Table ofContents

 

 

 

**UNITED STATES**

**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 December 31, 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  No o

 

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 January 26, 2010** |
|------------------------------------------|------------|---------------------------------------------------------|
| Common Stock, par value  $0.01 per share |       | 42,923,757                                              |

 

 

 

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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 ofFinancial Condition and Results of Operations,” among others. Forward-lookingstatements typically are identified by the use of terms such as “may,” “will,” “should,”“expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words,although some forward-looking statements are expressed differently. You shouldconsider statements that contain these words carefully because they describeour expectations, plans, strategies and goals and our beliefs concerning futurebusiness conditions, our future results of operations, our future financialposition, and our business outlook or state other “forward-looking”information.*

 

*Readers are referred to “Item 1A.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 regarding our  ability to open, relocate and expand  stores in new and existing markets  and operate these stores on a profitable basis;* |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                          |
| · | * * | *conditions affecting consumer  spending and the impact, depth and duration of the current economic downturn;*                                                |
|   |     |                                                                                                                                                          |
| · | * * | *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 of one or more  members of our senior management or experienced buying and management  personnel;*                                         |
|   |     |                                                                                                                                                          |
| · | * * | *an increase in the cost or a  disruption in the flow of our products;*                                                                                       |
|   |     |                                                                                                                                                          |
| · | * * | *seasonal and quarterly  fluctuations;*                                                                                                                       |
|   |     |                                                                                                                                                          |
| · | * * | *fluctuations in our comparable  store results;*                                                                                                              |
|   |     |                                                                                                                                                          |
| · | * * | *our ability to operate in highly  competitive markets and to compete effectively;*                                                                           |
|   |     |                                                                                                                                                          |
| · | * * | *our ability to operate information  systems and implement new technologies effectively;*                                                                     |
|   |     |                                                                                                                                                          |
| · | * * | *our ability to generate strong  cash flows from our operations;*                                                                                             |
|   |     |                                                                                                                                                          |
| · | * * | *our ability to anticipate and  respond in a timely manner to changing consumer demands and preferences; and*                                                 |
|   |     |                                                                                                                                                          |
| · | * * | *our ability to generate strong  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**                                                                           |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                              |   |   |
| Item 1 — Financial Statements                                                                                |   |   |
|                                                                                                              |   |   |
| Consolidated Balance  Sheets as of December 31, 2009 and June 30, 2009                                  |   | 1      |
|                                                                                                              |   |   |
| Consolidated  Statements of Operations for the Three-Months and Six-Months Ended  December 31, 2009 and 2008 |   | 2      |
|                                                                                                              |   |   |
| Consolidated  Statements of Cash Flows for the Six-Months Ended December 31, 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                                         |   | 11     |
|                                                                                                              |   |   |
| Item 4 — Controls and Procedures                                                                             |   | 11     |
|                                                                                                              |   |   |
| **PART II  — OTHER INFORMATION**                                                                        |   | 12     |
|                                                                                                              |   |   |
| Item  1 — Legal Proceedings                                                                                  |   | 12     |
|                                                                                                              |   |   |
| Item 1A — Risk Factors                                                                                       |   | 12     |
|                                                                                                              |   |   |
| Item 4 — Submission of Matters to a Vote of Security  Holders                                                |   | 13     |
|                                                                                                              |   |   |
| Item 6 — Exhibits                                                                                            |   | 14     |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**TuesdayMorning Corporation**

**ConsolidatedBalance Sheets**

**December 31,2009 (unaudited) and June 30, 2009**

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

 
| ** **                                                                                                                                                                                                       | ** ** | **December 31,  2009** | ** ** | **June 30,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| **ASSETS**                                                                                                                                                                                                       |       |                        |       |                    |       |
| Current assets:                                                                                                                                                                                                  |       |                        |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                       |       | $                           | 57,690     |                    | $          | 5,783 |   |
| Inventories                                                                                                                                                                                                      |       | 241,245                     |       | 223,628                 |       |
| Prepaid expenses and  other current assets                                                                                                                                                                       |       | 5,997                       |       | 10,197                  |       |
| Deferred income taxes                                                                                                                                                                                            |       | 1,441                       |       | 1,545                   |       |
| Total current assets                                                                                                                                                                                             |       | 306,373                     |       | 241,153                 |       |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Property and equipment,  net                                                                                                                                                                                     |       | 72,466                      |       | 72,356                  |       |
| Deferred financing  costs                                                                                                                                                                                        |       | 3,739                       |       | 4,211                   |       |
| Other assets                                                                                                                                                                                                     |       | 964                         |       | 1,521                   |       |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Total Assets                                                                                                                                                                                                     |       | $                           | 383,542    |                    | $          | 319,241 |   |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                    |       |                        |       |                    |       |
| Current liabilities:                                                                                                                                                                                             |       |                        |       |                    |       |
| Accounts payable                                                                                                                                                                                                 |       | $                           | 84,125     |                    | $          | 47,109 |   |
| Accrued liabilities                                                                                                                                                                                              |       | 36,703                      |       | 28,765                  |       |
| Income taxes payable                                                                                                                                                                                             |       | 7,147                       |       | 1,564                   |       |
| Total current  liabilities                                                                                                                                                                                       |       | 127,975                     |       | 77,438                  |       |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Deferred rent                                                                                                                                                                                                    |       | 3,480                       |       | 4,171                   |       |
| Income tax payable —  non current                                                                                                                                                                           |       | 618                         |       | —                  |       |
| Deferred income taxes                                                                                                                                                                                            |       | 1,817                       |       | 2,279                   |       |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Total Liabilities                                                                                                                                                                                                |       | 133,890                     |       | 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; 41,903,965 shares issued and  outstanding at December 31, 2009 and 42,836,707 shares issued and  outstanding at June 30, 2009 |       | 429                         |       | 428                     |       |
| Additional paid-in  capital                                                                                                                                                                                      |       | 204,035                     |       | 203,633                 |       |
| Retained earnings                                                                                                                                                                                                |       | 45,123                      |       | 31,334                  |       |
| Accumulated other  comprehensive loss                                                                                                                                                                            |       | 65                          |       | (42                     | )          |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Total Stockholders’  Equity                                                                                                                                                                                 |       | 249,652                     |       | 235,353                 |       |
|                                                                                                                                                                                                             |       |                        |       |                    |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                 |       | $                           | 383,542    |                    | $          | 319,241 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Operations (unaudited)**

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

 
| ** **                                    | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                | ** ** | **2008**                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Net sales                                     |       | $                                                       | 289,615    |                                                  | $          | 272,650 |   | $ | 455,482 |   | $ | 446,051 |   |
| Cost of sales                                 |       | 180,152                                                 |       | 171,755                                               |       | 282,640 |   | 281,000 |   |
| Gross profit                                  |       | 109,463                                                 |       | 100,895                                               |       | 172,842 |   | 165,051 |   |
| Selling, general and  administrative expenses |       | 79,295                                                  |       | 80,315                                                |       | 149,607 |   | 151,227 |   |
| Operating income                              |       | 30,168                                                  |       | 20,580                                                |       | 23,235 |   | 13,824 |   |
| Other income (expense):                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Interest income                               |       | 2                                                       |       | —                                                |       | 2 |   | 1 |   |
| Interest expense                              |       | (705                                                    | )          | (717                                                  | )          | (1,455 | ) | (1,127 | ) |
| Other income, net                             |       | 103                                                     |       | 192                                                   |       | 88 |   | 271 |   |
|                                          |       | (600                                                    | )          | (525                                                  | )          | (1,365 | ) | (855 | ) |
| Income before income  taxes                   |       | 29,568                                                  |       | 20,055                                                |       | 21,870 |   | 12,969 |   |
| Income tax expense                            |       | 11,118                                                  |       | 7,344                                                 |       | 8,081 |   | 4,556 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income                                    |       | $                                                       | 18,450     |                                                  | $          | 12,711 |   | $ | 13,789 |   | $ | 8,413 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| **Earnings  Per Share**                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income per common  share:                 |       |                                                    |       |                                                  |       |   |   |   |   |
| Basic                                         |       | $                                                       | 0.43       |                                                  | $          | 0.31 |   | $ | 0.32 |   | $ | 0.20 |   |
| Diluted                                       |       | $                                                       | 0.43       |                                                  | $          | 0.31 |   | $ | 0.32 |   | $ | 0.20 |   |
| Weighted average number  of common shares:    |       |                                                    |       |                                                  |       |   |   |   |   |
| Basic                                         |       | 41,801                                                  |       | 41,462                                                |       | 41,743 |   | 41,451 |   |
| Diluted                                       |       | 42,234                                                  |       | 41,587                                                |       | 42,230 |   | 41,597 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Dividends per common  share                   |       | $                                                       | —     |                                                  | $          | — |   | $ | — |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Cash Flows (unaudited)**

**(Inthousands)**

 
| ** **                                                                     | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
|                                                                           |       |                                              |       |   |   |
| **Net  cash flows from operating activities:**                                 |       |                                              |       |   |   |
| Net income                                                                     |       | $                                                 | 13,789     |   | $ | 8,413 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                  |       | 7,936                                             |       | 8,446 |   |
| Amortization of  financing fees                                                |       | 472                                               |       | 226 |   |
| Deferred income taxes                                                          |       | (858                                              | )          | (3,910 | ) |
| Loss on disposal of  assets                                                    |       | 346                                               |       | 185 |   |
| Stock-based  compensation                                                      |       | 1,096                                             |       | 1,140 |   |
| Other non-cash items                                                           |       | 107                                               |       | 4 |   |
| Change in operating  assets and liabilities:                                   |       |                                              |       |   |   |
| Inventories                                                                    |       | (17,810                                           | )          | (19,885 | ) |
| Prepaid and other  assets                                                      |       | 4,757                                             |       | 2,363 |   |
| Accounts payable                                                               |       | 31,377                                            |       | 958 |   |
| Accrued liabilities                                                            |       | 7,938                                             |       | 3,453 |   |
| Deferred rent                                                                  |       | (691                                              | )          | (120 | ) |
| Income taxes payable                                                           |       | 6,201                                             |       | 4,269 |   |
| Net cash provided by  operating activities                                     |       | 54,660                                            |       | 5,542 |   |
|                                                                           |       |                                              |       |   |   |
| **Net  cash flows from investing activities:**                                 |       |                                              |       |   |   |
| Capital expenditures                                                           |       | (8,392                                            | )          | (7,032 | ) |
| Net cash used in  investing activities                                         |       | (8,392                                            | )          | (7,032 | ) |
|                                                                           |       |                                              |       |   |   |
| **Net  cash flows from financing activities:**                                 |       |                                              |       |   |   |
| Repayments under revolving  credit facility                                    |       | (61,605                                           | )          | (153,941 | ) |
| Proceeds under  revolving credit facility                                      |       | 61,605                                            |       | 147,471 |   |
| Change in cash  overdraft                                                      |       | 5,639                                             |       | 8,444 |   |
| Payment of debt  financing costs                                               |       | —                                            |       | (3,275 | ) |
| Net cash provided by  (used in) financing activities                           |       | 5,639                                             |       | (1,301 | ) |
| Net increase (decrease)  in cash and cash equivalents                          |       | 51,907                                            |       | (2,791 | ) |
| Cash and cash  equivalents, beginning of period                                |       | 5,783                                             |       | 8,630 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                 | 57,690     |   | $ | 5,839 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**TuesdayMorning Corporation**

**Notesto Consolidated Financial Statements (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 all adjustments,consisting only 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 occurredthat required disclosure.

 

2.        Stock-based compensation — We account forour stock-based compensation plan in accordance with Accounting StandardsCodification (“ASC”) 718 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R), “Share Based Payment.”  Under ASC 718,all stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as an expense in the statementof 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 IncentivePlan (the “2008 Plan”) which allow for the granting of stock options todirectors, officers, key employees of, and certain other key individuals whoperform services for us and our subsidiaries. The 1997 Plan authorized grantsof options to purchase up to 4,800,000 shares of authorized, but unissuedcommon stock. Equity awards may no longer be granted under the 1997 Plan butoptions granted under the plan are still exercisable. The 2004 Plan and the2008 Plan authorize grants of options to purchase up to 2,000,000, and2,500,000 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 December 31,2009. 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 stockinto which such options are exercisable. At December 31, 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 1,215,202 shares and593,041 shares available for grant under the 2004 Plan and 2008 Plan at December 31,2009, respectively.  Stock options are awarded with a strike price equalto the average of the high and low trading prices of the Company’s common stockon the date of grant in the 1997 Plan and the 2004 Plan. Stock options areawarded with a strike price equal to the closing price of the Company’s commonstock on the date of the grant in the 2008 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 us andour 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 December 31, 2009 there were990,292 shares of restricted stock outstanding with a weighted average fairvalue of $2.04 per share under the 2004 Plan and 2008 Plan.

 

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Stock-based compensation expense recognized in the three-month andsix-month periods ended December 31, 2009, was as follows (in thousands):

 
| ** **                                                | ** ** | **Three Months Ended  December 31, 2009** | ** ** | **Six Months Ended  December 31, 2009** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                                                      |       |                                                          |       |                                                        |       |
| Total cost of  stock-based compensation during the period |       | $                                                             | 459        |                                                        | $          | 903 |   |
| Amounts capitalized in  ending inventory                  |       | (181                                                          | )          | (363                                                        | )          |
| Amounts recognized in  expense previously capitalized     |       | 287                                                           |       | 556                                                         |       |
|                                                      |       |                                                          |       |                                                        |       |
| Amounts charged against  income for the period before tax |       | $                                                             | 565        |                                                        | $          | 1,096 |   |

 

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 forDerivative Instruments and Hedging Activities.”  Changes in the fair valueof the contracts that are considered to be effective are recorded in othercomprehensive income or loss until the hedged item is recorded inearnings.  Effective cash flow hedges are reclassified out of othercomprehensive income or loss and into cost of sales when the hedged inventoryis sold.  Ineffective cash flow hedges are recorded in other income orloss and were not material for the periods presented.  The effect offoreign exchange contracts on our financial position or results of operationshas historically been immaterial.  Comprehensive income for the quartersended December 31, 2009 and 2008 was $18.5 million and $12.7 million,respectively, while comprehensive income for the six-month period ended December 31,2009, and 2008 was $13.8 million and $8.4 million, respectively.

 

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 California Court of Appealsupheld the trial court’s de-certification order and the plaintiffs havesubsequently filed a petition for review by the California Supreme Court. In addition,some plaintiffs have chosen to pursue their claims individually and have filedseparate lawsuits against us alleging overtime violations. We do not expect anyof these complaints to have a material impact on our financial statements.

 

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 four plaintiffsabandoned their class action claim and have elected to pursue their individualclaims as well as claims under California’s Private Attorney General Act withrespect to such allegations. The first phase of this trial occurred in September andOctober of 2009 and the court ruled that the plaintiffs failed to meettheir burden of proof with respect to the meal and rest period and overtimeclaims presented in that phase of the trial. The second phase of this trial regarding the remaining overtime claims ofcertain plaintiffs is expected to commence in March 2010.  A final judgment has not been rendered inthis case and it is presently unknown whether any of the plaintiffs will chooseto pursue any of their claims on appeal. A companion lawsuit alleging the same claims was filed in December 2008on behalf 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 a judgmentfiled in the District County Court of Texas in and for the County ofBexar.  The plaintiff, a former employee, claimed violations under theEqual Employment Opportunity Act (EEOC).  We have appealed the judgmentand the matter has been ordered for mediation in February of 2010.  We do not expect it to have a material impactto 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.

 

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5.         Earnings per common share — The followingtable sets forth the computation of basic and diluted earnings per commonshare:

 
| ** **                                                                                                               | ** ** | **Three Months Ended  December 31** | ** ** | **Six Months Ended  December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share data)**                                                       | ** ** | **2009**                                           | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| **Basic  earnings per share:**                                                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                                                               |       | $                                                  | 18,450     |                                             | $          | 12,711 |   | $ | 13,789 |   | $ | 8,413 |   |
| Less: Income to  participating securities                                                                                |       | (457                                               | )          | —                                           |       | (356 | ) | — |   |
| Income available to  common stockholders                                                                                 |       | 17,993                                             |       | 12,711                                           |       | 13,433 |   | 8,413 |   |
| Weighted average number  of common shares outstanding                                                                    |       | 41,801                                             |       | 41,462                                           |       | 41,743 |   | 41,451 |   |
| Net income per common  share                                                                                             |       | $                                                  | 0.43       |                                             | $          | 0.31 |   | $ | 0.32 |   | $ | 0.20 |   |
|                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| **Diluted  earnings per share:**                                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Income available to  common stockholders                                                                                 |       | $                                                  | 17,993     |                                             | $          | 12,711 |   | $ | 13,433 |   | $ | 8,413 |   |
|                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Dilutive effect of  employee stock options and restricted stock                                                          |       | 433                                                |       | 125                                              |       | 487 |   | 146 |   |
| Weighted average number  of common shares outstanding                                                                    |       | 41,801                                             |       | 41,462                                           |       | 41,743 |   | 41,451 |   |
| Weighted average number  of common shares and diluted effect of outstanding employee stock options and  restricted stock |       | 42,234                                             |       | 41,587                                           |       | 42,230 |   | 41,597 |   |
|                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net income per common  share                                                                                             |       | $                                                  | 0.43       |                                             | $          | 0.31 |   | $ | 0.32 |   | $ | 0.20 |   |

 

For the quarter ended December 31, 2009, and2008, 1,874,650 and 1,977,045 options, respectively, were excluded because exerciseprices were in excess of the average market price.  For the six-months ended December 31,2009, and 2008, 1,870,260 and 1,986,785 options, respectively, were excludedbecause exercise prices were in excess of the average market price.

 

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 increasethe amount from $150.0 million to $180.0 million. The revolvingcredit facility 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.  The amount that can bedrawn on the Facility at any given time is determined based on percentages ofcertain inventory and credit card receivables. Unless borrowings and letters of creditexceed 82.5% of the maximum amounts available under the revolving creditfacility or an event of default exists, the Company does not have to complywith any financial covenants. Should such an event occur, the Company isrequired to comply with a consolidated fixed charge coverage ratioof 1:1.  As of December 31, 2009, we were in compliance with allrequired covenants.

 

At December 31, 2009, we had no outstandingamounts under the revolving credit facility, $12.3 million of outstandingletters of credit and availability of $106.3 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.  There were no LIBOR loans during thesix-months ended December 31, 2009.

 

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

 

7.       Income Taxes — Tuesday Morning Corporationor one of its subsidiaries files income tax returns in the U.S. federaljurisdiction, and various state jurisdictions. With few exceptions, TuesdayMorning Corporation is no longer subject to U.S. state and local income taxexaminations by tax authorities for years before 1999. The Internal RevenueService has concluded an examination of the Company for all tax years through June 30,2007.  The effective tax rates for the quarter and six-months ended December 31,2009 and December 31, 2008 were 37.6% and 37.0% compared to 36.6% and35.1%, respectively.  The effective tax rate is higher in the quarter andsix-months ended December 31, 2009 as compared to the quarter andsix-months ended December 31, 2008 primarily due to an increase in state 

 

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income taxes. As of the end of the secondquarter of fiscal year 2010, the Company’s annual effective tax rate could notbe reliably estimated as a result of the difficulty in forecasting fiscal 2010tax profit or loss.  As a result, weused the actual effective tax rate for the six months ended December 31,2009 in determining income tax expense.

 

8.        Cash and Cash Equivalents — Credit cardreceivables of $5.1 million and $2.7 million at December 31, 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(formerly Emerging Issues Task Force 03-6-1) “Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities.” ASC 260-10-45 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 ASC260-10-45 on its consolidated financial statements effective July 1, 2009with no material impact to the financial statements.

 

In June 2009, the FASB issued ASC 105-10 (formerly SFAS No. 168),“Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles.” The FASB Accounting Standards Codification   (“Codification”)has become the source of authoritative accounting principles recognized by theFASB to be applied by nongovernmental entities in the preparation of financialstatements in accordance with GAAP. All existing accounting standard documentsare superseded by the Codification and any accounting literature not includedin the Codification will not be authoritative. However, rules andinterpretive releases of the SEC issued under the authority of federalsecurities laws will continue to be the source of authoritative generallyaccepted accounting principles for SEC registrants. Effective September 30,2009, all references made to GAAP in our consolidated financial statements willinclude the new Codification numbering system along with original references.The Codification does not change or alter existing GAAP and, therefore, willnot have an impact on our financial position, results of operations or cashflows.

 
| **Item  2.** | **Management’s Discussion and  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 858 discount retail stores in 43 states asof December 31, 2009. We sell closeout home furnishings, housewares, giftsand related items, which we purchase at below wholesale prices. Our storesoperate 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 onvarious strategic initiatives that we believe have and will continue to offsetthe impact of this trend including, but not limited to:

 

·                  striving to provide a merchandiseassortment that evolves and adapts to the changing needs and preferences of ourcustomer 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 chainefficiency including reviewing operational practices such as freight costs,vendor payment terms, distribution processes and increasing inventory turns

 

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·                  striving to optimize our marketing planby maximizing traffic

·                  increasing comparable store sales

·                  expanding the current customer base

·                  increasing cost efficiency

·                  striving to optimize our purchasing ofinventory to best match customer demand.

 

We also continue to closely monitor and control ourmarkdowns of inventory to avoid marking down items that continue to sellthrough at reasonable rates.  Markdowns during the second quarter offiscal 2010 were 4.9% of sales versus 5.2% of sales for the same period lastyear.  We believe this strategy has and will contribute to overall marginby focusing our markdowns on inventory that is truly slow moving and notmarking down items on the basis of age in inventory alone thereby allowing usto continue to exclude markdowns on opportunistic buys which are too large forus to sell through in one year.  However, if our sales forecasts are notachieved, we may be required to record additional markdowns that could exceedhistorical levels.  The effect of a 0.5% markdown in the value of ourinventory at December 31, 2009 would result in a decline in gross profitand diluted earnings per share for the second quarter of fiscal 2010 of $1.2million and $0.02, respectively.  Under current economic conditions,forecasts can vary significantly from the actual results we may encounter.

 

Our ability to continuously attract buying opportunitiesfor closeout merchandise, and to anticipate consumer demand as closeoutmerchandise becomes available, represents an uncertainty in our business. Bytheir nature, specific closeout merchandise items are generally only availablefrom manufacturers or vendors on a non-recurring basis. As a result, we do nothave long-term contracts with our vendors for supply, pricing or access toproducts, but make individual purchase decisions, which are often for largequantities. Although we have many sources of merchandise and do not foresee anyshortage of closeout merchandise in the near future, we cannot assure thatmanufacturers 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 spenddiscretionary income. At this time, we view the direction of the economy to beuncertain, which does not allow us a high degree of visibility or certaintywith respect to our future earnings.

 

Net sales for the second quarter of fiscal 2010 wereapproximately $289.6 million, an increase of 6.2% compared to the same periodlast year. Comparable store sales for the quarter ended December 31, 2009,increased by 5.1% compared to the same period last year which was primarily dueto an increase in customer traffic offset by a slight decrease in averageticket.  Net income for the quarter was $18.5 million and diluted earningsper share was $0.43.

 

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 eight new stores and did not close anyexisting stores during the second quarter of fiscal 2010. In addition, werelocated three existing stores.

 

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**Results of 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** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **December 31**             | ** ** | **December 31**           | ** ** |
| ** **                                       | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                        |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                    |       | 62.2                             |       | 62.9                           |       | 62.1 |   | 63.0 |   |
| Gross profit                                     |       | 37.8                             |       | 37.1                           |       | 37.9 |   | 37.0 |   |
| Selling, general and  administrative expense     |       | 27.4                             |       | 29.5                           |       | 32.8 |   | 33.9 |   |
| Operating income                                 |       | 10.4                             |       | 7.6                            |       | 5.1 |   | 3.1 |   |
| Net interest expense  and other income (expense) |       | (0.2                             | )          | (0.2                           | )          | (0.3 | ) | (0.2 | ) |
| Income before income  taxes                      |       | 10.2                             |       | 7.4                            |       | 4.8 |   | 2.9 |   |
| Income tax expense                               |       | 3.8                              |       | 2.7                            |       | 1.8 |   | 1.0 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Net income                                       |       | 6.4                              | %          | 4.7                            | %          | 3.0 | % | 1.9 | % |

 

**Three Months Ended December 31,2009**

**Compared to the Three Months Ended December 31,2008**

 

During the second quarter of fiscal 2010, net salesincreased to $289.6 million from $272.7 million, an increase of $16.9 million,or 6.2%, compared to the quarter ended December 31, 2008.  Theincrease in second quarter sales was primarily due to a 5.1% increase incomparable store sales and an increase of $3.5 million in new store sales. Theincrease in comparable sales for the second quarter of fiscal 2010 wascomprised of a 5.3% increase in the average number of transactions and a 0.2%decrease in average transaction amount. Average store sales for the secondquarter of fiscal 2010 increased 6.6% compared to the same period last year.Comparable store sales and sales per store increased primarily due to a higheraverage number of transactions. Management believes the average number oftransactions were higher due primarily to an improvement in the economycombined with consumers’ focus on value during the holiday season.

 

Gross profit increased $8.6 million, or 8.5%, to$109.4 million for the  quarter ended December 31,2009 as compared to $100.9 million for the same quarter last year.  Thisincrease was primarily the result of higher sales volume. Our gross profitpercentage increased from 37.0% for the second quarter of fiscal 2009 to 37.8%for the second quarter of fiscal 2010. This increase of 0.8% in gross profitpercentage was primarily due to a 0.3% decrease in markdowns as a percentage ofsales due to improved sell-through rates of aged inventory combined with a 0.3%decrease in shrink as a percentage of sales. Additionally, freight costs as a percentage of sales decreased 0.1%.

 

Selling, general and administrative expenses decreased$1.0 million, or 1.3%, to $79.3 million in the second quarter of fiscal 2010from $80.3 million in the same quarter last year.  The decrease wasprimarily attributable to a decrease in advertising of $1.9 million offset byan increase in legal fees of $0.4 million due to ongoing litigation and anincrease in store supplies of $0.4 million due to increased store traffic.  As a percentage of net sales, these expensesdecreased 2.1% to 27.4% in the second quarter of fiscal 2010 from 29.5% in thesame quarter last year which was primarily due to an increase in our averagestore sales.  Selling, general and administrative expenses per averagestore were $93,000 this quarter compared to $94,000 in the same quarter lastyear, a decrease of 1.1%.

 

The income tax expense for the quarter ended December 31,2009 was $11.1 million versus $7.3 million for the same period last year. The effective tax rate for the quarters ended December 31, 2009 and 2008was 37.6% and 36.6%, respectively.  Theeffective tax rate is higher in the quarter ended December 31, 2009 ascompared to the quarter ended December 31, 2008 primarily due to anincrease in state income taxes.

 

**Six Months Ended December 31,2009**

**Compared to the Six Months Ended December 31,2008**

 

During the six months-ended December 31, 2009,net sales increased to $455.5 million from $446.1 million, an increase of $9.4million or 2.1% compared to the six-month period ended December 31, 2008.The increase in sales for the first six months of fiscal 2010 was primarily dueto an 0.8% increase in comparable store sales. The increase in comparable salesfor the first six months of fiscal 2010 was comprised of a 2.5% increase in theaverage number of transactions offset by a 1.7% decrease in the averagetransaction amount.  Total average store sales for the first six months offiscal 2010 increased 1.9% when compared to the same prior year period. Comparable store 

 

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sales and sales per store increased primarily due tohigher traffic levels.  Management believes the average number oftransactions were higher due primarily to an improvement in the economycombined with consumers’ focus on value during the holiday season.

 

Gross profit increased $7.8 million, or 4.7%, to$172.8 million for the six-months ended December 31, 2010 as compared to$165.1 million for the same six-month period last year.  This increase was primarily the result ofhigher sales volume.  In the six-month period ended December 31,2010, our gross profit percentage increased to 37.9% from 37.0% in the sameperiod last year.  This 0.9% increase in gross profit margin was primarilydue to a 0.5% decrease in markdowns as a percentage of sales, primarily due toimproved sell through rates of aged inventory combined with a 0.2% decrease inshrink as a percentage of sales. Additionally, freight costs as a percentage of sales decreased 0.1%.

 

Selling, general and administrative expenses duringthe six-months ended December 31, 2009 decreased $1.6 million, or 1.1%, to$149.6 million from $151.2 million during the six-months ended December 31,2008.  The decrease was primarily attributable to a $2.8 million decreasein advertising and a $0.5 million decrease in depreciation. Those decreaseswere offset by a $2.0 million increase in salaries and benefits.  As apercentage of net sales, these expenses decreased by 1.1% to 32.8% in the firstsix months of fiscal 2010 from 33.9% in the same period last year.  Thedecreased percentage is primarily due to the improved expense leveraging givenour improved comparable store sales.  Selling, general and administrativeexpenses per average store were $175.0 thousand for the six months-ended December 31,2009 compared to $177.8 thousand in the same period last year, a decreaseof 1.3%.

 

The income tax provision for the six month periodsended December 31, 2009 and 2008 was $8.1 million and $4.6 million,respectively, reflecting an effective tax rate of 37.0% and 35.1%,respectively.  The effective tax rate is higher in the six months ended December 31,2009 as compared to the six months ended December 31, 2008 primarily dueto an increase in state income taxes.

 

**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.  Giventhe seasonality of our business, the amount of borrowings under our revolvingcredit facility may fluctuate materially depending on various factors,including the time of year, our needs and the opportunity to acquiremerchandise inventory.  We have no off-balance sheet arrangements ortransactions with unconsolidated, limited purpose or variable interestentities, nor do we have material transactions or commitments involving relatedpersons or entities.

 

Net cash provided by operating activities for thesix-months ended December 31, 2009 and 2008 was $54.7 million and $5.5million, respectively, representing a $49.2 million increase. The $54.6 millionof cash provided by operating activities in the second quarter of fiscal 2010was primarily due to an increase in our accounts payable of $31.4 millioncombined with net income of $13.8 million, a depreciation adjustment of $7.9million and an increase in accrued liabilities of $7.9 million offset by aincrease in inventory of $17.8 million.  The increase in accounts payablewas primarily due to the timing of our purchases with more receipts in the secondfiscal quarter of 2010 versus the second fiscal quarter of 2009.   Our overall purchases for the second fiscalquarter of 2010 were slightly less than the same period last year.  Therehas been no material change in our payment policy to vendors.

 

Capital expenditures are principally associated withnew store openings or enhancements to warehouse and office equipment andtotaled $8.4 million and $7.0 million for the six-months ended December 31,2009 and 2008, respectively. The increase in capital expenditures was primarilyrelated to systems improvements, distribution center equipment and storefixtures.  We expect to spend approximately $12.5 million for additionalcapital expenditures during the remainder of fiscal 2010, which will includethe opening of new stores, store expansions, relocations of existing stores,enhancements of selected stores, fixtures for existing stores and purchases ofequipment for our distribution center and corporate office.

 

Net cash provided by financing activities of $5.6 millionfor the six-months ended December 31, 2009 is primarily due to increasesin our cash overdraft.

 

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. The amount that can bedrawn on the Facility at any given time is determined based on percentages ofcertain inventory and credit card receivables. Unless borrowings and letters of creditexceed 82.5% of the maximum amounts available under the revolving creditfacility or an event of default exists, the Company does not have to complywith any financial covenants. Should such an event occur, the Company isrequired to comply with a consolidated fixed charge coverage ratioof 1:1.  As of December 31, 2009, we were in compliance with allrequired covenants.

 

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At December 31, 2009, we had no outstandingamounts under the revolving credit facility, $12.3 million of outstandingletters of credit and availability of $106.3 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.  There were no LIBOR loans during thesix-months ended December 31, 2009.

 

**Store Openings/Closings**

 
| ** **                          | ** ** | **Six Months**   | ** ** | **Six Months**   | ** ** | **Six Months** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Ended**             | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **June 30,**   | ** ** |
| ** **                          | ** ** | **2009**              | ** ** | **2008**              | ** ** | **2009**            | ** ** |
|                                |       |                  |       |                  |       |                |       |
| Stores open at  beginning of period |       | 857                   |       | 842                   |       | 860                 |       |
| Stores opened during  the period    |       | 18                    |       | 21                    |       | 14                  |       |
| Stores closed during  the period    |       | (17                   | )          | (3                    | )          | (17                 | )          |
| Stores open at end of  period       |       | 858                   |       | 860                   |       | 857                 |       |

 

**Recent Accounting Pronouncements**

 

In June 2008, the FinancialAccounting 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 ASC260-10-45 on its consolidated financial statements effective July 1, 2009with no material impact to the financial statements.

 

In June 2009, the FASBissued ASC 105-10 (formerly SFAS No. 168), “Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles.”The FASB Accounting Standards Codification   (“Codification”) has becomethe source of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin accordance with GAAP. All existing accounting standard documents aresuperseded by the Codification and any accounting literature not included inthe Codification will not be authoritative. However, rules andinterpretive releases of the SEC issued under the authority of federalsecurities laws will continue to be the source of authoritative generallyaccepted accounting principles for SEC registrants. Effective September 30,2009, all references made to GAAP in our consolidated financial statements willinclude the new Codification numbering system along with original references.The Codification does not change or alter existing GAAP and, therefore, willnot have an impact on our financial position, results of operations or cashflows.

 

**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 December 31, 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.    Controlsand 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 December 31, 2009 to ensure that information requiredto 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

 

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communicated to our management, including ourprincipal executive and principal financial officers, to allow timely decisionsregarding 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 providereasonable, not absolute, assurance that the objectives of our disclosurecontrol system are met and, as set forth above, our chief executive officer andchief financial officer have concluded, based on their evaluation as of the endof the period covered by this report, that our disclosure controls andprocedures were effective to provide reasonable assurance that the objectivesof our disclosure 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 December 31,2009 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, we were named as a defendant inthree complaints filed in the Superior Court of California in and for theCounty of Los Angeles. The plaintiffs sought to certify a statewide class madeup of some of our current and former employees, which they claim are owedcompensation for overtime wages, penalties and interest. The plaintiffs alsosought attorney’s fees and costs. In October 2003, we entered into asettlement agreement with a sub-class of these plaintiffs consisting ofmanagers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. 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 California Court of Appeals upheld the trial court’sde-certification order and the plaintiffs have subsequently filed a petitionfor review by the California Supreme Court. In addition, some plaintiffs havechosen to pursue their claims individually and have filed separate lawsuitsagainst us alleging overtime violations. We do not expect any of thesecomplaints to have a material impact on our financial statements.

 

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 July 2007. In December 2008, the four plaintiffsabandoned their class action claim and have elected to pursue their individualclaims as well as claims under California’s Private Attorney General Act withrespect to such allegations. The first phase of this trial occurred in September andOctober of 2009 and the court ruled that the plaintiffs failed to meettheir burden of proof with respect to the meal and rest period and overtimeclaims presented in that phase of the trial. The second phase of this trial regarding the remaining overtime claimsof certain plaintiffs is expected to commence in March 2010.  A final judgment has not been rendered inthis case and it is presently unknown whether any of the plaintiffs will chooseto pursue any of their claims on appeal. A companion lawsuit alleging the same claims was filed in December 2008on behalf 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 rest periodviolations. This case has been stayed pending the outcome of another case. Wedo not expect this complaint to have a material impact on our financialstatements.

 

In September 2009, we received notice of ajudgment filed in the District County Court of Texas in and for the County ofBexar.  The plaintiff, a former employee, claimed violations under theEqual Employment Opportunity Act (EEOC).  We have appealed the judgmentand the matter has been ordered for mediation in February of 2010.  We do not expect it to have a material impactto 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.

 

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**Item 4. Submission of Matters to aVote of Security Holders**

 

At the Annual Meeting of Stockholders held on November 12,2009, the following proposals were submitted to stockholders with the followingresults:

 

1.                     Election of seven directors to serveuntil their terms expire at the next annual meeting of stockholders, or theearlier of their death, resignation or removal

 
| ** **                     | ** ** | **Number of Shares** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **For**                        | ** ** | **Withheld** | ** ** |
|                           |       |                           |       |   |   |
| Bruce A. Quinnell              |       | 31,950,388                     |       | 4,563,466 |   |
| Kathleen Mason                 |       | 31,345,786                     |       | 5,168,068 |   |
| Benjamin D. Chereskin          |       | 32,061,632                     |       | 4,452,222 |   |
| Robin P. Selati                |       | 34,947,704                     |       | 1,566,150 |   |
| William J.  Hunckler, III |       | 34,807,637                     |       | 1,706,217 |   |
| David B. Green                 |       | 34,908,946                     |       | 1,604,908 |   |
| Starlette Johnson              |       | 35,471,244                     |       | 1,042,610 |   |

 

2.                     Ratification of the selection of Ernst &Young LLP as our independent registered public accounting firm for the fiscalyear ending June 30, 2010

 
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
|       |       |                           |       |
| For        |       | 36,339,701                     |       |
|       |       |                           |       |
| Against    |       | 167,278                        |       |
|       |       |                           |       |
| Abstain    |       | 6,875                          |       |

 

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**Item 6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Title of Exhibit**                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1                 |       | Certificate of Incorporation of Tuesday Morning  Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to  the Company’s Registration Statement on Form S-4 (File  No. 333-46017) as filed with the Securities and Exchange Commission (the  “Commission”) on February 10, 1998) |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1.2               |       | Certificate of Amendment to the Certificate of  Incorporation of the Company dated March 25, 1999 (incorporated by  reference to Exhibit 3.3 to the Company’s Registration Statement on  Form S-1/A (File No. 333-74365) as filed with the Commission on  March 29, 1999)                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1.3               |       | Certificate of Amendment to the Certificate of  Incorporation of the Company dated May 7, 1999 (incorporated by  reference to Exhibit 3.1.3 to the Company’s Form 10-Q as filed with  the Commission on May 2, 2005)                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.2                 |       | Amended and Restated By-laws of the Company dated  December 14, 2006 (incorporated by reference to Exhibit 3.1 to the  Company’s Form 8-K as filed with the Commission on December 20, 2006)                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 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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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:     January 28,  2010 |                            | By: | /s/ Stephanie Bowman |
|                                                      |                            | Stephanie Bowman, Executive Vice President, |
|                                                      |                            | Chief Financial Officer, Treasurer 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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