Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED March 31, 2010**

 

**OR**

 

**o****                   TRANSITION REPORT PURSUANT TO SECTION 13OR 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 a smallerreporting 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 April 27, 2010** |
|------------------------------------------|------------|-------------------------------------------------------|
| Common Stock, par value  $0.01 per share |       | 42,938,637                                            |

 

 

 

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

 

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

 

·                                                          *inclement weather*

 

·                                                          *changes in ourmerchandise mix;*

 

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

 

·                                                          *increased or newcompetition;*

 

·                                                          *loss or departure ofone or more members of our senior management or experienced buying and managementpersonnel;*

 

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

 

·                                                          *seasonal and quarterlyfluctuations;*

 

·                                                          *fluctuations in ourcomparable store results;*

 

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

 

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

 

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

 

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

 

·                                                          *our ability to generatestrong holiday season sales.*

 

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

 

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

 

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| **PART I -  FINANCIAL INFORMATION**                                                                        | 4      |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| Item 1 — Financial Statements                                                                              | 4      |
|                                                                                                            |   |
| Consolidated  Balance Sheets as of March 31, 2010 and June 30, 2009                                   | 4      |
|                                                                                                            |   |
| Consolidated  Statements of Operations for the Three Months and Nine Months Ended  March 31, 2010 and 2009 | 5      |
|                                                                                                            |   |
| Consolidated  Statements of Cash Flows for the Nine Months Ended March 31, 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**

 

**TuesdayMorning Corporation**

**ConsolidatedBalance Sheets**

**March 31,2010 (unaudited) and June 30, 2009**

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

 
| ** **                                                                                                                                                                                                    | ** ** | **March 31,  2010** | ** ** | **June 30,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| **ASSETS**                                                                                                                                                                                                    |       |                     |       |                    |       |
| Current assets:                                                                                                                                                                                               |       |                     |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                        | 26,619     |                    | $          | 5,783 |   |
| Inventories                                                                                                                                                                                                   |       | 257,996                  |       | 223,628                 |       |
| Prepaid expenses and  other current assets                                                                                                                                                                    |       | 8,100                    |       | 10,197                  |       |
| Deferred income taxes                                                                                                                                                                                         |       | 667                      |       | 1,545                   |       |
| Total current assets                                                                                                                                                                                          |       | 293,382                  |       | 241,153                 |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Property and equipment,  net                                                                                                                                                                                  |       | 72,447                   |       | 72,356                  |       |
| Deferred financing  costs                                                                                                                                                                                     |       | 3,777                    |       | 4,211                   |       |
| Other assets                                                                                                                                                                                                  |       | 1,834                    |       | 1,521                   |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Total Assets                                                                                                                                                                                                  |       | $                        | 371,440    |                    | $          | 319,241 |   |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                 |       |                     |       |                    |       |
| Current liabilities:                                                                                                                                                                                          |       |                     |       |                    |       |
| Accounts payable                                                                                                                                                                                              |       | $                        | 83,395     |                    | $          | 47,109 |   |
| Accrued liabilities                                                                                                                                                                                           |       | 33,704                   |       | 28,765                  |       |
| Income taxes payable                                                                                                                                                                                          |       | 3,164                    |       | 1,564                   |       |
| Total current  liabilities                                                                                                                                                                                    |       | 120,263                  |       | 77,438                  |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Deferred rent                                                                                                                                                                                                 |       | 3,355                    |       | 4,171                   |       |
| Income tax payable —  non current                                                                                                                                                                        |       | 644                      |       | —                  |       |
| Deferred income taxes                                                                                                                                                                                         |       | 1,363                    |       | 2,279                   |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Total Liabilities                                                                                                                                                                                             |       | 125,625                  |       | 83,888                  |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Commitments and contingencies                                                                                                                                                                                 |       |                     |       |                    |       |
| Stockholders’ equity:                                                                                                                                                                                    |       |                     |       |                    |       |
| Preferred stock, par  value $0.01 per share, authorized 10,000,000 shares, none issued or  outstanding                                                                                                        |       | —                   |       | —                  |       |
| Common stock, par value  $0.01 per share, authorized 100,000,000 shares; 42,938,637 shares issued and  outstanding at March 31, 2010 and 42,836,707 shares issued and  outstanding at June 30, 2009 |       | 429                      |       | 428                     |       |
| Additional paid-in  capital                                                                                                                                                                                   |       | 206,110                  |       | 203,633                 |       |
| Retained earnings                                                                                                                                                                                             |       | 39,193                   |       | 31,334                  |       |
| Accumulated other  comprehensive income (loss)                                                                                                                                                                |       | 83                       |       | (42                     | )          |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Total Stockholders’  Equity                                                                                                                                                                              |       | 245,815                  |       | 235,353                 |       |
|                                                                                                                                                                                                          |       |                     |       |                    |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                              |       | $                        | 371,440    |                    | $          | 319,241 |   |

 

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

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Operations (unaudited)**

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

 
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                                     |       | $                                                    | 172,000    |                                                | $          | 167,000 |   | $ | 627,482 |   | $ | 613,052 |   |
| Cost of sales                                 |       | 107,440                                              |       | 106,022                                             |       | 390,080 |   | 387,023 |   |
| Gross profit                                  |       | 64,560                                               |       | 60,978                                              |       | 237,402 |   | 226,029 |   |
| Selling, general and  administrative expenses |       | 70,814                                               |       | 70,366                                              |       | 220,422 |   | 221,593 |   |
| Operating income (loss)                       |       | (6,254                                               | )          | (9,388                                              | )          | 16,980 |   | 4,436 |   |
| Other income (expense):                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                               |       | 5                                                    |       | —                                              |       | 7 |   | 1 |   |
| Interest expense                              |       | (772                                                 | )          | (860                                                | )          | (2,228 | ) | (1,988 | ) |
| Other income (expense),  net                  |       | (244                                                 | )          | (173                                                | )          | (155 | ) | 98 |   |
|                                          |       | (1,011                                               | )          | (1,033                                              | )          | (2,376 | ) | (1,889 | ) |
| Income (loss) before  income taxes            |       | (7,265                                               | )          | (10,421                                             | )          | 14,604 |   | 2,547 |   |
| Income tax expense  (benefit)                 |       | (2,929                                               | )          | (3,593                                              | )          | 5,151 |   | 962 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                             |       | $                                                    | (4,336     | )                                                   | $          | (6,828 | ) | $ | 9,453 |   | $ | 1,585 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| **Earnings  Per Share**                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) per  common share:          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                         |       | $                                                    | (0.10      | )                                                   | $          | (0.16 | ) | $ | 0.22 |   | $ | 0.04 |   |
| Diluted                                       |       | $                                                    | (0.10      | )                                                   | $          | (0.16 | ) | $ | 0.22 |   | $ | 0.04 |   |
| Weighted average number  of common shares:    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                         |       | 42,049                                               |       | 41,534                                              |       | 41,844 |   | 41,479 |   |
| Diluted                                       |       | 42,049                                               |       | 41,534                                              |       | 42,377 |   | 41,729 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Dividends per common  share                   |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |

 

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

 

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Cash Flows (unaudited)**

**(Inthousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
|                                                                               |       |                                            |       |   |   |
| **Net  cash flows from operating activities:**                                     |       |                                            |       |   |   |
| Net income                                                                         |       | $                                               | 9,453      |   | $ | 1,585 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                            |       |   |   |
| Depreciation and  amortization                                                     |       | 11,795                                          |       | 12,637 |   |
| Amortization of  financing fees                                                    |       | 804                                             |       | 474 |   |
| Deferred income taxes                                                              |       | (538                                            | )          | (1,432 | ) |
| Loss on disposal of  assets                                                        |       | 781                                             |       | 546 |   |
| Stock-based  compensation                                                          |       | 1,519                                           |       | 1,656 |   |
| Other non-cash items                                                               |       | 125                                             |       | 12 |   |
| Change in operating  assets and liabilities:                                       |       |                                            |       |   |   |
| Inventories                                                                        |       | (34,527                                         | )          | (19,570 | ) |
| Prepaid and other  assets                                                          |       | 1,784                                           |       | 726 |   |
| Accounts payable                                                                   |       | 32,564                                          |       | 5,377 |   |
| Accrued liabilities                                                                |       | 4,939                                           |       | (755 | ) |
| Deferred rent                                                                      |       | (816                                            | )          | 28 |   |
| Income taxes payable                                                               |       | 2,244                                           |       | 1,579 |   |
| Net cash provided by  operating activities                                         |       | 30,127                                          |       | 2,863 |   |
|                                                                               |       |                                            |       |   |   |
| **Net  cash flows from investing activities:**                                     |       |                                            |       |   |   |
| Capital expenditures                                                               |       | (12,668                                         | )          | (9,919 | ) |
| Net cash used in  investing activities                                             |       | (12,668                                         | )          | (9,919 | ) |
|                                                                               |       |                                            |       |   |   |
| **Net  cash flows from financing activities:**                                     |       |                                            |       |   |   |
| Repayments under  revolving credit facility                                        |       | (61,605                                         | )          | (193,242 | ) |
| Proceeds under  revolving credit facility                                          |       | 61,605                                          |       | 206,742 |   |
| Change in cash  overdraft                                                          |       | 3,722                                           |       | (5,130 | ) |
| Payment of debt  financing costs                                                   |       | (370                                            | )          | (4,437 | ) |
| Proceeds from exercise  of common stock options                                    |       | 25                                              |       | — |   |
| Net cash provided by  financing activities                                         |       | 3,377                                           |       | 3,933 |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | 20,836                                          |       | (3,123 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 5,783                                           |       | 8,630 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                               | 26,619     |   | $ | 5,507 |   |

 

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

 

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**TuesdayMorning Corporation**

**Notesto Consolidated Financial Statements (unaudited)**

 

1.         Basis ofpresentation — The unaudited consolidated interim financial statements includedherein have been prepared by us pursuant to the rules and regulations ofthe Securities and Exchange Commission (the “SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations. Thesefinancial statements include all adjustments, consisting only of those of anormal recurring nature, which, in the opinion of management, are necessary topresent fairly the results of the interim periods presented and should be readin conjunction with the consolidated financial statements and notes thereto inour Form 10-K for the year ended June 30, 2009.  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 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.

 

2.        Stock-based compensation — We account for our stock-based compensation plan inaccordance with Accounting Standards Codification (“ASC”) 718 (formerlyStatement of Financial Accounting  Standards (“SFAS”) No. 123R), “ShareBased Payment.”  Under ASC 718, all stock-based compensation cost ismeasured at the grant date, based on the estimated fair value of the award, andis recognized as an expense in the statement of operations over the requisiteservice period.

 

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 March 31,2010. The exercise prices of the outstanding options range between $0.63 and$35.23, which represents fair market value on the grant date of the shares ofcommon stock into which such options are exercisable. At March 31, 2010,all shares available under the 1997 Plan had been granted and the 1997 Planexpired pursuant to its terms as of December 29, 2007, although certainawards remain outstanding under the 1997 Plan.  There were 1,164,134shares and 601,374 shares available for grant under the 2004 Plan and 2008Plan, respectively, at March 31, 2010.  Stock options are awardedwith a strike price equal to the average of the high and low trading prices ofthe Company’s common stock on the date of grant in the 1997 Plan and the 2004Plan. Stock options are awarded with a strike price equal to the closing priceof the Company’s common stock 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 March 31, 2010, there were800,202 shares of restricted stock outstanding with a weighted average fairvalue of $1.86 per share under the 2004 Plan and 2008 Plan.

 

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Stock-based compensation expense recognized in thethree-month and nine-month periods ended March 31, 2010, was as follows(in thousands):

 

| ** **                                                | ** ** | **Three Months Ended  March 31, 2010** | ** ** | **Nine Months Ended  March 31, 2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                      |       |                                                       |       |                                                      |       |
| Total cost of  stock-based compensation during the period |       | $                                                          | 457        |                                                      | $          | 1,360 |   |
| Amounts capitalized in  ending inventory                  |       | (172                                                       | )          | (535                                                      | )          |
| Amounts recognized in  expense previously capitalized     |       | 138                                                        |       | 694                                                       |       |
|                                                      |       |                                                       |       |                                                      |       |
| Amounts charged against  income for the period before tax |       | $                                                          | 423        |                                                      | $          | 1,519 |   |

 

3.       Comprehensive incomeor loss — Comprehensive income or loss is defined as net income or loss plusthe change in equity during a period from transactions and other events,excluding those resulting from investments by and distributions tostockholders.  We account for foreign currency forward contracts as cashflow hedges in accordance with ASC 815 (formerly SFAS No. 133), “Accountingfor Derivative Instruments and Hedging Activities.”  Changes in the fairvalue of the contracts that are considered to be effective are recorded inother comprehensive 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 loss for the quartersended March 31, 2010 and 2009 was $4.3 million and $6.8 million,respectively, while comprehensive income for the nine-month period ended March 31,2010 and 2009 was $9.6 million and $1.6 million, respectively.

 

4.        Commitmentsand Contingencies — During 2001 and 2002, we were named as a defendant in threecomplaints filed in the Superior Court of California in and for the County ofLos Angeles. The plaintiffs sought to certify a statewide class made up of someof our current and former employees, which they claim are owed compensation forovertime wages, penalties and interest. The plaintiffs 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 settled the individual claims of twoplaintiffs in the lawsuit with no material impact on our financial statements.In addition, approximately 75 individual plaintiffs have chosen to pursue theirclaims individually and have filed separate lawsuits against us allegingovertime violations. We do not expect any of these complaints to have amaterial 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 Court has found in our favor on all claims andwe are awaiting the entry of a final judgment. It is presently unknown whether any of the plaintiffs will choose topursue any of their claims on appeal.  A companion lawsuit alleging thesame claims was filed in Orange County Superior Court in December 2008 onbehalf of approximately thirty-four additional individual plaintiffs. Thislawsuit includes a claim under California’s Private Attorney General Act. Thecompanion lawsuit is still in the initial stages of litigation. We do notexpect any of these complaints to have a material impact on our financial statements.

 

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

 

In September 2009, we received notice of ajudgment filed in the District County Court of Texas in and for the County ofBexar.  The plaintiff, a former employee, claimed violations under theEqual Employment Opportunity Act (EEOC).  We have appealed thejudgment.  We do not expect it to have a material impact to our financialstatements.

 

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 - Thefollowing table sets forth the computation of basic and diluted earnings percommon share:

 
| ** **                                                                                                               | ** ** | **Three Months Ended********March 31** | ** ** | **Nine Months Ended  March 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------|------------|
| **(In thousands, except for per share data)**                                              | ** ** | **2010**                                              | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                                     |       |                                                  |       |                                           |       |   |   |   |   |
| **Basic  earnings per share:**                                                                                           |       |                                                  |       |                                           |       |   |   |   |   |
| Net income (loss)                                                                                                        |       | $                                                     | (4,336     | )                                              | $          | (6,828 | ) | $ | 9,453 |   | $ | 1,585 |   |
| Less: Income to  participating securities                                                                                |       | —                                                |       | —                                         |       | 229 |   | — |   |
| Income available to common  stockholders                                                                                 |       | (4,336                                                | )          | (6,828                                         | )          | 9,224 |   | 1,585 |   |
| Weighted average number  of common shares outstanding                                                                    |       | 42,049                                                |       | 41,534                                         |       | 41,844 |   | 41,479 |   |
| Net income (loss) per  common share                                                                                      |       | $                                                     | (0.10      | )                                              | $          | (0.16 | ) | $ | 0.22 |   | $ | 0.04 |   |
|                                                                                                                     |       |                                                  |       |                                           |       |   |   |   |   |
| **Diluted  earnings per share:**                                                                                         |       |                                                  |       |                                           |       |   |   |   |   |
| Net income (loss)                                                                                                        |       | $                                                     | (4,336     | )                                              | $          | (6,828 | ) | $ | 9,453 |   | $ | 1,585 |   |
|                                                                                                                     |       |                                                  |       |                                           |       |   |   |   |   |
| Dilutive effect of  employee stock options and restricted stock                                                          |       | —                                                |       | —                                         |       | 533 |   | 250 |   |
| Weighted average number  of common shares outstanding                                                                    |       | 42,049                                                |       | 41,534                                         |       | 41,844 |   | 41,479 |   |
| Weighted average number  of common shares and diluted effect of outstanding employee stock options and  restricted stock |       | 42,049                                                |       | 41,534                                         |       | 42,377 |   | 41,729 |   |
|                                                                                                                     |       |                                                  |       |                                           |       |   |   |   |   |
| Net income (loss) per  common share                                                                                      |       | $                                                     | (0.10      | )                                              | $          | (0.16 | ) | $ | 0.22 |   | $ | 0.04 |   |

 

For the quarters ended March 31, 2010, and 2009,1,849,049 and 3,468,497 options, respectively, were excluded because theirinclusion would have been anti-dilutive.  For the nine-months ended March 31,2010, and 2009, 1,869,444 and 2,459,088 options, respectively, were excludedbecause exercise prices were in excess of the average market price.Additionally, 800,202 and 1,306,769 restricted shares were outstanding at March 31,2010, and 2009, respectively.  None ofthese shares were included in the diluted earnings per share calculation forthe quarters ended March 31, 2010, and 2009, because such inclusion wouldhave been anti-dilutive.

 

6.        Revolving credit facility — On December 15, 2008, we entered into anew credit 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.  On January 28, 2009, we entered into anamendment to increase the amount from $150.0 million to$180.0 million. The Revolving Credit Facility may be increased by up to$70.0 million, not to exceed an aggregate total commitment of$250.0 million. Our indebtedness under the Revolving Credit Facility issecured 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 a specified dollar amount for30 consecutive days during the period from December 28 through January 31.On January 29, 2010, we entered into a second amendment to the RevolvingCredit Facility to increase the clean down limit from $45.0 million to $65.0million.  The Revolving Credit Facilitycontains certain restrictive covenants, which affect, among others, our abilityto incur liens or incur additional indebtedness, sell assets or merge orconsolidate with any other entity. The amount that can be drawn on theRevolving Credit Facility at any given time is determined based on percentagesof certain inventory and credit card receivables. Unless borrowings and lettersof credit exceed 82.5% of the maximum amounts available under the RevolvingCredit Facility or an event of default exists, the Company does not have tocomply with any financial covenants. Should such an event occur, the Company isrequired to comply with a consolidated fixed charge coverage ratioof 1:1.  As of March 31, 2010, we were in compliance with allrequired covenants.  There were no LIBORloans during the quarter ended March 31, 2010.

 

At March 31, 2010, we had no outstanding amountsunder the Revolving Credit Facility, $9.3 million of outstanding letters ofcredit and availability of $112.9 million under the Revolving Credit Facility.Letters of credit under the Revolving Credit Facility are primarily forself-insurance purposes. We incur commitment fees of up to 0.75% on the unusedportion of the Revolving Credit Facility. Any borrowing under the RevolvingCredit Facility incurs interest at LIBOR or the prime rate, depending on thetype of borrowing, plus an applicable margin. These rates are increased orreduced as our average daily availability changes.

 

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.

 

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7.       Income Taxes —Tuesday Morning Corporation or one of its subsidiaries files income tax returnsin the U.S. federal jurisdiction, and various state jurisdictions. With fewexceptions, Tuesday Morning Corporation is no longer subject to U.S. state andlocal income tax examinations by tax authorities for years before 1999. TheInternal Revenue Service has concluded an examination of the Company for alltax years through June 30, 2007.  The effective tax rates for thenine-months ended March 31, 2010 and March 31, 2009 were 35.3% and37.8%, respectively.  The effective tax rate is lower in the nine-monthsended March 31, 2010 as compared to the nine-months ended March 31,2009 due to a decrease in the effective tax rate for state income taxes.

 

8.         Cash andCash Equivalents — Credit card receivables of $4.4 million and $2.7 million at March 31,2010 and June 30, 2009, 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.

 

9.         RecentAccounting Pronouncements — In June 2008, the Financial AccountingStandards Board (“FASB”) issued FASB ASC 260-10-45 (formerly Emerging IssuesTask Force 03-6-1) “Determining Whether Instruments Granted in Share-BasedPayment Transactions are Participating Securities.”  ASC 260-10-45addresses whether instruments granted in share-based payment transactions areparticipating securities prior to vesting, and therefore, need to be includedin the earnings allocation in computing earnings per share (EPS) under the twoclass method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earningsper Share.”  ASC 260-10-45 is effective for financial statements issuedfor fiscal years beginning after December 15, 2008 and interim periodswithin those years.  The Company adopted the provisions of ASC 260-10-45on its consolidated financial statements effective July 1, 2009 with nomaterial impact to the financial statements.

 

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

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

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 847 discount retail stores in 43 states asof March 31, 2010. 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 merchandise assortment that evolves and adapts tothe changing needs and preferences of our customer base;

·                  continuing to review the individual contributions of the existing storebase and making decisions about the future of individual store locationsincluding whether to close or relocate them;

·                  seeking to improve overall supply chain efficiency including reviewingoperational practices such as freight costs, vendor payment terms, distributionprocesses and increasing inventory turns;

·                  striving to maximize our traffic by optimizing our marketing plan;

·                  increasing comparable store sales;

·                  expanding the current customer base;

·                  increasing cost efficiency;

·                  striving to optimize our purchasing of inventory to best match customerdemand.

 

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 third quarter of fiscal2010 were 4.8% of sales versus 5.7% of sales for the same period lastyear.  We believe this strategy has contributed and will continue tocontribute to overall margin by focusing our markdowns on inventory that istruly slow moving and not marking down items on the basis of age in inventoryalone thereby allowing us to continue to exclude markdowns on opportunisticbuys which are too large for us to sell through in one year.  However, ifour sales 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 March 31, 2010 would result in adecline in gross profit and diluted earnings per share for the third quarter offiscal 2010 of $1.3 million and $0.02, respectively.  Under current economicconditions, forecasts can vary significantly from the actual results we mayencounter.

 

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

 

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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 third quarter of fiscal 2010 wereapproximately $172.0 million, an increase of 3.0% compared to the same periodlast year. Comparable store sales for the quarter ended March 31, 2010,increased by 1.6% compared to the same period last year which was primarily dueto an increase in customer traffic offset by a decrease in averageticket.  Net loss for the quarter was $4.3 million and diluted loss pershare was $0.10.

 

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 three new stores and closed fourteenexisting stores during the third quarter of fiscal 2010. In addition, werelocated thirteen existing stores.

 

**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** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **March 31**                | ** ** | **March 31**               | ** ** |
| ** **                                       | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net sales**                                    |       | 100.0                            | %          | 100.0                           | %          | 100 | % | 100.0 | % |
| Cost of sales                                    |       | 62.5                             |       | 63.5                            |       | 62.2 |   | 63.1 |   |
| Gross profit                                     |       | 37.5                             |       | 36.5                            |       | 37.8 |   | 36.9 |   |
| Selling, general and  administrative expense     |       | 41.1                             |       | 42.1                            |       | 35.1 |   | 36.1 |   |
| Operating income (loss)                          |       | (3.6                             | )          | (5.6                            | )          | 2.7 |   | 0.7 |   |
| Net interest expense  and other income (expense) |       | (0.6                             | )          | (0.6                            | )          | (0.4 | ) | (0.3 | ) |
| Income (loss) before  income taxes               |       | (4.2                             | )          | (6.2                            | )          | 2.3 |   | 0.4 |   |
| Income tax expense  (benefit)                    |       | (1.7                             | )          | (2.2                            | )          | 0.8 |   | 0.2 |   |
|                                             |       |                                  |       |                            |       |   |   |   |   |
| Net income (loss)                                |       | (2.5                             | )%         | (4.1                            | )%         | 1.5 | % | 0.3 | % |

 

**Three Months Ended March 31,2010**

**Compared to the Three Months Ended March 31,2009**

 

During the third quarter of fiscal 2010, net salesincreased to $172.0 million from $167.0 million, an increase of $5.0 million,or 3.0%, compared to the quarter ended March 31, 2009.  The increasein third quarter sales was primarily due to a 1.6% increase in comparable storesales and an increase of $2.3 million in non comparable store sales. Theincrease in comparable sales for the third quarter of fiscal 2010 was comprisedof a 2.9% increase in the average number of transactions and a 1.3% decrease inaverage transaction amount. Average store sales for the third quarter of fiscal2010 increased 3.3% 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 $3.6 million, or 5.9%, to $64.6million for the quarter ended March 31, 2010 as compared to $61.0million for the same quarter last year.  This increase was primarily theresult of higher sales volume. Our gross profit percentage increased from 36.5%for the third quarter of fiscal 2009 to 37.5% for the third quarter of fiscal2010. This increase of 1.0% in gross profit percentage was primarily due to a0.9% decrease in markdowns as a percentage of sales due to improvedsell-through rates.

 

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Selling, general and administrative expenses increased$0.4 million, or 0.6%, to $70.8 million in the third quarter of fiscal 2010from $70.4 million in the same quarter last year.  The increase wasprimarily attributable to an increase in wages and benefits offset by decreasesin rent, utilities and advertising.  As a percentage of net sales,selling, general and administrative expenses decreased 1.0% to 41.1% in thethird quarter of fiscal 2010 from 42.1% in the same quarter last year which wasprimarily due to the improved expense leveraging given the increase in averagestore sales.  Selling, general and administrative expenses per averagestore were $83.0 thousand this quarter compared to $82.3 thousand in the samequarter last year, an increase of 0.9%.

 

The income tax benefit for the quarter ended March 31,2010 was $2.9 million versus $3.6 million for the same period last year. The effective tax rate for the quarters ended March 31, 2010 and 2009 was40.3% and 34.5%, respectively.  The effective tax rate is higher in thequarter ended March 31, 2010 as compared to the quarter ended March 31,2009 due to primarily to higher effective state income tax rates.

 

**Nine Months Ended March 31, 2010**

**Compared to the Nine Months Ended March 31,2009**

 

During the nine months-ended March 31, 2010, netsales increased to $627.5 million from $613.1 million, an increase of $14.4million or 2.4% compared to the nine-month period ended March 31, 2009.The increase in sales for the first nine months of fiscal 2010 was primarilydue to an 1.0% increase in comparable store sales. The increase in comparablesales for the first nine months of fiscal 2010 was comprised of a 2.6% increasein the average number of transactions offset by a 1.6% decrease in the averagetransaction amount.  Total average store sales for the first nine monthsof fiscal 2010 increased 2.3% when compared to the same prior yearperiod.  Comparable store sales and sales per store increased primarilydue to higher traffic levels.  Management believes the average number of transactionswere higher due primarily to an improvement in the economy combined withconsumers’ focus on value during the current economic climate.

 

Gross profit increased $11.4 million, or 5.0%, to$237.4 million for the nine-months ended March 31, 2010 as compared to$226.0 million for the same nine-month period last year.  This increasewas primarily the result of higher sales volume.  In the nine-month periodended March 31, 2010, our gross profit percentage increased to 37.8% from36.9% in the same period last year.  This 0.9% increase in gross profitmargin was primarily due to a 0.6% decrease in markdowns as a percentage ofsales, primarily due to better sell through of merchandise resulting in lowermarkdown percentages combined with a 0.2% decrease in shrink as a percentage ofsales.

 

Selling, general and administrative expenses duringthe nine-months ended March 31, 2010 decreased $1.2 million, or 0.5%, to$220.4 million from $221.6 million during the nine-months ended March 31,2009.  The decrease was primarily attributable to a $3.6 million decreasein advertising, a $1.1 million decrease in utilities, and a $0.8 milliondecrease in depreciation.  Thosedecreases to total selling, general and administrative costs were offset by a$5.2 million increase in salaries and benefits and a $1.2 million increase inlegal expenses. As a percentage of net sales, these expenses decreased by 1.0%to 35.1% in the first nine months of fiscal 2010 from 36.1% in the same periodlast year.  The decreased percentage is primarily due to the improvedexpense leveraging given the increase in average store sales.  Selling,general and administrative expenses per average store were $258.3 thousandfor the nine months-ended March 31, 2009 compared to $260.0 thousandin the same period last year, a decrease of 0.6%.

 

The income tax provision for the nine month periodsended March 31, 2010 and 2009 was $5.2 million and $1.0 million,respectively, reflecting an effective tax rate of 35.3% and 37.8%,respectively.  The effective tax rate is lower in the nine months ended March 31,2010 as compared to the nine months ended March 31, 2009 due to a decreasein the effective tax rate for 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 thenine-months ended March 31, 2010 and 2009 was $30.1 million and $2.9million, respectively, representing a $27.2 million increase. The $30.1 millionof cash provided by operating activities in the third quarter of fiscal 2010was primarily due to an increase in our accounts payable of $32.6 millioncombined with net income of $9.4 million, and a depreciation adjustment of$11.8 million offset by an increase in inventory of $34.5 million.  Theincrease in accounts payable was primarily due to the timing of our purchaseswith more merchandise received in the third fiscal quarter of 2010.  Our overall purchases for the third fiscal quarter of 2010 were also higherthan the same period last year.  There has been no material change in ourpayment policy to vendors.

 

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Capital expenditures are principally associated withnew store openings or enhancements to warehouse and office equipment andtotaled $12.7 million and $9.9 million for the nine-months ended March 31,2010 and 2009, respectively. The increase in capital expenditures was primarilyrelated to systems improvements, distribution center equipment and storefixtures.  We expect to spend approximately $8.3 million for additionalcapital expenditures during the remainder of fiscal 2010, which will includesystems improvements, the opening of new stores,  relocations of existing stores, enhancementsof selected stores, fixtures for existing stores and purchases of equipment forour distribution center and corporate office.

 

Net cash provided by financing activities of $3.4million for the nine-months ended March 31, 2010 is primarily due toincreases in 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.  On January 28, 2009, we entered into anamendment to increase the amount from $150.0 million to$180.0 million. The Revolving Credit Facility may be increased by up to$70.0 million, not to exceed an aggregate total commitment of$250.0 million. Our indebtedness under the Revolving Credit Facility issecured 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 a specified dollar amount for30 consecutive days during the period from December 28 through January 31.On January 29, 2010, we entered into a second amendment to the RevolvingCredit Facility to increase the clean down limit from $45.0 million to $65.0million.  The Revolving Credit Facilitycontains certain restrictive covenants, which affect, among others, our abilityto incur liens or incur additional indebtedness, sell assets or merge orconsolidate with any other entity. The amount that can be drawn on theRevolving Credit Facility at any given time is determined based on percentagesof certain inventory and credit card receivables. Unless borrowings and lettersof credit exceed 82.5% of the maximum amounts available under the RevolvingCredit Facility or an event of default exists, the Company does not have tocomply with any financial covenants. Should such an event occur, the Company isrequired to comply with a consolidated fixed charge coverage ratioof 1:1.  As of March 31, 2010, we were in compliance with allrequired covenants.  There were no LIBORloans during the quarter ended March 31, 2010.

 

At March 31, 2010, we had no outstanding amountsunder the Revolving Credit Facility, $9.3 million of outstanding letters ofcredit and availability of $112.9 million under the Revolving Credit Facility.Letters of credit under the Revolving Credit Facility are primarily forself-insurance purposes. We incur commitment fees of up to 0.75% on the unusedportion of the Revolving Credit Facility. Any borrowing under the RevolvingCredit Facility incurs interest at LIBOR or the prime rate, depending on thetype of borrowing, plus an applicable margin. These rates are increased orreduced as our average daily availability changes.

 

**Store Openings/Closings**

 
| ** **                          | ** ** | **Nine Months** | ** ** | **Nine Months** | ** ** | **Fiscal  Year**  | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|-------------------|------------|
| ** **                          | ** ** | **Ended**            | ** ** | **Ended**            | ** ** | **Ended**         | ** ** |
| ** **                          | ** ** | **March 31,**   | ** ** | **March 31,**   | ** ** | **June 30,** | ** ** |
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **2009**          | ** ** |
|                                |       |                 |       |                 |       |              |       |
| Stores open at  beginning of period |       | 857                  |       | 842                  |       | 851               |       |
| Stores opened during  the period    |       | 21                   |       | 27                   |       | 23                |       |
| Stores closed during  the period    |       | (31                  | )          | (19                  | )          | (17               | )          |
| Stores open at end of  period       |       | 847                  |       | 850                  |       | 857               |       |

 

**Recent Accounting Pronouncements**

 

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

 

In June 2009, the FASB issued ASC 105-10(formerly SFAS No. 168), “Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles.” The FASB AccountingStandards Codification   (“Codification”) has become the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inaccordance with GAAP. All existing accounting standard documents are supersededby the Codification and any accounting literature not

 

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included in the Codification will not beauthoritative. However, rules and interpretive releases of the SEC issuedunder the authority of federal securities laws will continue to be the sourceof authoritative generally accepted accounting principles for SEC registrants.Effective September 30, 2009, all references made to GAAP in ourconsolidated financial statements will include the new Codification numberingsystem along with original references. The Codification does not change oralter existing GAAP and, therefore, will not have an impact on our financialposition, results of operations or cash flows.

 

**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 March 31, 2010, we have determinedthat there was no material market risk exposure to our consolidated financialposition, results of operations or cash flows as of such date. Our market riskis discussed in more detail in our Annual Report on Form 10-K for thefiscal year ended June 30, 2009. We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes. We have not beensignificantly affected by any changes in the foreign currency exchange rate orinterest rate market risks since June 30, 2009.  The effect offoreign exchange contracts on our financial position or results of operationshas historically been, and continue to be, immaterial.

 

**Item 4.       Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

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 March 31, 2010 to ensure that information required tobe disclosed by us in this Quarterly Report on Form 10-Q was (1) recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (2) accumulatedand communicated to our management, including our principal executive andprincipal financial officers, to allow timely decisions regarding requireddisclosure.

 

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 March 31, 2010that have materially affected, or are reasonably likely 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, 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 California Supreme Court has declined to reviewthat decision.  We settled the individualclaims of two plaintiffs in the lawsuit with no material impact on ourfinancial statements. In addition, approximately 75 individual 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 claimsconcerning meal and rest periods, was filed in Orange County, California in2004, by managers, managers-in-training and assistant managers, and an amendedcomplaint was filed in July 2007. In December 2008, the fourplaintiffs abandoned their class action claim and have elected to pursue theirindividual claims as well as claims under California’s Private Attorney GeneralAct with respect to such allegations. The Court has found in our favor on allclaims and we are awaiting the entry of a final judgment.  It is presently unknown whether any of theplaintiffs will choose to pursue any of their claims on appeal.  Acompanion lawsuit alleging the same claims was filed in Orange County SuperiorCourt in December 2008 on behalf of approximately thirty-four additionalindividual plaintiffs. This lawsuit includes a claim under California’s PrivateAttorney General Act. The companion lawsuit is still in the initial stages oflitigation. We do not expect any of these complaints to have a material impacton our financial statements.

 

In December 2008, 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 another case.We do 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 thejudgment.  We do not expect it to have a material impact to our financialstatements.

 

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 6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Title of Exhibit**                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1                 |       | Certificate of Incorporation of Tuesday Morning  Corporation (the “Company”) (incorporated by reference to Exhibit 3.1 to  the Company’s Registration Statement on Form S-4 (File  No. 333-46017) as filed with the Securities and Exchange Commission (the  “Commission”) on February 10, 1998) |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1.2               |       | Certificate of Amendment to the Certificate of  Incorporation of the Company dated March 25, 1999 (incorporated by  reference to Exhibit 3.3 to the Company’s Registration Statement on  Form S-1/A (File No. 333-74365) as filed with the Commission on  March 29, 1999)                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1.3               |       | Certificate of Amendment to the Certificate of  Incorporation of the Company dated May 7, 1999 (incorporated by  reference to Exhibit 3.1.3 to the Company’s Form 10-Q as filed with  the Commission on May 2, 2005)                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.2                 |       | Amended and Restated By-laws of the Company dated  December 14, 2006 (incorporated by reference to Exhibit 3.1 to the  Company’s Form 8-K as filed with the Commission on December 20,  2006)                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.1                |       | Second Amendment, dated January 29, 2010 to  Credit Agreement by and among the Company, Bank of America, N.A., Wells Fargo  Retail Finance, LLC, and Regions Bank (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on February 4, 2010)                           |
|                |       |                                                                                                                                                                                                                                                                                                                                          |
| 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:    April 30, 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)                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.1             |       | Second Amendment, dated January 29, 2010 to  Credit Agreement by and among the Company, Bank of America, N.A., Wells Fargo  Retail Finance, LLC, and Regions Bank (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on February 4, 2010)                           |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 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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