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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)    

ý

 

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

For the fiscal year ended June 30, 2008

or

o

 

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

Commission File Number 0-19658


Tuesday Morning Corporation
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
  75-2398532
(I.R.S. Employer Identification No.)

6250 LBJ Freeway
Dallas, Texas 75240
(972) 387-3562

(Address, zip code and telephone number, including area code,
of registrant's principal executive offices)


Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share registered on the Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

         The aggregate market value of shares of the registrant's common stock held by non-affiliates of the registrant at June 30, 2008 was approximately $171,798,000, based upon the closing sale price on the Nasdaq National Market reported for such date.

         As of the close of business August 28, 2008, there were 41,816,820 outstanding shares of the registrant's common stock.



Documents Incorporated By Reference:

        Portions of the Registrant's Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated herein by reference to the extent indicated into Part III of this Form 10-K.


Forward-Looking Statements

        This Form 10-K contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations, estimates and projections. These statements may be found throughout this Form 10-K, particularly under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operation," among others. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend" and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our future results of operations, our future financial positions, and our business outlook or state other "forward-looking" information.

        The factors listed below under the heading "Risk Factors" and in the other sections of this Form 10-K provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These risks, uncertainties and events also include, but are not limited to, the following: uncertainties regarding our ability to open stores in new and existing markets and operate these stores on a profitable basis; conditions affecting consumer spending; inclement weather; changes in our merchandise mix; timing and type of sales events, promotional activities and other advertising; increased or new competition; loss or departure of one or more members of our senior management, as well as experienced buying and management personnel; an increase in the cost or a disruption in the flow of our products; seasonal and quarterly fluctuations; fluctuations in our comparable store results; our ability to operate information systems and implement new technologies effectively; our ability to generate strong cash flows from our operations; our ability to maintain internal control over financial reporting; and our ability to anticipate and respond in a timely manner to changing consumer demands and preferences.

        The forward-looking statements made in this Form 10-K relate only to events as of the date on which the statements are made. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

        The terms "Tuesday Morning," "we," "us," and "our" as used in this Form 10-K refer to Tuesday Morning Corporation and its subsidiaries.

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PART I

Item 1.    Business

Overview

        We are a leading closeout retailer of upscale home furnishings, housewares, gifts and related items in the United States. We opened our first store in 1974 and operated 842 stores in 47 states as of June 30, 2008. Our stores operate during periodic "sale events," that occur in each month except January and July. We are generally closed for up to the first two weeks of January and July as we conduct physical inventories at all of our stores. We purchase first quality, brand name merchandise at closeout pricing and, in turn, sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

        We believe that our well recognized, first quality brand name merchandise and value-based pricing have enabled us to establish and maintain strong customer loyalty. Our customers, who are predominantly women from middle to upper-income households, are brand savvy, value-conscious customers seeking quality products at discount pricing. While we offer our customers consistent merchandise categories, each sales event features limited quantities of new and appealing products within these categories, creating a "treasure hunt" atmosphere in our stores.

        We believe that our customers are attracted to our stores by our advertising and direct mail program that emphasize the limited quantities of first quality, brand name merchandise which we offer at attractive prices, rather than location. This has allowed us to open our stores in secondary locations of major suburban markets such as strip malls, near our middle and upper income customers. We are able to obtain favorable lease terms because of our flexibility in site selection and our no-frills format, which allows us to use a wide variety of space configurations.

        In the fiscal year ended June 30, 2008, we recorded sales of $885.3 million and operating income of $24.9 million. We paid dividends in calendar years 2005, 2006 and 2007 ranging from $0.65 per share to $0.80 per share. On February 1, 2008, our Board of Directors voted to terminate the declaration of an annual cash dividend. The Board of Directors indicated that it will consider the full range of alternatives with regard to the use of any excess cash flow in the future.

        On April 30, 2007, our Board of Directors approved a change in our fiscal year end from December 31 to June 30, effective June 30, 2007. Accordingly, our financial statements include the six month period ended June 30, 2007, and will represent the twelve month periods ending June 30, thereafter. As a result of this change, this Form 10-K includes financial information for the six month transition period ended June 30, 2007 and 2006 and for the twelve month periods ended June 30, 2008, and 2007, December 31, 2006, 2005, 2004, and 2003. The twelve-month period ended June 30, 2008 is hereinafter referred to as fiscal 2008.

Key Operating Strengths

        Our success is based on the following operating strengths:

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Growth Strategy

        Our growth strategy is to continue to build on our position as a leading closeout retailer of upscale home furnishings, housewares, gifts and related items in the United States by:

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Industry Trends

        As a closeout retailer of first quality, brand name merchandise, we benefit from attractive characteristics in the closeout industry. Closeout merchandise is generally available to closeout retailers at low prices for a variety of reasons, including the inability of a manufacturer to sell merchandise through regular channels, the discontinuance of merchandise due to a style or color change, the cancellation of orders placed by other retailers and the termination of business by a manufacturer or wholesaler. Occasionally, the closeout retailer may be able to purchase closeout merchandise because a manufacturer has excess raw materials or production capacity. Typically, closeout retailers have lower merchandise costs, capital expenditures and operating costs, allowing them to sell merchandise at prices lower than other retailers.

        In addition, we benefit from several trends in the retailing industry. The increase in "just-in-time" inventory management techniques and the rise in retailer consolidation have both resulted in a shift of inventory risk from retailers to manufacturers. In response to an increasingly competitive market, manufacturers are introducing new products and new packaging more frequently. We believe that these trends have helped make the closeout retailer an integral part of manufacturers' overall distribution strategies. As a result, we believe manufacturers are increasingly looking for larger, more sophisticated closeout retailers such as ourselves that can purchase larger and more varied merchandise and can control the distribution and advertising of specific products in order to minimize disruption to the manufacturers' traditional distribution channels.

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Products

        We sell upscale home furnishings, housewares, gifts and related items. We do not sell seconds, irregulars, refurbished or factory rejects. Our merchandise primarily consists of lamps, rugs, kitchen accessories, small electronics, gourmet housewares, linens, luggage, bedroom and bathroom accessories, toys, stationary and silk plants as well as crystal, collectibles and silver serving pieces. We specialize in well-recognized, first quality, brand name merchandise, which has included Calphalon cookware, Krups, KitchenAid and Cuisinart appliances, Sferra linens, Donna Karan bath towels, Samsonite luggage, Wallace and Gorham flatware, Lenox and Dansk tabletop, Marquis crystal, Steinbach and Hummel collectibles, Madame Alexander dolls, Royal Doulton and Wedgwood china and giftware and many others.

        We differ from discount retailers in that we do not stock continuing lines of merchandise. Because we offer a continuity of merchandise categories with ever-changing individual product offerings, we provide our customers a higher proportion of new merchandise items than general merchandisers. We are continually looking to add new complementary merchandise categories that appeal to our customers.

Purchasing

        Since our inception, we have not experienced any significant difficulty in obtaining first quality, brand name closeout merchandise in adequate volumes and at attractive prices. We use a mix of domestic vendors and international vendors. As industry trends such as "just-in-time" inventory management, retailer consolidation and more frequent order cancellations by retailers place more inventory risk on manufacturers, we believe we will continue to see an increase in the number of vendors looking for effective ways to reduce excess inventory. In addition, as we continue to increase our number of stores, maximize productive retail space and increase distribution capacity, we believe our purchasing capacity will continue to increase and enable us to acquire larger quantities of closeout merchandise from individual vendors and manufacturers. Improvements in our distribution processes allow us to stock merchandise in our stores more quickly, which increases our purchasing flexibility. As a result of these trends and initiatives, we believe we will be able to take advantage of more and often larger, buying opportunities as well as offer an enhanced selection of products to our customers. During fiscal 2008, our top ten vendors accounted for approximately 13.1% of total purchases, with no single vendor accounting for more than 2.6%.

Pricing

        Our pricing policy is to sell all merchandise significantly below the retail prices generally charged by department and specialty stores. Prices are determined centrally and are uniform at all of our stores. Once a price is determined for a particular item, labels displaying three-tiered pricing are affixed to the product. A typical price tag displays a competitor's "regular" price, a competitor's "sale" price and our closeout price. Our management and buyers verify retail prices by reviewing prices published in advertisements and catalogues and manufacturers' suggested retail price lists and by visiting department or specialty stores selling similar merchandise. Our management information systems provide daily sales and inventory information, which enables us to mark down unsold merchandise on a timely and systematic basis and thereby effectively manage inventory levels.

Advertising

        We plan and implement an advertising program for each sale event. Prior to each sale event, we initiate a direct mailing or email to customers on our mailing list through our eTreasures® email program, which consists of customers who have previously visited our stores and requested mailings.

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These direct mailings alert customers to the opening of a sale event and the merchandise and prices we offer. We also communicate with customers by advertising in local newspapers in each of our markets.

        While we believe our direct mailings, targeted emails, newspaper and print advertising remain effective, we believe broadcast advertising may also be an effective means to attract new customers, encourage repeat visits by our existing customers and increase consumer awareness of Tuesday Morning. We have used television advertising in select markets in the past and may continue our use of television advertising in fiscal 2009.

Stores and Store Operations

         Site Selection.    During the planning process for fiscal 2009, we evaluated our current store base and plans for new store growth. As a result of this evaluation, we will continue pursuing expansion and relocation opportunities within our existing store base as well as opening new stores. For both new stores and relocations, we are negotiating for upgraded sites. With the expansion opportunities, we are working with high producing stores and increasing the selling square footage. We believe this will benefit us and better position us for the long-term while still maintaining a low cost per square foot in rent expense. To that end, for the fiscal year ending June 30, 2009 we plan to add slightly fewer stores than in prior years and expand or relocate existing stores as we locate profitable opportunities to do so. We expect our new stores to be similar in appearance and operation to our existing stores and do not anticipate any difficulties in identifying suitable additional store locations in areas with our target customer demographics. As we continue our expansion and relocation strategy, we expect to incur a minimal increase in the cost of real estate for those locations.

        We believe that our customers are attracted to our stores by our advertising, direct mail and email programs that emphasizes the limited quantities of first quality, brand name merchandise which we offer at attractive prices, rather than by location. This has allowed us to open our stores in secondary locations of major suburban markets, such as strip malls, near our middle and upper-income customers. We are able to obtain favorable lease terms because of our flexibility in site selection and our no-frills format, which allows us to effectively use a wide variety of space configurations. As a result of this opportunistic approach to site selection, we believe our real estate costs are lower than those of other retailers.

         Store Leases.    Except for one store adjacent to our distribution center, we lease our store locations under non-cancelable operating leases that include optional renewal periods. Some of our leases also provide for contingent rent based upon store sales exceeding stipulated amounts.

        Our store leases typically include "kick clauses," which allow us, at our option, to exit the lease 24 to 36 months after entering into the lease. These kick clauses, when combined with our inexpensive and portable store fixtures, provide us with flexibility in opening new stores by allowing us to quickly and cost-effectively vacate a site that does not meet our sales expectations. As a result, we generally do not operate locations with store level operating losses.

         Store Layout.    Our opportunistic site selection and "no-frills" approach to presenting merchandise allow us to use a wide variety of space configurations. The size of our stores generally ranges from 6,000 to 15,000 square feet and averaged approximately 9,200 square feet as of June 30, 2008. We have designed our stores to be functional, with little emphasis placed upon fixtures and leasehold improvements. We display all merchandise at each store by type and size on racks or counters, and we maintain minimum inventory in stockrooms.

         Store Operations.    We operate our stores during "sales events," that occur once each month except January and July. We are generally closed for up to the first two weeks of January and July as we conduct physical inventories at all our stores. We have increased the frequency of shipments of new merchandise during a sale event, which has resulted in improved efficiency of merchandise receiving

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and restocking activities at our stores. We have implemented initiatives to enhance the process by which merchandise is unloaded at the store and moved to the selling floor and we have increased our internal training program for store managers. We believe that on-going training is a critical component to the success of our store management. Each store manager receives ongoing training beginning with new manager training upon being hired or promoted as well as attendance at one or more training sessions held in Dallas, Texas. In addition, store managers are supported not only by the corporate office, but also by regional and zone field managers.

         Store Management.    Each store has a manager who is responsible for recruiting, training and supervising store personnel and assuring that the store is managed in accordance with our established guidelines and procedures. Store managers are full-time employees. Our store managers are supported by regional field management and zone level support. We have increased regional and zone personnel over the past two years and anticipate this level of support will improve and maintain consistency of execution at our stores. Our store managers are responsible for reviewing store inventory and ensuring their store is continually stocked for sale event and non-sale event periods. The store manager is assisted by part-time employees who serve as cashiers and help with merchandise stocking efforts.

        Members of our management visit selected stores during sale event and non-sale event periods to review inventory levels and presentation, personnel performance, expense controls, security and adherence to our procedures. In addition, regional managers periodically meet with senior management to review store policies and to discuss purchasing, merchandising and advertising strategies for future sale events.

         Store Locations.    As of June 30, 2008, we operated 842 stores in 47 states. Specific store locations can be accessed through our website at www.tuesdaymorning.com.

Distribution

        An important aspect of our success involves our ability to process, sort and distribute inventory quickly and efficiently. Our buying, distribution center and planning and allocation departments work closely together to ensure that our inventory flow is efficient and effective. The majority of our merchandise is received, inspected, counted, ticketed and designated for individual stores at our central distribution center in the Dallas, Texas, metropolitan area. As a general rule, we carry similar products in each of our stores, but the amount of inventory each store is allocated varies depending upon size, location and sales projections for that store. Consistent with our sale event strategy, we ship most of our merchandise to our stores within a few weeks of its arrival at our distribution center. We generally do not replenish specific merchandise during a sale event; however, new and different merchandise is shipped to stores throughout a sale event.

        We make inventory deliveries to our stores between 40 to 47 times per year, which allows us to significantly reduce the amount of inventory stored at our distribution center and maintain more consistent in-store inventory levels. This number of shipments also allows our stores to process shipments more effectively and stock their shelves with new merchandise during sale events. We also use a bar-code locator system to track inventory from the time it is received until it is shipped to our stores. This system allows us to locate, price, sort and ship merchandise efficiently from our central distribution center.

Management Information Systems

        We have invested significant resources in computers, bar code scanners and radio frequency terminals, software programming and related equipment, technology and training, and we will continue to update these systems as necessary. We maintain a corporate local area network computer system, which includes purchase order processing, imports, transportation, distribution, point of sale and financial systems and enables us to efficiently control and process our inventory.

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        At the store level, we have computer-based registers that capture daily sales data at the SKU level. Sales information, inventory information, open to buy, and other operational data is distributed daily to designated levels of management and to the individuals or groups that have responsibility for specific aspects of the business.

Competition

        We believe the principal factors by which we compete are price and product offering. We believe we compete effectively by pricing the merchandise we sell significantly below department and specialty store prices and by offering a broad assortment of high-end, first quality, brand name merchandise. We currently compete against a diverse group of retailers, including department and discount stores, specialty, e-commerce and catalog retailers and mass merchants, which sell, among other products, home furnishings, housewares and related products. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing products that we sell. Some of these competitors have substantially greater financial resources that may, among other things, increase their ability to purchase inventory at lower costs or to initiate and sustain aggressive price competition.

        We are distinguishable from our competitors in several respects. Unlike our competitors, which primarily offer continuing lines of merchandise, we offer changing lines of merchandise depending on availability at value driven prices. Most retailers in the closeout retailing industry are either general merchandisers or focus on apparel, while our focus is on primarily upscale home furnishings, housewares, gifts and related items. In addition, most closeout retailers focus on lower and middle-income consumers, while we generally cater to middle and upper-income customers. Finally, our business model has been and continues to be focused on ten major sale events which are promoted and advertised to our customers through direct mailings, emails and, from time to time, television advertising. We believe that our sale events create a sense of urgency and excitement on the part of our customers because they know that the availability of merchandise during a sale event is limited.

Seasonality

        Our business is highly seasonal, with a significant portion of our net sales and operating income generated during the quarter ended December 31, which includes the holiday shopping season. Net sales in the quarters ended December 31 of 2007, 2006 and 2005 accounted for approximately 35%, 35% and 36%, respectively, of our annual net sales for such years. Operating income for the quarter ended December 31 of 2007, 2006 and 2005 accounted for approximately 142%, 64% and 58%, respectively, of our annual operating income for such years.

Employees

        As of August 18, 2008, we employed approximately 2,000 persons on a full-time basis and approximately 8,800 individuals on a part-time basis. Our employees are not represented by any unions. We have not experienced any work stoppage due to labor disagreements and we believe that our employee relations are strong.

Trademarks and Tradenames

        The tradename "Tuesday Morning" is material to our business. We have registered the name "Tuesday Morning" as a service mark with the United States Patent and Trademark office. We have also registered other trademarks including "Closing Time®" and "eTreasures®."

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Corporate Information

        Tuesday Morning Corporation is a Delaware corporation incorporated in 1991. Our principal executive offices are located at 6250 LBJ Freeway, Dallas, Texas 75240, and our telephone number is (972) 387-3562.

        We maintain a website at www.tuesdaymorning.com. Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with, or furnished to, the Securities and Exchange Commission (the "SEC") are available our internet website.

        Any materials filed or furnished by us with the SEC may be read and copies made at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information which we file or furnish electronically with the SEC.

Item 1A.    Risk Factors

        Our business is subject to significant risks. You should carefully consider the risks and uncertainties described below and the other information in this Form 10-K, including our consolidated financial statements and the notes to those statements. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also affect our business operations. If any of the events described below actually occur, our business, financial condition or results of operations could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose part or all of your investment.


Risks Related to Our Business

We face a number of risks in opening new stores and relocating existing stores.

        As part of our growth strategy, we will continue to pursue expansion and relocation opportunities in our existing store base as well as open new stores. For both new stores and relocations, we are negotiating for upgraded sites. With the expansion opportunities, we are working with high producing stores and increasing the selling square footage. To that end, for the fiscal year ending June 30, 2009 we plan to add slightly fewer stores than in prior years and expand or relocate existing stores as we locate profitable opportunities to do so. However, we cannot assure that we will be able to achieve our relocation or expansion goals or that we will be able to operate our new stores profitably. Further, we cannot assure that any new store will achieve similar operating results to those of our existing stores or that new stores opened in markets in which we operate will not have a material adverse effect on the revenues and profitability of our existing stores. The success of our planned expansion will be dependent upon numerous factors, many of which are beyond our control, including the following:

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        We opened stores in new markets during the fiscal year ended June 30, 2008 and the six month period ended June 30, 2007 and during calendar year 2006. We intend to enter into additional new markets in fiscal 2009 and beyond. These markets may have different competitive conditions, consumer trends and discretionary spending patterns than our existing markets, which may cause our new stores in these markets to be less successful than stores in our existing markets.

Poor economic conditions affect consumer spending and may significantly harm our business.

        The success of our business depends to a significant extent upon the level of consumer spending. A number of factors beyond our control affect the level of consumer spending on merchandise that we offer, including, among other things:

        The merchandise we sell generally consists of discretionary items. Reduced consumer confidence, lower housing starts and spending cut backs may result in reduced demand for our discretionary items and may force us to take significant inventory markdowns. Reduced demand also may require increased selling and promotional expenses. Adverse economic conditions and any related decrease in consumer demand for discretionary items could have a material adverse effect on our business, results of operations and financial condition.

Our business and results of operations are subject to a broad range of uncertainties arising out of world events.

        Our business and results of operations are subject to uncertainties arising out of world events. These uncertainties may include a global economy slowdown, changes in consumer spending, changes in debt markets, increase in gasoline and natural gas prices, and economic consequences of military action or additional terrorist activities. Any future events arising as a result of terrorist activity or other world events may have a material impact on our business, our ability to source products, results of operations and financial condition.

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Our business is intensely competitive and increased or new competition could have a material adverse effect on us.

        The retail home furnishings industry is intensely competitive. As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, specialty and e-commerce retailers and mass merchants, which sell, among other products, home furnishing products similar and often identical to those we sell. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell. Many of these competitors have substantially greater financial resources that may allow them to initiate and sustain aggressive price competition. A number of different competitive factors could have a material adverse effect on our business, results of operations and financial condition, including:

        We cannot assure that we will be able to continue to compete successfully with our existing or new competitors, or that prolonged periods of deep discount pricing by our competitors will not materially harm our business.

We must continuously attract buying opportunities for closeout merchandise and anticipate consumer demand as closeout merchandise becomes available.

        By its nature, specific closeout merchandise items are available from manufacturers or vendors generally on a non-recurring basis. As a result, we do not have long-term contracts with our vendors for supply, pricing or access to products, but make individual purchase decisions, which are often for large quantities. We cannot assure that manufacturers or vendors will continue to make closeout merchandise available to us in quantities or on terms acceptable to us or that our buyers will continue to identify and take advantage of appropriate buying opportunities. In addition, if we misjudge consumer demand for products, we may significantly overstock unpopular products and be forced to take significant markdowns and miss opportunities to sell more popular products. Our inability to acquire suitable merchandise in the future or to accurately anticipate consumer demand for such merchandise would have an adverse effect on our business, results of operations and financial condition.

The loss of, or disruption in the operations of, our centralized distribution center would have a material adverse effect on our business and operations.

        With minor exceptions, all inventory is shipped directly from suppliers to our centralized distribution center in the Dallas, Texas metropolitan area, where the inventory is then processed, sorted and shipped to our stores. We depend in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution center. We cannot assure that we have anticipated all of the changing demands which our expanding operations will impose on our receiving and distribution system or that

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events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, will not result in delays in the delivery of merchandise to our stores. We also cannot assure that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event our distribution center is shut down for any reason.

Our freight costs and thus our cost of goods sold are impacted by changes in fuel prices.

        Our freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight cost both on inbound freight from vendors to our distribution center and outbound freight from our distribution center to our stores. In addition, the U.S. government requires drivers of over-the-road trucks to take certain rest periods which reduce the available amount of time they can drive during a 24 hour period. Increases in fuel prices and surcharges, as well as stringent driver regulations, may increase freight costs and thereby increase our cost of goods sold.

The loss or departure of one or more members of our senior management could have a material adverse effect on our business.

        Our future performance will depend in large part upon the efforts and abilities of our senior management, particularly Kathleen Mason, our President and Chief Executive Officer, and our other key employees, including our buyers. The loss of service of these persons could have a material adverse effect on our business and future prospects. We do not maintain key person life insurance for Ms. Mason or our other senior management. We only have an employment agreement with Ms. Mason, and have no such agreements with any of our other members of senior management.

We are dependent on external funding sources, which may not make available to us sufficient funds when we need them.

        We rely on external funding sources to finance our operations and growth. Our ability to obtain additional financing is dependent upon our future operating performance, general economic and competitive conditions and financial, business and other factors, many of which we cannot control.

If we are not able to generate strong cash flows from our operations, we will not be able to support capital expansion, operations and debt repayment.

        Our business is dependent upon our operations generating strong cash flows to support our capital expansion requirements, our general operating activities and to fund debt repayment. Our inability to continue to generate sufficient cash flows to support these activities or the lack of availability of financing in adequate amounts and on appropriate terms could adversely affect our financial performance and our earnings per share growth.

An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

        Merchandise manufactured and imported from overseas is the majority of our total product purchases acquired both domestically and internationally. A disruption in the shipping of our imported merchandise or an increase in the cost of those products may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Products from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported products include:

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        The products we buy abroad are often priced in foreign currencies and, therefore, we are affected by fluctuating exchange rates. In the past, we have entered into foreign currency exchange contracts with major financial institutions to hedge these fluctuations. We might not be able to successfully protect ourselves in the future against currency rate fluctuations, and our financial performance could suffer as a result. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Quantitative and Qualitative Disclosures About Market Risk" for more information about our foreign currency exchange rate exposure and hedging activities.

We are subject to environmental regulations.

        Under various federal, state and local environmental laws and regulations, current or previous owners or occupants of property may become liable for the costs of removing any hazardous substances found on the property. These laws and regulations often impose liability without regard to fault. As of June 30, 2008, we leased all but one of our stores and 444,000 square feet of land containing a 30,000 square foot building. We own 1,318,000 square feet of distribution facilities. In addition, we operate three aboveground diesel storage tanks at our distributions facilities. We could incur costs in the future related to our leased properties, owned buildings or storage tanks. We cannot assure that our policies and training will successfully help us avoid potential violations of these environmental laws and regulations in the future.

Our success depends upon our marketing, advertising and promotional efforts. If we are unable to implement them successfully, or if our competitors are more effective than we are, our revenue may be adversely affected.

        We use marketing and promotional programs to attract customers to our stores and to encourage purchases by our customers. We use various media for our promotional efforts, including print, television, database marketing and direct marketing. If we fail to choose the appropriate medium for our efforts, or fail to implement and execute new marketing opportunities, our competitors may be able to attract some of our customers and cause them to decrease purchases in our stores and increase purchases elsewhere, which could negatively impact our revenues. Changes in the amount and degree of promotional intensity or merchandising strategy by our competitors could cause us to have difficulties in retaining existing customers and attracting new customers.

Inclement weather in the markets in which our stores operate could adversely affect our operating results.

        Customers' willingness to shop and their demand for the merchandise in our stores is affected by adverse and inclement weather. Frequent or unusually heavy snow, ice or rain storms, severe cold or heat or extended periods of unseasonable temperatures in our markets could adversely affect our sales and increase markdowns.

14


We operate in highly competitive markets, and we may not be able to compete effectively.

        The retail business is highly competitive. We compete for customers, associates, locations, merchandise, services and other important aspects of our business with many other local, regional, national and international retailers. We also face competition from alternative retail distribution channels such as catalogues and internet websites. Changes in the merchandising, pricing and promotional activities of those competitors and in the retail industry generally, may adversely affect our performance.

If we do not attract and retain quality sales, distribution center and other associates in large numbers, as well as, experienced buying and management personnel, our performance could be adversely affected.

        Our performance is dependent on recruiting, developing, training and retaining quality sales, distribution center and other associates in large numbers, as well as, experienced buying and management personnel. Many of our associates are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In the event of increasing wage rates, if we do not increase our wages competitively, our customer service could suffer because of a declining quality of our workforce, or our earnings would decrease if we increase our wage rates. Further, our off-price model limits the market for experienced buying and management personnel and requires us to do significant internal training and development. Changes that adversely impact our ability to attract and retain quality associates and management personnel could adversely affect our performance.

If we are unable to operate information systems and implement new technologies effectively, our business could be disrupted or our sales or profitability could be reduced.

        The efficient operation of our business is dependent on our information systems, including our ability to operate them effectively and to successfully implement new technologies, systems, controls and adequate disaster recovery systems. In addition, we must protect the confidentiality of our and our customers' data. The failure of our information systems to perform as designed or our failure to implement and operate them effectively could disrupt our business or subject us to liability and thereby harm our profitability.

We maintain internal control over financial reporting, but cannot provide absolute assurance that there will not be material errors in our financial reporting.

        We maintain a system of internal control over financial reporting, but there are limitations inherent in internal control systems. If we are unable to maintain adequate and effective internal control over financial reporting, our financial reporting could be adversely affected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs.

Our results of operations are subject to seasonal and quarterly fluctuations, which could have a material adverse effect on the market price of our common stock.

        Our business is highly seasonal, with a significant portion of our net sales and operating income generated during the quarter ending December 31, which includes the holiday shopping season. Net sales in the quarters ended December 31 of 2007, 2006 and 2005 accounted for approximately 35%, 35% and 36%, respectively, of annual net sales for such years. Operating income for the quarters

15



ended December 31 of 2007, 2006 and 2005 accounted for approximately 142%, 64% and 58%, respectively, of annual operating income for such years. For more information about our seasonality, please read "Management's Discussion and Analysis of Financial Condition and Results of Operation—Quarterly Results and Seasonality." Because a significant percentage of our net sales and operating income are generated in the quarter ending December 31, we have limited ability to compensate for shortfalls in December quarter sales or earnings by changes in our operations or strategies in other quarters. A significant shortfall in results for the quarter ending December 31 of any year could have a material adverse effect on our annual results of operations and on the market price of our common stock. Our quarterly results of operations also may fluctuate significantly based on such factors as:

A failure to grow or maintain our comparable store sales may adversely affect our results of operations.

        A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:

        Our comparable store sales results have fluctuated in the past, and we believe such fluctuations may continue. Our comparable store sales decreased 7.6% for the fiscal year ended June 30, 2008, 2.5% in the six month period ended June 30, 2007, and 7.9%, and 4.0% in the calendar years ended 2006, and 2005, respectively. The unpredictability of our comparable store sales may cause our revenue and results of operations to vary from quarter to quarter, and an unanticipated decline in revenues or operating income may cause our stock price to fluctuate significantly. A failure to grow or maintain our comparable store sales results could have a material adverse effect on our results of operations.

16



Risks Related to Our Common Stock

Our certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors.

        Provisions in our certificate of incorporation and bylaws will have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

        In addition, we are subject the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

Our largest stockholder has significant influence over us, which may affect the rights of other stockholders.

        At August 19, 2008, Madison Dearborn Capital Partners II, L.P. and its affiliates (collectively, "Madison Dearborn") beneficially owned approximately 27% of the outstanding shares of our common stock, and thus, has a significant influence over election of our directors, approval of mergers, sales of assets and other matters. The interests of Madison Dearborn may conflict with the interests of other holders of our common stock.

Sales of our common stock by our largest stockholder could depress our stock price.

        If our largest stockholder sells substantial amounts of our common stock, the market price of our common stock could fall. Such sales might make it more difficult for us to sell equity or equity-related securities in the future. As of August 19, 2008, Madison Dearborn beneficially owned approximately 27% of the outstanding shares of our common stock. Pursuant to registration rights we granted to Madison Dearborn, we have filed, and the SEC has declared effective, a registration statement that would enable Madison Dearborn, from time to time, sell some or all of its shares of common stock, in the public market or otherwise.

Because our Board of Directors voted to terminate the declaration of an annual cash dividend, stockholders must look solely to appreciation of our common stock to realize a gain on their investment.

        On February 1, 2008, our Board of Directors voted to terminate the declaration of an annual cash dividend. The Board of Directors indicated that it will consider the full range of alternatives with regard to the use of any excess cash flow in the future. Our future dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements and investment opportunities.

17



Accordingly, stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may not occur.

Item 1B.    Unresolved Staff Comments

        None

Item 2.    Properties

         Stores.    We lease all of our stores from unaffiliated third parties normally through non-cancelable leases except one located adjacent to our distribution facility. At June 30, 2008, the remaining terms of our store leases generally range from six months to five years with a small percentage out to ten years. The average initial term of a store lease is approximately five years with options available for renewal. We intend to continue to lease all of our new stores from unaffiliated third parties. Leases may contain renewal clauses which are often executed and may contain additional terms regarding percentage of rent payments. Our store leases typically include "kick clauses," which allow us, at our option, to exit the lease 24 to 36 months after entering the lease.

         Distribution Facilities and Corporate Headquarters.    We own approximately 1,318,000 square feet of distribution facilities and a 79,000 square foot building which houses our corporate office in the Dallas, Texas metropolitan area.

        We have leases on three parcels of land of approximately 444,000 square feet, two of which are for trailer storage and the third parcel is for a 30,000 square foot building. The leases for trailer storage expire in April 2009 and December 2013 and the lease for the third parcel and building expires February 2011. We believe our current distribution facilities are adequate to meet our requirements for the next several years. We will, however, need to acquire or lease additional warehouse space in approximately three to four years to accommodate our distribution requirements as our store base grows.

Item 3.    Legal Proceedings

        During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs sought to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs also sought attorney's fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of manager-in-training and management trainees which was paid in November 2005 with no material impact to our financial statements. In August 2008, our motion for de-certification of the class of remaining plaintiffs was granted, thereby dismissing their class action claim. However, we expect the plaintiffs to appeal this ruling and some may pursue their claims individually. A similar lawsuit, which also alleges claims concerning meal and rest periods, was filed in Orange County, California in 2004 by managers, managers-in-training and assistant managers and an amended complaint was filed in January 2007. This case is still in the discovery phase and the plaintiffs have been ordered to move for class certification. We do not expect these complaints to have a material impact on our financial statements.

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

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

18



PART II

Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is listed on the NASDAQ Global Market under the symbol "TUES." The following table sets forth for the periods indicated the high and low sales prices per share as reported on the NASDAQ Global Market.

 
  High   Low  

Fiscal Year Ended June 30, 2008

             
 

First quarter

  $ 13.52   $ 8.59  
 

Second quarter

  $ 9.58   $ 4.41  
 

Third quarter

  $ 6.11   $ 4.04  
 

Fourth quarter

  $ 5.90   $ 3.90  

Six Months Ended June 30, 2007*

             
 

First quarter

  $ 17.87   $ 14.54  
 

Second quarter

  $ 15.54   $ 12.10  

Year Ended December 31, 2006

             
 

First quarter

  $ 23.96   $ 19.73  
 

Second quarter

  $ 23.21   $ 12.97  
 

Third quarter

  $ 15.33   $ 12.00  
 

Fourth quarter

  $ 19.02   $ 13.63  

*
We changed our fiscal year end to June 30 effective June 30, 2007. Accordingly, our fiscal period ended June 30, 2007 was comprised of only two fiscal quarters.

        On August 28, 2008, the last reported sale price for our common stock on the NASDAQ Global Market was $4.33 per share. As of August 28, 2008, there were approximately 29 holders of record of our common stock.

Dividend Policy

        We have declared and paid the following annual cash dividends:

 
  2007   2006

Payment date

  March 30, 2007   March 30, 2006

Dividend per common share

  $0.80   $0.80

Total dividend

  $33.1 million   $33.1 million

        On February 1, 2008, our Board of Directors voted to terminate the declaration of an annual cash dividend. The Board of Directors indicated that it will consider the full range of alternatives with regard to the use of any excess cash flow in the future.

Securities Authorized for Issuance Under Equity Compensation Plans

        The information contained in Item 12 of this Form 10-K is incorporated herein by reference.

Repurchases of Common Equity

        We do not have a stock repurchase program for our common stock.

19


Stock Price Performance

        The following graph illustrates a comparison of the cumulative total stockholder return (change in stock price plus reinvested dividends) for the fiscal year ended June 30, 2008, the six months ended June 30, 2007, and the four years ended December 31, 2006 through 2003, of (1) our common stock, (2) the S&P 500 Index and (3) a peer group of companies consisting of Big Lots, Inc.; TJX Companies Inc.; Dollar Tree Stores Inc.; Family Dollar Stores, Inc.; Williams-Sonoma Inc.; Bed Bath & Beyond Inc.; Ross Stores Inc.; Cost Plus, Inc.; and the Bombay Company. The chart assumes that $100 was invested on December 31, 2003 in our common stock and each of the comparison indices, and assumes that all dividends were reinvested.

Comparison of Total Return of the Company, Peer Group and Broad Market

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG TUESDAY MORNING CORP.,
S&P 500 INDEX AND PEER GROUP INDEX

GRAPHIC

ASSUMES $100 INVESTED ON JUNE 30, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JUNE 30, 3008

Item 6.   Selected Financial Data

        The following table sets forth the selected consolidated financial and operating data for fiscal years ended June 30, 2008, and 2007, the six months ended June 30, 2007 and 2006, and as of the end of, each of the four years ended December 31, 2006, 2005, 2004, and 2003. The statement of operations data for the fiscal year ended June 30, 2008, the six-month period ended June 30, 2007, the years ended December 31, 2006, and 2005 and the balance sheet data as of June 30, 2008, and 2007 are derived from our audited consolidated financial statements that appear herein. The statement of operations data for the fiscal year ended June 30, 2007 is derived from our unaudited consolidated financial statements. The six-month period ended June 30, 2006 and the balance sheet data as of June 30, 2006 are derived from our unaudited consolidated financial statements that are included in the respective Form 10-Q. The statement of operations data for the year ended December 31, 2003 and the

20



balance sheet data as of December 31, 2006, 2005, 2004, and 2003 are derived from our audited consolidated financial statements that are not included in this Form 10-K.

        The selected consolidated financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

 
  Fiscal Year Ended
June 30,
  Six Months Ended
June 30,
  Year Ended December 31,  
 
  2008   2007   2007   2006   2006   2005(5)   2004   2003  
 
  (In thousands, except per share and number of stores)
 

Statement of Operations Data:

                                                 

Net sales

  $ 885,281   $ 924,199   $ 408,520   $ 395,428   $ 911,107   $ 931,827   $ 897,841   $ 822,646  

Cost of sales

    562,578     578,881     257,851     247,564     568,594     574,546     556,623     513,097  
                                   
 

Gross profit

    322,703     345,318     150,669     147,864     342,513     357,281     341,218     309,549  

Selling, general and administrative expenses

    297,852     296,632     144,962     132,390     284,060     260,736     237,127     210,158  
                                   
 

Operating income

    24,851     48,686     5,707     15,474     58,453     96,545     104,091     99,391  

Loss on early extinguishment of debt

                                (3,854 )

Net interest and other expense

    (2,719 )   (1,521 )   (656 )   (266 )   (1,131 )   (526 )   (2,275 )   (8,283 )
                                   

Income before income taxes

    22,132     47,165     5,051     15,208     57,322     96,019     101,816     87,254  

Income tax expense

    7,634     17,094     1,970     5,769     20,893     35,060     39,199     33,593  
                                   

Net income

  $ 14,498   $ 30,071   $ 3,081   $ 9,439   $ 36,429   $ 60,959   $ 62,617   $ 53,661  
                                   

Earnings per share:

                                                 
 

Basic

  $ 0.35   $ 0.73   $ 0.07   $ 0.23   $ 0.88   $ 1.48   $ 1.53   $ 1.32  
 

Diluted

    0.35     0.72     0.07     0.23     0.87     1.46     1.50     1.29  

Weighted average shares outstanding:

                                                 
 

Basic

    41,439     41,433     41,433     41,380     41,392     41,264     41,046     40,513  
 

Diluted

    41,494     41,637     41,637     41,647     41,647     41,770     41,764     41,442  
 

Dividends per common share

  $   $ 0.80   $ 0.80   $ 0.80   $ 0.80   $ 0.65   $   $  

Operating Data:

                                                 

Number of stores:

                                                 
 

Beginning of period

    810     762     795     732     732     662     577     515  
 

Opened during period

    48     63     27     35     71     81     89     74  
 

Closed during period

    (16 )   (15 )   (12 )   (5 )   (8 )   (11 )   (4 )   (12 )
                                   
 

Open at end of period

    842     810     810     762     795     732     662     577  
                                   

Comparable store sales (decrease) increase(1)

   
(7.6

)%
 
(5.6

)%
 
(2.5

)%
 
(7.9

)%
 
(7.9

)%
 
(4.0

)%
 
(1.7

)%
 
3.4%
 

Average sales per store(2),(4)

  $ 1,076   $ 1,176   $ 512   $ 533   $ 1,193   $ 1,330   $ 1,429   $ 1,481  

Inventory turnover(3)

    2.1     2.2     2.1     2.3     2.2     2.5     2.8     3.2  

 


 

As of June 30,

 

As of December 31,

 
 
  2008   2007   2006   2006   2005   2004   2003  
 
  (In thousands)
 

Balance Sheet Data:

                                           

Working capital

  $ 168,130   $ 165,371   $ 153,428   $ 161,095   $ 152,648   $ 115,440   $ 60,954  

Inventories

    240,996     288,791     241,660     242,674     230,639     189,132     143,023  

Total assets

    341,776     394,321     352,307     393,134     379,927     336,120     253,394  

Total debt, including current portion

    8,500     56,500     21,000                  

Total stockholders' equity

    232,911     215,440     214,005     243,877     235,362     197,150     132,094  

(1)
Stores are included in the same store sales calculation at the beginning of the quarter following the anniversary date of the store opening. Stores that relocate within the same geographic market or modify their available retail space are still considered same store for purposes of this computation. The number of days our stores are open may fluctuate from period to period.

(2)
Average sales per store is the sum of the average sales per store for each quarter.

(3)
Inventory turnover is the ratio of cost of sales to average inventory. Average inventory is calculated by taking the average of the previous year-end and quarter-end inventory levels throughout the year.

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(4)
A significant portion of our revenues and net earnings are realized during the period from October through December while the increase in merchandise purchases in preparation for this holiday selling season occurs in prior months.

(5)
Based on certain views expressed in a letter of February 7, 2005 from the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants, we reviewed our accounting policies and practices associated with operating leases. Consistent with industry practices, we historically reported straight-line rental expense beginning on the lease commencement date. This had the effect of excluding the rent holiday associated with the pre-opening or build-out period of our stores from the calculation of the period over which we expensed rent. Following our review, we modified our accounting policies such that we begin recording rent expense on the date we take possession of or have the right to use the premises.

As a result of this adjustment, we recorded a one-time, non-cash, $3.9 million ($2.4 million, net of income tax) cumulative charge to earnings during the first quarter of the 2005 calendar year. The adjustment did not impact historical or future net cash flows or the timing of the payments under related leases. We believe that the new lease accounting policies will not have a material effect on future diluted earnings per share. Prior years' financial statements were not restated as the impact of this issue was immaterial to previously reported results for any individual previous periods.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operation

        The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes there to included elsewhere in this Form 10-K.

Overview

22


23


Critical Accounting Policies and Estimates

        Management's Discussion and Analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

         Inventory—Our inventories are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. Amounts are removed from inventory based on the retail inventory method which applies a cost-to-retail ratio to our various retail deductions such as sales, markdowns, and shrink, to arrive at our cost of sales. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are expensed as cost of sales as the related inventory is sold. The retail inventory method, which is used by a number of our competitors, involves management estimates with regard to items such as markdowns and inventory. Such estimates may significantly impact the ending inventory valuation at cost as well as the amount of gross margin recognized.

        We capitalize into inventory all merchandise costs and certain costs incurred to purchase, distribute and deliver merchandise to our stores in order to more accurately match the cost of merchandise with the timing of its sale. These costs are included in cost of sales when the merchandise is sold. Other cost of sales components include merchandise markdowns, shrink and damages, which are expensed as they are incurred.

        We conduct full physical inventories at all stores at June 30 and December 31 to measure quantities on hand and make appropriate adjustments to our financial statements. During periods for which physical observations do not occur, we utilize an estimate for recording shrinkage reserves based on our historical experience from the results of our physical inventories. This estimate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventories yield a different result. Thus, the difference between actual and estimated amounts may cause fluctuations in the quarters ending in March and September , but the difference is not a factor in the quarters ending in December and June. Since we conduct physical inventory counts twice a year, the subjective nature of our shrink percentage is reduced and our exposure to the risk of a significant error is minimized. In addition, we have loss prevention programs and policies that we believe minimize shrinkage. Although inventory shrinkage rates have not fluctuated significantly in recent years, if the actual rates were to differ from our estimates, then revisions to the inventory shrinkage expense could be required.

        Inventory is the largest asset on our balance sheet and represented approximately 71%, 73%, and 62% of total assets at June 30, 2008, and 2007 and December 31, 2006, respectively. Inventory decreased 16.6% or $47.8 million from June 30, 2007 to June 30, 2008, primarily due to a reduction in purchasing levels during the third and fourth quarters of 2008. Inventory increased 19.5% or $47 million from June 30, 2006 to June 30, 2007 primarily due to early purchases of favorably priced utilitarian and seasonal merchandise, as well as lower sales per store year over year. On a per store basis, inventory decreased 19.7% from June 30, 2007 to June 30, 2008 and increased 12.4% from

24



June 30, 2006 to June 30, 2007. At December 31, 2006, inventory increased 5.2% or $12.0 million to $242.7 million from $230.6 million at December 31, 2005. On a per store basis, inventory decreased approximately 3.2%, primarily due to a reduction in purchasing levels during the third and fourth quarters of calendar year 2006.

         Markdowns—We have used markdowns to promote the effective and timely sale of merchandise that allows us to consistently provide fresher merchandise to our customers. We are also utilizing markdowns coupled with promotional events to drive traffic and stimulate sales during non-sales event periods. Markdowns may be temporary or permanent. Temporary markdowns are for a designated period of time with markdowns recorded based on quantities sold during the period. Permanent markdowns may vary throughout the quarter or year in timing with higher markdowns traditionally recorded in the quarters ended June 30 and December 31 due primarily to seasonal merchandise. Permanent markdowns are charged to cost of sales immediately based on the total quantities on-hand in the stores. We review all inventory during each quarter on a continual basis to ensure all necessary price actions are taken to adequately value our inventory at the lower of cost or market. These actions which involve actual or planned permanent markdowns are considered by management to be the appropriate prices to stimulate demand for the merchandise. In addition to regularly reviewing inventory levels to identify slow-moving merchandise, management also considers current and anticipated demand, customer preferences, age of merchandise and seasonal trends in determining markdowns. Our markdowns, as a percentage of total sales, have generally been consistent from year to year. Changes in markdowns from period-to-period are discussed as a part of our Results of Operations analysis below. Actual required permanent markdowns could differ materially from management's initial estimates based on future customer demand or economic conditions. The effect of a 0.5% markdown in the value of our inventory at June 30, 2008 would result in a decline in gross profit and diluted earnings per share for the fiscal year ended June 30, 2008 of $1.2 million and $0.02, respectively.

         Insurance and Self-Insurance Reserves—We use a combination of insurance and self-insurance plans to provide for the potential liabilities associated with workers' compensation, general liability, property insurance, director and officers' liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers' compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors. The insurance liabilities we record are primarily influenced by changes in payroll expense, sales, number of vehicles, and the frequency and severity of claims; and include a reserve for claims incurred but not yet reported. Our self-insurance reserves for workers' compensation, general liability and medical, in total, were $9.4 million, $1.7 million, and $1.0 million at June 30, 2008, respectively. Expenses during the fiscal year ended June 30, 2008 were $3.1 million, $0.8 million and $7.1 million, respectively. At June 30, 2007, our self-insurance reserves for workers' compensation, general liability and medical, in total, were $10.0 million, $1.0 million, and $0.7 million, respectively. Expenses during the six months ended June 30, 2007 were $1.9 million, $0.4 million and $2.9 million. At December 31, 2006, our self-insurance reserves for workers' compensation, general liability and medical, in total, were $10.1 million, $1.1 million, and $0.7 million, respectively. Our estimated reserves may be materially different from our future actual claim costs, and, in the future, if we conclude an adjustment to our reserves is required, the liability will then be adjusted accordingly in the period that determination is made. There were no material changes in the estimates or assumptions used to determine self-insurance liabilities during the periods presented. We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims are paid from our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments as a change in estimate. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers.

25


         Stock-based compensation—The Compensation Committee of our Board of Directors and, through express consent of the Compensation Committee, the CEO are authorized to grant stock options and restricted stock awards from time to time to eligible employees and directors. We typically grant approved options with exercise prices equal to the market price of our common stock on the date of the option grant. The majority of the options granted vest daily over periods of four to five years and expire in ten years. On January 1, 2006, we adopted the provisions of SFAS No. 123(R), "Share Based Payment," which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. We calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

Results of Operations

        The following table sets forth, for the periods indicated, selected statement of operations data, expressed as a percentage of net sales, as well as the number of stores open at the end of each period.

 
  Fiscal Year Ended
June 30,
  Six Months Ended
June 30,
  Calendar Year Ended
December 31,
 
 
  2008   2007   2007   2006   2006   2005  

Net sales

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

    63.5     62.6     63.1     62.6     62.4     61.7  
                           
 

Gross profit

    36.5     37.4     36.9     37.4     37.6     38.3  

Selling, general and administrative expenses

    33.6     32.1     35.5     33.5     31.2     28.0  
                           
 

Operating income

    2.8     5.3     1.4     3.9     6.4     10.4  

Net interest and other expense

    (0.3 )   (0.2 )   (0.2 )   (0.1 )   (0.1 )   (0.1 )

Income tax expense

    0.9     1.8     0.5     1.5     2.3     3.8  
                           

Net income

    1.6     3.3     0.8     2.4     4.0     6.5  
                           

Number of stores open at end of period

    842     810     810     762     795     732  

        Selling, general and administrative expenses are comprised of wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses and corporate office costs. Increases in dollar amounts of these expenses are attributable to increases in the number of stores and increases in variable expenses due to new store sales growth. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

Twelve Months Ended June 30, 2008 Compared to Twelve Months Ended June 30, 2007

        Net sales decreased $38.9 million or 4.2% to $885.3 million in 2008 from $924.2 million in 2007, of which, sales from non-comparable new stores increased $30.0 million which was offset by a 7.6% decrease in comparable store sales from 2007, comprised of comparable store transactions decreasing 6.6% and the comparable store average ticket decreasing 1.0%. Our average annual sales per store decreased by $98,000 or 8.3% to $1.1 million in 2008. Comparable store sales and sales per store decreased primarily due to lower traffic levels. Management believes traffic levels were lower due to the lower discretionary income availability of our customers resulting from the impact of higher gasoline and energy costs and general economic conditions.

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        Gross profit decreased $22.6 million or 6.5% to $322.7 million in 2008 compared to $345.3 million in 2007, of which, $14.2 million of the gross profit decrease was directly attributable to a decrease in our net sales. Our gross profit percentage decreased to 36.5% in 2008 from 37.4% in 2007. This 0.9% decrease in our gross profit percentage was primarily attributable to a 0.6% increase in our markdowns as a percentage of sales due to an increase in our aged inventory and a 0.4% increase in our distribution and freight expenses resulting from increased energy costs as a percentage of sales. These increases were offset by a 0.2% decrease in our shrinkage costs.

        Selling, general and administrative expenses increased $1.2 million or 0.4% to $297.9 million in 2008 from $296.6 million in the prior year. The increase was attributable to a $7.5 million increase in store occupancy costs, store personnel costs, and store fixed asset depreciation expense primarily due to the expansion of our store base offset by a $3.8 million decrease in advertising expenses and a $2.4 million decrease in legal and consulting fees. As a percentage of sales these expenses increased 1.5% to 33.6% in 2008 from 32.1% in 2007. The increased percentage is primarily due to reduced expense leveraging given our negative comparable store sales for the year.

        Net interest and other expense increased $1.2 million to $2.7 million in 2008 compared to $1.5 million in 2007. This increase was attributable to $1.2 million more interest expense due to higher borrowing levels in the first and second quarters of fiscal 2008 compared to the first and second quarters of fiscal 2007.

        Income tax expense decreased $9.5 million to $7.6 million in 2008 from $17.1 million in 2007 due to decreased profitability. Our effective tax rate decreased to 34.5% in 2008 from 36.2% in 2007 primarily due to a reduction in federal taxes related to deductions of state and local taxes of jurisdictions in which we operate.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

        Net sales increased $13.1 million or 3.3% to $408.5 million for the six months ended June 30, 2007 from $395.4 million in the same period in 2006, primarily as a result of an increase of 48 stores from June 30, 2006 to June 30, 2007 offset by a 2.5% decrease in comparable store sales from the same period in 2006. Comparable store transactions decreased 3.9% and comparable store average ticket increased 1.5%. Our average sales per store in the six months ended June 30, 2007 was $511,700 and, a decrease of $21,000 or 3.9% from the same period in 2006. The decrease in average sales per store has been impacted by those stores opening in new markets performing below historical trends. Comparable store sales and sales per store decreased primarily due to lower traffic levels. Management believes that traffic levels declined due to the increase in supply of home furnishing products, the promotional environment of home furnishing retailers in this sector, as well as the economic pressures impacting the discretionary income of consumers.

        Gross profit increased $2.8 million or 1.9% to $150.7 million in the six months ended June 30, 2007 compared to $147.9 million in the same period in 2006, primarily due to new store growth partially offset by a decline in comparable store sales. Our gross profit percentage decreased to 36.9% in 2007 from 37.4% in 2006. This 0.5% decrease in our gross profit percentage was primarily attributable to a 0.6% increase in purchasing, freight and distribution expenses due to an increase in delivery surcharges which resulted from higher energy costs offset by a 0.1% decrease in temporary and permanent markdowns attributable to a shift in seasonal markdowns resulting from a reduction in seasonal inventory on hand during the most recent period.

        Selling, general and administrative expenses increased $12.6 million or 9.5% to $145.0 million in the six months ended June 30, 2007 from $132.4 million in the comparable period in the prior year. The increase was mostly attributable to an $8.7 million increase in store occupancy costs, store personnel costs and store fixed asset depreciation expense primarily due to the expansion of our store base. As a percentage of sales these expenses increased 2.0% to 35.5% in 2007 from 33.5% in 2006.

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The increased percentage was primarily due to reduced leverage on expenses as a result of our negative comparable store sales for the year and a 1.4% increase related to store occupancy costs, store personnel costs and store fixed asset depreciation expense. Selling, general and administrative expenses per average store was $182,000 in 2007, compared to $178,000 in the same six month period of 2006, an increase of 1.8%.

        Net interest and other expense increased $390,000 to $656,000 in the six months ended June 30, 2007 compared to $266,000 in the same period in 2006. This increase was attributable to $352,000 higher net interest expense due to higher average borrowing levels in 2007 than in 2006.

        Income tax expense decreased $3.8 million from $5.8 million in the six months ended June 30, 2006 to $2.0 million in the six months ended June 30, 2007 due to decreased profitability. Our effective tax rate increased to 39.0% for the six months ended June 30, 2007 from 37.9% for the six month period ended June 30, 2006 primarily due to the impact of higher state tax expense on our effective tax rate when calculated based on six months of operating results rather than a full year. This impact is driven by the absence of the high volume of sales from the holiday selling season on the six month calculation.

Twelve Months Ended December 31, 2006 Compared to Twelve Months Ended December 31, 2005

        Net sales decreased $20.7 million or 2.2% to $911.1 million in 2006 from $931.8 million in 2005, of which, $71.5 million of the decrease was attributable to a 7.9% decrease in comparable store sales from 2005 offset by an increase of $50.8 million year over year in sales from non-comparable new stores. Comparable store transactions decreased 7.3% and comparable store average ticket decreased 0.7%. Our average annual sales per store in 2006 was $1.2 million, a decrease of $138,000 or 10.4% from 2005. The decrease in average sales per store has been impacted by those stores opening in new markets performing below historical trends. Comparable store sales and sales per store decreased primarily due to lower traffic levels. Management believes traffic levels declined due to the increase in supply of home furnishing products, the promotional environment of home furnishing retailers in this sector, as well as the economic pressures impacting the discretionary income of consumers.

        Gross profit decreased $14.8 million or 4.1% to $342.5 million in 2006 compared to $357.3 million in 2005, of which, $20.7 million of the gross profit decrease was directly attributable to a decrease in our net sales. Our gross profit percentage decreased to 37.6% in 2006 from 38.3% in 2005. This 0.7% decrease in our gross profit percentage was primarily attributable to a 0.6% increase in temporary and permanent markdowns required to sell slow moving inventory and the addition of promotional events to drive customer traffic, 0.3% increase in shrink and damages resulting from lower per store inventory levels year over year and a 0.1% increase in purchasing, freight and distribution expenses attributable to an increase in delivery surcharges resulting from higher energy costs offset by 0.3% in improved overall product cost.

        Selling, general and administrative expenses increased $23.3 million or 8.9% to $284.1 million in 2006 from $260.7 million in the prior year. The increase was mostly attributable to a $16.6 million increase in store occupancy costs, store personnel costs and store fixed asset depreciation expense primarily due to the expansion of our store base. Also contributing to the increase is $4.0 million in stock compensation expense as a result of our adoption of FASB Statement No. 123(R) on January 1, 2006. As a percentage of sales these expenses increased 3.2% to 31.2% in 2006 from 28.0% in 2005. The increased percentage is primarily due to reduced leverage on expenses as a result of our negative comparable store sales for the year and a 2.2% increase related to store occupancy costs, store personnel costs and store fixed asset depreciation expense.

        Net interest and other expense increased $605,000 to $1.1 million in 2006 compared to $526,000 in 2005. This increase was primarily attributable to $747,000 higher interest expense due to higher average borrowing levels in 2006 than in 2005.

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        Income tax expense decreased $14.2 million to $20.9 million in 2006 from $35.1 million in 2005 due to decreased profitability. Our effective tax rate decreased slightly to 36.4% in 2006 from 36.5% in 2005 primarily due to the net adjustment of tax reserves related to net favorable settlements with certain state taxing authorities.

Twelve Months Ended December 31, 2005 Compared to Twelve Months Ended December 31, 2004

        Net sales increased $34.0 million or 3.8% to $931.8 million in 2005 from $897.8 million in 2004, of which, $68.6 million of the increase was attributable to sales from non-comparable new stores offset by a 4.0% decrease in comparable store sales from 2004. Comparable store transactions decreased 4.4% offset by an increase of 0.4% in comparable store average ticket. Our average annual sales per store decreased by $99,000 or 6.9% to $1.3 million in 2005. Comparable store sales and sales per store decreased primarily due to lower traffic levels. At the time, management believed traffic levels were lower due to the lower discretionary income availability of our customers resulting from the impact of higher gasoline and energy costs.

        Gross profit increased $16.1 million or 4.7% to $357.3 million in 2005 compared to $341.2 million in 2004, of which, $12.9 million of the gross profit increase was directly attributable to an increase in our net sales. Our gross profit percentage increased to 38.3% in 2005 from 38.0% in 2004. The 0.3% increase in our gross profit percentage was primarily attributable to a 0.4% decrease in temporary and permanent markdowns because of fewer promotional events in 2005 versus 2004, a 0.1% increase in inventory shrink due to the increased inventory levels in our stores, and a 0.2% improvement in the leveraging of our distribution and freight expenses primarily attributable to a packaging improvement that enabled us to distribute merchandise more efficiently.

        Selling, general and administrative expenses increased $23.6 million or 10.0% to $260.7 million in 2005 from $237.1 million in the prior year. The increase was mostly attributable to the $3.9 million one-time, non-cash lease accounting adjustment taken in the first quarter of 2005 and a $15.8 million increase in store occupancy costs, store personnel costs, and store fixed asset depreciation expense primarily due to the expansion of our store base. As a percentage of sales these expenses increased 1.5% to 27.9% in 2005 from 26.4% in 2004. The increased percentage is primarily due to reduced expense leveraging given our negative comparable store sales for the year and includes a 0.4% increase in rent expense due to the lease accounting adjustment and a 1.0% increase related to store occupancy costs, store personnel costs and store fixed asset depreciation expense.

        Net interest and other expense decreased $1.7 million to $526,000 in 2005 compared to $2.3 million in 2004. This decrease was attributable to $600,000 less interest expense due to lower average borrowings levels in 2005 than in 2004 and to $1.1 million in less deferred financing costs amortization due to the replacement of our revolving credit facility in December 2004 and less deferred financing costs required for amortization.

        Income tax expense decreased $4.1 million to $35.1 million in 2005 from $39.2 million in 2004 due to decreased profitability. Our effective tax rate decreased to 36.5% in 2005 from 38.5% in 2004 primarily due to the net adjustment of tax reserves related to net favorable settlements with certain state taxing authorities and due to a change in our state tax planning strategies.

Liquidity and Capital Resources

        We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flows will continue to be utilized for the expansion of our business and the use of any excess cash will be determined by the Board of Directors. On February 1, 2008, our Board of Directors voted to terminate the declaration of our cash dividend. Our borrowings have historically peaked in the quarter ended September 30 as we build inventory levels prior to the holiday selling season. Given the seasonality of our business, the amount of borrowings under our

29



revolving credit facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

        Net cash flows provided by operating activities for the fiscal year ended June 30, 2008, were $59.1 million while cash flows used for operating activities for the six months ended June 30, 2007 were $55.8 million and net cash flows provided from operating activities for calendar year 2006 was $54.3 million. For the fiscal year ended June 30, 2008, the increase in net cash provided by operating activities is primarily due to a decrease in inventory of $47.6 million offset by a decrease in accounts payable of $17.4 million along with net income of $14.5 million, adjusted for depreciation expense of $17.5 million. The decreases in inventory and accounts payable were due to decreased purchases of new inventory to better match customer demand. For the six months ended June 30, 2007, the shortfall in cash flow provided by operating activities of $55.8 million was primarily due to early purchases of favorably priced seasonal and utilitarian merchandise resulting in an increase in inventory of $46.3 million. A significant portion of our revenues and net earnings are realized during the period from October through December while an increase in merchandise purchases in preparation for this holiday selling season occurs in prior months. Negative comparable sales also contributed to the shortfall in cash flow as net income was only $3.1 million. For the calendar year ended December 31, 2006, the increase in net cash from operating activities of $54.3 million is due primarily due to net income of $36.4 million adjusted for depreciation expense of $16.7 million. Cash and cash equivalents as of June 30, 2008, and 2007, and December 31, 2006 were $8.6 million, $10.3 million and, $49.6 million, respectively. There has been no material change in our payment policy to vendors.

        Net cash used in investing activities was due to capital expenditures of $11.6 million, $6.7 million and $15.7 million, respectively, for the fiscal year ended June 30, 2008, the six month period ended June 30, 2007, and the calendar year ended December 31, 2006. During each year, capital expenditures were primarily for new store openings, various distribution center equipment and improvements and corporate office equipment and improvements. In fiscal 2009, we expect to spend approximately $10.0 million for capital expenditures, primarily for new store openings and distribution center equipment and improvements. Capital expenditures will be financed with funds generated from operations and borrowings under our revolving credit facility.

        Net cash used in financing activities of $49.2 million for the fiscal year ended June 30, 2008, was due primarily to net payments on our revolving credit facility of $48.0 million. Net cash provided by financing activities of $23.1 million for the six months ended June 30, 2007, was due primarily to net borrowings on our revolving credit facility of $56.5 million offset by our dividend payment of $33.1 million. Net cash used by financing activities for the years ended December 31, 2006, and 2005, of $32.5 million and $22.7 million, respectively, were due primarily to the payment of dividends of $33.1 million and $26.9 million, respectively.

        On March 9, 2007, our Board of Directors declared a cash dividend of $0.80 per common share that was paid on March 30, 2007 in the amount of $33.1 million. During the first quarter of 2006, our Board of Directors approved a cash dividend of $0.80 per share of common stock totaling $33.1 million and was paid on March 30, 2006. During the second quarter of 2005, our Board of Directors approved a cash dividend of $0.65 per share of common stock totaling $26.9 million and was paid on June 20, 2005. On February 1, 2008, our Board of Directors voted to terminate the declaration of an annual cash dividend. The Board of Directors indicated that it will consider the full range of alternatives with regard to the use of any excess cash flow in the future.

        In December 2004, we entered into a $210 million revolving credit facility which originally expired in December 2009. Any borrowing under the revolver incurs interest at LIBOR or the prime rate, depending on the term of the borrowing, plus an applicable margin. We incur commitment fees of up

30



to 0.25% on the unused portion of the revolving credit facility. This rate is reduced or increased as our average total leverage ratio changes. Our indebtedness under the credit facility is secured by a lien on our inventory and cash accounts, as well as a pledge of our ownership interests in all of our subsidiaries. On April 18, 2007, we entered into an amendment to our existing revolving credit facility. The amendment to the revolving credit facility provides for, among other things: the extension of the maturity date from December 2009 to December 2010; changes in applicable commitment fees and interest rates in connection with average leverage ratios; a reduction of the lenders' revolving credit commitment from $210 million to $200 million; a change in the total leverage ratio from the ratio "3:0 to 1:0" to the ratio "2:50 to 1:0"; and a "clean down" provision requirement that the sum of the aggregate principal amount of the outstanding borrowings may not exceed $30 million for 15 consecutive days during the period from December 1 through January 31.

        At June 30, 2008, and 2007, we had $8.5 million and $56.5 million, respectively, outstanding under the revolving credit facility, with $26.5 million at June 30, 2007 classified as short-term due to the clean down provisions under the revolving credit agreement. We had borrowing availability of $181.6 million and $134.6 million at June 30, 2008, and 2007, respectively. As of June 30, 2008, and 2007, we had outstanding letters of credit of $9.9 million and $8.9 million, respectively. Letters of credit under the revolving credit facility are primarily for self-insurance purposes.

        The revolving credit facility contains certain restrictive covenants, which among other things, require us to comply with certain financial ratios covering maximum leverage, minimum fixed charge coverage and minimum interest coverage. Other restrictions affect our ability to incur liens or make certain other restricted payments, sell assets or merge or consolidate with any other person. As of June 30, 2008, we were in compliance with all covenants.

        We anticipate that our net cash flows from operations and borrowings under our revolving credit facility will be sufficient to fund our working capital needs, planned capital expenditures, and interest payments for the next twelve months.

Off-Balance Sheet Arrangements

        We had no off-balance sheet arrangements as of June 30, 2008.

Contractual Obligations

        The following table summarizes our contractual obligations at June 30, 2008 and the effects such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

 
  Payments Due by Period  
Contractual Obligations
  Total   1 Year   2-3 Years   4-5 Years   > 5 Years  

Non-cancelable operating leases

  $ 190,541   $ 60,492   $ 85,826   $ 37,693   $ 6,530  

Revolving credit facility

    8,500         8,500          

Interest on revolving credit facility

    1,046     523     523          

Leased maintenance, insurance and taxes

    12,950     4,111     5,833     2,562     444  

        We do not consider merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order. Contractually required payments for maintenance, insurance and taxes on our leased properties are estimated above as a percentage of rent based on historical trends. These amounts can vary based on multiple factors including inflation, macroeconomic conditions, various local tax rates and appraised values of our rental properties. Interest paid on our revolving credit facility is calculated at a 6.15% rate, which is the rate management utilized for 2009 planning purposes, and will vary as additional borrowings are made or paid off early and will also

31



fluctuate with changes in applicable interest rates. We have no capital lease obligations at June 30, 2008.

Quarterly Results and Seasonality

        The following tables set forth some of our quarterly financial data for the ten quarters ended June 30, 2008. The quarterly information is unaudited but has been prepared on the same basis as the audited financial statements included elsewhere in this Form 10-K. We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. The results of operations for any quarter are not necessarily indicative of the results for any future period. (In thousands, except for per share data and comparable store sales.)

 
  Quarters Ended  
 
  Sept. 30,
2007
  Dec. 31,
2007
  March 31,
2008
  June 30,
2008
 

Net sales

  $ 201,656   $ 308,687   $ 178,446   $ 196,492  

Gross profit

    75,709     114,904     63,999     68,091  

Operating income (loss)

    3,165     34,240     (7,358 )   (5,197 )

Net income (loss)

    1,156     20,534     (4,697 )   (2,496 )

Basic earnings (loss) per share

    0.03     0.50     (0.11 )   (0.06 )

Diluted earnings (loss) per share

    0.03     0.50     (0.11 )   (0.06 )

Comparable store sales decrease

    (1.5 )%   (7.6 )%   (8.2 )%   (12.7 )%

 


 

Quarters Ended

 

 


 

 


 
 
  March 31,
2007
  June 30,
2007
   
   
 

Net sales

  $ 189,156   $ 219,364              

Gross profit

    70,868     79,800              

Operating income

    1,579     4,128              

Net income

    1,047     2,034              

Basic earnings per share

    0.03     0.05              

Diluted earnings per share

    0.03     0.05              

Comparable store sales increase (decrease)

    (5.4 )%   0.1 %            

 


 

Quarters Ended

 
 
  March 31,
2006
  June 30,
2006
  Sept. 30,
2006
  Dec. 31,
2006
 

Net sales

  $ 187,759   $ 207,669   $ 194,412   $ 321,266  

Gross profit

    73,591     74,273     73,064     121,583  

Operating income

    10,428     5,046     5,723     37,256  

Net income

    6,540     2,899     3,163     23,827  

Basic earnings per share

    0.16     0.07     0.08     0.58  

Diluted earnings per share

    0.16     0.07     0.08     0.57  

Comparable store sales decrease

    (4.5 )%   (10.8 )%   (4.6 )%   (9.8 )%

        Our quarterly results of operations may fluctuate based upon such factors as the number and timing of store openings, the amount of net sales contributed by new and existing stores, the mix of merchandise sold, pricing, store closings or relocations, competitive factors and general economic and weather-related conditions. The timing of sales events could impact the weighting of sales between quarters. We expect to continue to experience seasonal fluctuations in our business, with a significant

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percentage of our net sales and operating income being generated in the December quarter, which includes the holiday selling season.

Inflation

        Inflation has had some effect on our results of operations in the current year primarily in transportation, utilities and waste management costs. However, in our opinion, the overall effect of inflation has not had a material effect on our results of operations. We cannot assure that inflation will not materially affect us in the future.

Recent Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value and does not change existing guidance as to whether or not an instrument is carried at fair value. The provisions of SFAS No. 157 are effective for the recurring fair value measures for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of SFAS No. 157 are effective for the non recurring fair value measures for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

        In July 2006, the FASB issued Interpretation 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109, "Accounting for Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance with FASB Statement No. 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. As a result of this adoption, the Company recognized a $145,000 increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities." This statement permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this adoption on its consolidated financial statements.

        In June of 2008, the FASB issued a Staff Position on EITF 03-6-1 "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share." The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company is currently evaluating the impact of this adoption on its consolidated financial statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, such as foreign currency exchange and interest rates. Based on our market risk sensitive instruments outstanding as of June 30, 2008, as described below, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

         Foreign Currency Exchange Rates.    We enter into foreign currency forward contracts with major financial institutions to manage and reduce the impact of changes in foreign currency exchange rates on contractual merchandise purchases with certain international vendors. During the fiscal year ended June 30, 2008, the only transactions we hedged were for inventory purchase orders placed with foreign vendors for which the purchase order had to be settled in the vendor's foreign currency. The periods for the forward foreign exchange contracts correspond to the periods of the hedged transactions. Gains and losses on forward foreign exchange contracts are reflected in the statement of income and were immaterial to us as a whole in the fiscal year ended June 30, 2008. At June 30, 2008, we had outstanding forward foreign currency contracts to purchase approximately $424,000 of U.S. dollar equivalent Euros with maturities ranging between 53 and 123 days.

        The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. At June 30, 2008, the difference between the fair value of all outstanding contracts and the face amount of such contracts was immaterial. A large fluctuation in exchange rates for these currencies could have a material affect on their fair value; however, because we only use these forward foreign currency contracts to hedge future inventory purchases at a fixed price in the vendor's foreign currency at the time the purchase order is made, any fluctuations in the exchange rate should not materially affect us.

        The table below provides information about our forward foreign currency contracts at June 30, 2008 that are sensitive to foreign currency exchange rates and presents such information in U.S. dollar equivalents because that is our reporting currency. All the related contracts mature in 2008.

Expected Maturity
(U.S. dollar equivalent in thousands)

Currency
  Contract
Amount
  Exchange
Rate
  Notional
Amount
 

Euro

  $ 424,000     1.5952   $ 418,000  

        You can find more information about the accounting policies for our forward foreign currency contracts and our financial instruments in Notes 1 and 10 of the notes to our consolidated financial statements included elsewhere in this Form 10-K.

         Interest Rates.    We had outstanding debt in the amount of $8.5 million and $56.5 million at June 30, 2008 and 2007, respectively. We had no outstanding debt at December 31, 2006 and 2005. We use our revolving credit facility to fund our operations as needed. We are exposed to financial market risk due to fluctuating interest rates on our revolving line of credit. For example, if a 0.5% increase in rate had occurred during the fiscal year ended June 30, 2008, this increase would have resulted in an increase in interest expense of approximately $0.3 million. Any borrowing under our revolver will incur interest at LIBOR or the prime rate depending on the term of the borrowing plus an applicable margin. During the fiscal year ended June 30, 2008, the LIBOR rate varied from 3.61% and 3.39% while the prime rate was 5.0%. During the twelve month periods ended December 31, 2006 and 2005,

34



the LIBOR and prime rates varied from 4.83% to 5.44% and 7.25% to 8.25%, respectively. We incur commitment fees of up to 0.25% on the unused portion of the revolving credit facility. This rate is reduced or increased as our leverage ratio changes. We do not hold any derivatives related to interest rate exposure for any of our debt facilities. Our weighted average interest rate for the fiscal year ended June 30, 2008 was 6.22%. You can find more information about our debt in Note 4 of the notes to our consolidated financial statements included elsewhere in this Form 10-K.

Item 8.    Financial Statements and Supplementary Data

        The following consolidated financial statements of Tuesday Morning and its subsidiaries and Report of Independent Registered Public Accounting Firm are included in this Form 10-K.

Index
  Page
Number
 

Report of Independent Registered Public Accounting Firm

    F-2  

Consolidated Balance Sheets as of June 30, 2008, and 2007

    F-3  

Consolidated Statements of Income for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the years ended December 31, 2006, and 2005

    F-4  

Consolidated Statements of Stockholders' Equity for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the years ended December 31, 2006, and 2005

    F-5  

Consolidated Statements of Cash Flows for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the years ended December 31, 2006, and 2005

    F-6  

Notes to Consolidated Financial Statements for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the years ended December 31, 2006, and 2005

    F-7  

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

Disclosure Control Procedures

        Based on our management's evaluation (with participation of our principal executive officer and our principal financial officer), our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) were effective as of June 30, 2008 to ensure that information required to be disclosed by us in this Report on Form 10-K was (1) recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission's rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

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

35


Management's Annual Report on Internal Control Over Financial Reporting

        Management of Tuesday Morning is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or Rule 15(d)-15(f) under the Exchange Act. Tuesday Morning's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

        Our management (with the participation of our principal executive officer and our principal financial officer) assessed the effectiveness of Tuesday Morning's internal control over financial reporting as of June 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we believe that, as of June 30, 2008, Tuesday Morning's internal control over financial reporting is effective based on those criteria.

        The Company's independent registered public accounting firm has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of June 30, 2008. That report follows on the next page.

36



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Tuesday Morning Corporation

        We have audited Tuesday Morning Corporation's internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Tuesday Morning Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Tuesday Morning Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tuesday Morning Corporation as of June 30, 2008 and 2007 and the related consolidated statements of income, stockholders' equity, and cash flows for the fiscal year ended June 30, 2008, the six months ended June 30, 2007, and the years ended December 31, 2006 and 2005, of Tuesday Morning Corporation and our report dated August 26, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Dallas, Texas
August 26, 2008

37


Changes in Internal Control Over Financial Reporting

        There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.    Other Information

        None.


PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this Item 10 is incorporated herein by reference to the disclosure found in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act in connection with Tuesday Morning's 2008 Annual Meeting of Stockholders.

        We have adopted a "Code of Ethics for Senior Financial Officers" that establishes the ethical standards to be followed by the persons serving as principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have also adopted a "Code of Conduct" that establishes the business conduct to be followed by all of our officers, employees and members of our Board of Directors. Both are available on our website at www.tuesdaymorning.com under "Investor Relations—Corporate Governance."

        There have been no changes to the procedures by which shareholders may recommend candidates for our Board of Directors that have occurred in the quarter ending June 30, 2008.

Item 11.    Executive Compensation

        The information required by this Item 11 is incorporated herein by reference to the disclosure found in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act in connection with Tuesday Morning's 2008 Annual Meeting of Stockholders.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this Item 12 is incorporated herein by reference to the disclosure found in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act in connection with Tuesday Morning's 2008 Annual Meeting of Stockholders.

38


Equity Compensation Plan Information

        The following table provides information about our common stock that may be issued upon the exercise of options under equity compensation plans approved by stockholders as of the fiscal year ended June 30, 2008. We do not have any equity compensation plans that were not approved by our stockholders.

Plan Category
  Number of Securities
to Be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
(thousands)
  Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
  Number of Securities
Remaining Available for
Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (a))
(thousands)
 
 
  (a)
  (b)
  (c)
 

Equity Compensation Plans Approved by Security Holders

    2,000   $ 17.66     1,466  

Equity Compensation Plans Not Approved by Security Holders

             
               
 

Total

    2,000   $ 17.66     1,466  
               

Item 13.    Certain Relationships and Related Transactions, Director Independence

        The information required by this Item 13 is incorporated herein by reference to the disclosure found in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act in connection with Tuesday Morning's 2008 Annual Meeting of Stockholders.

Item 14.    Principal Accountant Fees and Services

        The information required by this Item 14 is incorporated herein by reference to the disclosure found in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act in connection with Tuesday Morning's 2008 Annual Meeting of Stockholders.


PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)
The following documents are filed as part of this Form 10-K.

(1)
Financial Statements:

(2)
The list of financial statements required by this item is set forth in Item 8.
Financial Statement Schedules:

        All financial statement schedules called for under Regulation S-X are not required under the related instructions, are not material or are not applicable and, therefore, have been omitted or are included in the consolidated financial statements or notes thereto included elsewhere in this Form 10-K.

39



 
 
Exhibit No.
  Description
      3.1.1   Certificate of Incorporation of Tuesday Morning Corporation (the "Company") (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the "Commission") on February 10, 1998)


 


 


 


3.1.2


 


Certificate of Amendment to the Certificate of Incorporation of the Company (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 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated December 14, 2006 as filed with the Commission on December 20, 2006)

 

 

 

10.1.1

 

Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998) †

 

 

 

10.1.2

 

Amendment No. 1 to the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999) †

 

 

 

10.1.3

 

First Amendment to the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q as filed with the Commission on August 1, 2005) †

 

 

 

10.2

 

Stockholders Agreement, dated as of December 29, 1997, by and among the Company, Madison Dearborn Capital Partners II, L.P. and the executives listed on Schedule I attached thereto (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998)

 

 

 

10.3

 

1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-74365) as filed with the Commission on March 12, 1999) †

 

 

 

10.4

 

Employment Agreement, dated as of July 25, 2000, by and between the Company and Kathleen Mason (incorporated by reference to Exhibit 99.2 to the Company's Form 10-Q as filed with the Commission on November 7, 2000)  †

 

 

 

10.5.1

 

Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Appendix B to the Company's Definitive 14A Proxy Statement as filed with the Commission on April 19, 2004) †

 

 

 

10.5.2

 

First Amendment to the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q as filed with the Commission on August 1, 2005) †

40


 
 
Exhibit No.
  Description
      10.5.3   Second Amendment to the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on November 8, 2007) †


 


 


 


10.6.1


 


Credit Agreement, dated as of December 22, 2004 by and among Tuesday Morning, Inc., Tuesday Morning Corporation, TMI Holdings, Inc., the lenders who are or may become a party to the agreement, Wachovia Bank, National Association, as Administrative Agent, Wells Fargo Bank, N.A. and LaSalle Bank National Association, as Co-Syndication Agents, U.S. Bank National Association and Sovereign Bank, as Co-Documentation Agents, Wachovia Capital Markets, LLC as a Co-Lead Arranger and Sole Book Manager, and Wells Fargo Bank, N.A. as a Co-Lead Arranger (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K/A as filed with the Commission on February 24, 2006)

 

 

 

10.6.2

 

First Amendment to Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on March 20, 2007)

 

 

 

10.7

 

Form of Incentive Stock Option Agreement under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan and the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on May 3, 2005) †

 

 

 

10.8

 

Form of Nonqualified Stock Option Agreement under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan and the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K as filed with the Commission on May 3, 2005) †

 

 

 

10.9

 

Letter Agreement dated July 18, 2006 from Kathleen Mason, on behalf of the Company, to Elizabeth Schroeder (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on July 18, 2006) †

 

 

 

10.10

 

Description of Directors Compensation (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q as filed with the Commission on May 4, 2007) †

 

 

 

10.11

 

Form of Restricted Stock Award Agreement for directors under the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on November 6, 2007) †

 

 

 

10.12

 

Form of Confidentiality Agreement for directors (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 

 

 

10.13

 

Form of Restricted Stock Award Agreement for directors under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 

 

 

10.14

 

Form of Restricted Stock Award Agreement for employees under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K as filed with the Commission on December 19, 2007)

 

 

 

10.15

 

Form of Restricted Stock Award Agreement for employees under the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

41


 
 
Exhibit No.
  Description
      21.1   Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Form 10-K as filed with the Commission on March 9, 2005)


 


 


 


23.1


 


Consent of Independent Registered Public Accounting Firm

 

 

 

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

Management contract or compensatory plan or arrangement

42



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    TUESDAY MORNING CORPORATION

Date: August 29, 2008

 

By:

 

/s/ 
KATHLEEN MASON

Kathleen Mason
Chief Executive Officer, President and Director

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
 
Title
 
Date

 

 

 

 

 
/s/ KATHLEEN MASON

Kathleen Mason
  Chief Executive Officer, President and Director (Principal Executive Officer)   August 29, 2008


/s/ 
STEPHANIE BOWMAN

Stephanie Bowman


 


Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)


 


August 29, 2008

/s/ 
BRUCE A. QUINNELL

Bruce A. Quinnell

 

Chairman of the Board

 

August 29, 2008

/s/ 
BENJAMIN D. CHERESKIN

Benjamin D. Chereskin

 

Director

 

August 29, 2008

/s/ 
ROBIN P. SELATI

Robin P. Selati

 

Director

 

August 29, 2008

/s/ 
DAVID B. GREEN

David B. Green

 

Director

 

August 29, 2008

43


Name
 
Title
 
Date

 

 

 

 

 
/s/ STARLETTE JOHNSON

Starlette Johnson
  Director   August 29, 2008


/s/ 
HENRY F. FRIGON

Henry F. Frigon


 


Director


 


August 29, 2008

/s/ 
WILLIAM J. HUNCKLER, III

William J. Hunckler, III

 

Director

 

August 29, 2008

44



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page  

Report of Independent Registered Public Accounting Firm

    F-2  

Consolidated Balance Sheets as of June 30, 2008, and 2007

    F-3  

Consolidated Statements of Income for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and 2005

    F-4  

Consolidated Statements of Stockholders' Equity for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and 2005

    F-5  

Consolidated Statements of Cash Flows for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and 2005

    F-6  

Notes to Consolidated Financial Statements for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and 2005

    F-7  

F-1



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Tuesday Morning Corporation

        We have audited the accompanying consolidated balance sheets of Tuesday Morning Corporation as of June 30, 2008, and 2007 and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended June 30, 2008, the six months ended June 30, 2007, and the years ended December 31, 2006 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tuesday Morning Corporation at June 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for the year ended June 30, 2008, the six months ended June 30, 2007, and the years ended December 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 1 to the financial statements, on January 1, 2006 the Company changed its method of accounting for stock-based compensation.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Tuesday Morning Corporation's internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2008, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Dallas, Texas
August 26, 2008

F-2


Tuesday Morning Corporation

Consolidated Balance Sheets

(In thousands, except for share data)

 
  June 30,  
 
  2008   2007  

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 8,630   $ 10,303  
 

Inventories

    240,996     288,791  
 

Prepaid expenses and other current assets

    11,292     5,954  
 

Deferred income taxes

        1,211  
           
   

Total current assets

    260,918     306,259  
           

Property and equipment, net

    77,315     83,776  

Deferred financing costs

    503     704  

Other assets

    3,040     3,582  
           
   

Total Assets

  $ 341,776   $ 394,321  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Current portion of long-term debt

        26,500  
 

Accounts payable

    63,899     82,453  
 

Accrued liabilities

    28,595     31,223  
 

Deferred income taxes

    267      
 

Income taxes payable

    27     712  
           
   

Total current liabilities

    92,788     140,888  
           

Long-term debt

    8,500     30,000  

Deferred rent

    4,163     4,534  

Deferred income taxes

    3,414     3,459  
           
   

Total Liabilities

    108,865     178,881  
           

Commitments and contingencies

             

Stockholders' equity:

             
 

Preferred stock, par value $0.01 per share, authorized 10,000,000 shares, none issued or outstanding

         
 

Common stock, par value $.01 per share, authorized 100,000,000 shares; 41,816,820, and 41,440,000 shares issued and outstanding as of June 30, 2008 and 2007

    418     414  
 

Additional paid-in capital

    201,154     198,183  
 

Retained earnings

    31,378     16,881  
 

Accumulated other comprehensive loss

    (39 )   (38 )
           
   

Total Stockholders' Equity

    232,911     215,440  
           

Total Liabilities and Stockholders' Equity

  $ 341,776   $ 394,321  
           

The accompanying notes are an integral part of these consolidated financial statements.

F-3


Tuesday Morning Corporation

Consolidated Statements of Income

(In thousands, except per share data)

 
   
   
  Years Ended December 31,  
 
  Year
Ended
June 30, 2008
  Six Months
Ended
June 30, 2007
 
 
  2006   2005  

Net sales

  $ 885,281   $ 408,520   $ 911,107   $ 931,827  

Cost of sales

    562,578     257,851     568,594     574,546  
                   
 

Gross profit

    322,703     150,669     342,513     357,281  

Selling, general and administrative expenses

    297,852     144,962     284,060     260,736  
                   
 

Operating income

    24,851     5,707     58,453     96,545  

Other income (expense):

                         
 

Interest expense

    (3,928 )   (1,158 )   (2,298 )   (1,552 )
 

Interest income

    157     146     158     129  
 

Other income, net

    1,052     356     1,009     897  
                   

    (2,719 )   (656 )   (1,131 )   (526 )
 

Income before income taxes

    22,132     5,051     57,322     96,019  

Income tax expense

    7,634     1,970     20,893     35,060  
                   
 

Net income

  $ 14,498   $ 3,081   $ 36,429   $ 60,959  
                   

Earnings Per Share

                         

Net income per common share:

                         
 

Basic

  $ 0.35   $ 0.07   $ 0.88   $ 1.48  
 

Diluted

  $ 0.35   $ 0.07   $ 0.87   $ 1.46  

Weighted average number of common shares:

                         
 

Basic

    41,439     41,433     41,392     41,264  
 

Diluted

    41,494     41,637     41,647     41,770  
 

Dividends per common share

      $ 0.80   $ 0.80   $ 0.65  

The accompanying notes are an integral part of these consolidated financial statements.

F-4


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity

(In thousands)

 
  Common Stock    
  Retained
Earnings
(Accumulated
Deficit)
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Additional
Paid-In
Capital
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balance at December 31, 2004

    41,102   $ 411   $ 188,969   $ 7,745   $ 25   $ 197,150  

Comprehensive income:

                                     

Net income

                60,959         60,959  

Unrealized loss on foreign exchange contracts, net of tax

                    (69 )   (69 )

Comprehensive income

                60,959     (69 )   60,890  

Shares issued in connection with employee stock option plan/stock purchase plan

    268     3     2,709             2,712  

Dividends declared

            (1,913 )   (24,941 )       (26,854 )

Other

            59             59  

Tax benefit of employee stock options exercised

            1,405             1,405  
                           

Balance at December 31, 2005

    41,370     414     191,229     43,763     (44 )   235,362  

Comprehensive income:

                                     

Net income

                36,429         36,429  

Unrealized gain on foreign exchange contracts, net of tax

                    36     36  

Comprehensive income

                36,429     36     36,465  

Shares issued in connection with employee stock option plan/stock purchase plan

    53         514             514  

Dividends declared

                (33,102 )       (33,102 )

Stock-based compensation expense

            4,575             4,575  

Tax benefit of employee stock options exercised

            63             63  
                           

Balance at December 31, 2006

    41,423     414     196,381     47,090     (8 )   243,877  

Comprehensive income:

                                     

Net income

                3,081         3,081  

Unrealized loss on foreign exchange contracts, net of tax

                    (30 )   (30 )

Comprehensive income

                3,081     (30 )   3,051  

Shares issued in connection with employee stock option plan/stock purchase plan

    17         10             10  

Adoption of FIN 48, "Accounting for Uncertainty in Income Taxes"

                (145 )       (145 )

Dividends declared

                (33,145 )       (33,145 )

Stock-based compensation expense

            1,848             1,848  

Tax benefit of employee stock options exercised

            (56 )           (56 )
                           

Balance at June 30, 2007

    41,440     414     198,183     16,881     (38 )   215,440  

Comprehensive income:

                                     

Net income

                14,498         14,498  

Unrealized loss on foreign exchange contracts, net of tax

                    (1 )   (1 )

Comprehensive income

                14,498     (1 )   14,497  

Shares issued in connection with employee stock incentive plan

    377     4     (3 )           1  

Stock-based compensation expense

            3,000             3,000  

Tax benefit of employee stock options exercised

            (26 )   (1 )       (27 )
                           

Balance at June 30, 2008

    41,817   $ 418   $ 201,154   $ 31,378   $ (39 ) $ 232,911  
                           

The accompanying notes are an integral part of these consolidated financial statements.

F-5


Tuesday Morning Corporation

Consolidated Statements of Cash Flows

(In thousands)

 
   
   
  Years Ended December 31,  
 
  Year
Ended
June 30, 2008
  Six Months
Ended
June 30, 2007
 
 
  2006   2005  

Cash flows from operating activities:

                         

Net income

  $ 14,498   $ 3,081   $ 36,429   $ 60,959  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                         
 

Depreciation

    17,483     8,858     16,738     14,606  
 

Amortization of financing fees

    201     93     171     171  
 

Stock based compensation expense

    3,174     2,011     4,029      
 

Loss on disposal of assets

    540     418     352      
 

Deferred income taxes

    1,407     762     289     (1,864 )
 

Other non-cash items

    (1 )   (232 )   37     (10 )
 

Change in operating assets and liabilities:

                         
   

Inventories

    47,621     (46,280 )   (11,489 )   (41,507 )
   

Prepaid and other current assets

    (5,338 )   (337 )   1,641     (2,068 )
   

Other assets

    542     1,555     (196 )   (1,389 )
   

Accounts payable

    (17,367 )   (6,061 )   13,539     2,253  
   

Accrued liabilities

    (2,628 )   (4,711 )   (6,438 )   2,823  
   

Deferred rent

    (371 )   (84 )   187     4,266  
   

Income taxes payable

    (685 )   (14,831 )   (977 )   (963 )
                   
 

Net cash provided by (used in) operating activities

    59,076     (55,758 )   54,312     37,277  
                   

Cash flows from investing activities:

                         
 

Capital expenditures

    (11,562 )   (6,655 )   (15,701 )   (16,060 )
                   
 

Net cash used in investing activities

    (11,562 )   (6,655 )   (15,701 )   (16,060 )
                   

Cash flows from financing activities:

                         
 

Payment of dividends to common stockholders

        (33,145 )   (33,102 )   (26,854 )
 

Borrowings under revolving credit facility

    220,000     185,500     286,500     230,000  
 

Repayments under revolving credit facility

    (268,000 )   (129,000 )   (286,500 )   (230,000 )
 

Change in cash overdraft

    (1,187 )            
 

Proceeds from exercise of common stock options and stock purchase plan purchase

        10     514     2,712  
 

Excess tax benefit related to exercise of stock options

            63     1,405  
 

Payment of financing fees

        (282 )        
                   
 

Net cash provided by (used in) financing activities

    (49,187 )   23,083     (32,525 )   (22,737 )
                   

Net increase (decrease) in cash and cash equivalents

    (1,673 )   (39,330 )   6,086     (1,520 )

Cash and cash equivalents, beginning of period

    10,303     49,633     43,547     45,067  
                   

Cash and cash equivalents, end of period

  $ 8,630   $ 10,303   $ 49,633   $ 43,547  
                   

Supplemental cash flow information:

                         
 

Interest paid

  $ 3,678   $ 953   $ 2,078   $ 1,303  
 

Income taxes paid

    11,491     16,217     22,039     36,463  

The accompanying notes are an integral part of these consolidated financial statements.

F-6


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        We operated 842 discount retail stores in 47 states as of June 30, 2008 (810, 795 and 732 stores at June 30, 2007, and December 31, 2006 and 2005 respectively). We sell close-out home furnishings, housewares, gifts and related items, which we purchase at below wholesale prices. Our stores operate seven days a week and focus on periodic "sale events" that occur in each month except January and July. We are generally closed for up to the first two weeks of January and July as we conduct physical inventories at all of our stores.

        (a)   Basis of Presentation—The accompanying consolidated financial statements include the accounts of Tuesday Morning Corporation, a Delaware corporation, and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We operate our business as a single operating segment.

        (b)   Fiscal Year Change—On April 30, 2007, the Board of Directors of the Company approved a change in the Company's fiscal year from December 31 to June 30, effective June 30, 2007. This Form 10-K is an annual report, and includes information for the fiscal year ended June 30, 2008, the six month transitional period ended June 30, 2007 and for the twelve month periods ended December 31, 2006 and 2005. The unaudited financial information for the six month period ended June 30, 2006 is as follows:

 
  Six Months
Ended
June 30,
2006
 
 
  (unaudited)
 

Total revenues

  $ 395,428  

Operating income

    15,474  

Income from continuing operations before income taxes

    15,208  

Net income

    9,439  

Net income per common share:

       

Basic

  $ 0.23  

Diluted

  $ 0.23  

        (c)   Cash and Cash Equivalents—Cash and cash equivalents are comprised of credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At June 30, 2008 and 2007, credit card receivables from third party consumer credit card providers were $5.6 million and $7.1 million, respectively.

        (c)   Inventories—Inventories, consisting of finished goods, are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. Amounts are removed from inventory based on the retail inventory method which applies a cost-to-retail ratio to our various retail deductions (sales, markdowns, shrink, etc.) to arrive at cost of sales. Buying, distribution, freight costs and certain other expenses are capitalized as part of inventory and are expensed as cost of sales as the related inventory is sold. These capitalized expenses included in ending inventory totaled $26.8 million and $28.6 million at June 30, 2008 and 2007, respectively. We expensed $71.5 million, $32.4 million, $69.3 million, and $66.8 million of capitalized

F-7


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


inventory costs in cost of sales for the fiscal year ended June 30, 2008, the six months ended June 30, 2007, and the years ended December 31, 2006 and 2005, respectively.

        We conduct semi-annual physical inventories to measure quantities on-hand and make appropriate adjustments to our financial statements. During periods for which physical observations do not occur, we utilize an estimate for recording shrinkage reserves, based on past historical trends of physical inventory results. These shrinkage reserves may require a favorable or unfavorable adjustment to actual results to the extent our subsequent actual physical inventories yield a different result. We use markdowns to promote the effective and timely sale of merchandise. Temporary markdowns are for a designated period of time with markdowns recorded based on quantities sold during the period. Permanent markdowns vary in timing throughout the year, but are charged to cost of sales immediately based on total quantities on-hand in the stores. We review all inventory at the end of each quarterly period to ensure all necessary price actions are taken to adequately value our inventory at the lower of cost or market. These actions which involve actual or planned permanent markdowns are considered by management to be the appropriate prices to stimulate demand for the merchandise. Actual required permanent markdowns could differ materially from management's initial estimates based on future customer demand or economic conditions.

        (e)   Property and Equipment—Property and equipment are stated at cost. Buildings, furniture, fixtures, leasehold improvements and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows:

Estimated Useful Lives

Buildings

  30 years

Furniture and fixtures

  3 to 7 years

Leasehold improvements

  Shorter of lease life or life of improvement

Equipment

 
5 to 10 years

        Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from our accounts and any gain or loss is recognized in income. Expenditures for maintenance, minor renewals and repairs are expensed as incurred, while major replacements and improvements are capitalized.

        (f)    Deferred Financing Costs—Deferred financing costs represent fees paid in connection with obtaining bank and other long-term financing. These fees are amortized over the term of the related financing using the effective interest method.

        (g)   Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of

F-8


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


enactment. We file our annual federal income tax return on a consolidated basis. Furthermore, we recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available or applicable laws or regulations may change thereby resulting in a favorable or unfavorable adjustment to amounts recorded.

        (h)   Self Insurance Reserves—We use a combination of insurance and self-insurance plans to provide for the potential liabilities for workers' compensation, general liability, property insurance, director and officers' liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors. Our estimated reserves may be materially different from our future actual claim costs, and, in the future, if we conclude an adjustment to our reserves is required, the liability will then be adjusted accordingly in the period that determination is made.

        (i)    Revenue Recognition—Sales are recorded at the point of sale and conveyance of merchandise to customers. Sales are net of estimated returns and exclude sales tax.

        (j)    Advertising—Costs for television, radio, newspaper, direct mail and other media are expensed as the advertised events take place. Advertising expenses for the fiscal year ended June 30, 2008 were $33,856 and were $15,881 for the six months ended June 30, 2007, and for the years ended December 31, 2006 and 2005 were $36,134 and, $34,371, respectively. We do not receive money from vendors to support our advertising expenditures.

        (k)   Use of Estimates—The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        (l)    Foreign Currency Transactions—We enter into foreign currency forward exchange contracts with major financial institutions to manage and reduce the impact of fluctuations in foreign currency exchange rates on certain contractual merchandise purchases with international vendors between the order and payment dates, which generally approximate 2 to 6 months. We do not utilize derivative financial instruments for trading or speculative purposes.

        We account for our foreign currency forward contracts as cash flow hedges in accordance with Financial Accounting Standards Board (FASB) Statement 133, Accounting for Derivative Instruments and Hedging Activities. Changes in the fair value of the contracts that are considered to be effective are recorded in other comprehensive income (loss) until the hedged item is recorded in earnings. Effective cash flow hedges are reclassified out of other comprehensive income (loss) and into cost of sales when the hedged inventory is sold. All of our cash flow hedges are effective. The effect of foreign exchange contracts on our financial position or results of operations is immaterial.

        (m)  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of—Long-lived assets, principally property and equipment and leasehold improvements, are reviewed for impairment when

F-9


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal appraisals, as applicable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Impairment of long-lived assets has not had a material impact on our financial position, results of operations or liquidity for the periods presented.

        (n)   Share-Based Compensation—Prior to January 1, 2006, we accounted for our stock-based compensation plans utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25). Generally, no compensation expense was recognized for fixed stock option plans because the exercise prices of employee stock options equaled or exceeded the market prices of the underlying stock on the dates of grant.

        Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) a "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date; (2) a "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have adopted Statement 123(R) based on the modified prospective method effective January 1, 2006.

        Had we applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," (as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure") previously reported net income, basic earnings per share and diluted

F-10


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


earnings per share would have changed to the pro forma amounts shown below (in thousands except per share amounts):

 
  Year Ended December 31,
2005
 

Net income as reported

  $ 60,959  

Less: Stock-based employee compensation expense determined under the fair value method, net of related tax effects

    (3,909 )
       

Pro forma net income

  $ 57,050  
       

Net income per common share:

       

Basic as reported

  $ 1.48  

Basic pro forma

  $ 1.38  

Diluted as reported

  $ 1.46  

Diluted pro forma

  $ 1.37  

        We recognized stock-based compensation costs under the requirements of Statement 123(R) for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the year ended December 31, 2006 as follows (in thousands):

 
  June 30,
2008
  June 30,
2007
  December 31,
2006
 

Total cost of stock-based compensation during the period

  $ 3,000   $ 1,848   $ 4,575  

Amounts capitalized in ending inventory

    (1,033 )   (455 )   (1,372 )

Amount recognized and charged to cost of goods sold

    1,207     621     826  
               

Amounts charged against income for the period before tax

  $ 3,174   $ 2,014   $ 4,029  
               

        Consistent with prior years, the fair value of each stock option granted during the fiscal year ended June 30, 2008 was estimated at the date of grant using a Black-Scholes option pricing model. The expected term of an option is based on our historical review of employee exercise behavior based on the employee class (executive or non-executive) and based on our consideration of the remaining contractual term if limited exercise activity existed for a certain employee class. The risk-free interest rate is the constant maturity risk free interest rate for U.S. Treasury instruments with terms consistent with the expected lives of the awards. The expected volatility is based on both the historical volatility of our stock based on our historical stock prices and implied volatility of our traded stock options. In 2006, we increased the number of data points used to calculate volatility from quarterly stock prices to daily stock prices and considered implied volatility of our traded stock options which decreased our

F-11


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


volatility assumption. For the fiscal year ended June 30, 2008, the six months ended June 30, 2007, and calendar years 2006, and 2005, these factors were as follows:

 
   
   
  Years Ended
December 31,
 
 
  Fiscal Year
Ended
June 30,
2008
  Six Months
Ended
June 30,
2007
 
 
  2006   2005  

Weighted average risk-free interest rate

    2.3-5.1 %   3.9-5.1 %   4.2-4.4 %   3.7 %

Expected life of options (years)

    4.4-6.0     4.4-6.0     4.4-6.0     7.3  

Expected stock volatility

    41.6-47.9 %   42.9-43.5 %   35.0 %   56.0 %

Expected dividend yield

    0.0 %   5.0 %   2.5 %   2.0 %

        (o)   Net Income Per Common Share—Basic net income per common share for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and, 2005 was calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted net income per common share for the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and for the years ended December 31, 2006 and, 2005 was calculated by dividing net income by the weighted average number of common shares including the impact of dilutive common stock options outstanding. See Notes 7 and 12.

        (p)   Recent Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be fair value and does not change existing guidance as to whether or not an instrument is carried at fair value. The provisions of SFAS No. 157 are effective for recurring fair value measures for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of SFAS No. 157 are effective for non recurring fair value measures for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

        In June of 2008, the FASB issued a Staff Position on EITF 03-6-1 "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share." The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company is currently evaluating the impact of this adoption on its consolidated financial statements.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities." This statement permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years

F-12


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


beginning after November 15, 2007. The Company does not expect the adoption of this statement to have a material impact on our consolidated financial statements.

        In July 2006, the FASB issued Interpretation 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109, "Accounting for Income Taxes." FIN-48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance with Statement 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. As a result of this adoption, the Company recognized a $145,000 increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings.

        (q)   Other Comprehensive Income (Loss)—Comprehensive income (loss) represents our change in equity (net assets), during a period, from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments or distributions by or to owners. The components of comprehensive income (loss) are reported in the Consolidated Statements of Stockholders' Equity.

        (r)   Off-balance Sheet or Variable Interest Arrangements—We do not have off-balance sheet arrangements, transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

(2) LEASE ACCOUNTING ADJUSTMENT

        Based on certain views expressed in a letter of February 7, 2005 from the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants, we reviewed our accounting policies and practices associated with operating leases. Consistent with industry practices, we historically reported straight-line rental expense beginning on the lease commencement date. This had the effect of excluding the rent holiday associated with the pre-opening or build-out period of our stores from the calculation of the period over which we expensed rent. Following our review, we modified our accounting policies such that we begin recording rent expense on the date we take possession of or have the right to use the premises.

        As a result of this adjustment, we recorded a one-time, non-cash, $3.9 million ($2.4 million, net of income tax) cumulative charge to earnings during the first quarter of calendar year 2005. The adjustment did not impact historical or future net cash flows or the timing of the payments under related leases. Prior years' financial statements were not restated as the impact of this issue was immaterial to previously reported results for any individual previous periods.

F-13


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(3) PROPERTY AND EQUIPMENT

        Property and equipment, net of accumulated depreciation, consisted of the following at:

 
  June 30,
2008
  June 30,
2007
  December 31,
2006
 

Land

  $ 8,504   $ 8,504   $ 8,504  

Buildings

    41,043     40,865     40,653  

Furniture and fixtures

    73,493     67,465     63,597  

Equipment

    60,753     58,457     57,406  

Leasehold improvements

    11,758     10,234     9,629  
               

    195,551     185,525     179,789  

Less accumulated depreciation

    (118,236 )   (101,749 )   (93,392 )
               
 

Net property and equipment

  $ 77,315   $ 83,776   $ 86,397  
               

(4) DEBT

        In December 2004, we entered into a $210 million revolving credit facility which was set to expire on December 2009. Any borrowing under the revolver incurs interest at LIBOR or the prime rate, depending on the term of the borrowing, plus an applicable margin. We incur commitment fees of up to 0.25% on the unused portion of the revolving credit facility. This rate is reduced or increased as our average total leverage ratio changes. Our indebtedness under the credit facility is secured by a lien on our inventory and cash accounts, as well as a pledge of our ownership interests in all of our subsidiaries. On April 18, 2007, we entered into an amendment to our existing revolving credit facility. The amendment to the revolving credit facility provides for, among other things: the extension of the maturity date from December 2009 to December 2010; changes in applicable commitment fees and interest rates in connection with average leverage ratios; a reduction of the lenders' revolving credit commitment from $210 million to $200 million; a change in the total leverage ratio from the ratio "3:0 to 1:0" to the ratio "2:50 to 1:0"; and a "clean down" provision requirement that for 15 consecutive days during the period from December 1 through January 31,the sum of the aggregate principal amount of the outstanding borrowings may not exceed $30 million.

        At June 30, 2008, we had $8.5 million outstanding under the revolving credit facility, with no amounts classified as short term. The amounts payable will be $0.0 million and $8.5 million at June 30, 2009 and 2010, respectively. No amounts will be due thereafter. At June 30, 2007, we had $56.5 million outstanding under the revolving credit facility, with $26.5 million classified as short-term due to the clean down provision under the revolving credit agreement. We had no balances outstanding related to our revolving credit facility at December 31, 2006 and 2005. We had borrowing availability of $181.6 million at June 30, 2008. As of June 30, 2008, we had outstanding letters of credit of $9.9 million. Our weighted average interest rate for the fiscal year ended June 30, 2008 was 6.22%. As of June 30, 2007, we had outstanding letters of credit of $8.9 million. As of December 31, 2006 and 2005, we had outstanding letters of credit of $8.1 million and $9.7 million, respectively. Letters of credit under the revolving credit facility are primarily for self-insurance purposes.

        The revolving credit facility contains certain restrictive covenants, which among other things, require us to comply with certain financial ratios covering maximum leverage, minimum fixed charge

F-14


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(4) DEBT (Continued)


coverage and minimum interest coverage. Other restrictions affect our ability to incur liens or make certain other restricted payments, sell assets or merge or consolidate with any other person. As of June 30, 2008, we were in compliance with all covenants.

        We believe our debt, as recorded, approximates fair value as the interest rates are variable based on current market rates.

(5) ACCRUED LIABILITIES

        Accrued liabilities consist of the following:

 
   
  December 31,  
 
  June 30,
2008
  June 30,
2007
  December 31,
2006
 

Sales tax

  $ 2,060   $ 2,567   $ 5,700  

Self-insurance reserves

    12,585     12,032     12,123  

Wages & benefits

    5,579     6,843     7,185  

Property taxes

    1,373     1,351     1,858  

Other expenses

    6,998     8,430     9,068  
               

Total accrued liabilities

  $ 28,595   $ 31,223   $ 35,934  
               

F-15


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(6) INCOME TAXES

        Income tax expense (benefit) for the fiscal year ended June 30, 2008, the six month period ended June 30, 2007, and the years ended December 31, 2006, and 2005, consists of:

 
  Current   Deferred   Total  

Fiscal Year Ended June 30, 2008

                   
 

Federal

  $ 5,598   $ 1,262   $ 6,860  
 

State and local

    603     171     774  
               
 

Total

  $ 6,201   $ 1,433   $ 7,634  
               

Six months ended June 30, 2007

                   
 

Federal

  $ 839   $ 725   $ 1,564  
 

State and local

    369     37     406  
               
 

Total

  $ 1,208   $ 762   $ 1,970  
               

Year ended December 31, 2006

                   
 

Federal

  $ 19,409   $ 417   $ 19,826  
 

State and local

    1,195     (128 )   1,067  
               
 

Total

  $ 20,604   $ 289   $ 20,893  
               

Year ended December 31, 2005

                   
 

Federal

    34,466     (1,796 )   32,670  
 

State and local

    2,458     (68 )   2,390  
               
 

Total

    36,924     (1,864 )   35,060  
               

        A reconciliation of the expected federal income tax expense at the statutory income tax rate to the actual tax expense follows (based upon a tax rate of 35%):

 
   
   
  Year Ended December 31,  
 
  Fiscal Year Ended
June 30,
2008
  Six Months Ended
June 30,
2007
 
 
  2006   2005  

Expected federal income tax expense

  $ 7,746   $ 1,768   $ 20,069   $ 33,607  

State income taxes, net of related federal tax benefit

    611     182     398     1,372  

Other, net

    (723 )   20     426     81  
                   

Total tax expense

  $ 7,634   $ 1,970   $ 20,893   $ 35,060  
                   

F-16


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(6) INCOME TAXES (Continued)

        The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows:

 
  June 30,    
 
 
  December 31,
2006
 
 
  2008   2007  

Deferred tax assets:

                   
 

Current:

                   
   

Other payroll and benefits

  $ 751   $ 739   $ 828  
   

Inventory reserves

    441     205     152  
   

Self-insurance reserves

    4,605     4,274     4,391  
   

Stock-compensation

    2,536     1,638      
   

Other current liabilities

    853     905     2,011  
 

Noncurrent:

                   
   

Deferred rent

    1,593     1,664     1,715  
               
 

Total gross deferred tax assets

  $ 10,779   $ 9,425   $ 9,097  
               

Deferred tax liabilities:

                   
 

Current:

                   
   

Inventory costs

  $ 7,094   $ 4,424   $ 2,196  
   

Prepaid supplies

    2,359     2,126     2,024  
 

Non-current:

                   
   

Property and equipment

    5,007     5,123     6,363  
               
 

Total gross deferred tax liabilities

    14,460     11,674     10,583  
               
 

Net deferred tax liability

  $ 3,681   $ 2,249   $ 1,486  
               

        We expect the deferred tax assets at June 30, 2008 to be fully recovered and the deferred tax liabilities at June 30, 2008 to be fully satisfied through the reversal of taxable temporary differences in future years as a result of normal business activities. Accordingly, no valuation allowances for deferred tax items were considered necessary as of June 30, 2008.

        Accounting for Uncertainty in Income Taxes—The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 1999. The Internal Revenue Service (IRS) has concluded an examination of the Company for years ending before 2005.

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

F-17


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(6) INCOME TAXES (Continued)

        We adopted the provisions of FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized $145 increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at January 1, 2007

  $ 1,148  

Additions for tax positions of prior years

    27  

Settlements

    (99 )
       

Balance at June 30, 2007

  $ 1,076  

Additions based on tax positions related to current year

    57  

Additions for tax positions of prior years

    11  

Reductions for tax positions of prior years

    (53 )
       

Balance at June 30, 2008

  $ 1,091  
       

        The total amount of unrecognized tax benefits (including interest and penalty accruals) as of June 30, 2008 is $1,583. The liability for unrecognized tax benefits is included in the balance sheet under Income Taxes Payable. Included in the balance at June 30, 2008 is $1,091 of tax positions that, if recognized, would affect the effective tax rate. Also, included in the balance at June 30, 2008 are $492 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of the deductibility. Because of the impact of the deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

        The Company classifies and recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the tax year ended June 30, 2008, the six month tax period ended June 30, 2007, and the tax years ended December 31, 2006, and 2005, we recognized, net of tax effect, $60, $45, $141, and $138 in interest, respectively. We paid, net of tax, $86 during the six months ended June 30, 2007, and $112 during the year ended December 31, 2006. No interest was paid in the years ended June 30, 2008, or December 31, 2005.

        We do not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease the effective tax rate within 12 months of June 30, 2008.

(7) STOCK-BASED INCENTIVE PLANS

        We have established a 1997 Long-Term Equity Incentive Plan, as amended (the "1997 Plan"), and a 2004 Long-Term Equity Incentive Plan, as amended (the "2004 Plan"), which allow us to grant stock options and restricted stock to directors, officers and key employees of, and certain other key individuals who perform services for us and our subsidiaries. The 1997 Plan and 2004 Plan authorizes grants of options to purchase up to 4,800,000 and 2,000,000 shares, respectively, of authorized, but unissued common stock. Stock options are awarded at fair market value equal to the average of the high and low trading price of our common stock on the date of grant.

        Options granted under the 1997 Plan and 2004 Plan typically vest over periods of four to five years and expire in ten years. The exercise prices of the options range between $4.92 and $35.23, which

F-18


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(7) STOCK-BASED INCENTIVE PLANS (Continued)


represents market value on the grant date of the shares of common stock into which such options are exercisable. At December 31, 2007, all shares available under the 1997 Plan had been granted and the 1997 Plan expired as of December 29, 2007. There were 1,466,431 shares available for grant under the 2004 Plan at June 30, 2008.

        Following is a summary of transactions relating to the 1997 Plan and 2004 Plan's options for the fiscal year ended June 30, 2008, the six month period ended June 30, 2007 and for the two years ended December 31, 2006, and 2005:

 
  Number of
Shares
  Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term (Years)
  Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2004

    2,092,065   $ 17.75              
 

Granted during year

    350,979     29.97              
 

Exercised during year

    (267,574 )   10.44              
 

Cancelled during year

    (159,177 )   27.55              
                         

Outstanding at December 31, 2005

    2,016,293   $ 20.07              
 

Granted during year

    404,000     15.79              
 

Exercised during year

    (53,405 )   10.76              
 

Cancelled during year

    (190,317 )   28.59              
 

Expired during year

    (138,068 )   27.05              
                         

Outstanding at December 31, 2006

    2,038,503   $ 18.20              
 

Granted during year

    130,000     14.60              
 

Exercised during year

    (9,929 )   1.39              
 

Forfeited during year

    (25,987 )   23.39              
 

Expired during year

    (40,510 )   26.46              
                         

Options Outstanding at June 30, 2007

    2,092,077     17.83              
 

Granted during year

    95,000     7.12              
 

Exercised during year

    (1,000 )   1.43              
 

Forfeited during year

    (115,918 )   13.53              
 

Expired during year

    (70,614 )   15.64              

Options Outstanding at June 30, 2008 (vested or expected to vest)

    1,999,545     17.66     4.98      
                         

Exercisable at June 30, 2008

    1,596,597   $ 17.73     4.26   $  
                         

        The weighted average grant date fair value of share options granted during the fiscal year ended June 30, 2008, the six months ended June 30, 2007 and the calendar years ended December 31, 2006, and 2005 was $1.69, $4.10, $4.71, and $10.98, respectively. The intrinsic value of vested shares at June 30, 2008 is zero.

        The total intrinsic value of share options exercised was $9 thousand and $139 thousand during the fiscal year ended June 30, 2008 and the six months ended June 30, 2007, respectively. The total intrinsic value of share options exercised during the years ended December 31, 2006 and 2005, were

F-19


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(7) STOCK-BASED INCENTIVE PLANS (Continued)


$332 thousand and $5.4 million, respectively. At June 30, 2008 we had $4.1 million of total unrecognized stock-based compensation expense related to stock options that is expected to be recognized over a weighted average period of 3.05 years.

        The following table summarizes information about stock options outstanding at June 30, 2008.

 
  Options Outstanding    
  Options Exercisable  
Range of Exercise Prices
  Number
Outstanding
  Weighted Average
Remaining
Contractual Life
(Years)
  Weighted Average
Exercise Price Per
Share
  Number
Exercisable
  Weighted Average
Exercise Price Per
Share
 
 
   
   
   
  (in thousands)
   
 

$4.92—$8.31

    155,793     6.29   $ 7.25     79,365   $ 8.08  

$10.00—$10.00

    467,000     2.07   $ 10.00     467,000   $ 10.00  

$12.38—$14.70

    160,959     8.33   $ 13.77     51,740   $ 13.71  

$14.70—$20.02

    294,794     6.17   $ 17.57     195,712   $ 17.75  

$20.04—$20.04

    500,000     4.77   $ 20.04     500,000   $ 20.04  

$20.78—$30.25

    285,999     6.21   $ 27.56     216,887   $ 28.16  

$30.25—$35.23

    135,000     6.82   $ 31.21     85,893   $ 31.22  
                             

    1,999,545     5.09   $ 17.66     1,596,597   $ 17.73  
                             

        Restricted Stock Awards—Under the terms of the 1997 Plan and the 2004 Plan we may also grant restricted stock to compensate certain directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries. Restricted stock awards are not transferable, but bear rights of ownership including voting and dividend rights. Shares are valued at the market price at the date of award. At December 31, 2007, all shares under the 1997 Plan had been granted and the 1997 Plan expired as of December 29, 2007. As of June 30, 2008, there were 375,820 shares of restricted stock outstanding with a weighted average fair value of $5.00 per share under the 2004 plan. Compensation expense related to restricted shares is recognized ratably over the requisite service period. This expense totaled $433 thousand for the fiscal year ended June 30, 2008, and $49 thousand for the six months ended June 30, 2007. At June 30, 2008, we had $1.3 million of total unrecognized stock-based compensation expense related to restricted stock awards that is expected to

F-20


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(7) STOCK-BASED INCENTIVE PLANS (Continued)


be recognized over a weighted average period of 2.4 years. There was no expense for the years ended December 31, 2006, or 2005.

 
  Number of
Shares
  Weighted-
Average
Fair Value at Date of
Grant
 

Outstanding at December 31, 2006

           
 

Granted during year

    6,744   $ 14.83  
 

Vested during year

           
 

Forfeited during year

           
           

Outstanding at June 30, 2007

    6,744   $ 14.83  
 

Granted during year

    376,820     5.00  
 

Vested during year

    (6,744 )   14.83  
 

Forfeited during year

    (1,000 )   4.85  
           

Outstanding at June 30, 2008

    375,820   $ 5.00  

(8) OPERATING LEASES

        We lease substantially all store locations under non-cancelable operating leases. Our leases generally are for a five year period with two five year renewal options and, in very limited circumstances, our leases involve a tenant allowance for leasehold improvements. As disclosed in Note 2, we record rent expense ratably over the life of the lease beginning with the date we take possession of or have the right to use the premises, and if our leases provide for a tenant allowance, we record the landlord reimbursement as a liability and ratably amortize the liability as a reduction to rent expense over the lease term beginning with the date we take possession of or control the physical access to the premises. Leases for new stores also typically allow us the ability to terminate a lease after 24 to 36 months if the store does not achieve sales expectations or another location appears more desirable. Future minimum rental payments under leases are as follows:

Fiscal Years Ending June 30,
   
 

2009

  $ 60,492  

2010

    48,537  

2011

    37,289  

2012

    25,769  

2013

    11,924  

Thereafter

    6,530  
       

Total minimum rental payments

  $ 190,541  
       

        Rent expense for the fiscal year ended June 30, 2008 was $74,937 and $35,184 for the six months ended June 30, 2007. Rent expense for 2006, and 2005, was $65,366, and $63,362, respectively. Rent expense includes rent for store locations and warehouses. Rent based on sales is not material to our financial statements.

F-21


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(9) 401(K) PROFIT SHARING PLAN AND STOCK PURCHASE PROGRAM

        We have a 401(k) profit sharing plan for the benefit of our full-time, eligible employees after six months of service. Under the plan, eligible employees may request us to deduct and contribute from 1% to 20% of their salary to the plan. Subject to Internal Revenue Service Regulations, we match each participant's contribution up to 4% of participant's compensation. We expensed contributions of $930 thousand for the fiscal year ended June 30, 2008 and $466 thousand during the six months ended June 30, 2007. We expensed contributions of $872 thousand and $801 thousand during the years ended December 31, 2006, and 2005, respectively.

        Prior to December 31, 2007, we offered participation in a stock purchase program for full time employees after completion of 90 days of continuous employment. This stock purchase plan was terminated effective December 31, 2007. We expensed our contributions as incurred. The contributions were immaterial for all reported years.

(10) FINANCIAL INSTRUMENTS

        We had various forward foreign currency contracts outstanding at June 30, 2008, and 2007, and December 31, 2006, with fair values of $418, $40, and $13, respectively. Our risk that counterparties to these contracts may be unable to perform is minimized by limiting the counterparties to major financial institutions. The fair value of our forward foreign currency contracts were determined based on quoted market prices of comparable contracts.

(11) LEGAL PROCEEDINGS

        During 2001 and 2002, we were named as a defendant in three complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs sought to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs also sought attorney's fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of manager-in-training and management trainees which was paid in November 2005 with no material impact to our financial statements. In August 2008, our motion for de-certification of the class of remaining plaintiffs was granted, thereby dismissing their class action claim. However, we expect the plaintiffs to appeal this ruling and some may pursue their claims individually. A similar lawsuit, which also alleges claims concerning meal and rest periods, was filed in Orange County, California in 2004 by managers, managers-in-training and assistant managers and an amended complaint was filed in January 2007. This case is still in the discovery phase and the plaintiffs have been ordered to move for class certification. We do not expect these complaints to have a material impact on our financial statements.

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

F-22


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(12) EARNINGS PER COMMON SHARE

        The following table sets forth the computation of basic and diluted earnings per common share:

 
   
   
  Years Ended December 31,  
 
  Fiscal Year Ended
June 30,
2008
  Six Months
Ended June 30,
2007
 
 
  2006   2005  

Basic Earnings Per Share:

                         
 

Net income

  $ 14,498   $ 3,081   $ 36,429   $ 60,959  
                   
 

Weighted average number of common shares outstanding

    41,439     41,433     41,392     41,264  
                   
 

Basic earnings per common share

  $ 0.35   $ 0.07   $ 0.88   $ 1.48  
                   

Diluted Earnings Per Share:

                         
 

Net income

  $ 14,498   $ 3,081   $ 36,429   $ 60,959  
                   
 

Dilutive effect of employee stock options

    55     204     255     506  
 

Weighted average number of common shares outstanding

    41,439     41,433     41,392     41,264  
                   
 

Weighted average number of common shares and dilutive effect of outstanding employee stock options

    41,494     41,637     41,647     41,770  
                   
 

Diluted earnings per common share

  $ 0.35   $ 0.07   $ 0.87   $ 1.46  
                   

        Options representing the rights to purchase common stock of 1,597,000 shares at June 30, 2008, 888,000 at June 30, 2007, 776,000 at December 31, 2006, and 584,000 shares at December 31, 2005 had exercise prices greater than the average quoted market price for our common stock. These shares were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been anti-dilutive.

(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

        A summary of the unaudited quarterly results is as follows for the ten quarters ended June 30, 2008:

 
  Quarters Ended(1)  
 
  Sept. 30,
2007
  Dec. 31,
2007
  March 31,
2008
  June 30, 2008  

Net sales

  $ 201,656   $ 308,687   $ 178,446   $ 196,492  

Gross profit

    75,709     114,904     63,999     68,091  

Operating income (loss)

    3,165     34,240     (7,358 )   (5,197 )

Net income (loss)

    1,156     20,534     (4,697 )   (2,496 )

Basic earnings (loss) per share

  $ 0.03   $ 0.50   $ (0.11 ) $ (0.06 )

Diluted earnings (loss) per share

  $ 0.03   $ 0.50   $ (0.11 ) $ (0.06 )

F-23


TUESDAY MORNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All dollar amounts in thousands, except for per share amounts)

(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)


 
  Quarters Ended(1)  
 
  March 31, 2007   June 30, 2007  

Net sales

  $ 189,156   $ 219,364  

Gross profit

    70,868     79,800  

Operating income

    1,579     4,128  

Net income

    1,047     2,034  

Basic earnings per share

  $ 0.03   $ 0.05  

Diluted earnings per share

  $ 0.03   $ 0.05  

 

 
  Quarters Ended(1)  
 
  March 31, 2006   June 30, 2006   Sept. 30, 2006   Dec. 31, 2006  

Net sales

  $ 187,759   $ 207,669   $ 194,412   $ 321,266  

Gross profit

    73,591     74,273     73,064     121,583  

Operating income

    10,428     5,046     5,723     37,256  

Net income

    6,540     2,899     3,163     23,827  

Basic earnings per share

  $ 0.16   $ 0.07   $ 0.08   $ 0.58  

Diluted earnings per share

  $ 0.16   $ 0.07   $ 0.08   $ 0.57  

(1)
A significant portion of our revenues and net earnings are realized during the period from October through December.

F-24



EXHIBIT INDEX

 
 
Exhibit No.
  Description
      3.1.1   Certificate of Incorporation of Tuesday Morning Corporation (the "Company") (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Securities and Exchange Commission (the "Commission") on February 10, 1998)


 


 


 


3.1.2


 


Certificate of Amendment to the Certificate of Incorporation of the Company (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 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated December 14, 2006 as filed with the Commission on December 20, 2006)

 

 

 

10.1.1

 

Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998) †

 

 

 

10.1.2

 

Amendment No. 1 to the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1/A (File No. 333-74365) as filed with the Commission on March 29, 1999) †

 

 

 

10.1.3

 

First Amendment to the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q as filed with the Commission on August 1, 2005) †

 

 

 

10.2

 

Stockholders Agreement, dated as of December 29, 1997, by and among the Company, Madison Dearborn Capital Partners II, L.P. and the executives listed on Schedule I attached thereto (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-4 (File No. 333-46017) as filed with the Commission on February 10, 1998)

 

 

 

10.3

 

1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-74365) as filed with the Commission on March 12, 1999) †

 

 

 

10.4

 

Employment Agreement, dated as of July 25, 2000, by and between the Company and Kathleen Mason (incorporated by reference to Exhibit 99.2 to the Company's Form 10-Q as filed with the Commission on November 7, 2000)  †

 

 

 

10.5.1

 

Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Appendix B to the Company's Definitive 14A Proxy Statement as filed with the Commission on April 19, 2004) †

 

 

 

10.5.2

 

First Amendment to the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q as filed with the Commission on August 1, 2005) †

 
 
Exhibit No.
  Description
      10.5.3   Second Amendment to the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on November 8, 2007) †


 


 


 


10.6.1


 


Credit Agreement, dated as of December 22, 2004 by and among Tuesday Morning, Inc., Tuesday Morning Corporation, TMI Holdings, Inc., the lenders who are or may become a party to the agreement, Wachovia Bank, National Association, as Administrative Agent, Wells Fargo Bank, N.A. and LaSalle Bank National Association, as Co-Syndication Agents, U.S. Bank National Association and Sovereign Bank, as Co-Documentation Agents, Wachovia Capital Markets, LLC as a Co-Lead Arranger and Sole Book Manager, and Wells Fargo Bank, N.A. as a Co-Lead Arranger (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K/A as filed with the Commission on February 24, 2006)

 

 

 

10.6.2

 

First Amendment to Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on March 20, 2007)

 

 

 

10.7

 

Form of Incentive Stock Option Agreement under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan and the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on May 3, 2005) †

 

 

 

10.8

 

Form of Nonqualified Stock Option Agreement under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan and the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K (File No. 000-19658) as filed with the Commission on May 3, 2005) †

 

 

 

10.9

 

Letter Agreement dated July 18, 2006 from Kathleen Mason, on behalf of the Company, to Elizabeth Schroeder (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on July 18, 2006) †

 

 

 

10.10

 

Description of Directors Compensation (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q as filed with the Commission on May 4, 2007) †

 

 

 

10.11

 

Form of Restricted Stock Award Agreement for directors under the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on November 6, 2007) †

 

 

 

10.12

 

Form of Confidentiality Agreement for directors (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 

 

 

10.13

 

Form of Restricted Stock Award Agreement for directors under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 

 

 

10.14

 

Form of Restricted Stock Award Agreement for employees under the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 

 

 

10.15

 

Form of Restricted Stock Award Agreement for employees under the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K as filed with the Commission on December 19, 2007) †

 
 
Exhibit No.
  Description
      21.1   Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Form 10-K as filed with the Commission on March 9, 2005)


 


 


 


23.1


 


Consent of Independent Registered Public Accounting Firm

 

 

 

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

Management contract or compensatory plan or arrangement



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Documents Incorporated By Reference
Forward-Looking Statements
PART I
Risks Related to Our Business
Risks Related to Our Common Stock
PART II
Report of Independent Registered Public Accounting Firm
PART III
PART IV
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Tuesday Morning Corporation Consolidated Balance Sheets (In thousands, except for share data)
Tuesday Morning Corporation Consolidated Statements of Income (In thousands, except per share data)
Tuesday Morning Corporation Consolidated Statements of Stockholders' Equity (In thousands)
Tuesday Morning Corporation Consolidated Statements of Cash Flows (In thousands)
TUESDAY MORNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except for per share amounts)
EXHIBIT INDEX

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 333-79441, 333-90315, 333-117880 and 333-145811 and Form S-3 Nos. 333-108275 and 333-147103) of Tuesday Morning Corporation and in the related Prospectuses of our reports dated August 26, 2008, with respect to the consolidated financial statements of Tuesday Morning Corporation, and the effectiveness of internal control over financial reporting of Tuesday Morning Corporation, included in this Annual Report (Form 10-K) for the fiscal year ended June 30, 2008.

/s/ ERNST & YOUNG LLP
Dallas, Texas

August 26, 2008




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Exhibit 31.1

CERTIFICATION

I, Kathleen Mason, certify that:

1.
I have reviewed this annual report on Form 10-K of Tuesday Morning Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 29, 2008   By:   /s/ KATHLEEN MASON

        Kathleen Mason
Chief Executive Officer



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Exhibit 31.2

CERTIFICATION

I, Stephanie Bowman, certify that:

1.
I have reviewed this annual report on Form 10-K of Tuesday Morning Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 29, 2008   By:   /s/ STEPHANIE BOWMAN

        Stephanie Bowman
Chief Financial Officer



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Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF
TUESDAY MORNING CORPORATION PURSUANT TO 18 U.S.C. §1350

I, Kathleen Mason, the Chief Executive Officer of Tuesday Morning Corporation, hereby certify that:

1.
The annual report on Form 10-K of Tuesday Morning Corporation for the fiscal year ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the above-mentioned report fairly presents, in all material respects, the financial condition and results of operations of Tuesday Morning Corporation.

Date: August 29, 2008   By:   /s/ KATHLEEN MASON

        Kathleen Mason
Chief Executive Officer



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Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF
TUESDAY MORNING CORPORATION PURSUANT TO 18 U.S.C. §1350

I, Stephanie Bowman, the Chief Financial Officer of Tuesday Morning Corporation, hereby certify that:

1.
The annual report on Form 10-K of Tuesday Morning Corporation for the period ended June 30, 2008 fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the above-mentioned report fairly presents, in all material respects, the financial condition and results of operations of Tuesday Morning Corporation.

Date: August 29, 2008   By:   /s/ STEPHANIE BOWMAN

        Stephanie Bowman
Chief Financial Officer



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