Table of Contents

 

 

** **

**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED**

**September 30, 2008**

 

**OR**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE TRANSITION PERIOD**

**FROM           TO           **

 

**Commission file number 0-19658**

 

**TUESDAYMORNING CORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

 

| **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 principalexecutive offices)

 

**(972) 387-3562**

(Registrant’s telephone number, includingarea code)

 

**Not applicable**

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes   x  No   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated  filer x | Non-accelerated  filer o                        | Smaller  reporting company o |
|---------------------------|---------------------------|-------------------------------------------------|-----------------------------------|
|                      |                      | (Do not check if a  smaller  reporting company) |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  oNo  x

 

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

 

| **Class**                               | ** ** | **Outstanding at October 31, 2008** |
|-----------------------------------------|------------|---------------------------------------------------------|
| Common Stock, par value $0.01 per share |       | 42,577,320                                              |

 

 

** **

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**Forward-Looking Statements**

 

*This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of the federalsecurities laws and the Private Securities Litigation Reform Act of 1995,which are based on management’s current expectations, estimates andprojections. These statements may be found throughout this Form 10-Qparticularly under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” among others. Forward-lookingstatements 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 shouldconsider statements that contain these words carefully because they describeour expectations, plans, strategies and goals and our beliefs concerning futurebusiness conditions, our future results of operations, our future financialposition, and our business outlook or state other “forward-looking”information.*

 

*Readers are referred to “Item 1A. RiskFactors” of our Annual Report on Form 10-K for the year ended June 30,2008 for examples of risks, uncertainties and events that could cause ouractual results to differ materially from the expectations expressed in ourforward-looking statements. These risks, uncertainties and events also include,but are not limited to, the following:*

 

·                    *uncertaintiesregarding our ability to open stores in new and existing markets and operatethese stores on a profitable basis;*

 

·                    *conditions affecting consumer spending and the impactof the current economic downturn;*

 

·                    *inclement weather;*

 

·                    *changes in our merchandise mix;*

 

·                    *timing and type of sales events, promotionalactivities and other advertising;*

 

·                    *increased or new competition;*

 

·                    *loss or departure of one or more members of oursenior management as well as experienced buying and management personnel;*

 

·                    *an increase in the cost or a disruption in the flowof our products;*

 

·                    *seasonal and quarterly fluctuations;*

 

·                    *fluctuations in our comparable store results;*

 

·                    *our ability to operate in highly competitive marketsand to compete effectively;*

 

·                    *our ability to operate information systems andimplement new technologies effectively;*

 

·                    *our ability to generate strong cash flows from ouroperation;*

 

·                    *our ability to maintain internal control overfinancial reporting;*

 

·                  *our ability to continue obtaining funding fromexternal sources through compliance with restrictive covenants in our revolvingcredit facility*

 

·                    *our ability to anticipate and respond in a timelymanner to changing consumer demands and preferences; and*

 

·                    *our ability to generate strong holiday season sales.*

 

*The forward-looking statements made in this Form 10-Qrelate only to events as of the date on which the statements were made. Exceptas may be required by law, we undertake no obligation to update ourforward-looking statements to reflect events and circumstances after the dateon which the statements were made or to reflect the occurrence of unanticipatedevents.*

 

*The terms “Tuesday Morning,”  “the Company,” “we,” “us” and “our” as usedin this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporationand its subsidiaries.*

 

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| **PART I - FINANCIAL INFORMATION**                                                                    | 1                                                                                                   |
|------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                       |                                                                                                |
| Item 1 — Financial Statements                                                                         | 1                                                                                                   |
|                                                                                                       |                                                                                                |
|                                                                                                       | Consolidated  Balance Sheets as of September 30, 2008 and June 30, 2008                   | 1 |
|                                                                                                       |                                                                                                |   |
|                                                                                                       | Consolidated  Statements of Operations for the Three Months Ended September 30, 2008  and 2007 | 2 |
|                                                                                                       |                                                                                                |   |
|                                                                                                       | Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2008  and 2007 | 3 |
|                                                                                                       |                                                                                                |   |
|                                                                                                       | Notes to  Consolidated Financial Statements                                                         | 4 |
|                                                                                                       |                                                                                                |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 6                                                                                                   |
|                                                                                                       |                                                                                                |
| Item 3 — Quantitative and Qualitative  Disclosures About Market Risk                                  | 9                                                                                                   |
|                                                                                                       |                                                                                                |
| Item 4 — Controls and Procedures                                                                      | 9                                                                                                   |
| ** **                                                                                                 | ** **                                                                                          |
| **PART II — OTHER INFORMATION**                                                                  | 10                                                                                                  |
|                                                                                                       |                                                                                                |
| Item 1 — Legal Proceedings                                                                            | 10                                                                                                  |
|                                                                                                       |                                                                                                |
| Item 1A — Risk Factors                                                                                | 10                                                                                                  |
|                                                                                                       |                                                                                                |
| Item 6 — Exhibits                                                                                     | 11                                                                                                  |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Tuesday Morning Corporation**

**ConsolidatedBalance Sheets**

**September 30, 2008 (unaudited) and June 30,2008**

**(In thousands, except per share data)**

 
| ** **                                                                                                                                                                                                       | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | ** **                   | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                                       | ** ** | ** **                   | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                                                                  |       |                         |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                                        |       | $                            | 4,888      |                    | $          | 8,630 |   |
| Inventories                                                                                                                                                                                                      |       | 307,081                      |       | 240,996                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                        |       | 11,847                       |       | 9,296                   |       |
| Income tax receivable                                                                                                                                                                                            |       | 8,952                        |       | 1,996                   |       |
| Total current assets                                                                                                                                                                                             |       | 332,768                      |       | 260,918                 |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Property and equipment, net                                                                                                                                                                                      |       | 76,601                       |       | 77,315                  |       |
| Deferred financing costs                                                                                                                                                                                         |       | 453                          |       | 503                     |       |
| Other assets                                                                                                                                                                                                     |       | 2,519                        |       | 3,040                   |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Total Assets                                                                                                                                                                                                     |       | $                            | 412,341    |                    | $          | 341,776 |   |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                   | ** ** | ** **                   | ** ** | ** **              | ** ** |
| Current liabilities:                                                                                                                                                                                             |       |                         |       |                    |       |
| Revolving credit facility                                                                                                                                                                                        |       | $                            | 6,500      |                    | $          | — |   |
| Accounts payable                                                                                                                                                                                                 |       | 106,175                      |       | 63,899                  |       |
| Accrued liabilities                                                                                                                                                                                              |       | 30,821                       |       | 28,595                  |       |
| Deferred income taxes                                                                                                                                                                                            |       | 267                          |       | 267                     |       |
| Income taxes payable                                                                                                                                                                                             |       | 1,612                        |       | 27                      |       |
| Total current liabilities                                                                                                                                                                                        |       | 145,375                      |       | 92,788                  |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Revolving credit facility                                                                                                                                                                                        |       | 30,000                       |       | 8,500                   |       |
| Deferred rent                                                                                                                                                                                                    |       | 4,127                        |       | 4,163                   |       |
| Deferred income taxes                                                                                                                                                                                            |       | 3,414                        |       | 3,414                   |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Total Liabilities                                                                                                                                                                                                |       | 182,916                      |       | 108,865                 |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Commitments and contingencies                                                                                                                                                                                    |       |                         |       |                    |       |
| Stockholders’ equity:                                                                                                                                                                                       |       |                         |       |                    |       |
| Preferred stock, par value $0.01 per share,  authorized 10,000,000 shares, none issued or outstanding                                                                                                            |       | —                       |       | —                  |       |
| Common stock, par value $0.01 per share,  authorized 100,000,000 shares; 42,577,320 shares issued and outstanding at September 30,  2008 and 41,816,820 shares issued and outstanding at June 30, 2008 |       | 426                          |       | 418                     |       |
| Additional paid-in capital                                                                                                                                                                                       |       | 202,001                      |       | 201,154                 |       |
| Retained earnings                                                                                                                                                                                                |       | 27,081                       |       | 31,378                  |       |
| Accumulated other comprehensive loss                                                                                                                                                                             |       | (83                          | )          | (39                     | )          |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Total Stockholders’ Equity                                                                                                                                                                                  |       | 229,425                      |       | 232,911                 |       |
|                                                                                                                                                                                                             |       |                         |       |                    |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                  |       | $                            | 412,341    |                    | $          | 341,776 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**Tuesday Morning Corporation**

**ConsolidatedStatements of Operations (unaudited)**

**(In thousands, except per share data)**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                          |       |                                                 |       |   |   |
| Net sales                                     |       | $                                                    | 173,401    |   | $ | 201,656 |   |
| Cost of sales                                 |       | 109,245                                              |       | 125,947 |   |
| Gross profit                                  |       | 64,156                                               |       | 75,709 |   |
| Selling, general and administrative  expenses |       | 70,910                                               |       | 72,544 |   |
| Operating income (loss)                       |       | (6,754                                               | )          | 3,165 |   |
| Other income (expense):                       |       |                                                 |       |   |   |
|                                          |       |                                                 |       |   |   |
| Interest expense                              |       | (411                                                 | )          | (1,686 | ) |
| Other income                                  |       | 80                                                   |       | 378 |   |
|                                          |       | (331                                                 | )          | (1,308 | ) |
| Income (loss) before income taxes             |       | (7,085                                               | )          | 1,857 |   |
| Income tax expense (benefit)                  |       | (2,788                                               | )          | 701 |   |
|                                          |       |                                                 |       |   |   |
| Net income (loss)                             |       | $                                                    | (4,297     | ) | $ | 1,156 |   |
|                                          |       |                                                 |       |   |   |
| **Earnings Per Share**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income (loss) per common share:           |       |                                                 |       |   |   |
| Basic                                         |       | $                                                    | (0.10      | ) | $ | 0.03 |   |
| Diluted                                       |       | $                                                    | (0.10      | ) | $ | 0.03 |   |
| Weighted average number of common shares:     |       |                                                 |       |   |   |
| Basic                                         |       | 41,441                                               |       | 41,440 |   |
| Diluted                                       |       | 41,441                                               |       | 41,585 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**Tuesday Morning Corporation**

**ConsolidatedStatements of Cash Flows (unaudited)**

**(In thousands)**

 
| ** **                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                                                  |       |                                                 |       |   |   |
| **Net cash flows from operating activities:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income (loss)                                                                     |       | $                                                    | (4,297     | ) | $ | 1,156 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                         |       | 4,212                                                |       | 4,442 |   |
| Amortization of financing fees                                                        |       | 50                                                   |       | 50 |   |
| Deferred income taxes                                                                 |       | —                                               |       | 2,706 |   |
| Loss on disposal of assets                                                            |       | 139                                                  |       | 169 |   |
| Stock-based compensation                                                              |       | 709                                                  |       | 1,342 |   |
| Other                                                                                 |       | (44                                                  | )          | 66 |   |
| Change in operating assets and liabilities:                                           |       |                                                 |       |   |   |
| Inventories                                                                           |       | (65,940                                              | )          | (57,361 | ) |
| Prepaid and other assets                                                              |       | (8,986                                               | )          | (4,134 | ) |
| Accounts payable                                                                      |       | 45,941                                               |       | 4,724 |   |
| Accrued liabilities                                                                   |       | 2,226                                                |       | 1,332 |   |
| Deferred rent                                                                         |       | (36                                                  | )          | 8 |   |
| Income taxes payable                                                                  |       | 1,585                                                |       | (271 | ) |
| Net cash used in operating activities                                                 |       | (24,441                                              | )          | (45,771 | ) |
| **Net cash flows from investing activities:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Capital expenditures                                                                  |       | (3,637                                               | )          | (3,267 | ) |
| Net cash used in investing activities                                                 |       | (3,637                                               | )          | (3,267 | ) |
| **Net cash flows from financing activities:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Borrowings under revolving credit facility                                            |       | 63,000                                               |       | 82,500 |   |
| Repayments under revolving credit facility                                            |       | (35,000                                              | )          | (35,000 | ) |
| Change in cash overdraft                                                              |       | (3,665                                               | )          | 3,157 |   |
| Proceeds from exercise of common stock  options and stock purchase plan purchases     |       | 1                                                    |       | (4 | ) |
| Net cash provided by financing activities                                             |       | 24,336                                               |       | 50,653 |   |
| Net decrease in cash and cash equivalents                                             |       | (3,742                                               | )          | 1,615 |   |
| Cash and cash equivalents, beginning of  period                                       |       | 8,630                                                |       | 10,303 |   |
| Cash and cash equivalents, end of period                                              |       | $                                                    | 4,888      |   | $ | 11,918 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**Tuesday Morning Corporation**

**Notes toConsolidated Financial Statements (unaudited)**

 

1.                 Basis ofpresentation - The unaudited consolidated interim financial statements includedherein have been prepared by us pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations. Thesefinancial statements include all adjustments, consisting only of those of anormal recurring nature, which, in the opinion of management, are necessary topresent fairly the results of the interim periods presented and should be readin conjunction with the consolidated financial statements and notes thereto inour Form 10-K for the year ended June 30, 2008.  Due to the seasonal nature of our business,the results of operations for the quarter are not indicative of the results tobe expected for the entire fiscal year.

 

Thebalance sheet at June 30, 2008 has been derived from the auditedconsolidated financial statements at that date but does not include all of theinformation and notes required by U.S. generally accepted accounting principlesfor complete financial statements. For further information, refer to theconsolidated financial statements and notes thereto included in our Form 10-Kfor the year ended June 30, 2008. We operate our business as a single operating unit.

 

2.             Stock-basedcompensation — We account for our stock-based compensation plan in accordancewith Statement of Financial Accounting Standards 123 (revised 2004) “Share-BasedPayment” (“SFAS 123R”). Under SFAS 123R, all stock-based compensation cost ismeasured at the grant date, based on the estimated fair value of the award, andis recognized as an expense in the statement of operations over the requisiteservice period.

 

Wehave established the Tuesday Morning Corporation 1997 Long-Term EquityIncentive Plan, as amended (the “1997 Plan”), and the Tuesday MorningCorporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”),which allows us to grant stock options and restricted stock to directors,officers and key employees of, and certain other key individuals who performservices for us and our subsidiaries. The 1997 Plan and the 2004 Planauthorizes grants of options to purchase up to 4,800,000 and 2,000,000 shares,respectively, of authorized, but unissued common stock. Stock options areawarded with exercise prices equal to the average of the high and low tradingprices of our common stock on the date of grant.

 

Optionsgranted under the 1997 Plan and the 2004 Plan typically vest daily over periodsof four to five years or vest based on the attainment of performance goals inequal installments over three years with the options expiring in ten years. Theexercise prices of the options range between $3.93. and $35.23, whichrepresents market value on the grant date of the shares of common stock intowhich such options are exercisable. At September 30, 2008, all sharesavailable under the 1997 Plan had been granted and the 1997 plan expired as of December 29,2007.  There were 104,311 sharesavailable for grant under the 2004 Plan at September 30, 2008.

 

Underthe terms of the 1997 Plan and the 2004 Plan we may also grant restricted stockto compensate certain directors, officers, key employees and certain other keyindividuals who perform services for us and our subsidiaries. Restricted stockawards are not transferable, but bear rights of ownership including voting anddividend rights. Shares are valued at the market price at the date of award. Asof September 30, 2008, there were 1,143,064 shares of restricted stockoutstanding with a weighted average fair value of $4.34 per share under the 2004 plan.

 

Duringthe quarters ended September 30, 2008 and 2007, we recognized stock-basedcompensation expense as follows (in thousands):

 
| ** **                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Total cost of stock-based compensation during the period |       | $        | 855        |     | $          | 1,207 |   |
| Amounts capitalized in ending inventory                  |       | (402     | )          | (229     | )          |
| Amounts recognized in expense previously capitalized     |       | 256      |       | 364      |       |
| Amounts charged against income for the period before tax |       | $        | 709        |     | $          | 1,342 |   |

 

3.*                *Comprehensiveincome or loss - Comprehensive income or loss is defined as net income or lossplus the change in equity during a period from transactions and other events,excluding those resulting from investments by and distributions tostockholders.  We account for foreigncurrency forward contracts as cash flow hedges in accordance with FinancialAccounting Standards Board (FASB) Statement 133, *Accountingfor Derivative Instruments and Hedging Activities*.  Changes in the fair value of the contractsthat are considered to be effective are recorded in other comprehensive incomeor loss until the hedged item is recorded in earnings.  Effective cash flow hedges are reclassifiedout of other comprehensive income or loss and into cost of sales when thehedged inventory is sold.  All of ourcash flow hedges are effective.  Theeffect of foreign exchange contracts on our financial position or results ofoperations has historically been immaterial. Total comprehensive loss for the three month period ended September 30,2008 was $4.3 million while comprehensive income for the same period in 2007was $1.2 million.

 

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4.               During 2001 and2002, we were named as a defendant in three complaints filed in the SuperiorCourt of California in and for the County of Los Angeles.  The plaintiffs sought to certify a statewideclass made up of some of our current and former employees, which they claim areowed compensation for overtime wages, penalties and interest. The plaintiffsalso sought attorney’s fees and costs. In October 2003, we entered into asettlement agreement with a sub-class of these plaintiffs consisting ofmanagers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements.  In August 2008, our motion forde-certification of the class of remaining plaintiffs was granted, therebydismissing their class action claim.  Theplaintiffs have appealed this ruling and some may pursue their claimsindividually.  A similar lawsuit, whichalso alleges claims concerning meal and rest periods, was filed in OrangeCounty, California in 2004, by managers, managers-in-training and assistantmanagers, and an amended complaint was filed in January 2007. In September 2008,the plaintiffs abandoned their class action claim and have elected to pursuetheir claims under California’s Private Attorney General Act as well as throughindividual proceedings.  Plaintiffs haveamended their complaint and discovery will continue.  We do not expect either of these complaintsto have a material impact to our financial statements.

 

Weintend to vigorously defend all pending actions. We do not believe these or anyother legal proceedings pending or threatened against us would have a materialadverse effect on our financial condition or results of operations.

 

5.                 Earnings percommon share

 
| ** **                                                                                         | ** ** | **Three Months Ended  September 30,**                  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Basic earnings (loss) per share:**                                                               | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                                                     | (4,297     | ) | $ | 1,156 |   |
| Weighted average number of common shares outstanding                                               |       | 41,441                                                                |       | 41,440 |   |
| Net income (loss) per common share                                                                 |       | $                                                                     | (0.10      | ) | $ | 0.03 |   |
|                                                                                               |       |                                                                  |       |   |   |
| **Diluted earnings per share:**                                                                    | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                                                     | (4,297     | ) | $ | 1,156 |   |
| Dilutive effect of employee stock options                                                          |       | —                                                                |       | 145 |   |
| Weighted average number of common shares outstanding                                               |       | 41,441                                                                |       | 41,440 |   |
| Weighted average number of common shares and diluted effect of  outstanding employee stock options |       | 41,441                                                                |       | 41,585 |   |
| Net income (loss) per common share                                                                 |       | $                                                                     | (0.10      | ) | $ | 0.03 |   |

 

6.               Revolvingcredit facility — At September 30, 2008, we had $36.5 million outstandingunder the revolving credit facility, $10.4 million of outstanding letters ofcredit and availability of $41.8 million under the revolving creditfacility.  Any borrowing under the revolvingcredit facility incurs interest at LIBOR or the prime rate, depending on thetype of borrowing, plus an applicable margin. We incur commitment fees of up to 0.25% on the unused portion of therevolving credit facility.  This rate isincreased or reduced as our average total leverage ratio changes. The weightedaverage interest rate at September 30, 2008 was 6.45%. Our indebtednessunder the credit facility is secured by a lien on our inventory and cashaccounts, as well as a pledge of our ownership interests in all of oursubsidiaries. On April 18, 2007, we entered into an amendment to ourexisting revolving credit facility. The amendment to the revolving creditfacility provided for, among other things: the extension of the maturity datefrom December 2009 to December 2010; changes in applicable commitmentfees and interest rates in connection with average leverage ratios; a reductionof the lenders’ revolving credit commitment from $210 million to $200 million;a change in the total leverage ratio from the ratio “3:00 to 1:0” to the ratio “2:50to 1:0”; and a “clean down” provision requirement that the sum of the aggregateprincipal amount of the outstanding borrowings may not exceed $30 million for15 consecutive days during the period from December 1 through January 31.The revolving credit facility contains certain restrictive covenants, whichamong other things, require us to comply with certain financial ratios coveringmaximum leverage, minimum fixed charge coverage and minimum interest coverage.Other restrictions affect our ability to incur liens or make certain otherrestricted payments, sell assets or merge or consolidate with any other person.As of September 30, 2008, we were in compliance with all covenants.

 

Whilewe believe we will remain in compliance with the restrictive covenants duringthe remainder of fiscal 2009, if forecasted results are not achieved, we wouldfail to comply with certain restrictive covenants.  We believe we could make the requiredprincipal payments and reduce our inventory purchasing plan accordingly if wewere unable to obtain additional funding under the facility.  Additionally, we could seek to obtain awaiver from our existing lender or refinance with a new lender to ensureadequate purchasing capability prior to the 2009 holiday season.  However, in the event we were not able toobtain additional funding, our business would be adversely affected.  Although we consider such a scenariounlikely, given the current credit environment, there is no assurance that theCompany would be able to raise additional financing on terms, conditions orcosts that would be favorable to us.

 

7.               Income Taxes -Tuesday Morning Corporation or one of its subsidiaries files income tax returnsin the U.S. federal jurisdiction, and various state jurisdictions. With fewexceptions, Tuesday Morning Corporation is no longer subject to U.S. state andlocal

 

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incometax examinations by tax authorities for years before 1999. The Internal RevenueService has concluded an examination of the Company for years ending before2005.  The effective tax rate of 39.4%was higher in the first quarter of fiscal 2009 as compared to the same quarterlast year of 37.8% primarily due to an increase in state income tax rates.

 

8.                  Cash and CashEquivalents — Credit card receivables of $3.0 million and $8.4 million at September 30,2008 and 2007, respectively, from MasterCard, Visa, Discover and AmericanExpress, as well as highly liquid investments with an original maturity date ofthree months or less are considered to be cash equivalents.

 

9.                  RecentAccounting Pronouncements — In June 2008, the Financial AccountingStandards Board (“FASB”) issued a staff position on Emerging Issues Task Force03-6-1 “Determining Whether Instruments Granted in Share-Based PaymentTransactions are Participating Securities.” The FSP addresses whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the earnings allocation in computing earnings per share (EPS)under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128,“Earnings per Share.”  The FSP iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. Early adoption of this FSP is not permitted.  The Company is currently evaluating theimpact of the adoption of this FSP on its consolidated financial statements.

 

InMarch of 2008, the FASB adopted Statement of Financial AccountingStandards (SFAS) No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities.*  This statement requires enhanced disclosuresabout an entity’s derivative and hedging activities.  The SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is currently evaluating the impact of the adoption of SFAS No. 161on its consolidated financial statements.

 

TheCompany adopted the provisions of SFAS No. 157, *Fair ValueMeasures* during the first quarter of fiscal 2009 with no materialimpact.  SFAS No. 157 applies tofair value measurements that are already required or permitted by otheraccounting standards, except for measurements of share-based payments andmeasurements that are similar to, but not intended to be fair value and doesnot change existing guidance as to whether or not an instrument is carried atfair value.

 

**Item 2.****                        ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with our unauditedConsolidated Financial Statements and the notes thereto included in Item 1 ofthis Quarterly Report on Form 10-Q.

 

**Introduction**

 

Weoperated 851 discount retail stores in 45 states as of September 30, 2008.We sell closeout home furnishings, housewares, gifts and related items, whichwe purchase at below wholesale prices. Our stores operate during periodic “salesevents” that occur in each month except January and July. We are generallyclosed for the first two weeks of January and July, which traditionallyhave been weaker months for retailers. We purchase first quality, brand namemerchandise at closeout prices and sell it at prices significantly below thosegenerally charged by department stores and specialty and catalog retailers. Wedo not sell seconds, irregulars, refurbished or factory rejects.

 

**Business Overview**

 

Theretail home furnishings industry has been negatively impacted by increasedsupply and competition within an already highly competitive promotionalenvironment, a trend we believe is likely to continue in the near term andpotentially longer. As a closeout retailer of home furnishings, we currentlycompete against a diverse group of retailers, including department and discountstores, specialty and e-commerce retailers and mass merchants, which sell,among other products, home furnishing products similar and often identical to thosewe sell. We also compete in particular markets with a substantial number ofretailers that specialize in one or more types of home furnishing and housewareproducts that we sell. Many of these competitors have substantially greaterfinancial resources than we do. Our competitors’ greater financial resourcesallow them to initiate and sustain aggressive price competition, initiatebroader marketing campaigns that reach a larger customer base, fund ongoingpromotional events and communicate more frequently with existing and potentialcustomers.

 

Inresponse to this trend in the retail home furnishings industry, we have beenfocused internally on implementing various strategic initiatives that webelieve will offset the impact of this trend including, but not limited to,striving to provide a merchandise assortment that evolves and adapts to thechanging needs and preferences of the Company’s customer base, continuing toreview the individual contributions of the existing store base and makingdecisions about the future of individual store locations, including whether toclose or relocate them, seeking to improve overall supply chain efficiency,including reviewing operational practices such as freight costs, vendor paymentterms and distribution processes, and striving to improve the Company’smarketing plan by maximizing traffic, increasing comparable store sales andexpanding the current customer base, while also maintaining costefficiency.  Given the uncertain economicenvironment, we have significantly decreased our inventory purchases.  We have also begun to more 

 

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closelymonitor and control our markdowns of inventory to avoid marking down items thatcontinue to sell through at reasonable rates. As a result, markdowns during the first quarter of 2009 fell to 4.3% ofsales versus the prior year quarter of 4.5% of sales.  We believe this strategy will contribute tooverall margin by focusing our mark downs on inventory that is truly slowmoving and not marking down items on the basis of age in inventory alonethereby allowing us to continue to exclude mark downs on opportunistic buyswhich are too large for us to sell through in one year.  However, if our forecasts for the criticalholiday season are not achieved, we may be required to record additionalmarkdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at September 30,2008 would result in a decline in gross profit and diluted earnings per sharefor the first quarter of fiscal 2009 of $1.5 million and $0.02,respectively.  Under current economicconditions, forecasts can vary significantly from the actual results we mayencounter.

 

Ourability to continuously attract buying opportunities for closeout merchandiseand to anticipate consumer demand as closeout merchandise becomes availablerepresents an uncertainty in our business. By their nature, specific closeoutmerchandise items are generally only available from manufacturers or vendors ona non-recurring basis. As a result, we do not have long-term contracts with ourvendors for supply, pricing or access to products, but make individual purchasedecisions, which are often for large quantities. Although we have many sourcesof merchandise and do not foresee any shortage of closeout merchandise in thenear future, we cannot assure that manufacturers or vendors will continue tomake desirable closeout merchandise available to us in quantities or on termsacceptable to us or that our buyers will continue to identify and takeadvantage of appropriate buying opportunities. Since this uncertainty is aby-product of our business, we expect it to be an ongoing concern.

 

Thestability of our earnings is also heavily influenced by macroeconomic factors.As the economy improves or worsens our business is often similarly impacted.Macroeconomic factors, such as the current conditions in the debt and housingmarkets, have impacted and will continue to impact our business by decreasingthe disposable income of our potential consumers. The decline in consumerconfidence levels has also had a negative impact on consumers’ ability andwillingness to spend discretionary income. At this time, we view the directionof the economy to be uncertain, which does not allow us a high degree ofvisibility or certainty in predicting our earnings.

 

Netsales for the first quarter of fiscal 2009 were approximately $173.4 million, adecrease of 14.0% compared to the same period last year. Comparable store salesfor the quarter ended September 30, 2008, decreased by 17.3% compared tothe same period last year which was primarily due to a decline in customertraffic and a decrease in average ticket.  Comparable store sales havedecreased for this and the prior four quarters of operations.  Net loss for the quarter was $4.3 million andloss per share was $0.10.

 

Wecontinue to remain focused on our long-term growth and profitability. The homefurnishings and high end decorative sectors of the U.S. economy continue to bechallenged by the highly competitive promotional environment and weakness inthe housing and debt markets.

 

Weopened twelve new stores and closed three existing stores during the firstquarter of fiscal 2009. In addition, we relocated six existing stores andexpanded two existing stores.

 

**Results of Operations**

 

Thefollowing table sets forth certain financial information from our consolidatedstatements of operations expressed as a percentage of net sales. Our businessis highly seasonal, with a significant portion of our net sales and most of ouroperating income generated in the quarter ending December 31, whichincludes the holiday season. There can be no assurance that the trends in salesgrowth or operating results will continue in the future.

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net sales                                       |       | 100.0                                                | %          | 100.0 | % |
| Cost of sales                                   |       | 63.0                                                 |       | 62.5 |   |
| Gross profit                                    |       | 37.0                                                 |       | 37.5 |   |
| Selling, general and administrative expense     |       | 40.9                                                 |       | 36.0 |   |
| Operating income (loss)                         |       | (3.9                                                 | )          | 1.5 |   |
| Net interest expense and other income (expense) |       | (0.2                                                 | )          | (0.6 | ) |
| Income (loss) before income taxes               |       | (4.1                                                 | )          | 0.9 |   |
| Income tax expense (benefit)                    |       | (1.6                                                 | )          | 0.3 |   |
| Net income (loss)                               |       | (2.5                                                 | )%         | 0.6 | % |

 

**Three Months Ended September 30, 2008**

**Compared to the Three Months Ended September 30, 2007**

 

Duringthe first quarter of fiscal 2009, net sales decreased to $173.4 million from$201.7 million, a decrease of $28.3 million or 14.0% compared to the quarterended September 30, 2007.  Thedecrease in first quarter sales was primarily due to a 17.3% decrease in 

 

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comparablestore sales, partially offset by an increase of $6.2 million in new storesales. The decrease in comparable sales for the first quarter of fiscal 2009was comprised of a 14.0% decrease in the number of transactions and a decreasein average transaction amount of 3.3%. Average store sales for the firstquarter of fiscal 2009 decreased 17.6% compared to the same period last year.Comparable store sales and sales per store decreased primarily due to lowertraffic levels. Management believes traffic levels were lower due to a numberof factors, including an increase in supply of home furnishing products, thehighly competitive promotional environment of the home furnishings retailsector, decreased discretionary income of consumers due to recent economicdisruptions and a weakness in the housing market.

 

Grossprofit decreased $11.5 million, or 15.2%, to $64.2 million for the three monthsended September 30, 2008 as compared to the same quarter last year inwhich gross profit was $75.7 million, and this decline was primarily the resultof lower sales volume. Our gross profit percentage decreased from 37.5% for thefirst quarter of fiscal 2008 to 37.0% for the first quarter of fiscal 2009.This decrease of 0.5% in gross profit percentage was primarily due to anincrease in distribution costs of 0.4% primarily due to the deleveraging offixed costs over a smaller cost of sales base.

 

Selling,general and administrative expenses decreased $1.6 million, or 2.2%, to $70.9million in the first quarter of fiscal 2009 from $72.5 million in the samequarter last year.  The decrease was attributable to decreases of $1.2million in store personnel costs, $0.9 in advertising expenses, $0.4 in creditcard processing costs and bank fees, $0.4 in supplies and $0.4 in stockcompensation expense.  These decreaseswere partially offset by a $1.5 million increase in store occupancy costs dueto an increase in the number of stores, and an increase of $0.4 in legalexpenses.  As a percentage of net sales, these expenses increased 4.9% to40.9% in the first quarter of fiscal 2009 from 36.0% in the same quarter lastyear which was primarily due to a decrease in our average store sales.  Selling, general and administrative expensesper average store were $84 thousand this quarter compared to$89 thousand in the same quarter last year, a decrease of 6.3%.

 

Theincome tax benefit for the quarter ended September 30, 2008 was $2.8million while the income tax provision was $0.7 million for the same periodlast year, reflecting effective tax rates of 39.4% and 37.8%, respectively. Theeffective tax rate was higher in the first quarter of fiscal 2009 as comparedto the same quarter last year primarily due to an increase in the expectedstate income tax rates.

 

**Liquidity and Capital Resources**

 

Wehave financed our operations with funds generated from operating activities andborrowings under our revolving credit facility. Our cash flows will continue tobe utilized for the expansion of our business. Our borrowings have historically peaked in the quarter ended September 30as we build inventory levels prior to the holiday selling season.  Giventhe seasonality of our business, the amount of borrowings under our revolvingcredit facility may fluctuate materially depending on various factors,including the time of year, our needs and the opportunity to acquiremerchandise inventory.  We have no off-balance sheet arrangements ortransactions with unconsolidated, limited purpose or variable interestentities, nor do we have material transactions or commitments involving relatedpersons or entities.

 

Netcash used in operating activities for the three months ended September 30,2008 and 2007 was $24.4 million and $45.8 million, respectively, representing a$21.4 million decrease. The $24.4 million use of cash in the first quarter offiscal 2009 was primarily due to an increase in our inventories of $65.9million offset by an increase in our accounts payable of $45.9 million.  The increases were primarily due to inventorypurchases during the first quarter of fiscal 2009 in preparation for theupcoming holiday season.  Our overallpurchases for the first fiscal quarter of 2009 were significantly less than thesame period last year.  There has been nomaterial change in our payment policy to vendors.

 

Capitalexpenditures principally associated with new store openings and warehouse andoffice equipment were $3.6 million and $3.3 million for the three months ended September 30,2008 and 2007, respectively. The increase in capital expenditures was due tothe opening of more new stores during the first quarter of fiscal 2009 ascompared to the same quarter last year. We expect to spend approximately $6.4million for additional capital expenditures during the remainder of fiscal2009, which will include the opening of new stores, store expansions,relocations of existing stores, enhancements of selected stores and purchasesof equipment for our distribution center and corporate office.

 

Netcash provided by financing activities of $24.3 million for the three monthsended September 30, 2008 is primarily from borrowings under our revolvingcredit facility of $63 million net of repayments of $35 million.

 

AtSeptember 30, 2008, we had $36.5 million outstanding under the revolvingcredit facility, $10.4 million of outstanding letters of credit andavailability of $41.8 million under the revolving credit facility.  Any borrowing under the revolving creditfacility incurs interest at LIBOR or the prime rate, depending on the type ofborrowing, 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 increased or reduced as ouraverage total leverage ratio changes. The weighted average interest rate at September 30,2008 was 6.45%. Our indebtedness under the credit facility is secured by a lienon our inventory and cash accounts, as well as a pledge of our ownershipinterests in all of our subsidiaries. On April 18, 2007, we entered intoan amendment to our existing revolving credit facility. The amendment to the revolvingcredit facility provided for, among other things: the extension of the maturitydate from December 2009 to December 2010; changes in applicablecommitment fees and interest rates in connection with average leverage ratios;a reduction of the lenders’ revolving credit commitment from $210 million to$200 million; and a “clean down” provision requirement that the sum of theaggregate principal amount of the outstanding 

 

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borrowingsmay not exceed $30 million for 15 consecutive days during the period from December 1through January 31. The revolving credit facility contains certainrestrictive covenants, which among other things, require us to comply withcertain financial ratios covering maximum leverage, minimum fixed chargecoverage and minimum interest coverage. Other restrictions affect our abilityto incur liens or make certain other restricted payments, sell assets or mergeor consolidate with any other person. As of September 30, 2008, we were incompliance with all covenants.

 

Whilewe believe we will remain in compliance with the restrictive covenants duringthe remainder of fiscal 2009, if forecasted results are not achieved, we wouldfail to comply with certain restrictive covenants.  We believe we could make the requiredprincipal payments and reduce our inventory purchasing plan accordingly if wewere unable to obtain additional funding under the facility.  Additionally, we would seek to obtain awaiver from our existing lender or refinance with a new lender to ensureadequate purchasing capability prior to the 2009 holiday season.  However, in the event we were not able toobtain additional funding, our business would be adversely affected.  Although we consider such a scenariounlikely, given the current credit environment, there is no assurance that theCompany would be able to raise additional financing on terms, conditions orcosts that would be favorable to us.

 

**Store Openings/Closings**

 
| ** **                         | ** ** | **Three Months  Ended  September 30  2008** | ** ** | **Three Months  Ended  September 30  2007** | ** ** | **Fiscal Year  Ended  June 30,  2008** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
|                               |       |                                                  |       |                                                  |       |                                             |       |
| Stores open at beginning of period |       | 842                                                   |       | 810                                                   |       | 810                                              |       |
| Stores opened during the period    |       | 12                                                    |       | 6                                                     |       | 48                                               |       |
| Stores closed during the period    |       | (3                                                    | )          | (3                                                    | )          | (16                                              | )          |
| Stores open at end of period       |       | 851                                                   |       | 813                                                   |       | 842                                              |       |

 

**Recent Accounting Pronouncements**

 

InJune 2008, the Financial Accounting Standards Board (“FASB”) issued astaff position on Emerging Issues Task Force 03-6-1 “Determining WhetherInstruments Granted in Share-Based Payment Transactions are ParticipatingSecurities.”  The FSP addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share (EPS) under the two class methoddescribed in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings perShare.”  The FSP is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. Early adoption of this FSP is not permitted.  The Company is currently evaluating theimpact of the adoption of this FSP on its consolidated financial statements.

 

InMarch of 2008, the FASB adopted Statement of Financial AccountingStandards (SFAS) No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities.*  This statement requires enhanced disclosuresabout an entity’s derivative and hedging activities.  The SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is currently evaluating the impact of the adoption of SFAS No. 161on its consolidated financial statements.

 

TheCompany adopted the provisions of SFAS No. 157, *Fair ValueMeasures* during the first quarter of fiscal 2009 with no materialimpact.  SFAS No. 157 applies tofair value measurements that are already required or permitted by otheraccounting standards, except for measurements of share-based payments andmeasurements that are similar to, but not intended to be fair value and doesnot change existing guidance as to whether or not an instrument is carried atfair value.

 

**Item 3.****    ****Quantitativeand Qualitative Disclosures About Market Risk**

 

Weare exposed to various market risks, including changes in foreign currencyexchange rates and interest rates. Market risk is the potential loss arisingfrom adverse changes in market prices and rates, such as foreign currencyexchange and interest rates. Based on our market risk sensitive instrumentsoutstanding as of September 30, 2008, we have determined that there was nomaterial market risk exposure to our consolidated financial position, resultsof operations or cash flows as of such date. Our market risk is discussed inmore detail in our Annual Report on Form 10-K for the fiscal year ended June 30,2008. We do not enter into derivatives or other financial instruments fortrading or speculative purposes. We have not been significantly affected by anychanges in the foreign currency exchange rate or interest rate market riskssince June 30, 2008.  The effect offoreign exchange contracts on our financial position or results of operationshas historically been and continue to be immaterial.

 

**Item 4.     Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

Basedon our management’s evaluation (with participation of our principal executiveofficer and our principal financial officer), our principal executive officerand our principal financial officer have concluded that our disclosure controlsand procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) underthe Securities Exchange Act of 1934, as amended) were effective as of September 30,2008 to ensure that information required to be disclosed by us in thisQuarterly Report on Form 10-Q was (1) recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and (2) accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,to allow timely decisions regarding required disclosure.

 

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

 

**Changes in Internal Control Over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended September 30, 2008 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

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**PART II- OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

During2001 and 2002, we were named as a defendant in three complaints filed in theSuperior Court of California in and for the County of Los Angeles.  The plaintiffs sought to certify a statewideclass made up of some of our current and former employees, which they claim areowed compensation for overtime wages, penalties and interest. The plaintiffsalso sought attorney’s fees and costs. In October 2003, we entered into asettlement agreement with a sub-class of these plaintiffs consisting ofmanagers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements.  In August 2008, our motion forde-certification of the class of remaining plaintiffs was granted, therebydismissing their class action claim.  Theplaintiffs have appealed this ruling and some may pursue their claimsindividually.  A similar lawsuit, whichalso alleges claims concerning meal and rest periods, was filed in OrangeCounty, California in 2004, by managers, managers-in-training and assistant managers,and an amended complaint was filed in January 2007. In September 2008,the plaintiffs abandoned their class action claim and have elected to pursuetheir claims under California’s Private Attorney General Act as well as throughindividual proceedings.  Plaintiffs haveamended their complaint and discovery will continue.  We do not expect either of these complaintsto have a material impact to our financial statements.

 

Weintend to vigorously defend all pending actions. We do not believe these or anyother legal proceedings pending or threatened against us would have a materialadverse effect on our financial condition or results of operations.

 

**Item 1A. Risk Factors**

 

Therehave been no material changes from our risk factors previously disclosed in “Item1A. Risk Factors” of our Form 10-K for the fiscal year ended June 30,2008.

 

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**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 (incorporated by reference to Exhibit 3.1.3 to the  Company’s Form 10-Q as filed with the Commission on May 2, 2005)                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.2                 |       | Amended  and Restated By-laws of the Company dated December 14, 2006  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  as filed with the Commission on December 20, 2006)                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.1                |       | Amended  and Restated Employment Agreement, dated September 29, 2008, between the  Company and Kathleen Mason (incorporated by reference to Exhibit 10.1 to  the Company’s Form 8-K filed with the Commission on October 3,  2008)                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.2                |       | Employment  Agreement dated October 2, 2008, between the Company and Michael J.  Marchetti (incorporated by reference to Exhibit 10.2 to the Company’s  Form 8-K as filed with the Commission on October 3, 2008)                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.3                |       | Form of  Performance Stock Award Agreement under the Tuesday Morning Corporation 2004  Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on October 10, 2008)                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.4                |       | Form of  Restricted Stock Award Agreement under the Tuesday Morning Corporation 2004  Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.2 of the Company’s Form 8-K as filed with the Commission  on October 10, 2008)                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.5                |       | Form of  Nonqualified Stock Option Agreement for Employees under the Tuesday Morning  Corporation 2004 Long-Term Incentive Plan (incorporated by reference to  Exhibit 10.3 of the Company’s Form 8-K as filed with the Commission  on October 10, 2008)                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 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 *                                                                                                                                                                       |

 

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

 

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SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **                                                | **TUESDAY MORNING CORPORATION** |
|-----------------------------------------------------------|---------------------------------|
|                                                      |                            |   | (Registrant) |
|                                                      |                            |   |   |
| DATE:     November 1,  2008 |                            | By: | /s/  Stephanie Bowman |
|                                                      |                            |   | Stephanie  Bowman, Executive Vice President,  Chief Financial Officer and Secretary  (Principal Financial Officer and duly authorized to sign this report on  behalf of the registrant) |

 

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**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 (incorporated by reference to Exhibit 3.1.3 to the  Company’s Form 10-Q (File No. 000-19658) as filed with the  Commission on May 2, 2005)                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.2                  |       | Amended  and Restated By-laws of the Company dated December 14, 2006  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  (File No. 000-19658) as filed with the Commission on December 20,  2006)                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.1                 |       | First  Amendment to the Tuesday Morning Corporation employee Stock Purchase Plan  dated September 19, 2007                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.2                 |       | Amended  and Restated Employment Agreement, dated September 29, 2008, between the  Company and Kathleen Mason (incorporated by reference to Exhibit 10.1 to  the Company’s Form 8-K filed with the Commission on October 3,  2008)                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.3                 |       | Employment  Agreement dated October 2, 2008, between the Company and Michael J.  Marchetti (incorporated by reference to Exhibit 10.2 to the Company’s  Form 8-K as filed with the Commission on October 3, 2008)                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.4                 |       | Form of  Performance Stock Award Agreement under the Tuesday Morning Corporation 2004  Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on October 10, 2008)                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.5                 |       | Form of  Restricted Stock Award Agreement under the Tuesday Morning Corporation 2004  Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2  of the Company’s Form 8-K as filed with the Commission on  October 10, 2008)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 31.1                 |       | Form of  Nonqualified Stock Option Agreement for Employees under the Tuesday Morning  Corporation 2004 Long-Term Incentive Plan (incorporated by reference to  Exhibit 10.3 of the Company’s Form 8-K as filed with the Commission  on October 10, 2008)                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 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*                                                                                                                                                                |

 

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*                        Thecertifications attached hereto as Exhibit 32.1 and Exhibit 32.2 arefurnished 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 Actof 1934, as amended.

 

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