UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED
March 31, 2005

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD
FROM                TO              

 

Commission file number 0-19658

 

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

75-2398532

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

6250 LBJ Freeway
Dallas, Texas 75240

(Address, including zip code, of principal executive offices)

 

(972) 387-3562

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).

Yes  ý  No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 25, 2005

Common Stock, par value $0.01 per share

 

41,140,524

 

 



 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and Private Securities Litigation Reform Act of 1995.  These statements may be found throughout this Form 10-Q particularly under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others.  Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are expressed differently.  You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or state other “forward-looking” information based on currently available information.

 

Readers are referred to the caption “Risk Factors” appearing at the end of Item I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 for additional factors that may affect our forward-looking statements.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed 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.

 

The terms “Tuesday Morning,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.

 



 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1 – Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

 

 

 

Item 4 – Controls and Procedures

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1 – Legal Proceedings

 

 

 

Item 5 – Other Information

 

 

 

Item 6 – Exhibits

 

 



 

Tuesday Morning Corporation

Consolidated Balance Sheets

(In thousands, except for share data)

 

 

 

March 31,
2005

 

Dec. 31,
2004

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

14,295

 

$

45,067

 

Inventories

 

212,587

 

189,132

 

Prepaid expenses and other current assets

 

7,388

 

5,169

 

Deferred income taxes

 

5,991

 

5,991

 

Total current assets

 

240,261

 

245,359

 

 

 

 

 

 

 

Property and equipment, net

 

86,920

 

86,332

 

Deferred financing costs

 

809

 

877

 

Other assets

 

3,189

 

3,552

 

 

 

 

 

 

 

Total Assets

 

$

331,179

 

$

336,120

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

76,568

 

72,722

 

Accrued liabilities

 

32,477

 

39,549

 

Income taxes payable

 

4,952

 

17,483

 

Total current liabilities

 

113,997

 

129,754

 

 

 

 

 

 

 

Revolving credit facility

 

 

 

Deferred rent

 

4,249

 

165

 

Deferred income taxes

 

9,051

 

9,051

 

 

 

 

 

 

 

Total Liabilities

 

127,297

 

138,970

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $.01 per share, authorized 100,000,000 shares; 41,140,524 shares issued and outstanding at March 31, 2005 and 41,101,965 shares at December 31, 2004

 

411

 

411

 

Additional paid-in capital

 

189,078

 

188,969

 

Retained earnings

 

14,411

 

7,745

 

Accumulated other comprehensive income (expense)

 

(18

)

25

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

203,882

 

197,150

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

331,179

 

$

336,120

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



 

Tuesday Morning Corporation

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net sales

 

$

185,594

 

$

168,597

 

Cost of sales

 

113,036

 

102,585

 

Gross profit

 

72,558

 

66,012

 

Selling, general and administrative expenses

 

62,122

 

52,531

 

Operating income

 

10,436

 

13,481

 

Other income (expense):

 

 

 

 

 

Interest income

 

34

 

4

 

Interest expense

 

(206

)

(411

)

Other income (expense)

 

193

 

241

 

 

 

21

 

(166

)

Income before income taxes

 

10,457

 

13,315

 

Income tax expense

 

3,791

 

5,126

 

 

 

 

 

 

 

Net income

 

$

6,666

 

$

8,189

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.16

 

$

0.20

 

Diluted

 

$

0.16

 

$

0.20

 

Weighted average number of common shares:

 

 

 

 

 

Basic

 

41,129

 

40,980

 

Diluted

 

41,740

 

41,742

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



 

Tuesday Morning Corporation

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net cash flows from operating activities:

 

 

 

 

 

Net income

 

$

6,666

 

$

8,189

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,459

 

2,670

 

Amortization of financing fees

 

43

 

101

 

Other

 

(28

)

 

Change in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(23,455

)

(52,211

)

Prepaid and other assets

 

(1,831

)

(406

)

Accounts payable

 

3,846

 

17,165

 

Accrued liabilities

 

(7,072

)

(6,227

)

Deferred rent

 

4,084

 

 

Income taxes payable

 

(12,531

)

(6,820

)

Net cash used in operating activities

 

(26,819

)

(37,539

)

Net cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(4,047

)

(6,279

)

Net cash used in investing activities

 

(4,047

)

(6,279

)

Net cash flows from financing activities:

 

 

 

 

 

Proceeds from revolving credit facility

 

 

27,000

 

Proceeds from exercise of common stock options and stock purchase plan purchases

 

94

 

378

 

Net cash provided by financing activities

 

94

 

27,378

 

Net decrease in cash and cash equivalents

 

(30,772

)

(16,440

)

Cash and cash equivalents, beginning of period

 

45,067

 

23,536

 

Cash and cash equivalents, end of period

 

$

14,295

 

$

7,096

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



 

Tuesday Morning Corporation

Notes to Consolidated Financial Statements

 

1.               Basis of presentation - The consolidated interim financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the consolidated financial statements and notes thereto in our Form 10-K filing for the year ended December 31, 2004.  Because of the seasonal nature of our business, the results of operations for the quarter are not indicative of the results to be expected for the entire year.

 

2.               Lease accounting adjustment - Based on certain views expressed in a letter of February 7, 2005 from the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants, we reviewed our accounting policies and practices associated with operating leases. Consistent with industry practices, we historically reported straight-line rental expense beginning on the lease commencement date. This had the effect of excluding the rent holiday associated with the pre-opening or build-out period of our stores from the calculation of the period over which we expensed rent. Following our review, we modified our accounting policies such that we begin recording rent expense on the date we take possession of or have the right to use the premises.

 

As a result of this adjustment, we recorded a non-cash, $3.9 million ($2.4 million, net of income tax or $0.06 per diluted share) cumulative charge to earnings during the first quarter of fiscal 2005. The adjustment did not impact historical or future net cash flows nor the timing of the payments under related leases. We believe that the new lease accounting policies will not have a material effect on future diluted earnings per share. Prior years’ financial statements were not restated as the impact of this issue was immaterial to previously reported results for any individual previous period.

 

3.               Comprehensive income - Comprehensive income is defined as net income plus the change in equity during a period from transactions and other events, excluding those resulting from investments by and distributions to stockholders. Total comprehensive income for the three month period ended March 31, 2005 and 2004 was $6.6 million and $8.1 million, respectively.

 

4.               Legal proceedings – During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs are seeking to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs are also seeking attorney’s fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of manager-in-training and management trainees.  The settlement agreement is currently under appeal by one of the plaintiffs.

 

In December 2003, we were named as a defendant in a new lawsuit filed in the Superior Court of California, in and for the County of San Diego.  The plaintiffs are alleging failure to pay for minimum reporting time, travel time, split-shift premiums, meal periods and other labor issues.  We have reached a memorandum of understanding on a settlement with the plaintiffs but no formalized settlement agreement has been submitted to the court.

 

In June 2004, we were named as a defendant in a complaint filed in the U.S. District Court, Central District of California. The plaintiff, Thomas Kinkade Company (f/k/a/ Media Arts Group Inc.), is alleging copyright infringement and false advertisements on merchandise we sold in the second quarter of 2004. This lawsuit is in the discovery phase.

 

We intend to vigorously defend all pending actions. We do not believe these or any other legal proceedings pending or threatened against us would have a material adverse effect on our financial condition or results of operations.

 

4



 

5.               Earnings per common share

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

 

 

(in thousands, except per share
amounts)

 

Basic earnings per share:

 

 

 

 

 

Net income

 

$

6,666

 

$

8,189

 

Weighted average number of common shares outstanding

 

41,129

 

40,980

 

Net income per common share

 

$

0.16

 

$

0.20

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income

 

$

6,666

 

$

8,189

 

 

 

 

 

 

 

Dilutive effect of employee stock options

 

611

 

762

 

Weighted average number of common shares outstanding

 

41,129

 

40,980

 

Weighted average number of common shares and diluted effect of outstanding employee stock options

 

41,740

 

41,742

 

Net income per common share

 

$

0.16

 

$

0.20

 

 

6.               Revolving credit facility – Our $210 million revolving credit facility expires in December 2009.  We incur commitment fees of up to 0.25% on the unused portion of the revolving credit facility. Any borrowings under the revolving credit facility incur interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our average total leverage ratio changes.

 

At March 31, 2005, we had no balances outstanding under the revolving credit facility and had availability of $202.1 million.

 

7.               Stock-based compensation – We account for our stock-based compensation plans utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25).  Generally, no compensation expense is recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant.

 

The following table represents the effect on net income and earnings per share if we had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and our adoption on January 1, 2003 of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”  The pro forma effects of stock-based compensation on net income and net income per common share are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

 

 

(in thousands, except per share
amounts)

 

Net income as reported

 

$

6,666

 

$

8,189

 

Less: Stock-based employee compensation expense determined under the fair value method, net of related tax effects

 

1,000

 

818

 

Pro-forma net income

 

$

5,666

 

$

7,371

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic as reported

 

$

0.16

 

$

0.20

 

Basic pro-forma

 

0.14

 

0.18

 

Diluted as reported

 

0.16

 

0.20

 

Diluted pro-forma

 

0.14

 

0.18

 

 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement

 

5



 

123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the time of grant. Pro forma disclosure is no longer an alternative.

 

In connection with the Securities Exchange Commission’s amendment of its rules, Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) on January 1, 2006.

 

Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date; (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

 

The company has not yet determined which transition method it plans to adopt under Statement 123(R).

 

As permitted by Statement 123, the company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and on the model chosen to determine fair value for grants after January 1, 2006. However, had we adopted Statement 123(R) in prior periods based on our use of the Black-Scholes option pricing model, the impact of that standard would have approximated the impact of Statement 123 as described above in the disclosure of pro forma net income and earnings per share. While Statement 123(R) permits entities to continue use of the Black-Scholes option pricing model, Statement 123(R) also permits the use of a “binomial model.” We have no yet determined which model we will use to measure the fair value of future employee stock option grants upon the adoption of Statement 123(R).

 

8.               Reclassifications - Certain prior year amounts may have been reclassified to conform to the current period presentation.

 

6



 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

       We sell upscale, name brand home furnishings, gifts and related items significantly below retail prices charged by department and specialty stores throughout 673 stores in 43 states. We have a unique event-based selling strategy that creates a sense of urgency and excitement for our customer base.

 

       Our store base has grown at approximately 10% per year for the last five years, and during the first quarter of 2005 we expanded our store base by 18 new stores and had 7 store closures.

 

       Our operating profits, combined with more efficient use of working capital and increased inventory turns over past years have increased cash flow, which has been used to reduce debt. At March 31, 2005, we had no debt outstanding as compared to $27.0 million in debt outstanding at March 31, 2004. We anticipate using our revolving credit facility during certain periods of the remainder of 2005 for inventory purchases and capital expenditures, but we expect to generate excess cash flow for the entire fiscal year 2005. We will be evaluating appropriate uses of our excess cash flow in the future, including the use of capital to expand the business and other alternative uses for our cash.

 

Lease Accounting Adjustment

 

Based on certain views expressed in a letter of February 7, 2005 from the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants, we reviewed our accounting policies and practices associated with operating leases. Consistent with industry practices, we historically reported straight-line rental expense beginning on the lease commencement date. This had the effect of excluding the rent holiday associated with the pre-opening or build-out period of our stores from the calculation of the period over which we expensed rent. Following our review, we modified our accounting policies such that we begin recording rent expense on the date we take possession of or have the right to use the premises.

 

As a result of this adjustment, we recorded a non-cash, $3.9 million ($2.4 million, net of income tax or $0.06 per diluted share) cumulative charge to earnings during the first quarter of 2005. The adjustment did not impact historical or future net cash flows nor the timing of the payments under related leases. We believe that the new lease accounting policies will not have a material effect on future diluted earnings per share. Prior years’ financial statements were not restated as the impact of this issue was immaterial to previously reported results for any individual previous periods.

 

Results of Operations

 

The following table sets forth certain financial information from our consolidated statements of income expressed as a percentage of net sales.  Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the fourth quarter, which includes the holiday season. There can be no assurance that the trends in sales growth or operating results will continue in the future.

 

 

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

Net sales

 

100.0

%

100.0

%

Cost of sales

 

60.9

 

60.8

 

Gross profit

 

39.1

 

39.2

 

Selling, general and administrative expense

 

33.5

 

31.2

 

Operating income

 

5.6

 

8.0

 

Net interest expense and other income (expense)

 

0.0

 

(0.1

)

Income before income taxes

 

5.6

 

7.9

 

Income tax expense

 

2.0

 

3.0

 

Net income

 

3.6

%

4.9

%

 

7



 

Three Months Ended March 31, 2005

Compared to the Three Months Ended March 31, 2004

 

During the first quarter of 2005, net sales increased to $185.6 million from $168.6 million, an increase of $17.0 million or 10.1% compared to the same quarter of 2004. The increase in first quarter sales is primarily due to sales from non-comparable new stores, offset by a 0.3% decrease in comparable store sales. The decrease in comparable sales for the first quarter of 2005 was comprised of a 0.3% decrease in the number of transactions offset by a flat average transaction amount.  Average store sales for the first quarter decreased 3.1% when compared to the same prior year quarter.

 

Gross profit increased $6.6 million, or 10.0%, to $72.6 million for the three months ending March 31, 2005 as compared to last year’s first quarter of $66.0 million, primarily as a result of our increased net sales.  Our gross profit percentage decreased to 39.1% from 39.2% in the prior year’s first quarter.  This 0.1% decrease is comprised of a 0.6% decrease in gross margin due to a shift in product mix and a lower initial mark up in the first quarter of 2005 as compared to the first quarter of 2004, offset by a 0.4% reduction in our distribution and freight expenses and a 0.1% decrease in damages and shrink.

 

Selling, general and administrative expenses are comprised of store labor, store occupancy costs, advertising, miscellaneous store operating expenses and corporate office costs. Increases in dollar amounts of these expenses are attributable to increases in the number of stores and increases in variable expenses due to sales growth. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

 

Selling, general and administrative expenses increased $9.6 million, or 18.3%, to $62.1 million from $52.5 million in the first quarter of 2004.  The increase was attributable to the opening of new stores, to the $3.9 million lease accounting adjustment and to increases in variable expenses.  As a percentage of net sales these expenses increased 2.3% to 33.5% in the first quarter of 2005 from 31.2% in the first quarter of 2004.  The increased percentage is primarily due to the 2.1% increase in rent expense due to the lease accounting adjustment and includes a 0.8% increase related to rent, occupancy and depreciation expense associated with the increase in our store base, offset by a 0.7% decrease in advertising expense.

 

Net interest and other income (expense) decreased $0.2 million compared to the first quarter of 2004.   This reduction is a result of limited borrowings under our revolving credit line in the first quarter 2005 as compared to the first quarter 2004.

 

The income tax provision for the three month periods ended March 31, 2005 and 2004 was $3.8 million and $5.1 million, respectively, reflecting an effective tax rate of 36.3% and 38.5%, respectively.  The effective tax rate is lower in the first quarter of 2005 as compared to the first quarter of 2004 due to a lower estimated annual effective tax for 2005 and an adjustment of tax reserves related to a favorable settlement with a taxing authority.

 

Liquidity and Capital Resources

 

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flow strategy during the last three years has been focused on funding our store growth and distribution improvements and reducing our debt and financing costs associated with our recapitalization in 1997. Our cash flows will continue to be utilized for the expansion of our business, but we are exploring the alternative uses of excess cash for the future. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

 

Net cash used in operating activities for the three months ended March 31, 2005 and 2004 was $26.8 million and $37.5 million, respectively, representing a $10.7 million decrease. This decrease is predominantly due to the decrease in inventory purchases in the first quarter of 2005 as compared to the first quarter of 2004, offset by the increase in estimated income tax payments and in advertising prepayments.

 

At March 31, 2005, our inventory increased $23.5 million to $212.6 million from $189.1 million at December 31, 2004 primarily due to the increase in the number of stores and the normal seasonal build-up of inventory.  Accounts payable balances have increased to $76.6 million as of March 31, 2005 from $72.7 million at December 31, 2004.

 

Capital expenditures principally associated with new store opening and warehouse equipment were $4.0 million and $6.3 million for the three months ending March 31, 2005 and 2004, respectively.  We expect to spend approximately $14.0 million for additional capital expenditures for the remainder of 2005, which will include the opening of new

 

8



 

stores, enhancements of selected stores, and purchases of equipment for our distribution center and corporate office.

 

We have a $210 million revolving credit facility that expires in December 2009.  Any borrowing under the revolving credit facility will incur interest at LIBOR or the prime rate, depending on the term of the borrowing, plus an applicable margin. We incur commitment fees of up to 0.25% on the unused portion of the revolving credit facility. This rate is reduced or increased as our average total leverage ratio changes. Our indebtedness under the credit facility is secured by a lien on our inventory and cash accounts, as well as a pledge of our ownership interests in all of our subsidiaries.

 

At March 31, 2005, we had no debt outstanding under the revolving credit facility and had availability of $202.1 million.  As of March 31, 2005 and 2004, we had outstanding letters of credit of $7.9 million and $6.2 million, respectively, primarily for self-insurance.

 

The revolving credit facility contains certain restrictive covenants, which among other things, require us to comply with certain financial ratios covering maximum leverage, minimum fixed charge coverage and minimum interest coverage. Other restrictions affect our ability to incur liens or make certain other restricted payments, sell assets or merge or consolidate with any other person. As of March 31, 2005, we were in compliance with all covenants.

 

We anticipate that our future net cash flows from operations and unused borrowings under our revolving credit facility will be sufficient to fund our working capital needs and planned capital expenditures for the next 12 months.

 

Store Openings/Closings

 

 

 

Three Months Ended
March 31
2005

 

Three Months
Ended
March 31
2004

 

Twelve Months
Ended
December 31,
2004

 

 

 

 

 

 

 

 

 

Stores Open at beginning of period

 

662

 

577

 

577

 

Stores Opened

 

18

 

18

 

89

 

Stores Closed

 

(7

)

(1

)

(4

)

Stores Open at end of period

 

673

 

594

 

662

 

 

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

 

We are 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.  Based on our market risk sensitive instruments outstanding as of March 31, 2005, 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.  Our market risk is discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2004.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.  There have been no significant changes in the foreign currency exchange rate or interest rate market risks since December 31, 2004.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Based on our management’s evaluation (with participation of our principal executive officer and our principal financial officer), our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of March 31, 2005 to ensure that material information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure

 

9



 

control system were met.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs are seeking to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs are also seeking attorney’s fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of manager-in-training and management trainees.  The settlement agreement is currently under appeal by one of the plaintiffs.

 

In December 2003, we were named as a defendant in a new lawsuit filed in the Superior Court of California, in and for the County of San Diego.  The plaintiffs are alleging failure to pay for minimum reporting time, travel time, split-shift premiums, meal periods and other labor issues.  We have reached a memorandum of understanding on a settlement with the plaintiffs but no formalized settlement agreement has been submitted to the court.

 

In June 2004, we were named as a defendant in a complaint filed in the U.S. District Court, Central District of California. The plaintiff, Thomas Kinkade Company (f/k/a/ Media Arts Group Inc.), is alleging copyright infringement and false advertisements on merchandise we sold in the second quarter of 2004. This lawsuit is in the discovery phase.

 

We intend to vigorously defend all pending actions. We do not believe these or any other legal proceedings pending or threatened against us would have a material adverse effect on our financial condition or results of operations.

 

Item 5. Other Information

 

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since April 21, 2003.

 

10



 

Item 6.   Exhibits

 

Exhibit
Number

 

Title of Exhibit

3.1

 

Certificate of Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the “Commission”) on February 10, 1998).

3.1.2

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999) .

3.1.3

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated May 7, 1999.

3.2

 

Amended and Restated By-laws of the Company. (incorporated by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998).

31.1

 

Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certifications of the Chief Executive Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2

 

Certifications of the Chief Financial Officer of the Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 


*                 The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

11



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TUESDAY MORNING CORPORATION

 

 

(Registrant)

 

 

 

 

 

DATE:

May 2, 2005

By:

/s/ Loren K. Jensen

 

 

 

Loren K. Jensen, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer and duly
authorized to sign this report on behalf of the
registrant)

 

12



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

3.1

 

Certificate of Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the “Commission”) on February 10, 1998)

3.1.2

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999)

3.1.3

 

Certificate of Amendment to the Certificate of Incorporation of the Company dated May 7, 1999

3.2

 

Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998)

31.1

 

Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2

 

Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 


*                 The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

13


Exhibit 3.1.3

 

CERTIFICATE OF AMENDMENT

TO THE

CERTIFICATE OF INCORPORATION

OF

TUESDAY MORNING CORPORAT1ON

 

Pursuant to the provisions of Section 242 of the General Corporate Law of the State of Delaware, Tuesday Morning Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation”), does hereby certify:

 

FIRST: That the Board of Directors of the Corporation has adopted a resolution setting forth and declaring advisable that Article Four of the Certificate of Incorporation of the Corporation be deleted and a new Article Four be inserted which shall read in its entirety as follows:

 

“ARTICLE FOUR. The total number of shares of capital stock that the Corporation shall have the authority to issue is 100,000,000 shares of common stock, $.01 par value (the “Common Stock”), and 10,000,000 shares of preferred stock, $.01 par value (the “Preferred Stock”). Shares of Preferred Stock may be issued from time to time in one or more series, each such series to have such distinctive designation or title as may be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series shall have such designations, preferences, limitations and relative rights, including voting rights, as shall be stated in the resolution or resolutions providing for the issuance of such series of Preferred Stock, as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof (the “Preferred Designation”), in accordance with the laws of the State of Delaware. The Board of Directors, in such resolution or resolutions, may increase or decrease the number of shares within each such series; provided, however, the Board of Directors may not decrease the number of shares within a series to less than the number of shares within such series that are then issued.”

 

SECOND: That the Board of Directors of the Corporation has adopted a resolution setting forth and declaring advisable that a new Article be added to the Certificate of Incorporation entitled Article Eleven to read in its entirety as follows:

 

“ARTICLE ELEVEN. In accordance with Section 203 of the General Corporation Law of the State of Delaware, the Corporation expressly elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware.”

 



 

THIRD: That thereafter, pursuant to resolution of the Board of Directors, stockholders owning at least a majority of the outstanding shares of common stock executed a written consent to approve the Certificate of Amendment pursuant to Section 228 of the General Corporation Law of the State of Delaware. No other class of stockholders was entitled to vote on the Certificate of Amendment.

 

FOURTH: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

 

FIFTH: That this Certificate of Amendment shall be effective upon the filing hereof.

 

IN WITNESS WHEREOF, the Corporation has caused this Amendment to its Certificate of Incorporation to be executed this 7th day of May, 1999.

 

 

 

TUESDAY MORNING CORPORATION

 

 

 

 

 

By:

/s/ Jerry M. Smith

 

 

 

Jerry M. Smith

 

 

President

 

ATTEST:

 

 

/s/ Mark E. Jarvis

 

Mark E. Jarvis, Secretary

 

 

144248.1A

 

2


EXHIBIT 31.1

 

CERTIFICATION

 

I, Kathleen Mason, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Tuesday Morning Corporation;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)                                      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                                     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)                                      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)                                     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)             All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: May 2, 2005

By:

/s/ Kathleen Mason

 

 

 

 

Kathleen Mason

 

 

 

Chief Executive Officer

 

 


EXHIBIT 31.2

 

CERTIFICATION

 

I, Loren K. Jensen, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Tuesday Morning Corporation;

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)                          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)                          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)                         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: May 2, 2005

By:

/s/ Loren K. Jensen

 

 

 

 

Loren K. Jensen

 

 

 

Chief Financial Officer

 

 


EXHIBIT 32.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF TUESDAY MORNING CORPORATION PURSUANT TO

18 U.S.C §1350

 

I, Kathleen Mason, the Chief Executive Officer of Tuesday Morning Corporation, hereby certify that:

 

1.                                       The quarterly report on Form 10-Q of Tuesday Morning Corporation for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.                                       The information contained in the above-mentioned report fairly presents, in all material respects, the financial condition and results of operations of Tuesday Morning Corporation.

 

Date: May 2, 2005

By:

/s/ Kathleen Mason

 

 

 

Kathleen Mason
Chief Executive Officer

 


EXHIBIT 32.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF TUESDAY MORNING CORPORATION PURSUANT TO

18 U.S.C §1350

 

I, Loren K. Jensen, the Chief Financial Officer of Tuesday Morning Corporation, hereby certify that:

 

1.                                       The quarterly report on Form 10-Q of Tuesday Morning Corporation for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.                                       The information contained in the above-mentioned report fairly presents, in all material respects, the financial condition and results of operations of Tuesday Morning Corporation.

 

Date: May 2, 2005

By:

/s/  Loren K. Jensen

 

 

 

Loren K. Jensen
Chief Financial Officer