Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark  One)**                                             | ** ** | ** **                                                                                         |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                         |
| x                                                           | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                  | ** ** | ** **                                                                                         |
| **FOR  THE QUARTERLY PERIOD ENDED September 30, 2009** |
|                                                        |       |                                                                                               |
| **OR**                                                      |
|                                                        |       |                                                                                               |
| o                                                           | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THETRANSITION PERIOD FROM          TO          **

 

**Commissionfile number 0-19658**

 

**TUESDAYMORNING CORPORATION**

(Exact Name of Registrantas Specified in its Charter)

 

| **Delaware**                                                     | ** ** | **75-2398532**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |

 

**6250 LBJFreeway**

**Dallas,Texas 75240**

(Address, including zipcode, of principal executive offices)

 

**(972)387-3562**

(Registrant’s telephonenumber, including area code)

 

**Notapplicable**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  Noo

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

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

 

| **Class**                                | ** ** | **Outstanding at October 28, 2009** |
|------------------------------------------|------------|---------------------------------------------------------|
| Common Stock, par value  $0.01 per share |       | 42,836,707                                              |

 

 

 

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**Forward-LookingStatements**

 

*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 of FinancialCondition and Results of Operations,” among others. Forward-looking statementstypically are identified by the use of terms such as “may,” “will,” “should,” “expect,”“anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-lookingstatements are expressed differently. You should consider statements thatcontain these words carefully because they describe our expectations, plans,strategies and goals and our beliefs concerning future business conditions, ourfuture results of operations, our future financial position, and our businessoutlook or state other “forward-looking” information.*

 

*Readers are referred to “Item 1A.Risk Factors” of our Annual Report on Form 10-K for the year ended June 30,2009 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:*

 

·                                          *uncertainties regardingour ability to open, relocate and expand stores in new and existing markets and operate these stores on aprofitable basis;*

 

·                                          *conditions affectingconsumer spending and the impact, depth and duration of the current economicdownturn;*

 

·                                          *inclement weathe*r

 

·                                          *changes in our merchandise mix;*

 

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

 

·                                          *increased or new competition;*

 

·                                          *loss or departure ofone or more members of our senior management or experienced buying andmanagement personnel;*

 

·                                          *an increase in the cost or adisruption in the flow of our products;*

 

·                                          *seasonal and quarterlyfluctuations;*

 

·                                          *fluctuations in ourcomparable store results;*

 

·                                          *our ability to operate in highlycompetitive markets and to compete effectively;*

 

·                                          *our ability to operateinformation systems and implement new technologies effectively;*

 

·                                          *our ability to generatestrong cash flows from our operations;*

 

·                                          *our ability toanticipate and respond in a timely manner to changing consumer demands andpreferences; and*

 

·                                          *our ability to generatestrong holiday season sales.*

 

*The forward-looking statements madein this Form 10-Q relate only to events as of the date on which thestatements were made. Except as may be required by law, we undertake noobligation to update our forward-looking statements to reflect events andcircumstances after the date on which the statements were made or to reflectthe occurrence of unanticipated events.*

 

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

 

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| **PART I - FINANCIAL  INFORMATION**                                                                  | 1                                                                                                  |
|-----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                      |                                                                                               |
| Item  1 — Financial Statements                                                                       | 1                                                                                                  |
|                                                                                                      |                                                                                               |   |
|                                                                                                      | Consolidated  Balance Sheets as of September 30, 2009 and June 30, 2009                  | 1 |
|                                                                                                      |                                                                                               |   |
|                                                                                                      | Consolidated Statements of Operations for the Three  Months Ended September 30, 2009 and 2008 | 2 |
|                                                                                                      |                                                                                               |   |
|                                                                                                      | Consolidated Statements of Cash Flows for the Three  Months Ended September 30, 2009 and 2008 | 3 |
|                                                                                                      |                                                                                               |   |
|                                                                                                      | Notes to Consolidated Financial Statements                                                         | 4 |
|                                                                                                      |                                                                                               |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 7                                                                                                  |
|                                                                                                      |                                                                                               |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                 | 10                                                                                                 |
|                                                                                                      |                                                                                               |
| Item 4 — Controls and Procedures                                                                     | 10                                                                                                 |
| ** **                                                                                                | ** **                                                                                         |
| **PART II  — OTHER INFORMATION**                                                                | 10                                                                                                 |
|                                                                                                      |                                                                                               |
| Item  1 — Legal Proceedings                                                                          | 10                                                                                                 |
|                                                                                                      |                                                                                               |
| Item 1A — Risk Factors                                                                               | 11                                                                                                 |
|                                                                                                      |                                                                                               |
| Item 6 — Exhibits                                                                                    | 11                                                                                                 |

 

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Table of Contents

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**TuesdayMorning Corporation**

**ConsolidatedBalance Sheets**

**September 30,2009 (unaudited) and June 30, 2009**

**(Inthousands, except per share data)**

 
| ** **                                                                                                                                                                                                        | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| **ASSETS**                                                                                                                                                                                                        |       |                         |       |                    |       |
| Current assets:                                                                                                                                                                                                   |       |                         |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                            | 5,602      |                    | $          | 5,783 |   |
| Inventories                                                                                                                                                                                                       |       | 280,716                      |       | 223,628                 |       |
| Prepaid expenses and  other current assets                                                                                                                                                                        |       | 14,472                       |       | 10,197                  |       |
| Deferred income taxes                                                                                                                                                                                             |       | —                       |       | 1,545                   |       |
| Total current assets                                                                                                                                                                                              |       | 300,790                      |       | 241,153                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Property and equipment,  net                                                                                                                                                                                      |       | 71,961                       |       | 72,356                  |       |
| Deferred financing  costs                                                                                                                                                                                         |       | 3,975                        |       | 4,211                   |       |
| Other assets                                                                                                                                                                                                      |       | 1,222                        |       | 1,521                   |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total Assets                                                                                                                                                                                                      |       | $                            | 377,948    |                    | $          | 319,241 |   |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                     |       |                         |       |                    |       |
| Current liabilities:                                                                                                                                                                                              |       |                         |       |                    |       |
| Accounts payable                                                                                                                                                                                                  |       | $                            | 102,246    |                    | $          | 47,109 |   |
| Accrued liabilities                                                                                                                                                                                               |       | 32,888                       |       | 28,765                  |       |
| Income taxes payable                                                                                                                                                                                              |       | 77                           |       | 1,564                   |       |
| Deferred income taxes                                                                                                                                                                                             |       | 576                          |       | —                  |       |
| Total current  liabilities                                                                                                                                                                                        |       | 135,787                      |       | 77,438                  |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Revolving credit  facility                                                                                                                                                                                        |       | 5,300                        |       | —                  |       |
| Deferred rent                                                                                                                                                                                                     |       | 3,506                        |       | 4,171                   |       |
| Income tax payable –  non current                                                                                                                                                                            |       | 612                          |       | —                  |       |
| Deferred income taxes                                                                                                                                                                                             |       | 2,009                        |       | 2,279                   |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total Liabilities                                                                                                                                                                                                 |       | 147,214                      |       | 83,888                  |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| 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; 42,836,707 shares issued and  outstanding at September 30, 2009 and 42,836,707 shares issued and  outstanding at June 30, 2009 |       | 428                          |       | 428                     |       |
| Additional paid-in  capital                                                                                                                                                                                       |       | 203,669                      |       | 203,633                 |       |
| Retained earnings                                                                                                                                                                                                 |       | 26,673                       |       | 31,334                  |       |
| Accumulated other  comprehensive loss                                                                                                                                                                             |       | (36                          | )          | (42                     | )          |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total Stockholders’  Equity                                                                                                                                                                                  |       | 230,734                      |       | 235,353                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                  |       | $                            | 377,948    |                    | $          | 319,241 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Operations (unaudited)**

**(Inthousands, except per share data)**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                          |       |                                                 |       |   |   |
| Net sales                                     |       | $                                                    | 165,867    |   | $ | 173,401 |   |
| Cost of sales                                 |       | 102,488                                              |       | 109,245 |   |
| Gross profit                                  |       | 63,379                                               |       | 64,156 |   |
| Selling, general and  administrative expenses |       | 70,312                                               |       | 70,910 |   |
| Operating loss                                |       | (6,933                                               | )          | (6,754 | ) |
| Other income (expense):                       |       |                                                 |       |   |   |
|                                          |       |                                                 |       |   |   |
| Interest expense                              |       | (751                                                 | )          | (411 | ) |
| Other income (expense),  net                  |       | (14                                                  | )          | 80 |   |
|                                          |       | (765                                                 | )          | (331 | ) |
| Loss before income  taxes                     |       | (7,698                                               | )          | (7,085 | ) |
| Income tax benefit                            |       | (3,037                                               | )          | (2,788 | ) |
|                                          |       |                                                 |       |   |   |
| Net loss                                      |       | $                                                    | (4,661     | ) | $ | (4,297 | ) |
|                                          |       |                                                 |       |   |   |
| **Loss  Per Share**                           |       |                                                 |       |   |   |
| Net loss per common  share:                   |       |                                                 |       |   |   |
| Basic                                         |       | $                                                    | (0.11      | ) | $ | (0.10 | ) |
| Diluted                                       |       | $                                                    | (0.11      | ) | $ | (0.10 | ) |
| Weighted average number  of common shares:    |       |                                                 |       |   |   |
| Basic                                         |       | 41,686                                               |       | 41,441 |   |
| Diluted                                       |       | 41,686                                               |       | 41,441 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Cash Flows (unaudited)**

**(Inthousands)**

 
| ** **                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                                                              |       |                                                 |       |   |   |
| **Net  cash flows from operating activities:**                                    |       |                                                 |       |   |   |
| Net loss                                                                          |       | $                                                    | (4,661     | ) | $ | (4,297 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:      |       |                                                 |       |   |   |
| Depreciation and  amortization                                                    |       | 3,929                                                |       | 4,212 |   |
| Amortization of  financing fees                                                   |       | 236                                                  |       | 50 |   |
| Deferred income taxes                                                             |       | 1,443                                                |       | — |   |
| Loss on disposal of  assets                                                       |       | 222                                                  |       | 139 |   |
| Stock-based  compensation                                                         |       | 533                                                  |       | 709 |   |
| Other                                                                             |       | 6                                                    |       | (44 | ) |
| Change in operating  assets and liabilities:                                      |       |                                                 |       |   |   |
| Inventories                                                                       |       | (57,176                                              | )          | (65,940 | ) |
| Prepaid and other  assets                                                         |       | (3,976                                               | )          | (8,986 | ) |
| Accounts payable                                                                  |       | 51,000                                               |       | 45,941 |   |
| Accrued liabilities                                                               |       | 3,393                                                |       | 2,226 |   |
| Deferred rent                                                                     |       | 65                                                   |       | (36 | ) |
| Income taxes payable                                                              |       | (875                                                 | )          | 1,585 |   |
| Net cash used in  operating activities                                            |       | (5,861                                               | )          | (24,441 | ) |
| **Net  cash flows from investing activities:**                                    |       |                                                 |       |   |   |
| Capital expenditures                                                              |       | (3,757                                               | )          | (3,637 | ) |
| Net cash used in  investing activities                                            |       | (3,757                                               | )          | (3,637 | ) |
| **Net  cash flows from financing activities:**                                    |       |                                                 |       |   |   |
| Borrowings under  revolving credit facility                                       |       | 33,954                                               |       | 63,000 |   |
| Repayments under  revolving credit facility                                       |       | (28,654                                              | )          | (35,000 | ) |
| Change in cash  overdraft                                                         |       | 4,137                                                |       | (3,665 | ) |
| Proceeds from exercise  of common stock options and stock purchase plan purchases |       | —                                               |       | 1 |   |
| Net cash provided by  financing activities                                        |       | 9,437                                                |       | 24,336 |   |
| Net decrease in cash  and cash equivalents                                        |       | (181                                                 | )          | (3,742 | ) |
| Cash and cash  equivalents, beginning of period                                   |       | 5,783                                                |       | 8,630 |   |
| Cash and cash  equivalents, end of period                                         |       | $                                                    | 5,602      |   | $ | 4,888 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**TuesdayMorning Corporation**

**Notesto Consolidated Financial Statements (unaudited)**

 

1.                 Basis of presentation — The unaudited consolidatedinterim financial statements included herein have been prepared by us pursuantto the rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to such rules andregulations. These financial statements include all adjustments, consistingonly of those of a normal recurring nature, which, in the opinion ofmanagement, are necessary to present fairly the results of the interim periodspresented and should be read in conjunction with the consolidated financialstatements and notes thereto in our Form 10-K for the year ended June 30,2009.  Due to the seasonal nature of our business, the results ofoperations for the quarter are not indicative of the results to be expected forthe entire fiscal year.

 

The balance sheet at June 30, 2009 has beenderived from the audited consolidated financial statements at that date butdoes not include all of the information and notes required by U.S. generallyaccepted accounting principles for complete financial statements. For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in our Form 10-K for the year ended June 30, 2009.  Weoperate our business as a single operating segment.

 

We have evaluated subsequent events through the timeand date of the filing of these financial statements.  No events occurred that required disclosure.

 

2.             Stock-based compensation — We account for ourstock-based compensation plan in accordance with Accounting StandardsCodification (“ASC”) 718 (formerly Statement of Financial Accounting  Standards (“SFAS”) No. 123R), “ShareBased Payment.”  Under ASC 718, allstock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as an expense in thestatement of operations over the requisite service period.

 

We have established the Tuesday Morning Corporation1997 Long-Term Equity Incentive Plan, as amended (the “1997 Plan”), the TuesdayMorning Corporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004Plan”), and the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan(the “2008 Plan”) which allow for the granting of stock options to directors,officers, key employees of, and certain other key individuals who performservices for, us and our subsidiaries. The 1997 Plan authorized grants ofoptions to purchase up to 4,800,000 shares of authorized, but unissued commonstock. Equity awards may no longer be granted under the 1997 Plan but optionsgranted under the plan are still exercisable. The 2004 Plan and the 2008 Planauthorize grants of options to purchase up to 2,000,000, and 2,500,000 shares,respectively, of authorized, but unissued common stock.

 

Options granted under the 1997 Plan and the 2004 Plantypically vest over periods of three to five years and expire in ten yearswhile options granted under the 2008 Plan typically vest over periods of one tothree years and expire in ten years. Options granted under the 2004 Plan andthe 2008 Plan may have certain performance requirements in addition to serviceterms. If the performance conditions are not satisfied, the options areforfeited. No options with performance conditions were outstanding as of September 30,2009. The exercise prices of the options range between $0.63 and $35.23, whichrepresents fair market value on the grant date of the shares of common stock intowhich such options are exercisable. At September 30, 2009, all sharesavailable under the 1997 Plan had been granted and the 1997 Plan expiredpursuant to its terms as of December 29, 2007, although certain awardsremain outstanding under the 1997 Plan.  There were 1,331,334 shares and540,541 shares available for grant under the 2004 Plan and 2008 Plan at September 30,2009, respectively.  Stock options areawarded with a strike price equal to the average of the high and low tradingprices of the Company’s common stock on the date of grant in the 1997 Plan andthe 2004 Plan. Stock options are awarded with a strike price equal to theclosing price of the Company’s common stock on the date of the grant in the2008 Plan.

 

Under the terms of the 2004 Plan and the 2008 Plan, wemay also grant restricted stock to compensate certain directors, officers, keyemployees of, and certain other key individuals who perform services for, usand our subsidiaries. Restricted stock awards are not transferable, but bear rightsof ownership including voting and dividend rights. Shares are valued at themarket price at the date of award. As of September 30, 2009 there were1,151,190 shares of restricted stock outstanding with a weighted average fairvalue of $1.79 per share under the 2004 Plan and 2008 Plan.

 

During the quarters ended September 30, 2009 and2008, we recognized stock-based compensation expense as follows (in thousands):

 
| ** **                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Total cost of  stock-based compensation during the period |       | $        | 444        |     | $          | 855 |   |
| Amounts capitalized in  ending inventory                  |       | (181     | )          | (402     | )          |
| Amounts recognized in  expense previously capitalized     |       | 269      |       | 256      |       |
| Amounts charged against  income for the period before tax |       | $        | 532        |     | $          | 709 |   |

 

3.               Comprehensive income or loss —Comprehensive income or loss is defined as net income or loss plus the changein equity during a period from transactions and other events, excluding thoseresulting from investments by and distributions to stockholders.  Weaccount for foreign currency forward contracts as cash flow hedges inaccordance with ASC 815 (formerly SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities.” Changes in the fair value of the contracts that are considered to be effectiveare recorded in other comprehensive income or loss until the hedged item isrecorded in earnings.  Effective cash flow hedges are reclassified out ofother comprehensive income or loss and into cost of sales when the hedgedinventory is sold.  Ineffective cash flow hedges are recorded in otherincome or loss and were not material for the periods presented.  The effect of foreign exchange contracts onour financial position or results of operations has historically beenimmaterial.  Comprehensive loss for the three-month period ended September 30,2009 was $4.7 million while comprehensive loss was $4.3 million for thethree-month period ended September 30, 2008.

 

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4.               Commitments and Contingencies — 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. Theplaintiffs sought to certify a statewide class made up of some of our currentand former employees, which they claim are owed compensation for overtimewages, penalties and interest. The plaintiffs also sought attorney’s fees andcosts. In October 2003, we entered into a settlement agreement with asub-class of these plaintiffs consisting of managers-in-training and managementtrainees which was paid in November 2005 with no material impact to ourfinancial statements. A store manager class was certified. However, in August 2008,our motion for de-certification of the class of store managers was granted,thereby dismissing their class action claim. The plaintiffs have appealed thisruling and oral argument has taken place, but there has been no ruling. Inaddition, some plaintiffs may choose to pursue their claims individually. We donot expect any of these complaints to have a material impact on our financialstatements.

 

A similar lawsuit, which also alleges claimsconcerning meal and rest periods, was filed in Orange County, California in2004, by managers, managers-in-training and assistant managers, and an amendedcomplaint was filed in July 2007. In December 2008, the fourplaintiffs abandoned their class action claim and have elected to pursue theirindividual claims as well as claims under California’s Private Attorney GeneralAct with respect to such allegations. Trial on this matter began in September 2009.A companion lawsuit alleging the same claims was filed in December 2008 onbehalf of approximately thirty-four additional individual plaintiffs. Thislawsuit includes a claim under California’s Private Attorney General Act. Thecompanion lawsuit is still in the initial stages of litigation. We do notexpect any of these complaints to have a material impact on our financialstatements.

 

In December 2008, a class action lawsuit wasfiled by hourly, non-exempt employees in the Superior Court of California inand for the County of Los Angeles, alleging claims covering meal and restperiod violations. This case has been stayed pending the outcome of anothercase. We do not expect this complaint to have a material impact on ourfinancial statements.

 

In September 2009, we received notice of ajudgment filed in the District County Court of Texas in and for the County ofBexar.  The plaintiff claimed violationsunder the Equal Employment Opportunity Act (EEOC).  We have appealed the judgment and do notexpect it to have a material impact to our financial statements.

 

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

 

5.               Earnings per common share — The following table setsforth the computation of basic and diluted earnings per common share:

 
| ** **                                                                                         | ** ** | **Three Months Ended  September 30,**                  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                                                              | ** ** | **2008** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Basic  loss per share:**                                                                         |       |                                                                  |       |   |   |
| Net loss                                                                                           |       | $                                                                     | (4,661     | ) | $ | (4,297 | ) |
| Weighted average number  of common shares outstanding                                              |       | 41,686                                                                |       | 41,441 |   |
| Net loss per common  share                                                                         |       | $                                                                     | (0.11      | ) | $ | (0.10 | ) |
|                                                                                               |       |                                                                  |       |   |   |
| **Diluted  loss per share:**                                                                       |       |                                                                  |       |   |   |
| Net loss                                                                                           |       | $                                                                     | (4,661     | ) | $ | (4,297 | ) |
| Dilutive effect of  employee stock options and restricted stock awards                             |       | —                                                                |       | — |   |
| Weighted average number  of common shares outstanding                                              |       | 41,686                                                                |       | 41,441 |   |
| Weighted average number  of common shares and diluted effect of outstanding employee stock options |       | 41,686                                                                |       | 41,441 |   |
| Net loss per common  share                                                                         |       | $                                                                     | (0.11      | ) | $ | (0.10 | ) |

 

Options of 2,981,292 andrestricted stock awards of 1,151,190 were excluded from the diluted earningsper share calculation for September 30, 2009, because the options and awardswould have been anti-dilutive in a net loss quarter. Options of 2,600,065 andrestricted stock awards of 1,128,320 were excluded from the diluted earning pershare calculations for September 30, 2008, because the awards would have beenanti-dilutive in a net loss quarter.

 

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6.               Revolving credit facility — On December 15,2008, we entered into a new credit agreement providing for an asset-based,five-year senior secured revolving credit facility (the “Revolving CreditFacility”) in the amount of up to $150.0 million which matures on December 15,2013 and on January 28, 2009, we entered into an amendment to increase theamount from $150.0 million to $180.0 million. The revolving creditfacility may be increased by up to $70.0 million, not to exceed anaggregate total commitment of $250.0 million. Our indebtedness under thecredit facility is secured by a lien on substantially all of our assets. Therevolving credit facility contains, among other things, a “clean down”provision requiring that the sum of the aggregate principal amount of theoutstanding loans and undrawn letters of credit may not exceed$45.0 million for 30 consecutive days during the period from December 28through January 31. The revolving credit facility contains certainrestrictive covenants, which affect, among others, our ability to incur liensor incur additional indebtedness, sell assets or merge or consolidate with anyother entity. Unless borrowings and letters of credit exceed 82.5% of themaximum amounts available under the revolving credit facility or an event ofdefault exists, the Company does not have to comply with any financialcovenants. Should such an event occur, the Company is required to comply with aconsolidated fixed charge coverage ratio of 1:1.  As of September 30, 2009, we were incompliance with all required covenants.

 

At September 30, 2009, we had $5.3 millionoutstanding under the revolving credit facility, $12.4 million of outstandingletters of credit and availability of $130.9 million under the revolving creditfacility. Letters of credit under the revolving credit facility are primarilyfor self-insurance purposes. We incur commitment fees of up to 0.75% on theunused portion of the revolving credit facility. Any borrowing under therevolving credit facility incurs interest at LIBOR or the prime rate, dependingon the type of borrowing, plus an applicable margin. These rates are increasedor reduced as our average daily availability changes. The weighted averageinterest rate for prime rate loans at September 30, 2009 was 6.0%.  There were no LIBOR loans during the quarterended September 30, 2009.

 

The fair value of financial instruments is determinedby reference to various market data and other valuation techniques asappropriate.  The only material financialinstrument we carry is our revolving credit facility.  We believe our debt, as recorded,approximates fair value as the interest rates are variable based on currentmarket rates.

 

7.               Income Taxes — Tuesday Morning Corporation or one ofits subsidiaries files income tax returns in the U.S. federal jurisdiction, andvarious state jurisdictions. With few exceptions, Tuesday Morning Corporationis no longer subject to U.S. state and local income tax examinations by taxauthorities for years before 1999. The Internal Revenue Service has concludedan examination of the Company for all tax years through June 30,2007.  The effective tax rate for the quarter ended September 30,2009 was 39.5% compared to 39.4% for the same quarter last year.  As of the end of the first quarter of fiscalyear 2010, the Company’s annual effective tax rate could not be reliablyestimated as a result of the difficulty in forecasting fiscal 2010 profit orloss.

 

8.            Cash and Cash Equivalents — Credit card receivables of$3.5 million and $2.7 million at September 30, 2009 and June 30,2009, respectively, from MasterCard, Visa, Discover and American Express, aswell as highly liquid investments with an original maturity date of threemonths or less are considered to be cash equivalents.

 

9.               Recent Accounting Pronouncements — In June 2008,the Financial Accounting Standards Board (“FASB”) issued FASB ASC 260-10-45 (formerlyEmerging Issues Task Force 03-6-1) “Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities.”  ASC260-10-45 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.”  ASC 260-10-45 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those years.  The Company adopted the provisions of ASC 260-10-45on its consolidated financial statements effective July 1, 2009 with nomaterial impact to the financial statements.

 

In June 2009, the FASB issued ASC 105-10(formerly SFAS No. 168), “Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles.” The FASB AccountingStandards Codification  (“Codification”) has become the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inaccordance with GAAP. All existing accounting standard documents are supersededby the Codification and any accounting literature not included in theCodification will not be authoritative. However, rules and interpretivereleases of the SEC issued under the authority of federal securities laws willcontinue to be the source of authoritative generally accepted accountingprinciples for SEC registrants. Effective September 30, 2009, allreferences made to GAAP in our consolidated financial statements will includethe new Codification numbering system along with original references. TheCodification does not change or alter existing GAAP and, therefore, will nothave an impact on our financial position, results of operations or cash flows.

 

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

 

The following discussion should be read in conjunctionwith our unaudited Consolidated Financial Statements and the notes theretoincluded in Item 1 of this Quarterly Report on Form 10-Q.

 

**Introduction**

 

We operated 850 discount retail stores in 43 states asof September 30, 2009. We sell closeout home furnishings, housewares,gifts and related items, which we purchase at below wholesale prices. Ourstores operate during periodic “sales events” that occur in each month except January andJuly. We are generally closed for the first two weeks of January and July,which traditionally have been weaker months for retailers. We purchase firstquality, brand name merchandise at closeout prices and sell it at pricessignificantly below those generally charged by department stores and specialtyand catalog retailers. We do not sell seconds, irregulars, refurbished orfactory rejects.

 

**Business Overview**

 

The retail home furnishings industry has beennegatively impacted by increased supply and competition within an alreadyhighly competitive promotional environment, a trend we believe is likely tocontinue in the near term and potentially longer. As a closeout retailer ofhome furnishings, we currently compete against a diverse group of retailers,including department and discount stores, specialty and e-commerce retailersand mass merchants, which sell, among other products, home furnishing productssimilar and often identical to those we sell. We also compete in particularmarkets with a substantial number of retailers that specialize in one or moretypes of home furnishing and houseware products that we sell. Many of thesecompetitors have substantially greater financial resources than we do. Ourcompetitors’ greater financial resources allow them to initiate and sustainaggressive price competition, initiate broader marketing campaigns that reach alarger customer base, fund ongoing promotional events and communicate morefrequently with existing and potential customers.

 

In response to increased competition in the retailhome furnishings and housewares industries, we have been focused internally onimplementing various strategic initiatives that we believe will offset theimpact of this trend including, but not limited to, striving to provide amerchandise assortment that evolves and adapts to the changing needs andpreferences of our customer base, continuing to review the individualcontributions of the existing store base and making decisions about the futureof individual store locations including whether to close or relocate them,seeking to improve overall supply chain efficiency including reviewingoperational practices such as freight costs, vendor payment terms, distributionprocesses and increasing inventory turns, and striving to optimize ourmarketing plan by maximizing traffic, increasing comparable store sales andexpanding the current customer base, while also increasing cost efficiency. Weare also striving to optimize our purchasing of inventory to best matchcustomer demand.

 

We also continue toclosely monitor and control our markdowns of inventoryto avoid marking down items that continue to sell through at reasonablerates.  Markdowns during the first quarter of fiscal 2010 were 3.2% ofsales versus 4.3% of sales for the same period last year.  We believe thisstrategy has and will contribute to overall margin by focusing our markdowns oninventory that is truly slow moving and not marking down items on the basis ofage in inventory alone thereby allowing us to continue to exclude markdowns onopportunistic buys which are too large for us to sell through in oneyear.  However, if our forecasts for the holiday season are not achieved,we may be required to record additional markdowns that could exceed historicallevels.  The effect of a 0.5% markdown in the value of our inventory at September 30,2009 would result in a decline in gross profit and diluted earnings per sharefor the first quarter of fiscal 2009 of $1.4 million and $0.03,respectively.  Under current economic conditions, forecasts can varysignificantly from the actual results we may encounter.

 

Our ability to continuously attract buyingopportunities for closeout merchandise, and to anticipate consumer demand ascloseout merchandise becomes available, represents an uncertainty in ourbusiness. By their nature, specific closeout merchandise items are generallyonly available from manufacturers or vendors on a non-recurring basis. As aresult, we do not have long-term contracts with our vendors for supply, pricingor access to products, but make individual purchase decisions, which are oftenfor large quantities. Although we have many sources of merchandise and do notforesee any shortage of closeout merchandise in the near future, we cannotassure that manufacturers or vendors will continue to make desirable closeout merchandiseavailable to us in quantities or on terms acceptable to us or that our buyerswill continue to identify and take advantage of appropriate buyingopportunities. Since this uncertainty is a by-product of our business, weexpect it to be an ongoing concern.

 

The stability of our earnings is also heavilyinfluenced by macroeconomic factors. As the economy improves or worsens ourbusiness is often similarly impacted. Macroeconomic factors, such as thecurrent conditions in the debt and housing markets and unemployment, haveimpacted and will continue to impact our business by decreasing the disposableincome of our potential consumers. The decline in consumer confidence levelshas also had a negative impact on consumers’ ability and willingness to spend discretionaryincome. At this time, we view the direction of the economy to be uncertain,which does not allow us a high degree of visibility or certainty with respectto our future earnings.

 

Net sales for the first quarter of fiscal 2010 wereapproximately $165.9 million, a decrease of 4.3% compared to the same periodlast year. Comparable store sales for the quarter ended September 30,2009, decreased by 5.8% compared to the same period last year which wasprimarily due to a decline in customer traffic and a decrease in averageticket.  Comparable store sales have decreased for this and the prioreight quarters.  Net loss for the quarter was $4.7 million and loss pershare was $0.11.

 

We continue to remain focused on our long-term growthand profitability. The home furnishings and high end decorative sectors of theU.S. economy continue to be challenged by the highly competitive promotionalenvironment and weakness in the housing and debt markets.

 

We opened ten new stores and closed seventeen existingstores during the first quarter of fiscal 2010. In addition, we relocated nineexisting stores.

 

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**Resultsof Operations**

 

The following table sets forth certain financialinformation from our consolidated statements of operations expressed as apercentage of net sales. Our business is highly seasonal, with a significantportion of our net sales and most of our operating income generated in thequarter ending December 31, which includes the holiday season. There canbe no assurance that the trends in sales or operating results will continue inthe future.

 
| ** **                                       | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net sales                                        |       | 100.0                                                | %          | 100.0 | % |
| Cost of sales                                    |       | 61.8                                                 |       | 63.0 |   |
| Gross profit                                     |       | 38.2                                                 |       | 37.0 |   |
| Selling, general and  administrative expense     |       | 42.4                                                 |       | 40.9 |   |
| Operating loss                                   |       | (4.2                                                 | )          | (3.9 | ) |
| Net interest expense  and other income (expense) |       | (0.4                                                 | )          | (0.2 | ) |
| Loss before income  taxes                        |       | (4.6                                                 | )          | (4.1 | ) |
| Income tax benefit                               |       | (1.8                                                 | )          | (1.6 | ) |
| Net loss                                         |       | (2.8                                                 | )%         | (2.5 | )% |

 

**Three Months Ended September 30,2009**

**Compared to the Three Months Ended September 30,2008**

 

During the first quarter of fiscal 2010, net salesdecreased to $165.9 million from $173.4 million, a decrease of $7.5 million, or4.3%, compared to the quarter ended September 30, 2008.  The decreasein first quarter sales was primarily due to a 5.8% decrease in comparable storesales, partially offset by an increase of $1.9 million in new store sales. Thedecrease in comparable sales for the first quarter of fiscal 2010 was comprisedof a 1.7% decrease in the average number of transactions and a 4.1% decrease inaverage transaction amount. Average store sales for the first quarter of fiscal2010 decreased 5.1% compared to the same period last year. Comparable storesales and sales per store decreased primarily due to lower average transactionamounts. Management believes average transaction amounts were lower due to anumber of factors, including an increase in the supply of home furnishingproducts, the highly competitive promotional environment of the homefurnishings retail sector, decreased discretionary income of consumers due tothe current economic downturn and continued weakness in the housing market.

 

Gross profit decreased $0.8 million, or 1.2%, to $63.4million for the three months ended September 30, 2009 as compared to $64.2million for the same quarter last year. This decline was primarily the result of lower sales volume. Our grossprofit percentage increased from 37.0% for the first quarter of fiscal 2009 to38.2% for the first quarter of fiscal 2010. This increase of 1.2 % in grossprofit percentage was primarily due to a 1.1% decrease in markdowns as apercentage of sales, primarily due to improved sell-through rates of agedinventory as well as a decrease in freight expenses due to a decline in fuelsurcharges.

 

Selling, general and administrative expenses decreased$0.6 million, or 0.8%, to $70.3 million in the first quarter of fiscal 2010from $70.9 million in the same quarter last year.  The decrease wasprimarily attributable to a decrease in advertising of $1.0 million.  As apercentage of net sales, these expenses increased 1.5% to 42.4% in the firstquarter of fiscal 2010 from 40.9% in the same quarter last year which wasprimarily due to a decrease in our average store sales.  Selling, generaland administrative expenses per average store were $82,000 this quartercompared to $84,000 in the same quarter last year, a decrease of 1.7%.

 

The income tax benefit for the quarter ended September 30,2009 was $3.0 million versus $2.8 million for the same period last year.  The effective tax rate for the quarters endedSeptember 30, 2009 and 2008 was 39.5% and 39.4%, respectively.

 

**Liquidity and Capital Resources**

 

We have financed our operations with funds generatedfrom operating activities and borrowings under our revolving credit facility.Our cash flows will continue to be utilized for the expansion of ourbusiness.  Our borrowings have historically peaked in the quarter ended September 30as we build inventory levels prior to the holiday selling season.  However, our borrowings were lower during thequarter ended September 30, 2009 compared to the same quarter in prioryears due to a reduction in our inventory levels to match current customerdemand.  Given the seasonality of our business, the amount of borrowingsunder our revolving credit facility may fluctuate materially depending onvarious factors, including the time of year, our needs and the opportunity toacquire merchandise inventory.  We have no off-balance sheet arrangementsor transactions with unconsolidated, limited purpose or variable interestentities, nor do we have material transactions or commitments involving relatedpersons or entities.

 

Net cash used in operating activities for the threemonths ended September 30, 2009 and 2008 was $5.9 million and $24.4 million,respectively, representing a $18.5 million decrease. The $5.9 million use ofcash in the first quarter of fiscal 2010 was primarily due to an increase inour inventories of $57.2 million offset by an increase in our accounts payableof $51.0 million.  The increases were primarily due to inventory purchasesduring the first quarter of fiscal 2010 in preparation for the upcoming holidayseason.  Our overall purchases for the first fiscal quarter of 2010 wereslightly less than the same period last year.  There has been no materialchange in our payment policy to vendors.

 

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Capital expenditures principally associated with newstore openings or enhancements and warehouse and office equipment were $3.8million and $3.6 million for the three months ended September 30, 2009 and2008, respectively. The increase in capital expenditures was primarily relatedto systems improvements, distribution center equipment and store fixtures.  We expect to spend approximately $17.1million for additional capital expenditures during the remainder of fiscal2010, which will include the opening of new stores, store expansions, relocationsof existing stores, enhancements of selected stores and purchases of equipmentfor our distribution center and corporate office.

 

Net cash provided by financing activities of $9.4million for the three months ended September 30, 2009 is primarily fromborrowings under our revolving credit facility of $34.0 million net ofrepayments of $29.0 million.

 

On December 15, 2008, we entered into a newcredit agreement providing for an asset-based, five-year senior securedrevolving credit facility (the “Revolving Credit Facility”) in the amount of upto $150.0 million which matures on December 15, 2013 and on January 28,2009, we entered into an amendment to increase the amount from$150.0 million to $180.0 million. The revolving credit facility maybe increased by up to $70.0 million, not to exceed an aggregate totalcommitment of $250.0 million. Our indebtedness under the credit facilityis secured by a lien on substantially all of our assets. The revolving creditfacility contains, among other things, a “clean down” provision requiring thatthe sum of the aggregate principal amount of the outstanding loans and undrawnletters of credit may not exceed $45.0 million for 30 consecutivedays during the period from December 28 through January 31. Therevolving credit facility contains certain restrictive covenants, which affect,among others, our ability to incur liens or incur additional indebtedness, sellassets or merge or consolidate with any other entity. Unless borrowings andletters of credit exceed 82.5% of the maximum amounts available under therevolving credit facility or an event of default exists, the Company does nothave to comply with any financial covenants. Should such an event occur, theCompany is required to comply with a consolidated fixed charge coverage ratioof 1:1.  As of September 30,2009, we were in compliance with all required covenants.

 

At September 30, 2009, we had $5.3 millionoutstanding under the revolving credit facility, $12.4 million of outstandingletters of credit and availability of $130.9 under the revolving creditfacility. Letters of credit under the revolving credit facility are primarilyfor self-insurance purposes. We incur commitment fees of up to 0.75% on theunused portion of the revolving credit facility. Any borrowing under therevolving credit facility incurs interest at LIBOR or the prime rate, dependingon the type of borrowing, plus an applicable margin. These rates are increasedor reduced as our average daily availability changes.   The weighted average interest rate for primerate loans at September 30, 2009 was 6.0%. There were no LIBOR loans during the quarter ended September 30,2009.

 

**Store Openings/Closings**

 
| ** **                          | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Three Months  Ended  September 30,  2008** | ** ** | **Fiscal Year  Ended  June 30,  2009** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                |       |                                                   |       |                                                   |       |                                             |       |
| Stores open at  beginning of period |       | 857                                                    |       | 842                                                    |       | 842                                              |       |
| Stores opened during  the period    |       | 10                                                     |       | 12                                                     |       | 35                                               |       |
| Stores closed during  the period    |       | (17                                                    | )          | (3                                                     | )          | (20                                              | )          |
| Stores open at end of  period       |       | 850                                                    |       | 851                                                    |       | 857                                              |       |

 

**RecentAccounting Pronouncements**

 

In June 2008, the Financial Accounting StandardsBoard (“FASB”) issued FASB ASC 260-10-45 (formerly Emerging Issues Task Force03-6-1) “Determining Whether Instruments Granted in Share-Based PaymentTransactions are Participating Securities.”  ASC 260-10-45 addresseswhether instruments granted in share-based payment transactions areparticipating securities prior to vesting and, therefore, need to be includedin the earnings allocation in computing earnings per share (EPS) under the twoclass method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earningsper Share.”  ASC 260-10-45 is effective for financial statements issuedfor fiscal years beginning after December 15, 2008 and interim periodswithin those years.  The Company adopted the provisions of ASC 260-10-45on its consolidated financial statements effective July 1, 2009 with nomaterial impact to the financial statements.

 

In June 2009, the FASB issued ASC 105-10(formerly SFAS No. 168), “Accounting Standards Codification and the Hierarchyof Generally Accepted Accounting Principles.” The FASB Accounting StandardsCodification  (“Codification”) has become the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inaccordance with GAAP. All existing accounting standard documents are supersededby the Codification and any accounting literature not included in theCodification will not be authoritative. However, rules and interpretivereleases of the SEC issued under the authority of federal securities laws willcontinue to be the source of authoritative generally accepted accountingprinciples for SEC registrants. Effective September 30, 2009, allreferences made to GAAP in our consolidated financial statements will includethe new Codification numbering system along with original references. TheCodification does not change or alter existing GAAP and, therefore, will nothave an impact on our financial position, results of operations or cash flows.

 

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**Item 3.**    **Quantitative and Qualitative Disclosures About MarketRisk**

 

We are exposed to various market risks, includingchanges in foreign currency exchange rates and interest rates. Market risk isthe potential loss arising from adverse changes in market prices and rates,such as foreign currency exchange and interest rates. Based on our market risksensitive instruments outstanding as of September 30, 2009, we havedetermined that there was no material market risk exposure to our consolidatedfinancial position, results of operations or cash flows as of such date. Ourmarket risk is discussed in more detail in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2009. We do not enter into derivativesor other financial instruments for trading or speculative purposes. We have notbeen significantly affected by any changes in the foreign currency exchangerate or interest rate market risks since June 30, 2009.  The effectof foreign exchange contracts on our financial position or results ofoperations has historically been, and continue to be, immaterial.

 

**Item 4.    Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

Based on our management’s evaluation (withparticipation of our principal executive officer and our principal financialofficer), our principal executive officer and our principal financial officerhave concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) orRule 15d-15(e) under the Securities Exchange Act of 1934, as amended)were effective as of September 30, 2009 to ensure that informationrequired to be disclosed by us in this Quarterly Report on Form 10-Q was (1) recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (2) accumulatedand communicated to our management, including our principal executive and principalfinancial officers, to allow timely decisions regarding required disclosure.

 

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

 

**Changes in Internal Control OverFinancial Reporting**

 

There were no changes in our internal control overfinancial reporting that occurred during the quarter ended September 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

During 2001 and 2002, wewere named as a defendant in three complaints filed in the Superior Court ofCalifornia in and for the County of Los Angeles. The plaintiffs sought tocertify a statewide class made up of some of our current and former employees,which they claim are owed compensation for overtime wages, penalties andinterest. The plaintiffs also sought attorney’s fees and costs. In October 2003,we entered into a settlement agreement with a sub-class of these plaintiffsconsisting of managers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. A store manager class wascertified. However, in August 2008, our motion for de-certification of theclass of store managers was granted, thereby dismissing their class actionclaim. The plaintiffs have appealed this ruling and oral argument has takenplace, but there has been no ruling. In addition, some plaintiffs may choose topursue their claims individually. We do not expect any of these complaints tohave a material impact on our financial statements.

 

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 July 2007. In December 2008,the four plaintiffs abandoned their class action claim and have elected topursue their individual claims as well as claims under California’s PrivateAttorney General Act with respect to such allegations. Trial on this matterbegan in September 2009. A companion lawsuit alleging the same claims wasfiled in December 2008 on behalf of approximately thirty-four additionalindividual plaintiffs. This lawsuit includes a claim under California’s PrivateAttorney General Act. The companion lawsuit is still in the initial stages oflitigation. We do not expect any of these complaints to have a material impacton our financial statements.

 

In December 2008, aclass action lawsuit was filed by hourly, non-exempt employees in the SuperiorCourt of California in and for the County of Los Angeles, alleging claimscovering meal and rest period violations. This case has been stayed pending theoutcome of another case. We do not expect this complaint to have a materialimpact on our financial statements.

 

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In September 2009, we received notice of a judgmentfiled in the District County Court of Texas in and for the County ofBexar.  The plaintiff claimed violationsunder the Equal Employment Opportunity Act (EEOC).  We have appealed the judgment and do notexpect it to have a material impact to our financial statements.

 

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

 

**Item 1A. Risk Factors**

 

There have been no material changes from our riskfactors previously disclosed in “Item 1A. Risk Factors” of our Form 10-Kfor the fiscal year ended June 30, 2009.

 

**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)                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 31.1                |       | Certification by the Chief Executive Officer of the  Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 31.2                |       | Certification by the Chief Financial Officer of the  Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 32.1                |       | Certification of the Chief Executive Officer of the  Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 32.2                |       | Certification of the Chief Financial Officer of the  Company pursuant to 18 U.S.C §1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                       |

 

----

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

 

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SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** **                                                | **TUESDAY MORNING CORPORATION**                                                                                                                        |
|-----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                      |                        (Registrant) |
|                                                      |                                                                                                                                                   |   |
| DATE:     October 30,  2009 | By:                                                                                                                                                    |   | /s/ Stephanie Bowman |
|                                                      |                                                                                                                                                   | Stephanie Bowman, Executive Vice President,   Chief Financial Officer and Secretary |
|                                                           |                                                                                                                                                        |  |  |

 

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

 

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