuesday Morning Corporation and Subsidiaries . December 31, 1999, 1998 and 1997
. (All amounts in thousands, except for share amounts)
- --------------------------------------------------------------------------------
(15) PRO FORMA EARNINGS PER COMMON SHARE (unaudited)
The schedule below provides a pro forma comparison of income per share for 1999
and 1998. It assumes that the initial public offering of April 1999 had taken
place on January 1, 1998.
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998
(Amounts in thousands, except per share amounts)
<S> <C> <C>
Net income available to common shareholders $ 17,068 $ 2,186
Plus:
Preferred Dividends/Discount Accretion 3,748 10,966
Premium on redemption of senior preferred stock 4,395 --
Interest expense from $31 million notes payment, net of tax 852 2,239
Extraordinary item related to debt extinguishment, net of tax 3,048 --
-----------------------------------
Pro forma income available to common shareholders $ 29,111 $ 15,391
-----------------------------------
Basic EPS:
Weighted average common shares 38,155 37,715
-----------------------------------
Net income per common share $ 0.76 $ 0.41
-----------------------------------
Diluted EPS:
Weighted average number of common shares and common share
equivalents outstanding 39,947 39,171
-----------------------------------
Net income per common share $ 0.73 $ 0.39
-----------------------------------
</TABLE>
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1999 and 1998 follows:
<TABLE>
<CAPTION>
Quarters Ended
March 31,1999 June 30,1999 Sept. 30,1999 Dec. 31,1999
<S> <C> <C> <C> <C>
Net Sales $ 71,761 $ 107,681 $ 113,493 $ 195,931
Comparable store sales increase 13.1% 16.6% 16.7% 10.3%
Gross profit $ 28,374 $ 35,578 $ 41,352 $ 71,457
Operating income $ 5,860 $ 8,557 $ 12,743 $ 38,428
Net income (loss) $ 435 $ (837) $ 4,592 $ 21,021
Net income (loss) available to
Common shareholders $ (2,423) $ (6,122) $ 4,592 $ 21,021
EPS - Diluted $ (0.09) $ (0.18) $ 0.11 $ 0.52
<CAPTION>
Quarters Ended
March 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998
<S> <C> <C> <C> <C>
Net Sales $ 58,811 $ 84,829 $ 78,485 $ 173,970
Comparable store sales increase 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 $ (0.15) $ (0.15) $ (0.05) $ 0.40
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 28
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Tuesday Morning Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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, grew nationwide, increasing our store base to 390
stores in 38 states as of February, 2000.
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 $8.65 per square foot, are significantly lower than
those of many other retailers. Of the new stores opened in 1999, we spent
approximately $75,000 per store for fixture and start-up costs, plus an
additional $174,000 for on-hand inventory. Average sales per store and store
level operating income in 1999 were $1,319,000 and $196,000 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 $13.4 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 1996 reflect these initiatives. In 1999 Tuesday Morning recorded
net sales of $488.9 million and operating income of $65.6 million, representing
compounded annual growth of 23.9% and 47.6%, respectively, since 1996. Our sales
growth has been driven by new store openings as well as annual increases in
comparable store sales of 18.3%, 12.1% and 13.3% in 1997, 1998 and 1999,
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, 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.
Tuesday Morning became a publicly traded company again in April, 1999. See Note
8 to the Consolidated Financial Statements for a discussion of the initial
public offering.
Despite significant leverage, we have continued to operate profitably (excluding
recapitalization fees and expenses in 1997) and to expand our store base, adding
35 stores in 1999. Additionally, we anticipate adding a total of at least 45
stores to our store base in 2000 and at least 50 stores in 2001. 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
Year Ended December 31
1997 1998 1999
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.7 64.9 63.8
-------------------------------
Gross profit 36.3 35.1 36.2
Selling, general and
administrative expense 25.3 23.9 22.7
Recapitalizaton fees and
expenses 10.4 -- --
-------------------------------
Operating income 0.6 11.1 13.5
Net interest and other
income (expense) (0.7) (5.7) (4.1)
-------------------------------
Income (loss) before income
taxes and extraordinary item (0.1) 5.4 9.4
Income tax expense (1.0) (2.1) (3.5)
-------------------------------
Net income (loss) before
extraordinary item (1.1) 3.3 5.9
Extraordinary item related to
debt extinguishment
(net of tax) -- -- (0.6)
-------------------------------
Net income (1.1)% 3.3% 5.3%
===============================
Number of stores open
at end of period 315 347 382
1999 Compared to 1998
Net sales for the year increased $92.8 million or 23.4% to $488.9 million from
$396.1 million in 1998. This increase was attributable to a 13.3% increase in
comparable store sales and $37.4 million in sales from new stores. Our
comparable store sales increase was the result of increases in both the number
of transactions and the average transaction value per customer. Average annual
sales per store increased 12.6% to $1,319,000 from $1,171,000 in 1998.
Gross profit increased $37.7 million or 27.2% due to the increase in sales and
an increase in the gross profit percentage. In 1999 our gross profit percentage
increased to 36.2% from 35.1% in 1998. This 1.1% increase was due to a .6%
improvement in initial margin, a 1.2% improvement in markdowns offset by a .7%
increase in buying, distribution and freight costs. In 1998 our markdowns were
higher than normal due to the liquidation of our fine jewelry inventory which
was planned as part of our 1997 recapitalization. Buying, distribution and
freight costs increased due to international freight rate increases and
additional distribution costs due to an additional warehouse which was leased in
May 1999 and the addition of a second shift in our main warehouse.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 29
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Tuesday Morning Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Selling, general and administrative expenses increased $16.3 million or 17.2%.
This increase is attributable to the additional stores, inflationary increases
and increases in variable expenses. As a percentage of sales these expenses
decreased 1.2% from 23.9% to 22.7% which was the result of the leverage obtained
as a result of our strong comp store sales increases.
Interest expense decreased $4.3 million due to the paydown in April 1999 of $31
million of senior subordinated debt and a $3 million scheduled reduction of our
notes payable.
Extraordinary expense consists of costs associated with the write-off of
financing fees and premium paid on the early redemption of $31 million Senior
Subordinated notes that was paid down with proceeds from the IPO.
Income tax expense increased $9.0 million to $17.2 million in 1999 from $8.2
million in 1998. This increase was due to higher levels of income in 1999 as
compared to 1998. Our effective income tax rate was 37.8% in 1999 and was 38.4%
in 1998 due to a realignment of our operations which reduced taxes in various
states.
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.
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 1997, 1998 and 1999 were $1.2
million, $4.0 million and $8.2 million, respectively. Net cash flows from
operating activities were low 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. The increase in
1999 was attributable to an increase in net income offset by an increase in
inventories which increased due to earlier planned 2000 shipments, an increase
in the number of stores and timing increases due to Y2K concerns. Cash and cash
equivalents as of December 31, 1997, 1998 and 1999 were $23.5 million and $20.3
million and $19.8 million, respectively.
Capital expenditures, principally associated with new store openings and
warehouse systems enhancements, were $5.3 million, $4.7 million and $14.0
million for 1997, 1998, and 1999, respectively. In 1999 we spent $6.5 million to
purchase a warehouse which we previously leased. In 2000, we expect to spend
$7.0 million for capital expenditures due to an increased store opening plan.
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, 1999 and 1998 we had outstanding $98.1 million and $101.5 million under the
term loans and no amounts outstanding under the revolving credit facility.
Remaining availability is based on eligible inventory and was $61.6 million at
December 31, 1999 and $40.6 million at December 31, 1998. The term A loan ($35.6
at December 31, 1998 and $32.8 at December 31, 1999) and the revolving credit
facility loans will mature in December 2002, and the term B loan ($65.9 million
at December 31, 1998 and $65.2 million at December 31, 1999) 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 the loans outstanding
under the revolving credit facility may not exceed $15.0 million.
Tuesday Morning's indebtedness under the senior credit facility is secured by a
lien on Tuesday Morning's inventory, tangible personal property and a second
mortgage on its owned real property and a pledge of Tuesday Morning's ownership
interests in all of its subsidiaries. Tuesday Morning has granted a first lien
on all of its owned real property to a real estate lender to secure the
repayment of a note which had a balance of approximately $3.6 million at
December 31, 1998 and $2.6 million at December 31, 1999.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 30
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Tuesday Morning Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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.
In March 1999, Tuesday Morning offered to exchange all of its shares of junior
redeemable preferred stock and junior perpetual preferred stock for shares of
its common stock, subject to the consummation of an initial public offering.
Holders of $89.9 million of junior redeemable preferred stock and $0.6 million
of junior perpetual preferred stock (such amounts representing these shares'
liquidation value plus accrued but unpaid dividends) elected to exchange their
shares of preferred stock for a number of shares of common stock equal to such
amounts divided by the per share offering price of the common stock offered in
the public offering, net of underwriting discount. Holders of $5.8 million of
junior redeemable preferred stock and $1.6 million of junior perpetual preferred
stock elected not to exchange their shares for common stock. Tuesday Morning
redeemed these shares in connection with the public offering for a redemption
price equal to approximately $1,112 per share (the shares' liquidation value
plus accrued but unpaid dividends).
In addition, Tuesday Morning used a portion of the net proceeds from the
offering to redeem all of the senior exchangeable redeemable preferred stock at
an aggregate redemption price of approximately $33.9 million. Tuesday Morning
also used approximately $34.4 million of the net proceeds from the offerings to
redeem a portion of the senior subordinated notes. After the application of the
net proceeds from the offerings Tuesday Morning had no shares of preferred stock
outstanding and $69 million principal amount of the senior subordinated notes
outstanding. 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 interest payments
through 2000.
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 40% of annual net sales in
each of the last three years, and operating income excluding recapitalization
fees and expenses for the fourth quarters of 1997, 1998 and 1999 accounted for
approximately 71.5%, 64.9% and 58.6%, respectively, of annual operating income
for such years.
The following tables set forth certain quarterly financial data as percentages
of net sales, except the number of stores open at end of period date, for the
eight quarters ended December 31, 1999. The quarterly information is unaudited
but has been prepared on the same basis as the audited financial statements
included elsewhere in this Annual Report. 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
conjunction with Tuesday Morning's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report. The results of operations for
any quarter are not necessarily indicative of the results for any future
period.
Three months ended
3/31/99 6/30/99 9/30/99 12/31/99
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 39.5 33.0 36.4 36.5
Operating Income 8.2 8.0 11.2 19.6
Net income (loss) 0.6 (0.8) 4.1 10.7
Number of stores
open at end
of period 354 365 368 382
Three months ended
3/31/98 6/30/98 9/30/98 12/31/98
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 38.0 32.2 39.2 33.7
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
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 fell in the third quarter of 1999,
whereas in 1998 the opening day of that sales event fell in the fourth quarter.
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 used the proceeds of $75.9 million to redeem 31% 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 converted all of the remaining shares of Junior Preferred
Stocks into common stock. In connection with the early redemption of a portion
of the Senior Subordinated Notes, the Company incurred an extraordinary charge,
net of income taxes, of approximately $3.0 million in the second quarter of
1999.
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 2001.
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT -- PAGE 31
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Tuesday Morning Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Year 2000 Compliance
In anticipation that year 2000 issues (Y2K) could adversely affect our ability
to conduct our business we polled our vendors, freight companies, ports of entry
and U.S. Customs. We also tested all of our computer software and hardware. We
also received assurance from our banks and credit card processors. As a result
of our reviews, we made several system upgrades and modified several software
programs. The total cost of these modifications, excluding scheduled upgrades,
was $110,000. We experienced no significant Y2K related problems.
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 1999, 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 statement and were immaterial to
us as a whole in 1999. At December 31, 1999, we had outstanding forward foreign
currency contracts to purchase approximately $8.9 million of various currencies
with maturities ranging between 15 and 217 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, 1999, 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 1 and 11 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, 1999. 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 6 and 11 in Notes to Consolidated
Financial Statements for further information on our debt.
Based on our market risk sensitive instruments outstanding at December 31, 1999,
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.
Inventory
The Company's inventory increased $44.8 million during 1999 to $141.5 million
as the Company increased its store count by 35 to a total of 382 locations.
Inventory in the warehouse at December 31, 1999 was $32.2 million higher than at
December 31, 1998. This increase is primarily due to two reasons. The first
event of 2000 was earlier than previous first events, and in order to assure
that the stores received inventory for this earlier opening and to be better
positioned in the event of any Y2K disruption, the warehouse scheduled more
processing to be done in the later part of 1999.
Total Inventory Levels by Location
($ millions)
12/31/99 12/31/98 12/31/97
Stores $ 71.4 $ 58.8 $ 61.5
Warehouse 70.1 37.9 37.7
------------------------------------
Total $ 141.5 $ 96.7 $ 99.2
====================================
Inventory on a per store basis was abnormally low at December 31, 1998. This was
due to our conservative reaction to the impact of (i) the Asian economy in late
1998 and (ii) the volatility of the United States stock market in the fall of
that year. We have brought inventory back to acceptable levels at December 31,
1999.
Per Store Inventory Levels by Location
($ thousands)
12/31/99 12/31/98 12/31/97
Stores $ 187 $ 169 $ 195
Warehouse 184 109 120
------------------------------------
Total $ 371 $ 278 $ 315
====================================
Store Count 382 347 315
<PAGE>
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1999 ANNUAL REPORT -- PAGE 32
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Tuesday Morning Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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, 1999,
is derived from the audited Consolidated Financial Statement of Tuesday Morning.
The selected consolidated financial and operating data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
Selected Financial Data (in thousands except per share data) Year Ended December 31,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 210,265 $ 256,756 $ 327,307 $ 396,095 $ 488,866
Cost of sales 137,427 165,189 208,432 257,037 312,106
---------------------------------------------------------------------
Gross profit 72,838 91,567 118,875 139,058 176,760
Selling, general and administrative expenses 63,040 71,167 82,939 94,843 111,173
Recapitalization fees and expenses (1) -- -- 33,960 129 --
---------------------------------------------------------------------
Operating income 9,798 20,400 1,976 44,086 65,587
Net interest and other income (expense) (2,534) (1,892) (2,294) (22,726) (20,164)
---------------------------------------------------------------------
Income (loss) before income taxes 7,264 18,508 (318) 21,360 45,423
Income tax expense 2,491 6,992 3,246 8,208 17,164
---------------------------------------------------------------------
Net income (loss) 4,773 11,516 (3,564) 13,152 28,259
Extraordinary item related to debt extinguishment
(net of tax) -- -- -- -- (3,048)
Preferred dividends -- -- (57) (10,966) --
---------------------------------------------------------------------
Net income (loss) available to common $ 4,773 $ 11,516 $ (3,621) $ 2,186 $ 25,211
Earnings (loss) per share (2)
Basic $ (0.09) $ 0.02 $ (0.21) $ 0.08 $ 0.49
Diluted $ (0.09) $ 0.02 $ (0.21) $ 0.08 $ 0.46
Weighted average shares outstanding
Basic 65,198 65,436 65,394 26,369 34,958
Diluted 65,198 68,406 65,394 27,825 36,750
Pro forma earnings per share (3)
Basic _ _ _ $ 0.41 $ 0.76
Diluted _ _ _ $ 0.39 $ 0.73
Operating Data:
Number of stores:
Beginning of period 246 260 286 315 347
Opened during period 32 33 31 35 44
Closed during period (18) (7) (2) (3) (9)
---------------------------------------------------------------------
Open at end of period 260 286 315 347 382
=====================================================================
Comparable store sales increase (4) 6.4% 13.7% 18.3% 12.1% 13.3%
Average annual sales per store (5) $ 829 $ 925 $ 1,066 $ 1,171 $ 1,319
Average square feet per store 6,403 6,427 6,591 6,826 7,123
Balance Sheet Data (at period end):
Working capital $ 39,115 $ 49,568 $ 61,233 $ 70,507 $ 89,504
Total assets 94,243 121,757 168,924 155,319 203,716
Total debt, including current portion 8,398 6,622 214,977 205,197 175,792
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) 63,648 75,528 (219,874) (217,623) (35,948)
</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.
(2) Basic and diluted earnings per share have replaced primary and fully
diluted earnings per share in accordance with SFAS 128. See Note 14 to the
consolidated financial statements for the calculation of earnings per share
for 1997, 1998 and 1999. The Company used the same computation/methodology
for calculating 1995 and 1996 earnings per share as was used in calculating
1997 and 1998 earnings per share.
(3) Pro forma earnings per share reflects the sale by Tuesday Morning of
5,515,000 shares of common stock offered hereby at an initial public
offering price of $15.00 per share and also reflects the redemption of a
portion of our senior subordinated notes and the redemption, or exchange
into common stock, of all of our preferred stock.
(4) 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 as store openings and closings generally occur
between events.
(5) Average annual sales per store is the sum of the average of the sales per
store for each quarter.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-90315.
Arthur Andersen LLP /s/
Dallas, Texas
March 29, 2000
<PAGE>
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors
Tuesday Morning Corporation:
We consent to incorporation by reference in the registration statement (No.
333-90315) on Form S-8 of Tuesday Morning Corporation of our report dated
February 20, 1998, except for the last paragraph of Note 8, as to which the date
is March 25, 1999, relating to the consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Tuesday Morning Corporation and
subsidiaries for the year ended December 31, 1997, which report appears in the
December 31, 1999 annual report on Form 10-K of Tuesday Morning Corporation.
/s/ KPMG LLP
Dallas, Texas
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,795
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 141,534
<CURRENT-ASSETS> 164,485
<PP&E> 71,924
<DEPRECIATION> (38,838)
<TOTAL-ASSETS> 203,716
<CURRENT-LIABILITIES> 74,981
<BONDS> 162,283
0
0
<COMMON> 388
<OTHER-SE> (36,336)
<TOTAL-LIABILITY-AND-EQUITY> 203,716
<SALES> 488,866
<TOTAL-REVENUES> 488,866
<CGS> 312,106
<TOTAL-COSTS> 111,173
<OTHER-EXPENSES> (1,147)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,311
<INCOME-PRETAX> 45,423
<INCOME-TAX> 17,164
<INCOME-CONTINUING> 28,259
<DISCONTINUED> 0
<EXTRAORDINARY> (3,048)
<CHANGES> 0
<NET-INCOME> 25,211
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.46
</TABLE>
