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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**FOR THE QUARTERLY PERIOD ENDED September 30, 2010**

 

**OR**

 

**o**                   **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM           TO           **

 

**Commission File Number 0-19658**

 

**TUESDAYMORNING CORPORATION**

(ExactName of Registrant as Specified in its Charter)

 

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

 

**6250 LBJ Freeway**

**Dallas, Texas 75240**

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

 

**(972) 387-3562**

(Registrant’stelephone number, including area code)

 

**Not applicable**

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o No x

 

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

 

| **Class**                                | ** ** | **Outstanding at October 27, 2010** |
|------------------------------------------|------------|---------------------------------------------------------|
| Common  Stock, par value $0.01 per share |       | 43,034,366                                              |

 

 

 

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**Forward-Looking Statements**

 

*ThisQuarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of the federal securities laws and the Private Securities LitigationReform Act of 1995, which are based on management’s current expectations,estimates and projections. These statements may be found throughout thisForm 10-Q particularly under the heading “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” among others.Forward-looking statements typically are identified by the use of terms such as“may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend”and similar words, although some forward-looking statements are expresseddifferently. You should consider statements that contain these words carefullybecause they describe our expectations, plans, strategies and goals and ourbeliefs concerning future business conditions, our future results of operations,our future financial position, and our business outlook or state other “forward-looking”information.*

 

*Readersare referred to “Item 1A. Risk Factors” of our Annual Report on Form 10-Kfor the year ended June 30, 2010 for examples of risks, uncertainties andevents that could cause our actual results to differ materially from theexpectations expressed in our forward-looking statements. These risks,uncertainties and events also include, but are not limited to, the following:*

 

·                                                                                                      *uncertaintiesregarding our ability to open stores and relocate existing stores in new andexisting markets and operate these stores on a profitable basis;*

 

·                                                                                                      *conditionsaffecting consumer spending and consumer confidence and the impact, depth andduration of current economic conditions;*

 

·                                                                                                      *increasedor new competition;*

 

·                                                                                                      *ourability to operate information systems and implement new technologieseffectively;*

 

·                                                                                                      *ourability to safeguard our customers’ personal information and other secure data;*

 

·                                                                                                      *ourability to continue to attract buying opportunities and anticipate customerdemand;*

 

·                                                                                                      *lossof or disruption in our centralized distribution center;*

 

·                                                                                                      *ourfreight costs and thus our cost of goods sold are impacted by changes in fuelprices;*

 

·                                                                                                      *lossor departure of one or more members of our senior management or experiencedbuying and management personnel;*

 

·                                                                                                      *ourability to generate strong cash flows from our operations;*

 

·                                                                                                      *anincrease in the cost or a disruption in the flow of our imported products;*

 

·                                                                                                      *oursuccess in implementing our marketing, advertising and promotional efforts;*

 

·                                                                                                      *ourability to attract and retain quality sales, distribution center and otherassociates in large numbers;*

 

·                                                                                                      *seasonaland quarterly fluctuations;*

 

·                                                                                                      *fluctuationsin our comparable store results;*

 

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

 

*The terms “TuesdayMorning,”  “the Company,” “we,” “us” and “our” as used in this QuarterlyReport on Form 10-Q refer to Tuesday Morning Corporation and itssubsidiaries.*

 

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| **P****ART I - FINANCIAL INFORMATION**                                                               | 4      |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Item 1 —  Financial Statements                                                                       | 4      |
|                                                                                                      |   |
| Consolidated  Balance Sheets as of September 30, 2010 and June 30, 2010                         | 4      |
|                                                                                                      |   |
| Consolidated  Statements of Operations for the Three Months Ended September 30, 2010  and 2009       | 5      |
|                                                                                                      |   |
| Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2010  and 2009       | 6      |
|                                                                                                      |   |
| Notes to Consolidated Financial Statements                                                                | 7      |
|                                                                                                      |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 11     |
|                                                                                                      |   |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                 | 15     |
|                                                                                                      |   |
| Item 4 — Controls and Procedures                                                                     | 15     |
|                                                                                                      |   |
| **PART II  — OTHER INFORMATION**                                                                | 16     |
|                                                                                                      |   |
| Item  1 — Legal Proceedings                                                                          | 16     |
|                                                                                                      |   |
| Item  1A — Risk Factors                                                                              | 16     |
|                                                                                                      |   |
| Item 6 —  Exhibits                                                                                   | 17     |

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**Tuesday Morning Corporation**

**Consolidated Balance Sheets**

**September 30, 2010 (unaudited) and June 30, 2010**

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

 
| ** **                                                                                                                                                                                                        | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| **ASSETS**                                                                                                                                                                                                        |       |                         |       |                    |       |
| Current  assets:                                                                                                                                                                                                  |       |                         |       |                    |       |
| Cash  and cash equivalents                                                                                                                                                                                        |       | $                            | 4,727      |                    | $          | 23,522 |   |
| Inventories                                                                                                                                                                                                       |       | 306,462                      |       | 239,194                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                                        |       | 11,558                       |       | 9,756                   |       |
| Deferred  income taxes                                                                                                                                                                                            |       | 1,377                        |       | —                  |       |
| Total  current assets                                                                                                                                                                                             |       | 324,124                      |       | 272,472                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Property  and equipment, net                                                                                                                                                                                      |       | 73,665                       |       | 72,823                  |       |
| Deferred  financing costs                                                                                                                                                                                         |       | 3,267                        |       | 3,522                   |       |
| Other  assets                                                                                                                                                                                                     |       | 1,610                        |       | 1,719                   |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Assets                                                                                                                                                                                                     |       | $                            | 402,666    |                    | $          | 350,536 |   |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                    |       |                         |       |                    |       |
| Current  liabilities:                                                                                                                                                                                             |       |                         |       |                    |       |
| Accounts  payable                                                                                                                                                                                                 |       | $                            | 116,215    |                    | $          | 62,916 |   |
| Accrued  liabilities                                                                                                                                                                                              |       | 31,955                       |       | 34,317                  |       |
| Deferred  income taxes                                                                                                                                                                                            |       | —                       |       | 288                     |       |
| Income  taxes payable                                                                                                                                                                                             |       | 37                           |       | 96                      |       |
| Total  current liabilities                                                                                                                                                                                        |       | 148,207                      |       | 97,617                  |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Revolving  credit facility                                                                                                                                                                                        |       | 4,000                        |       | —                  |       |
| Deferred  rent                                                                                                                                                                                                    |       | 3,079                        |       | 3,181                   |       |
| Deferred  income taxes                                                                                                                                                                                            |       | 725                          |       | 1,207                   |       |
| Income  tax payable — non current                                                                                                                                                                            |       | 644                          |       | 639                     |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Liabilities                                                                                                                                                                                                |       | 156,655                      |       | 102,644                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| 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; 43,022,241  shares issued and outstanding at September 30, 2010 and 43,022,248  shares issued and outstanding at June 30, 2010 |       | 430                          |       | 430                     |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 206,296                      |       | 205,255                 |       |
| Retained  earnings                                                                                                                                                                                                |       | 39,437                       |       | 42,082                  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                    |       | (152                         | )          | 125                     |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Stockholders’ Equity                                                                                                                                                                                  |       | 246,011                      |       | 247,892                 |       |
|                                                                                                                                                                                                              |       |                         |       |                    |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                                  |       | $                            | 402,666    |                    | $          | 350,536 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**Tuesday Morning Corporation**

**Consolidated Statements of Operations (unaudited)**

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

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
|                                          |       |                                                 |       |   |   |
| Net  sales                                    |       | $                                                    | 172,756    |   | $ | 165,867 |   |
| Cost  of sales                                |       | 105,958                                              |       | 102,488 |   |
| Gross  profit                                 |       | 66,798                                               |       | 63,379 |   |
| Selling,  general and administrative expenses |       | 70,281                                               |       | 70,312 |   |
| Operating  loss                               |       | (3,483                                               | )          | (6,933 | ) |
| Other  income (expense):                      |       |                                                 |       |   |   |
|                                          |       |                                                 |       |   |   |
| Interest  expense                             |       | (690                                                 | )          | (751 | ) |
| Other  income (expense), net                  |       | (96                                                  | )          | (14 | ) |
|                                          |       | (786                                                 | )          | (765 | ) |
| Loss  before income taxes                     |       | (4,269                                               | )          | (7,698 | ) |
| Income  tax benefit                           |       | (1,624                                               | )          | (3,037 | ) |
|                                          |       |                                                 |       |   |   |
| Net  loss                                     |       | $                                                    | (2,645     | ) | $ | (4,661 | ) |
|                                          |       |                                                 |       |   |   |
| **Loss Per Share**                            |       |                                                 |       |   |   |
| Net  loss per common share:                   |       |                                                 |       |   |   |
| Basic                                         |       | $                                                    | (0.06      | ) | $ | (0.11 | ) |
| Diluted                                       |       | $                                                    | (0.06      | ) | $ | (0.11 | ) |
| Weighted  average number of common shares:    |       |                                                 |       |   |   |
| Basic                                         |       | 42,220                                               |       | 41,686 |   |
| Diluted                                       |       | 42,220                                               |       | 41,686 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**Tuesday Morning Corporation**

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

**(In thousands)**

 
| ** **                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
|                                                                         |       |                                                 |       |   |   |
| **Net cash flows from operating activities:**                                |       |                                                 |       |   |   |
| Net  loss                                                                    |       | $                                                    | (2,645     | ) | $ | (4,661 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                                 |       |   |   |
| Depreciation  and amortization                                               |       | 4,238                                                |       | 3,929 |   |
| Amortization  of financing fees                                              |       | 255                                                  |       | 236 |   |
| Deferred  income taxes                                                       |       | (1,723                                               | )          | 1,443 |   |
| Loss  on disposal of assets                                                  |       | 308                                                  |       | 222 |   |
| Stock-based  compensation                                                    |       | 418                                                  |       | 533 |   |
| Other  non-cash items                                                        |       | (168                                                 | )          | 6 |   |
| Change  in operating assets and liabilities:                                 |       |                                                 |       |   |   |
| Inventories                                                                  |       | (67,271                                              | )          | (57,176 | ) |
| Prepaid  and other assets                                                    |       | (1,802                                               | )          | (3,976 | ) |
| Accounts  payable                                                            |       | 51,859                                               |       | 51,000 |   |
| Accrued  liabilities                                                         |       | (2,362                                               | )          | 3,393 |   |
| Deferred  rent                                                               |       | (102                                                 | )          | 65 |   |
| Income  taxes payable                                                        |       | (54                                                  | )          | (875 | ) |
| Net  cash used in operating activities                                       |       | (19,049                                              | )          | (5,861 | ) |
|                                                                         |       |                                                 |       |   |   |
| **Net cash flows from investing activities:**                                |       |                                                 |       |   |   |
| Capital  expenditures                                                        |       | (5,388                                               | )          | (3,757 | ) |
| Net  cash used in investing activities                                       |       | (5,388                                               | )          | (3,757 | ) |
|                                                                         |       |                                                 |       |   |   |
| **Net cash flows from financing activities:**                                |       |                                                 |       |   |   |
| Repayments  under revolving credit facility                                  |       | —                                               |       | (28,654 | ) |
| Proceeds  under revolving credit facility                                    |       | 4,000                                                |       | 33,954 |   |
| Change  in cash overdraft                                                    |       | 1,440                                                |       | 4,137 |   |
| Excess  tax benefit from the exercise of employee stock options              |       | 197                                                  |       | — |   |
| Proceeds  from the exercise of common stock options                          |       | 5                                                    |       | — |   |
| Net  cash provided by financing activities                                   |       | 5,642                                                |       | 9,437 |   |
| Net  decrease in cash and cash equivalents                                   |       | (18,795                                              | )          | (181 | ) |
| Cash  and cash equivalents, beginning of period                              |       | 23,522                                               |       | 5,783 |   |
| Cash  and cash equivalents, end of period                                    |       | $                                                    | 4,727      |   | $ | 5,602 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**Tuesday Morning Corporation**

**Notes to Consolidated Financial Statements (unaudited)**

 

1.        Basis of presentation — Theunaudited consolidated interim financial statements included herein have beenprepared by us pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations. Thesefinancial statements include all adjustments, consisting only of those of anormal recurring nature, which, in the opinion of management, are necessary topresent fairly the results of the interim periods presented and should be readin conjunction with the consolidated financial statements and notes thereto inour Form 10-K for the year ended June 30, 2010.  Due to theseasonal nature of our business, the results of operations for the quarter arenot indicative of the results to be expected for the entire fiscal year.

 

The balance sheet atJune 30, 2010 has been derived from the audited consolidated financialstatements at that date but does not include all of the information and notesrequired by U.S. generally accepted accounting principles for completefinancial statements. For further information, refer to the consolidatedfinancial statements and notes thereto included in our Form 10-K for theyear ended June 30, 2010.  We operate our business as a singleoperating segment.

 

2.        Stock-based compensation — We haveestablished the Tuesday Morning Corporation 1997 Long-Term Equity IncentivePlan, as amended (the “1997 Plan”), the Tuesday Morning Corporation 2004Long-Term Equity Incentive Plan, as amended (the “2004 Plan”), and the TuesdayMorning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”)which allow for the granting of stock-based compensation, including stockoptions and restricted stock to directors, officers and key employees of, andcertain other key individuals who perform services for the Company, and itssubsidiaries.  All shares available underthe 1997 Plan have been granted and the 1997 Plan terminated pursuant to itsterms as of December 29, 2007. Equity awards may no longer be granted under the 1997 Plan but optionsgranted under the plan may still be exercisable.  Equity awards may be subject to forfeiture ifcertain performance requirements are not met under the 2004 and 2008plans.  No performance awards wereoutstanding as of September 30, 2010.

 

**Stock Options.**  The 1997 Plan authorized grants of options topurchase up to 4,800,000 shares of authorized, but unissued common stock. The2004 Plan and the 2008 Plan authorize grants of options to purchase up to2,000,000, and 2,500,000 shares, respectively, of authorized, but unissuedcommon stock. Stock options are awarded with a strike price at a fair marketvalue equal to the average of the high and low trading prices of our commonstock on the date of grant under the 1997 Plan and the 2004 Plan. Stock optionsare awarded with a strike price at a fair market value equal to the closingprice of our common stock on the date of the grant under the 2008 Plan.

 

Options granted under the1997 Plan and the 2004 Plan typically vest over periods of three to five yearsand expire ten years from the date of grant while options granted under the2008 Plan typically vest over periods of one to three years and expire tenyears from the date of grant. Options granted under the 2004 Plan and the 2008Plan may have certain performance requirements in addition to service terms. Ifthe performance conditions are not satisfied, the options are forfeited. Nooptions with performance conditions were outstanding as of September 30,2010. The exercise prices of stock options outstanding on September 30,2010, range between $0.63 and $35.23, which represents market value on thegrant date. There were 602,021 and 605,540 shares available for grant under the2004 Plan and the 2008 Plan at September 30, 2010, respectively.

 

**Restricted Stock**.  Restricted stock awards are not transferable,but bear certain rights of common stock ownership including voting and dividendrights. Shares are valued at the market price at the date of award.  As of September 30, 2010, there were810,619 shares of restricted stock outstanding with a weighted average grantdate fair value of $1.91 per share under the 2004 Plan and 2008 Plan.

 

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Stock-based compensationcosts were recognized as follows (in thousands):

 
| ** **                                                  | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
|                                                        |       |                                                     |       |   |   |
| Amortization  of stock-based compensation during the period |       | $                                                        | 415        |   | $ | 444 |   |
| Amounts  capitalized in ending inventory                    |       | (171                                                     | )          | (181 | ) |
| Amounts  recognized and charged to cost of goods sold       |       | 174                                                      |       | 269 |   |
| Amounts  charged against income for the period before tax   |       | $                                                        | 418        |   | $ | 532 |   |

 

3.      Comprehensive income or loss — Comprehensiveincome or loss is defined as net income or loss plus the change in equityduring a period from transactions and other events, excluding those resulting frominvestments by and distributions to stockholders.  We account for foreigncurrency forward contracts as cash flow hedges in accordance with ASC 815(formerly SFAS No. 133), “Accounting for Derivative Instruments andHedging Activities.”  Changes in the fair value of the contracts that areconsidered to be effective are recorded in other comprehensive income or lossuntil the hedged item is recorded in earnings.  Effective cash flow hedgesare reclassified out of other comprehensive income or loss and into cost ofsales when the hedged inventory is sold.  Ineffective cash flow hedges arerecorded in other income or loss and were not material for the periodspresented.  The effect of foreign exchange contracts on our financialposition or results of operations has historically been immaterial. Comprehensive loss for the quarters ended September 30, 2010 and 2009 was$2.9 million and $4.7 million, respectively.

 

4.       Commitments and Contingencies — During 2001 and 2002, we were named as a defendant in three complaintsfiled in the Superior Court of California in and for the County of Los Angeles.The plaintiffs sought to certify a statewide class made up of some of ourcurrent and former employees, which they claim are owed compensation forovertime wages, penalties and interest. The plaintiffs also sought attorney’sfees and costs. In October 2003, we entered into a settlement agreementwith a sub-class of these plaintiffs consisting of managers-in-training andmanagement trainees which was paid in November 2005 with no materialimpact to our financial statements. A store manager class was certified.However, in August 2008, our motion for de-certification of the class ofstore managers was granted, thereby dismissing their class action claim. TheCalifornia Court of Appeals upheld the trial court’s de-certification order andthe California Supreme Court has declined to review that decision. We settledthe individual claims of two plaintiffs in the lawsuit with no material impacton our financial statements. In addition, approximately 75 individualplaintiffs have chosen to pursue their claims individually and have filedseparate lawsuits against us alleging overtime violations.

 

A similar lawsuit, whichalso alleges claims concerning meal and rest periods, was filed in OrangeCounty, California in 2004, by managers, managers-in-training and assistantmanagers, and an amended complaint was filed in July 2007. In December 2008,the four plaintiffs abandoned their class action claim and have elected topursue their individual claims as well as claims under California’s PrivateAttorney General Act with respect to such allegations. The Court has found inour favor on all claims and a final judgment has been entered. It is presentlyunknown whether any of the plaintiffs will choose to pursue any of their claimson appeal. A companion lawsuit alleging the same claims was filed in OrangeCounty Superior Court in December 2008 on behalf of approximatelythirty-four additional individual plaintiffs. This lawsuit includes a claimunder California’s Private Attorney General Act. In January 2010, aplaintiff filed suit against us in Orange County Superior Court alleging claimsfor overtime compensation and meal and rest period violations. It was filed asa limited jurisdiction case. This case is still in the initial stages oflitigation. The companion lawsuit is still in the initial stages of litigation.

 

In August of 2009, asimilar lawsuit by a former store manager seeking alleging failure to payovertime was filed in Alabama.  The suitseeks class action status to include all current and former store managersoutside of the State of California.  Thiscase is still in the initial stages of litigation.  We do not expect any of these complaints tohave a material impact on our financial statements.

 

In December 2008, aclass action lawsuit was filed by hourly, non-exempt employees in the SuperiorCourt of California in and for the County of Los Angeles, alleging claimscovering meal and rest period violations. The court recently lifted the staythat had previously been in place and we are now moving forward with discovery.We do not expect this complaint to have a material impact on our financialstatements.

 

We intend to vigorouslydefend all pending actions. We do not believe these or any other legalproceedings pending or threatened against us would have a material adverseeffect on our financial condition or results of operations.

 

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5.     Earnings per common share - The following table sets forth the computation ofbasic and diluted earnings per common share:

 
| ** **                                                                                                               | ** ** | **Three Months Ended********September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(In thousands, except for per share data)**                                              | ** ** | **2010**                                                   | ** ** | **2009** | ** ** |
|                                                                                                                     |       |                                                       |       |   |   |
| **Basic earnings per share:**                                                                                            |       |                                                       |       |   |   |
| Net  income (loss)                                                                                                       |       | $                                                          | (2,645     | ) | $ | (4,661 | ) |
| Less:  Income to participating securities                                                                                |       | —                                                     |       | — |   |
| Income  available to common stockholders                                                                                 |       | (2,645                                                     | )          | (4,661 | ) |
| Weighted  average number of common shares outstanding                                                                    |       | 42,220                                                     |       | 41,686 |   |
| Net  income (loss) per common share                                                                                      |       | $                                                          | (0.06      | ) | $ | (0.11 | ) |
|                                                                                                                     |       |                                                       |       |   |   |
| **Diluted earnings per share:**                                                                                          |       |                                                       |       |   |   |
| Net  income (loss)                                                                                                       |       | $                                                          | (2,645     | ) | $ | (4,661 | ) |
|                                                                                                                     |       |                                                       |       |   |   |
| Dilutive  effect of employee stock options and restricted stock                                                          |       | —                                                     |       | — |   |
| Weighted  average number of common shares outstanding                                                                    |       | 42,220                                                     |       | 41,686 |   |
| Weighted  average number of common shares and diluted effect of outstanding employee  stock options and restricted stock |       | 42,220                                                     |       | 41,686 |   |
|                                                                                                                     |       |                                                       |       |   |   |
| Net  income (loss) per common share                                                                                      |       | $                                                          | (0.06      | ) | $ | (0.11 | ) |

 

For the quarters ended September 30,2010, and 2009, 1,663,055 and 2,981,292 options, respectively, were excludedbecause their inclusion would have been anti-dilutive.  Additionally,805,226 and 1,151,190 restricted shares were outstanding at September 30,2010, and 2009, respectively.  None of these shares were included in thediluted earnings per share calculation for the quarters ended September 30,2010, and 2009, because such inclusion would have been anti-dilutive.

 

6.        Revolving credit facility — OnDecember 15, 2008, we entered into a credit agreement providing for anasset-based, five-year senior secured revolving credit facility (the “RevolvingCredit Facility”) in the amount of up to $150.0 million which matures onDecember 15, 2013. On January 28, 2009, we entered into an amendmentto increase the amount of the revolver from $150.0 million to$180.0 million. The revolving credit facility may be increased by up to anadditional $70.0 million, not to exceed an aggregate total commitment of$250.0 million. Our indebtedness under the credit facility is secured by alien on substantially all of our assets. The revolving credit facilitycontained, among other things, a “clean down” provision requirement that thesum of the aggregate principal amount of the outstanding loans and undrawnletters of credit may not exceed $45.0 million for 30 consecutive daysduring the period from December 28 through January 31. OnJanuary 29, 2010, we entered into a second amendment to the RevolvingCredit Facility to increase the clean down limit to $65.0 million. TheRevolving Credit Facility contains certain restrictive covenants, which affect,among others, our ability to incur liens or incur additional indebtedness, sellassets or merge or consolidate with any other entity. Unless borrowings andletters of credit exceed 82.5% of the maximum amounts available under therevolving credit facility or an event of default exists, the Company does nothave to comply with any financial covenants. Should such an event occur, theCompany is required to comply with a consolidated fixed charge coverage ratioof 1:1. As of September 30, 2010, we were in compliance with all requiredcovenants.  Interest expenses of$0.7 million for the quarter ended September 30, 2010, were dueprimarily to commitment fees of $0.4 million and the amortization offinancing fees of $0.3 million.

 

At September 30, 2010,we had $4.0 million outstanding under the Revolving Credit Facility,$9.9 million of outstanding letters of credit and availability of$158.1 million under the Revolving Credit Facility. Letters of creditunder the Revolving Credit Facility are primarily for self-insurance purposes.We incur commitment fees of up to 0.75% on the unused portion of the RevolvingCredit Facility. Any borrowing under the Revolving Credit Facility incursinterest at LIBOR or the prime rate, depending on the type of borrowing, plusan applicable margin. These rates are increased or reduced as our average dailyavailability changes.

 

The fair value of financialinstruments is determined by reference to various market data and othervaluation techniques as appropriate.  The only material financialinstrument we carry is our revolving credit facility.  We believe ourdebt, as recorded, approximates fair value as the interest rates are variablebased on current market rates.

 

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7.      Income Taxes — Tuesday Morning Corporation orone 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 endingbefore or on June 30, 2007.  The effective tax rates for the quartersended September 30, 2010 and September 30, 2009 were 38.0% and 39.5%,respectively.  The effective tax rate was lower in the quarter ended September 30,2010 as compared to the quarter ended September 30, 2009 due to a decreasein the effective tax rate for state income taxes.

 

8.        Cash and Cash Equivalents — Creditcard receivables of $3.4 million and $3.2 million at September 30, 2010and June 30, 2010, respectively, from MasterCard, Visa, Discover andAmerican Express, as well as highly liquid investments with an originalmaturity date of three months or less, are considered to be cash equivalents.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussionshould be read in conjunction with our unaudited Consolidated FinancialStatements and the notes thereto included in Item 1 of this Quarterly Report onForm 10-Q.

 

**Introduction**

 

We operated 840 discountretail stores in 43 states as of September 30, 2010. We sell upscale,decorative home accessories, housewares, and famous maker gifts which wepurchase at below wholesale prices. Our stores operate during periodic “salesevents” that occur in each month except January and July. As we conductphysical inventories at all of our stores, we are normally closed for up to thefirst two weeks of January and July, which traditionally have been weakermonths for retailers. We purchase first quality, brand name merchandise atcloseout prices and, in turn, sell it at prices significantly below thosegenerally charged by department stores and specialty and catalog retailers. Wedo not sell seconds, irregulars, refurbished or factory rejects.

 

**BusinessOverview**

 

The retail home furnishingsindustry has been negatively impacted by increased supply and competitionwithin an already highly competitive promotional environment, a trend webelieve is likely to continue in the near term and potentially longer. As a closeoutretailer of home furnishings, we currently compete against a diverse group ofretailers, including department and discount stores, specialty, catalogue ande-commerce retailers and mass merchants, which sell, among other products, homefurnishing and related products similar and often identical to those we sell.We also compete in particular markets with a substantial number of retailersthat specialize in one or more types of home furnishing and houseware productsthat we sell. Some of these competitors have substantially greater financialresources than we do. Our competitors’ greater financial resources allow themto initiate and sustain aggressive price competition, initiate broadermarketing campaigns that reach a larger customer base, fund ongoing promotionalevents and communicate more frequently with existing and potential customers.

 

In response to the ongoingcompetition in the retail home furnishings and housewares industries, wecontinue to focus internally on various strategic initiatives that we believehave and will continue to offset the impact of this trend including, but notlimited to:

 

·                                striving toprovide a merchandise assortment that evolves and adapts to the changing needsand preferences of our customer base;

 

·                                continuing toreview the individual contributions of the existing store base and makingdecisions about the future of individual store locations including whether toclose or relocate them;

 

·                                seeking toimprove overall supply chain efficiency including reviewing operationalpractices such as freight costs, vendor payment terms, distribution processesand increasing inventory turns;

 

·                                striving tomaximize our traffic by optimizing our marketing plan;

 

·                                increasingcomparable store sales;

 

·                                expanding thecurrent customer base;

 

·                                increasing costefficiency;

 

·                                striving tooptimize our purchasing of inventory to best match customer demand.

 

We also continue to closelymonitor and control our markdowns of inventory to avoid marking down items thatcontinue to sell through at reasonable rates.  Markdowns during the firstquarter of fiscal 2011 were 3.9% of sales versus 3.2% of sales for the sameperiod last year.  We believe this strategy has contributed and willcontinue to contribute to overall margin by focusing our markdowns on inventorythat is truly slow moving and not marking down items on the basis of age ininventory alone thereby allowing us to exclude markdowns on opportunistic buyswhich are too large for us to sell through in one year.  However, if oursales forecasts are not achieved, we may be required to record additionalmarkdowns that could exceed historical levels.  The effect of a 0.5%markdown in the value of our inventory at September 30, 2010 would resultin a decline in gross profit and diluted earnings per share for the firstquarter of fiscal 2011 of $1.5 million and $0.02, respectively.  Undercurrent economic conditions, forecasts can vary significantly from the actualresults we achieve.

 

Our ability to continuouslyattract buying opportunities for closeout merchandise, and to anticipateconsumer demand as closeout merchandise becomes available, represents anuncertainty in our business. By their nature, specific closeout merchandiseitems are generally only available from manufacturers or vendors on anon-recurring basis. As a result, we do not have long-term contracts with ourvendors for supply, pricing or access to products, but make individual purchasedecisions, which are often for large quantities. Although we have many sourcesof merchandise and do not foresee any shortage of closeout merchandise in thenear future, we cannot assure that manufacturers or vendors will continue tomake desirable closeout merchandise available to us in quantities or on termsacceptable to us or that our buyers will continue to identify and takeadvantage of appropriate buying opportunities. Since this uncertainty is a by-productof our business, we expect it to be an ongoing concern.

 

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The stability of ourearnings is also heavily influenced by macroeconomic factors. As the economyimproves or worsens our business is often similarly impacted. Macroeconomicfactors, such as the current conditions in the debt and housing markets andunemployment, have impacted and will continue to impact our business bydecreasing the disposable income of our potential consumers. The decline inconsumer confidence levels has also had a negative impact on consumers’ abilityand willingness to spend discretionary income. At this time, we view the directionof the economy to be uncertain, which does not allow us a high degree ofvisibility or certainty with respect to our future earnings.

 

Net sales for the firstquarter of fiscal 2011 were approximately $172.8 million, an increase of 4.2%compared to the same period last year. Comparable store sales for the quarterended September 30, 2010, increased by 4.3% compared to the same periodlast year which was primarily due to an increase in customer traffic offset bya decrease in average ticket.  Net loss for the quarter was $2.6 millionand diluted loss per share was $0.06.

 

We continue to remainfocused on our long-term growth and profitability. The home furnishings andhigh end decorative sectors of the U.S. economy continue to be challenged bythe highly competitive promotional environment and weakness in the housing anddebt markets.

 

We opened four new storesand closed sixteen existing stores during the first quarter of fiscal 2011. Inaddition, we relocated nine existing stores.

 

**Results ofOperations**

 

The following table setsforth certain financial information from our consolidated statements ofoperations expressed as a percentage of net sales. Our business is highlyseasonal, with a significant portion of our net sales and most of our operatingincome generated in the quarter ending December 31, which includes theholiday season. There can be no assurance that the trends in sales or operatingresults will continue in the future.

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **September 30**            | ** ** |
| ** **                                       | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Net sales**                                    |       | 100.0                            | %          | 100.0 | % |
| Cost  of sales                                   |       | 61.3                             |       | 61.8 |   |
| Gross  profit                                    |       | 38.7                             |       | 38.2 |   |
| Selling,  general and administrative expense     |       | 40.7                             |       | 42.4 |   |
| Operating  loss                                  |       | (2.0                             | )          | (4.2 | ) |
| Net  interest expense and other income (expense) |       | (0.5                             | )          | (0.4 | ) |
| Loss  before income taxes                        |       | (2.5                             | )          | (4.6 | ) |
| Income  tax benefit                              |       | (1.0                             | )          | (1.8 | ) |
|                                             |       |                             |       |   |   |
| Net  loss                                        |       | (1.5                             | )%         | (2.8 | )% |

 

**ThreeMonths Ended September 30, 2010**

**Compared tothe Three Months Ended September 30, 2009**

 

During the first quarter offiscal 2011, net sales increased to $172.8 million from $165.9 million, anincrease of $6.9 million, or 4.2%, compared to the quarter endedSeptember 30, 2009.  This increase in first quarter sales wasprimarily due to a 4.3% increase in comparable store sales. The increase incomparable sales for the first quarter of fiscal 2011 was comprised of a 6.1%increase in the average number of transactions offset by a 1.8% decrease inaverage transaction amount. Average store sales for the first quarter of fiscal2011 increased 5.1% compared to the same period last year. Comparable storesales and average sales per store increased primarily due to a higher averagenumber of transactions. Management believes the average number of transactionswere higher due primarily to an improvement in the economy combined withconsumers’ focus on value shopping in the current economic climate.

 

Gross profit increased $3.4million, or 5.4%, to $66.8 million for the quarter ended September 30,2010 as compared to $63.4 million for the same quarter last year.  Thisincrease was primarily the result of higher sales volume. Our gross profitpercentage increased from 38.2% for the first quarter of fiscal 2010 to 38.7%for the first quarter of fiscal 2011. This increase of 0.5% in gross profitpercentage was primarily due to a 0.6% decrease in our cost of merchandise, aresult of opportunistic buys.

 

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Selling, general andadministrative expenses were unchanged at $70.3 million for the first quarterof fiscal year 2011 from the same quarter last year.  As a percentage ofnet sales, selling, general and administrative expenses decreased 1.7% to 40.7%in the first quarter of fiscal 2011 from 42.4% in the same quarter last yearwhich was primarily due to the improved expense leveraging given the increasein average store sales and reduction in the number of stores during the firstquarter of fiscal 2011.  Selling, general and administrative expenses per averagestore were $83.1 thousand for the quarter ended September 30, 2010,compared to $82.4 thousand for the same quarter last year, an increase of 0.9%.

 

The income tax benefit forthe quarter ended September 30, 2010 was $1.6 million compared to $3.0million for the same period last year.  The effective tax rate for thequarters ended September 30, 2010 and 2009 was 38.0% and 39.5%,respectively.  The effective tax rate is lower in the quarter ended September 30,2010 as compared to the quarter ended September 30, 2009 due primarily tolower effective state income tax rates.

 

**Liquidityand Capital Resources**

 

We have financed ouroperations with funds generated from operating activities and borrowings underour revolving credit facility. Our cash flows will continue to be utilized forthe expansion of our business.  Our borrowings have historically peakedduring October as we build inventory levels prior to the holiday sellingseason.  Given the seasonality of our business, the amount of borrowingsunder our revolving credit facility may fluctuate materially depending onvarious factors, including the time of year, our needs and the opportunity toacquire merchandise inventory.  We have no off-balance sheet arrangementsor transactions with unconsolidated, limited purpose or variable interestentities, nor do we have material transactions or commitments involving relatedpersons or entities.

 

Net cash used in operatingactivities for the quarters ended September 30, 2010 and 2009 was $19.0million and $5.9 million, respectively, representing a $13.1 million increase.The $19.0 million of cash used in operating activities in the first quarter offiscal 2011 was primarily due to an increase in our inventory of $67.3 millionoffset by a $51.9 million increase in our accounts payable during thequarter.  The increase in inventory and accounts payable was primarily dueto the planned build of our inventory for the upcoming holiday sellingseason.  Our overall purchases for the firstfiscal quarter of 2011 were higher than the same period last year due primarilyto the timing of our purchases.  There was no material change in ourpayment policy to vendors.

 

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Capital expenditures areprincipally associated with new store openings or relocations, existing storemaintenance, or enhancements to warehouse and office equipment and systems, andtotaled $5.4 million and $3.8 million for the quarters ended September 30,2010 and 2009, respectively.  Thisincrease in planned capital expenditures was primarily related to systemsimprovements, purchases of distribution center equipment and storefixtures.  We expect to spend approximately $11.6 million for additionalcapital expenditures during the remainder of fiscal 2011, which will includesystems improvements, the opening of new stores,  relocations of existingstores, enhancements of selected stores, fixtures for existing stores and purchasesof equipment for our distribution center and corporate office.

 

Net cash provided byfinancing activities of $5.6 million for the quarter ended September 30,2010 was primarily due to proceeds of $4.0 million from borrowings under ourrevolving credit facility.

 

On December 15, 2008,we entered into a credit agreement providing for an asset-based, five-yearsenior secured revolving credit facility (the “Revolving Credit Facility”) inthe amount of up to $150.0 million which matures on December 15,2013. On January 28, 2009, we entered into an amendment to increase theamount of the revolver from $150.0 million to $180.0 million. Therevolving credit facility may be increased by up to an additional$70.0 million, not to exceed an aggregate total commitment of$250.0 million. Our indebtedness under the credit facility is secured by alien on substantially all of our assets. The revolving credit facilitycontained, among other things, a “clean down” provision requirement that thesum of the aggregate principal amount of the outstanding loans and undrawnletters of credit may not exceed $45.0 million for 30 consecutive daysduring the period from December 28 through January 31. OnJanuary 29, 2010, we entered into a second amendment to the RevolvingCredit Facility to increase the clean down limit to $65.0 million. TheRevolving Credit Facility contains certain restrictive covenants, which affect,among others, our ability to incur liens or incur additional indebtedness, sellassets or merge or consolidate with any other entity. Unless borrowings andletters of credit exceed 82.5% of the maximum amounts available under therevolving credit facility or an event of default exists, the Company does nothave to comply with any financial covenants. Should such an event occur, theCompany is required to comply with a consolidated fixed charge coverage ratioof 1:1. As of September 30, 2010, we were in compliance with all requiredcovenants.  Interest expenses of$0.7 million for the quarter ended September 30, 2010, were dueprimarily to commitment fees of $0.4 million and the amortization offinancing fees of $0.3 million.

 

At September 30, 2010,we had $4.0 million outstanding under the Revolving Credit Facility,$9.9 million of outstanding letters of credit and availability of$158.1 million under the Revolving Credit Facility. Letters of creditunder the Revolving Credit Facility are primarily for self-insurance purposes.We incur commitment fees of up to 0.75% on the unused portion of the RevolvingCredit Facility. Any borrowing under the Revolving Credit Facility incursinterest at LIBOR or the prime rate, depending on the type of borrowing, plusan applicable margin. These rates are increased or reduced as our average dailyavailability changes.

 

**StoreOpenings/Closings**

 
| ** **                          | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Fiscal Year** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**            | ** ** |
| ** **                          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **June 30,**    | ** ** |
| ** **                          | ** ** | **2010**               | ** ** | **2009**               | ** ** | **2010**             | ** ** |
|                                |       |                   |       |                   |       |                 |       |
| Stores  open at beginning of period |       | 852                    |       | 857                    |       | 857                  |       |
| Stores  opened during the period    |       | 4                      |       | 10                     |       | 26                   |       |
| Stores  closed during the period    |       | (16                    | )          | (17                    | )          | (31                  | )          |
| Stores  open at end of period       |       | 840                    |       | 851                    |       | 852                  |       |

 

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

 

We are exposed to variousmarket risks, including changes in foreign currency exchange rates and interestrates. Market risk is the potential loss arising from adverse changes in marketprices and rates, such as foreign currency exchange and interest rates. Basedon our market risk sensitive instruments outstanding as of September 30,2010, we have determined that there was no material market risk exposure to ourconsolidated financial position, results of operations or cash flows as of suchdate. Our market risk is discussed in more detail in our Annual Report onForm 10-K for the fiscal year ended June 30, 2010. We do not enterinto derivatives or other financial instruments for trading or speculativepurposes. We have not been significantly affected by any changes in the foreigncurrency exchange rate or interest rate market risks since June 30,2010.  The effect of foreign exchange contracts on our financial positionor results of operations has historically been, and continue to be, immaterial.

 

**Item4.       Controls and Procedures**

 

**DisclosureControls and Procedures**

 

Based on our management’sevaluation (with participation of our principal executive officer and ourprincipal financial officer), our principal executive officer and our principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rule 13a-15(e) or Rule 15d-15(e) under theSecurities Exchange Act of 1934, as amended) were effective as of September 30,2010 to ensure that information required to be disclosed by us in thisQuarterly Report on Form 10-Q was (1) recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and (2) accumulated and communicated toour management, including our principal executive and principal financialofficers, to allow timely decisions regarding required disclosure.

 

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

 

**Changes inInternal Control Over Financial Reporting**

 

There were no changes in ourinternal control over financial reporting that occurred during the quarterended September 30, 2010 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

During 2001 and 2002, wewere named as a defendant in three complaints filed in the Superior Court ofCalifornia in and for the County of Los Angeles. The plaintiffs sought tocertify a statewide class made up of some of our current and former employees,which they claim are owed compensation for overtime wages, penalties andinterest. The plaintiffs also sought attorney’s fees and costs. In October 2003,we entered into a settlement agreement with a sub-class of these plaintiffsconsisting of managers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. A store manager class wascertified. However, in August 2008, our motion for de-certification of theclass of store managers was granted, thereby dismissing their class actionclaim. The California Court of Appeals upheld the trial court’s de-certificationorder and the California Supreme Court has declined to review that decision. Wesettled the individual claims of two plaintiffs in the lawsuit with no materialimpact on our financial statements. In addition, approximately 75 individualplaintiffs have chosen to pursue their claims individually and have filedseparate lawsuits against us alleging overtime violations.

 

A similar lawsuit, whichalso alleges claims concerning meal and rest periods, was filed in OrangeCounty, California in 2004, by managers, managers-in-training and assistantmanagers, and an amended complaint was filed in July 2007. In December 2008,the four plaintiffs abandoned their class action claim and have elected topursue their individual claims as well as claims under California’s PrivateAttorney General Act with respect to such allegations. The Court has found inour favor on all claims and a final judgment has been entered. It is presentlyunknown whether any of the plaintiffs will choose to pursue any of their claimson appeal. A companion lawsuit alleging the same claims was filed in OrangeCounty Superior Court in December 2008 on behalf of approximatelythirty-four additional individual plaintiffs. This lawsuit includes a claimunder California’s Private Attorney General Act. In January 2010, aplaintiff filed suit against us in Orange County Superior Court alleging claimsfor overtime compensation and meal and rest period violations. It was filed asa limited jurisdiction case. This case is still in the initial stages oflitigation. The companion lawsuit is still in the initial stages of litigation.

 

In August of 2009, asimilar lawsuit by a former store manager seeking alleging failure to payovertime was filed in Alabama.  The suitseeks class action status to include all current and former store managersoutside of the State of California.  Thiscase is still in the initial stages of litigation.  We do not expect any of these complaints tohave a material impact on our financial statements.

 

In December 2008, aclass action lawsuit was filed by hourly, non-exempt employees in the SuperiorCourt of California in and for the County of Los Angeles, alleging claimscovering meal and rest period violations. The court recently lifted the staythat had previously been in place and we are now moving forward with discovery.We do not expect this complaint to have a material impact on our financialstatements.

 

We intend to vigorouslydefend all pending actions. We do not believe these or any other legalproceedings pending or threatened against us would have a material adverseeffect on our financial condition or results of operations.

 

**Item 1A.Risk Factors**

 

There have been no materialchanges from our risk factors previously disclosed in “Item 1A. Risk Factors”of our Form 10-K for the fiscal year ended June 30, 2010.

 

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**Item6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Description** |
|---------------------|------------|-----------------|
|                |       |            |
|                | 3.1.1      |            | 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 attachedhereto as Exhibit 32.1 and Exhibit 32.2 are furnished with thisQuarterly Report on Form 10-Q and shall not be deemed “filed” by theCompany for purposes of Section 18 of the Securities Exchange Act of 1934,as amended.

 

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SIGNATURE

 

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

 
|                                           | **TUESDAY  MORNING CORPORATION** |                                                                                           |
|------------------------------------------------|----------------------------------|------------------------------------------------------------------------------------------------|
|                                           | (Registrant)                     |                                                                                           |
|                                           |                             |                                                                                           |
|                                           |                             |                                                                                           |
| DATE:     October 29, 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** |
|------------------|------------|-----------------|
|             |       |            |
|             | 3.1.1      |            | 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 attachedhereto as Exhibit 32.1 and Exhibit 32.2 are furnished with thisQuarterly Report on Form 10-Q and shall not be deemed “filed” by theCompany for purposes of Section 18 of the Securities Exchange Act of 1934,as amended.

 

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