**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE QUARTERLY PERIOD ENDEDSeptember 30, 2007**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM              TO**

 

**Commissionfile number 0-19658**

 

**TUESDAY MORNINGCORPORATION**

(Exact Name ofRegistrant as Specified in its Charter)

 

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

 

**6250LBJ Freeway**

**Dallas,Texas 75240**

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

 

**(972)387-3562**

(Registrant’stelephone number, including area code)

 

**Notapplicable**

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|--------------------------------|--------------------------|------------------------------|

 

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  oNo  x

 

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

 

| **Class**                               | ** ** | **Outstanding at October 31, 2007** |
|-----------------------------------------|------------|---------------------------------------------------------|
| Common Stock, par value $0.01 per share |       | 41,441,000                                              |

 

 

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**Forward-Looking Statements**

 

*This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of the federal securities lawsand the Private Securities Litigation Reform Act of 1995, which are basedon management’s current expectations, estimates and projections. Thesestatements may be found throughout this Form 10-Q particularly underthe heading “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” among others. Forward-looking statements typically areidentified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,”“believe,” “estimate,” “intend” and similar words, although someforward-looking statements are expressed differently. You should considerstatements that contain these words carefully because they describe ourexpectations, plans, strategies and goals and our beliefs concerning futurebusiness conditions, our future results of operations, our future financialposition, and our business outlook or state other “forward-looking”information.*

 

*Readersare referred to”Item 1A. Risk Factors” of our Annual Report on Form 10-K/Tfor the six month period ended June 30, 2007, and “Item 1A. Risk Factors”of this Quarterly Report on Form 10-Q for examples of risks, uncertaintiesand events that could cause our actual results to differ materially from theexpectations expressed in our forward-looking statements. These risks,uncertainties and events also include, but are not limited to, the following:*

 

•                  *uncertainties regardingour ability to open stores in new and existing markets and operate these storeson a profitable basis;*

•                  *conditions affectingconsumer spending, such as high gasoline prices and household utility costs;*

•                  *general regional andnational economic conditions;*

•                  *inclement weather, suchas the pattern of hurricanes that affected the Southeast U.S. inAugust and September 2004 and again in September 2005;*

•                  *changes in ourmerchandise mix;*

•                  *timing and type ofsales events, promotional activities and other advertising;*

•                  *uncertainties arisingout of world events;*

•                  *increased or newcompetition;*

•                  *our ability tocontinuously attract buying opportunities for closeout merchandise andanticipate consumer demand as closeout merchandise becomes available;*

•                  *loss of, or disruptionin, our centralized distribution center;*

•                  *loss or departure ofone or more members of our senior management;*

•                  *our dependence onexternal funding sources;*

•                  *an increase in the costor a disruption in the flow of our products;*

•                  *environmentalregulations;*

•                  *seasonal and quarterlyfluctuations;*

•                  *fluctuations in ourcomparable store results;*

•                  *our ability to operatein highly competitive markets and to compete effectively;*

•                  *our ability to attractand retain quality sales, distribution center and other associates in largenumbers, as well as, experienced buying and management personnel;*

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

•                  *our ability to generatestrong cash flows from our operations to support capital expansion, operationand debt repayment;*

•                  *our ability to maintaininternal control over financial reporting;*

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

•                  *our ability to generatestrong holiday season sales.*

 

*Theforward-looking statements made in this Form 10-Q relate only to events asof the date on which the statements were made. Except as may be required bylaw, we undertake no obligation to update our forward-looking statements toreflect events and circumstances after the date on which the statements weremade or to reflect the occurrence of unanticipated events.*

 

*Theterms “Tuesday Morning,” “we,” “us” and “our” as used in this Quarterly Reporton Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.*

* *

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| **PART I - FINANCIAL  INFORMATION**                                                                   |       |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       |       |
| Item 1 — Financial  Statements                                                                        |       |
|                                                                                                       |       |
| Consolidated Balance  Sheets as of September 30, 2007 and June 30, 2007                          |       |
|                                                                                                       |       |
| Consolidated  Statements of Income for the Three Months Ended September 30, 2007 and  2006            |       |
|                                                                                                       |       |
| Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2007  and 2006        |       |
|                                                                                                       |       |
| Notes to Consolidated  Financial Statements                                                                |       |
|                                                                                                       |       |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |
|                                                                                                       |       |
| Item 3 —  Quantitative and Qualitative Disclosures about Market Risk                                  |       |
|                                                                                                       |       |
| Item 4 — Controls  and Procedures                                                                     |       |
| ** **                                                                                                 | ** ** |
| **PART II — OTHER  INFORMATION**                                                                 | ** ** |
| ** **                                                                                                 | ** ** |
| Item 1 — Legal  Proceedings                                                                           |       |
|                                                                                                       |       |
| Item 1A — Risk Factors                                                                                |       |
|                                                                                                       |       |
| Item 6 — Exhibits                                                                                     |       |

 

 

----

 

** **

**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

## ***TuesdayMorning Corporation***

**Consolidated Balance Sheets**

**September 30, 2007 (unaudited) andJune 30, 2007**

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

 
| ** **                                                                                                                                                                                                        | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                                                                   |       |                         |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                            | 11,918     |                    | $          | 10,303 |   |
| Inventories                                                                                                                                                                                                       |       | 346,017                      |       | 288,791                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                        |       | 9,991                        |       | 5,954                   |       |
| Deferred income  taxes                                                                                                                                                                                            |       | —                       |       | 1,211                   |       |
| Total current  assets                                                                                                                                                                                             |       | 367,926                      |       | 306,259                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Property and  equipment, net                                                                                                                                                                                      |       | 82,432                       |       | 83,776                  |       |
| Deferred  financing costs                                                                                                                                                                                         |       | 654                          |       | 704                     |       |
| Other assets                                                                                                                                                                                                      |       | 3,679                        |       | 3,582                   |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total Assets                                                                                                                                                                                                      |       | $                            | 454,691    |                    | $          | 394,321 |   |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **              | ** ** |
| Current  liabilities:                                                                                                                                                                                             |       |                         |       |                    |       |
| Revolving credit  facility                                                                                                                                                                                        |       | $                            | 74,000     |                    | $          | 26,500 |   |
| Accounts payable                                                                                                                                                                                                  |       | 90,334                       |       | 82,453                  |       |
| Accrued  liabilities                                                                                                                                                                                              |       | 32,555                       |       | 31,223                  |       |
| Deferred income  taxes                                                                                                                                                                                            |       | 1,372                        |       | —                  |       |
| Income taxes  payable                                                                                                                                                                                             |       | 441                          |       | 712                     |       |
| Total current  liabilities                                                                                                                                                                                        |       | 198,702                      |       | 140,888                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Revolving credit  facility                                                                                                                                                                                        |       | 30,000                       |       | 30,000                  |       |
| Deferred rent                                                                                                                                                                                                     |       | 4,542                        |       | 4,534                   |       |
| Deferred income  taxes                                                                                                                                                                                            |       | 3,582                        |       | 3,459                   |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Liabilities                                                                                                                                                                                                |       | 236,826                      |       | 178,881                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| 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; 41,441,000 shares  issued and outstanding at September 30, 2007 and 41,440,000 shares  issued and outstanding at June 30, 2007 |       | 414                          |       | 414                     |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 199,384                      |       | 198,183                 |       |
| Retained  earnings                                                                                                                                                                                                |       | 18,037                       |       | 16,881                  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                    |       | 30                           |       | (38                     | )          |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Stockholders’ Equity                                                                                                                                                                                  |       | 217,865                      |       | 215,440                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                                  |       | $                            | 454,691    |                    | $          | 394,321 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

1

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**Tuesday Morning Corporation**

**Consolidated Statements of Income(unaudited)**

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

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                          |       |                                                 |       |   |   |
| Net sales                                     |       | $                                                    | 201,656    |   | $ | 194,412 |   |
| Cost of sales                                 |       | 125,947                                              |       | 121,348 |   |
| Gross profit                                  |       | 75,709                                               |       | 73,064 |   |
| Selling, general  and administrative expenses |       | 72,544                                               |       | 67,341 |   |
| Operating income                              |       | 3,165                                                |       | 5,723 |   |
| Other income  (expense):                      |       |                                                 |       |   |   |
| Interest income                               |       | —                                               |       | 5 |   |
| Interest expense                              |       | (1,686                                               | )          | (792 | ) |
| Other income                                  |       | 378                                                  |       | 174 |   |
|                                          |       | (1,308                                               | )          | (613 | ) |
| Income before  income taxes                   |       | 1,857                                                |       | 5,110 |   |
| Income tax  expense                           |       | 701                                                  |       | 1,947 |   |
|                                          |       |                                                 |       |   |   |
| Net income                                    |       | $                                                    | 1,156      |   | $ | 3,163 |   |
|                                          |       |                                                 |       |   |   |
| **Earnings  Per Share**                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income per  common share:                 |       |                                                 |       |   |   |
| Basic                                         |       | $                                                    | 0.03       |   | $ | 0.08 |   |
| Diluted                                       |       | $                                                    | 0.03       |   | $ | 0.08 |   |
| Weighted average  number of common shares:    |       |                                                 |       |   |   |
| Basic                                         |       | 41,440                                               |       | 41,392 |   |
| Diluted                                       |       | 41,585                                               |       | 41,584 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

 

2

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**Tuesday Morning Corporation**

**Consolidated Statements of Cash Flows(unaudited)**

**(In thousands)**

 
| ** **                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                              |       |                                                 |       |   |   |
| **Net  cash flows from operating activities:**                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                                        |       | $                                                    | 1,156      |   | $ | 3,163 |   |
| Adjustments to  reconcile net income to net cash used in operating activities:    |       |                                                 |       |   |   |
| Depreciation and  amortization                                                    |       | 4,442                                                |       | 4,153 |   |
| Amortization of  financing fees                                                   |       | 50                                                   |       | 43 |   |
| Deferred income  taxes                                                            |       | 2,706                                                |       | — |   |
| Amortization of  restricted stock compensation expense                            |       | 50                                                   |       | — |   |
| Loss on disposal  of assets                                                       |       | 169                                                  |       | 111 |   |
| Stock-based  compensation                                                         |       | 1,292                                                |       | 828 |   |
| Other                                                                             |       | 66                                                   |       | (4 | ) |
| Change in  operating assets and liabilities:                                      |       |                                                 |       |   |   |
| Inventories                                                                       |       | (57,361                                              | )          | (60,382 | ) |
| Prepaid and  other assets                                                         |       | (4,134                                               | )          | (1,325 | ) |
| Accounts payable                                                                  |       | 4,724                                                |       | 31,476 |   |
| Accrued  liabilities                                                              |       | 1,332                                                |       | 1,675 |   |
| Deferred rent                                                                     |       | 8                                                    |       | 18 |   |
| Income taxes  payable                                                             |       | (271                                                 | )          | 1,463 |   |
| Net cash used in  operating activities                                            |       | (45,771                                              | )          | (18,781 | ) |
| **Net  cash flows from investing activities:**                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Capital  expenditures                                                             |       | (3,267                                               | )          | (4,284 | ) |
| Net cash used in  investing activities                                            |       | (3,267                                               | )          | (4,284 | ) |
| **Net  cash flows from financing activities:**                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Borrowings under  revolving credit facility                                       |       | 82,500                                               |       | 68,500 |   |
| Repayments under  revolving credit facility                                       |       | (35,000                                              | )          | (42,500 | ) |
| Change in cash  overdraft                                                         |       | 3,157                                                |       | — |   |
| Proceeds from  exercise of common stock options and stock purchase plan purchases |       | (4                                                   | )          | 205 |   |
| Net cash  provided by financing activities                                        |       | 50,653                                               |       | 26,205 |   |
| Net decrease in  cash and cash equivalents                                        |       | 1,615                                                |       | 3,140 |   |
| Cash and cash  equivalents, beginning of period                                   |       | 10,303                                               |       | 5,766 |   |
| Cash and cash  equivalents, end of period                                         |       | $                                                    | 11,918     |   | $ | 8,906 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**Tuesday Morning Corporation**

**Notes to Consolidated FinancialStatements (unaudited)**

 

1.               Basis of presentation - The unauditedconsolidated interim financial statements included herein have been prepared byus pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations. These financial statements include alladjustments, consisting only of those of a normal recurring nature, which, inthe opinion of management, are necessary to present fairly the results of theinterim periods presented and should be read in conjunction with the consolidatedfinancial statements and notes thereto in our Form 10-K/T filing for thesix month period ended June 30, 2007. Because of the seasonal nature ofour business, the results of operations for the quarter are not indicative ofthe results to be expected for the entire year.

 

                        The balance sheet at June 30, 2007 has been derivedfrom the audited consolidated financial statements at that date but does notinclude all of the information and notes required by U.S. generally acceptedaccounting principles for complete financial statements. For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in our Form 10-K/T for the six month period ended June 30, 2007.

 

2.           Stock-based compensation — We account for our stock-basedcompensation plan in accordance with Statement of Financial AccountingStandards (“SFAS”) 123 (revised 2004) “Share-Based Payment” (SFAS 123R). UnderSFAS 123R, all stock-based compensation cost is measured at the grant date,based on the estimated fair value of the award, and is recognized as an expensein the income statement over the requisite service period.

 

We have established theTuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended(the “1997 Plan”), and the Tuesday Morning Corporation 2004 Long-Term EquityIncentive Plan, as amended (the “2004 Plan”), which allows for the granting ofstock options to directors, officers and key employees of, and certain otherkey individuals who perform services for us and our subsidiaries. The 1997 Planand the 2004 Plan authorizes grants of options to purchase up to 4,800,000 and2,000,000 shares, respectively, of authorized, but unissued common stock. Stockoptions are awarded at a fair market value equal to the average of the high andlow trading prices of the Company’s common stock on the date of grant.

 

Options granted under the1997 Plan and the 2004 Plan typically vest daily over periods of four to fiveyears and expire in ten years. The exercise prices of the options range between$8.13 and $35.23, which represents market value on the grant date. At September30, 2007, there were 251,412 and 1,519,256 shares available for grant under the1997 Plan and the 2004 Plan, respectively.

 

During the quarter endedSeptember 30, 2007 and 2006 we recognized stock-based compensation expense asfollows:

 
| ** **                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Total cost of  stock-based compensation during the period  |       | $        | 1,207      |     | $          | 1,335 |   |
| Amounts  capitalized in ending inventory                   |       | (229     | )          | (491     | )          |
| Amounts  recognized in expense previously capitalized      |       | 364      |       | 384      |       |
| Amounts charged  against income for the period before tax  |       | $        | 1,342      |     | $          | 1,228 |   |
|                                                       |       |     |       |     |       |
| Amount of  related income tax benefit recognized in income |       | $        | (294       | )        | $          | (255 | ) |

 

3.*              *Comprehensive income (loss) -Comprehensive income (loss) represents our change in equity (net assets),during a period, from transactions and other events and derivatives fromforeign currency contracts. It includes all changes in equity during a periodexcept those resulting from investments or distributions by or to owners.          Total comprehensive income for the three month periodended September 30, 2007 and 2006 was $1.2 million and $3.2 million,respectively.

 

4.                  Legalproceedings - During 2001 and 2002, we were named as a defendant in threecomplaints filed in the Superior Court of California in and for the County ofLos Angeles. These three complaints were subsequently consolidated into oneaction. The plaintiffs are seeking to certify a statewide class made up of someof our current and former employees, which they claim are owed compensation forovertime wages, penalties and interest. The plaintiffs are also seekingattorney’s fees and costs. In October 2003, we entered into a settlementagreement with a sub-class of these plaintiffs consisting of managers-in-trainingand management trainees which was paid in November 2005 with no materialimpact to our financial statements. There is no trial date set for theremaining complaint. A similar lawsuit, which also alleges claims concerningmeal and rest periods, was filed in Orange County, California in 2004, bymanagers, managers-in-training and assistant managers, and an amended complaintwas

 

4

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filed in January 2007. This case is stillin the discovery phase. We do not expect either of these complaints to have amaterial impact to our financial statements.

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

 

5.               Earnings per common share

 
| ** **                                                                                          | ** ** | **Three Months Ended  September 30,**              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| **Basic  earnings per share:**                                                                      | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net income                                                                                          |       | $                                                                 | 1,156      |   | $ | 3,163 |   |
| Weighted average  number of common shares outstanding                                               |       | 41,440                                                            |       | 41,392 |   |
| Net income per  common share                                                                        |       | $                                                                 | 0.03       |   | $ | 0.08 |   |
|                                                                                                |       |                                                              |       |   |   |
| **Diluted  earnings per share:**                                                                    | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net income                                                                                          |       | $                                                                 | 1,156      |   | $ | 3,163 |   |
| Dilutive effect  of employee stock options                                                          |       | 145                                                               |       | 192 |   |
| Weighted average  number of common shares outstanding                                               |       | 41,440                                                            |       | 41,392 |   |
| Weighted average  number of common shares and diluted effect of outstanding employee stock  options |       | 41,585                                                            |       | 41,584 |   |
| Net income per  common share                                                                        |       | $                                                                 | 0.03       |   | $ | 0.08 |   |

 

 

6.                  Revolving credit facility — At September 30,2007, we had $104 million outstanding under the revolving credit facility, $8.9million of outstanding letters of credit and availability of $87.1 millionunder the revolving credit facility. We incur commitment fees of up to 0.25% onthe unused 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 total leverage ratio changes.The weighted average interest rate atSeptember 30, 2007 was 6.26%. Our indebtedness under the credit facility issecured by a lien on our inventory and cash accounts, as well as a pledge ofour ownership interests in all of our subsidiaries. On April 18, 2007, weentered into an amendment to the existing revolving credit facility. Theamendment to the revolving credit facility provides for, among other things:the extension of the maturity date from December 22, 2009 to December 22, 2010;changes in applicable commitment fees and interest rates in connection withaverage leverage ratios; a reduction of the lenders’ revolving creditcommitment from $210 million to $200 million; a change in the total leverageratio from the ratio “3:00 to 1:0” to the ratio “2:50 to 1:0”; and a “cleandown” provision requirement that for 15 consecutive days during the period fromDecember 1 through January 31, the sum of the aggregate principal amount of theoutstanding loans may not exceed $30 million. The revolving credit facilitycontains certain restrictive covenants, which among other things, require us tocomply with certain financial ratios covering maximum leverage, minimum fixedcharge coverage and minimum interest coverage. Other restrictions affect ourability to incur liens or make certain other restricted payments, sell assetsor merge or consolidate with any other person. As of September 30, 2007,we were in compliance with all covenants.

 

7.                  Income Taxes - Tuesday MorningCorporation (Company) or one of its subsidiaries files income tax returns inthe U.S. federal jurisdiction, and various state jurisdictions. With fewexceptions, Tuesday Morning Corporation is no longer subject to U.S. state andlocal income tax examinations by tax authorities for years before 1999. TheInternal Revenue Service (IRS) has concluded an examination of the Company foryears ending before 2005.

 

In June 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*”,an interpretation of SFAS No. 109, “*Accountingfor Income Taxes*” (“FIN 48”), to create a single model to addressaccounting for uncertainty in tax positions. FIN 48 clarifies the accountingfor income taxes; by prescribing a minimum recognition threshold, a taxposition is required to meet before being recognized in the financialstatements. FIN 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition.

 

Tuesday Morning Corporation adopted the provisions ofFASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, onJanuary 1, 2007. As a result of the implementation of FIN 48, the Companyrecognized a $145 thousand increase in the liability for unrecognized taxbenefits, which was accounted for as a decrease to the January 1, 2007 balanceof retained earnings. A reconciliation of the beginning and ending amount ofunrecognized tax benefits is as follows:

 

5

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| ** **                                                | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|
| Balance at July  1, 2007                                  |       | $          | 1,076,447  |   |
| Additions based  on tax positions related to current year |       | 9,496      |       |
| Additions for  tax positions of prior years               |       | 15,036     |       |
| Reductions for  tax positions of prior years              |       | (49,693    | )          |
| Balance at September  30, 2007                            |       | $          | 1,051,286  |   |

 

                           The total amount of unrecognized tax benefits(including interest and penalty accruals) as of September 30, 2007 is $1.5million. Included in the balance at September 30, 2007 are $1.1 million of taxpositions that, if recognized, would affect the effective tax rate. Also,included in the balance at September 30, 2007 are $469 thousand of taxpositions for which the ultimate deductibility is highly certain but for whichthere is uncertainty about the timing of the deductibility. Because of theimpact of the deferred tax accounting, other than interest and penalties, thedisallowance of the shorter deductibility period would not affect the annualeffective tax rate but would accelerate the payment of cash to the taxingauthority to an earlier period.

 

Tuesday Morning Corporation does not anticipate thatthe total amount of unrecognized tax benefits will significantly increase ordecrease the effective tax rate within 12 months of September 30, 2007.

 

9.               Cash and Cash Equivalents — Credit cardreceivables of $8.4 million and $6.0 million at September 30, 2007 and 2006,respectively, from MasterCard, Visa, Discover and American Express, and allhighly liquid investments with an original maturity date of three months orless are considered to be cash equivalents.

 

10.         Recent Accounting Pronouncements - InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measures.”SFAS No. 157 defines fair value establishes a framework for measuring fairvalue, and requires additional disclosures about fair value measurements. SFASNo. 157 applies to fair measurements that are already required orpermitted by other accounting standards, except for measurements of share-basedpayments and measurements that are similar to, but not intended to be fairvalue and does not change existing guidance as to whether or not an instrumentis carried at fair value. The provisions of SFAS No. 157 are effective forthe specified fair value measures for financial statements issued for fiscalyears beginning after November 15, 2007. We are currently evaluating theimpact, if any, that the adoption of SFAS No. 157 will have on ourconsolidated financial statements

 

 

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

 

The following discussion should be read in conjunction with ourunaudited Consolidated Financial Statements and the notes thereto included inItem 1 of this Quarterly Report on Form 10-Q.

 

**Introduction**

 

We operated 813 discount retail stores in 47 states as of September 30,2007. We sell closeout home furnishings, housewares, gifts and related items,which we purchase at below wholesale prices. Our stores operate during periodic“sales events” that occur in each month except January and July. We aregenerally closed for the first two weeks of January and July, whichtraditionally have been weaker months for retailers. We purchase first quality,brand name merchandise at closeout prices and sell it at prices 50% to 80%below those generally charged by department stores and specialty and catalogretailers. We do not sell seconds, irregulars, refurbished or factory rejects.

 

**Business Overview**

 

Net sales for the first quarter of fiscal 2008 were approximately $201.7million, an increase of 3.7% compared to the same period last year. Comparablestore sales decreased by 1.5% driven by a decline in customer traffic andaverage ticket.  Net income for the quarter was $1.2 million and dilutedearnings per share was $0.03.

 

We continue to remain focused on our long-term growth andprofitability. The home furnishings and high end decorative sectors continue tobe challenged by the promotional environment and weakness in the housing anddebt markets.

 

We opened six new stores and closed three existing stores during thefirst quarter of fiscal 2008. In addition, we relocated eight existing storesand expanded seven existing stores.

 

**Resultsof Operations**

 

The following table setsforth certain financial information from our consolidated statements of incomeexpressed as a percentage of net sales. Our business is highly seasonal, with asignificant portion of our net sales and most of our operating income generatedin the quarter ending December 31, which includes the holiday season. There canbe no assurance that the trends in sales growth or operating results willcontinue in the future.

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net sales                                       |       | 100.0                                                | %          | 100.0 | % |
| Cost of sales                                   |       | 62.5                                                 |       | 62.4 |   |
| Gross profit                                    |       | 37.5                                                 |       | 37.6 |   |
| Selling, general  and administrative expense    |       | 36.0                                                 |       | 34.7 |   |
| Operating income                                |       | 1.5                                                  |       | 2.9 |   |
| Net interest expense and other income (expense) |       | (0.6                                                 | )          | (0.3 | ) |
| Income before  income taxes                     |       | 0.9                                                  |       | 2.6 |   |
| Income tax  expense                             |       | 0.3                                                  |       | 1.0 |   |
| Net income                                      |       | 0.6                                                  | %          | 1.6 | % |

 

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**ThreeMonths Ended September 30, 2007**

**Comparedto the Three Months Ended September 30, 2006**

 

During the first fiscalquarter of 2008, net sales increased to $201.7 million from $194.4 million, anincrease of $7.2 million or 3.7% compared to the quarter ended September 30,2006. The increase in first quarter sales is primarily due to $13.8 million insales from non-comparable new stores, offset by a 1.5% decrease in comparablestore sales. The decrease in comparable sales for the first fiscal quarter of2008 was comprised of a 0.7% decrease in the number of transactions and adecrease in average transaction amount of 0.8%. Average store sales for thefirst fiscal quarter of 2008 decreased 2.0% when compared to the same prioryear quarter. Comparable store sales and sales per store decreased primarilydue to lower traffic levels. Management believes traffic levels are lower dueto a number of factors, including an increase in supply of home furnishingproducts, the promotional environment of the home furnishings retail sector,the economic pressures impacting the discretionary income of consumers and aweakness in the housing market.

 

Gross profit increased$2.6 million, or 3.6%, to $75.7 million for the three months endedSeptember 30, 2007 as compared to the same quarter last year of $73.1million, primarily as a result of higher sales volume. Our gross profitpercentage decreased slightly from 37.6% to 37.5% in the first fiscal quarter.This decrease of 0.1% in gross profit percentage is primarily due to a slightincrease in markdowns and damages.

 

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

 

Selling, general andadministrative expenses increased $5.2 million, or 7.7%, to $72.5 million from$67.3 million in the same quarter last year.  The increase wasattributable to a $4.4 million increase in store occupancy costs, storepersonnel costs and store depreciation expense primarily due to the expansionin our store base, an increase of $600 thousand of store maintenance and otherstore expenses, $800 thousand in advertising costs and $300 thousand of othercorporate expenses including audit fees, equipment maintenance, taxes andbusiness insurance.  These were partially offset by a $1.2 milliondecrease in legal expense and a $200 thousand decrease in preopeningexpense.  As a percentage of net sales, these expenses increased 1.3% to36.0% in the first fiscal quarter of 2008 from 34.7% in the same quarter lastyear.  The increased percentage is primarily due to a 1.3% increaserelated to store occupancy costs, store personnel costs and store depreciationexpense, a 0.1% increase in store maintenance and an increase in advertising of0.3%. Selling, general and administrative expenses per average store is$89.5 thousand this quarter compared to $88.0 thousand in the samequarter last year, an increase of 1.7%.

 

The income tax provisionfor the three month periods ended September 30, 2007 and 2006 was $701thousand and $1.9 million, respectively, reflecting an effective tax rate of37.8% and 38.1%, respectively. The effective tax rate is lower in the firstquarter of fiscal 2008 as compared to the same quarter last year primarily dueto the favorable reduction of permanent book to tax differences in thecomparative periods.

 

### **Liquidity and Capital Resources**

### ** **

We have financed ouroperations with funds generated from operating activities and borrowings underour revolving credit facility. Our cash flows will continue to be utilized forthe expansion of our business and future cash dividends to our stockholders. Wehave no off-balance sheet arrangements or transactions with unconsolidated,limited purpose or variable interest entities, nor do we have materialtransactions or commitments involving related persons or entities.

 

Net cash used in operating activities for the three months endedSeptember 30, 2007 and 2006 was $45.8 million and $18.8 million,respectively, representing a $27.0 million increase. This increase is primarilydue to the change in accounts payable as a result of the timing of inventoryreceipts and the related payments to vendors. There has been no material changein the Company’s payment policy to vendors.

 

Capital expendituresprincipally associated with new store openings and warehouse and officeequipment were $3.3 million and $4.2 million for the three months endedSeptember 30, 2007 and 2006, respectively. The decrease in capitalexpenditures is due to opening fewer new stores during the first fiscal quarterof 2008 when compared to the same quarter last year. We expect to spendapproximately $12.7 million for additional capital expenditures during theremainder of fiscal 2008, which will include the opening of new stores, storesexpansion, relocation of existing stores, enhancements of selected stores andpurchases of equipment for our distribution center and corporate office.

 

At September 30,2007, we had $104 million outstanding under the revolving credit facility, $8.9million of outstanding letters of credit and availability of $87.1 millionunder the revolving credit facility. We incur commitment fees of up to 0.25% onthe unused 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 total leverage ratio

 

8

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changes. The weightedaverage interest rate at September 30, 2007 was 6.26%. Our indebtedness underthe credit facility is secured by a lien on our inventory and cash accounts, aswell as a pledge of our ownership interests in all of our subsidiaries. OnApril 18, 2007, we entered into an amendment to the existing revolving creditfacility. The amendment to the revolving credit facility provides for, amongother things: the extension of the maturity date from December 22, 2009 toDecember 22, 2010; changes in applicable commitment fees and interest rates inconnection with average leverage ratios; a reduction of the lenders’ revolvingcredit commitment from $210 million to $200 million; and a “clean down”provision requirement that for 15 consecutive days during the period fromDecember 1 through January 31, the sum of the aggregate principal amount of theoutstanding loans may not exceed $30 million. The revolving credit facilitycontains certain restrictive covenants, which among other things, require us tocomply with certain financial ratios covering maximum leverage, minimum fixedcharge coverage and minimum interest coverage. Other restrictions affect ourability to incur liens or make certain other restricted payments, sell assetsor merge or consolidate with any other person. As of September 30, 2007,we were in compliance with all covenants.

 

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

 

**StoreOpenings/Closings**

 
| ** **                          | ** ** | **Three Months  Ended  September 30  2007** | ** ** | **Three Months  Ended  September 30  2006** | ** ** | **Six Months  Ended  June 30,  2007** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                |       |                                             |       |                                                  |       |                                            |       |
| Stores open at  beginning of period |       | 810                                              |       | 762                                                   |       | 795                                             |       |
| Stores opened  during the period    |       | 6                                                |       | 12                                                    |       | 27                                              |       |
| Stores closed  during the period    |       | (3                                               | )          | (2                                                    | )          | (12                                             | )          |
| Stores open at end of period        |       | 813                                              |       | 772                                                   |       | 810                                             |       |

 

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

** **

We are exposed to variousmarket risks, including changes in foreign currency exchange rates and interestrates. Market risk is the potential loss arising from adverse changes in marketprices and rates, such as foreign currency exchange and interest rates. Basedon our market risk sensitive instruments outstanding as of September 30,2007, we have determined that there was no material market risk exposure to ourconsolidated financial position, results of operations or cash flows as of suchdate. Our market risk is discussed in more detail in our Annual Report onForm 10-K/T for the six month period ended June 30, 2007. We do notenter into derivatives or other financial instruments for trading orspeculative purposes. There have been no significant changes in the foreigncurrency exchange rate or interest rate market risks since June 30, 2007.

 

**Item 4. Controls and Procedures**

** **

**DisclosureControls and Procedures**

 

Based on our management’sevaluation (with participation of our principal executive officer and ourprincipal financial officer), our principal executive officer and our principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rule 13a-15(e) or Rule 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) were effective as ofSeptember 30, 2007 to ensure that information required to be disclosed byus in this Quarterly Report on Form 10-Q was (1) recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and (2) accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, to allow timely decisions regarding required disclosure.

 

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Becauseof inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues, if any, within a companyhave been detected. Accordingly, our disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the objectives ofour disclosure control system are met and, as set forth above, our chiefexecutive officer and chief financial officer have concluded, based on theirevaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures were effective to provide reasonableassurance that the objectives of our disclosure control system were met.

 

**Changesin Internal Control Over Financial Reporting**

 

There were no changes inour internal control over financial reporting that occurred during the quarterended September 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

 

 

 

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**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.  These three complaints were subsequentlyconsolidated into one action.  Theplaintiffs are seeking to certify a statewide class made up of some of ourcurrent and former employees, which they claim are owed compensation forovertime wages, penalties and interest. The plaintiffs are also seeking attorney’sfees and costs. In October 2003, we entered into a settlement agreementwith a sub-class of these plaintiffs consisting of managers-in-training andmanagement trainees which was paid in November 2005 with no materialimpact to our financial statements. There is no trial date set for theremaining complaint. A similar lawsuit, which also alleges claims concerningmeal and rest periods, was filed in Orange County, California in 2004, bymanagers, managers-in-training and assistant managers, and an amended complaintwas filed in January 2007. This case is still in the discovery phase. Wedo not expect either of these complaints to have a material impact to ourfinancial statements.

 

We intend to vigorously defend all pending actions. We do not believethese or any other legal proceedings pending or threatened against us wouldhave a material adverse effect on our financial condition or results ofoperations.

 

**Item 1A. Risk Factors**

 

There have been no material changes from our risk factors previouslydisclosed in “Item 1A. Risk Factors” of our Form 10-K/T for the six monthperiod ended June 30, 2007.

 

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**Item6.  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 (File No. 000-19658) as filed with the  Commission on May 2, 2005)                                                                      |
| 3.2                 |       | Amended and Restated  By-laws of the Company dated December 14, 2006 (incorporated by reference to  Exhibit 3.1 to the Company’s Form 8-K (File No. 000-19658) as  filed with the Commission on December 20, 2006)                                                                                                        |
| 10.1                |       | First Amendment  to the Tuesday Morning Corporation Employee Stock Purchase Plan dated  September 19, 2007                                                                                                                                                                                                                                    |
| 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 asExhibit 32.1 and Exhibit 32.2 are furnished with this QuarterlyReport on Form 10-Q and shall not be deemed “filed” by theCompany for purposes of Section 18 of the Securities Exchange Act of 1934,as amended.

 

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SIGNATURE

 

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

 
| ** ** | ** **             | **TUESDAY  MORNING CORPORATION** |
|------------|------------------------|----------------------------------|
|       |                   |                             | (Registrant) |
|       |                   |                             |   |
|       |                   |                             |   |
| DATE:      | November 1,  2007 | By:                              | /s/ Elizabeth A.  Schroeder |
|       |                   |                             | Elizabeth A.  Schroeder, Executive Vice President,  Chief Financial Officer and Secretary  (Principal Financial Officer and duly authorized to sign this report on  behalf of the registrant) |
|            |                        |                                  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1                  |       | Certificate of  Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by  reference to Exhibit 3.1 to the Company’s Registration Statement on  Form S-4 (File No. 333-46017) as filed with the Securities and  Exchange Commission (the “Commission”) on February 10, 1998) |
| 3.1.2                |       | Certificate of  Amendment to the Certificate of Incorporation of the Company dated  March 25, 1999 (incorporated by reference to Exhibit 3.3 to the  Company’s Registration Statement on Form S-1/A (File No. 333-74365)  as filed with the Commission on March 29, 1999)                                       |
| 3.1.3                |       | Certificate of  Amendment to the Certificate of Incorporation of the Company dated  May 7, 1999 (incorporated by reference to Exhibit 3.1.3 to the  Company’s Form 10-Q (File No. 000-19658) as filed with the Commission  on May 2, 2005)                                                                      |
| 3.2                  |       | Amended and  Restated By-laws of the Company dated December 14, 2006 (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K (File  No. 000-19658) as filed with the Commission on December 20, 2006)                                                                                                        |
| 10.1                 |       | First Amendment  to the Tuesday Morning Corporation employee Stock Purchase Plan dated  September 19, 2007                                                                                                                                                                                                                                    |
| 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 asExhibit 32.1 and Exhibit 32.2 are furnished with this QuarterlyReport on Form 10-Q and shall not be deemed “filed” by the Company forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

 

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