UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý  No  o

 

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

 

 

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and Private Securities Litigation Reform Act of 1995.  These statements may be found throughout this Form 10-Q particularly under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others.  Forward-looking statements typically are identified by the use of terms such as “may, “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are 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 results of operations, financial position, and our business outlook or state other “forward-looking” information based on currently available information.

 

Readers are referred to the caption “Risk Factors” appearing at the end of Item I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for additional factors that may affect our forward-looking statements.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.  We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.

 

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

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 – Financial Statements
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2004 and 2003
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Item 4 – Controls and Procedures
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Item 6 – Exhibits

 

 

Tuesday Morning Corporation

Consolidated Balance Sheets

(In thousands, except for share data)

 

		September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	8,583		$	23,536
Inventories		262,318			143,023
Prepaid expenses and other current assets		6,343			4,948
Deferred income taxes		5,106			5,106
Total current assets		282,350			176,613
Property and equipment, net		85,035			74,875
Deferred financing costs		895			907
Other assets		2,590			999
Total Assets		$	370,870		$	253,394
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility		$	60,700		$	—
Accounts payable		86,144			66,091
Accrued liabilities		34,909			36,321
Income taxes payable		4,930			13,247
Total current liabilities		186,683			115,659
Revolving credit facility, excluding current portion		20,000			—
Deferred income taxes		5,641			5,641
Total Liabilities		212,324			121,300
Commitments and contingencies
Shareholders’ equity:
Senior exchangeable preferred stock, par value $.01 per share, authorized 10,000,000 shares, none issued or outstanding		—			—
Common stock, par value $.01 per share, authorized 100,000,000 shares; 41,082,328 shares issued and outstanding at September 30, 2004 and 40,923,737 shares at December 31, 2003		411			409
Additional paid-in capital		187,283			186,455
Accumulated deficit		(29,152		)	(54,872		)
Accumulated other comprehensive income		4			102
Total Shareholders’ Equity		158,546			132,094
Total Liabilities and Shareholders’ Equity		$	370,870		$	253,394

 

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

 

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Tuesday Morning Corporation

Consolidated Statements of Income

(In thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net sales		$	186,148		$	173,898		$	565,442		$	501,665
Cost of sales		117,525			110,702			354,417			319,240
Gross profit		68,623			63,196			211,025			182,425
Selling, general and administrative expenses		55,700			50,494			168,068			145,407
Operating income		12,923			12,702			42,957			37,018
Other income (expense):
Interest income		1			5			8			62
Interest expense		(868		)	(2,441		)	(1,751		)	(7,143		)
Other income (expense)		190			194			637			650
		(677		)	(2,242		)	(1,106		)	(6,431		)
Income before income taxes		12,246			10,460			41,851			30,587
Income tax expense		4,724			4,079			16,131			11,831
Net income		$	7,522		$	6,381		$	25,720		$	18,756
Earnings Per Share
Net income per common share:
Basic		$	0.18		$	0.16		$	0.63		$	0.46
Diluted		$	0.18		$	0.15		$	0.62		$	0.45
Weighted average number of common shares:
Basic		41,061			40,544			41,029			40,406
Diluted		41,771			41,754			41,743			41,577

 

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

 

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Tuesday Morning Corporation

Consolidated Statements of Cash Flows

(In thousands)

 

		Nine Months Ended September 30,
		2004			2003
Net cash flows from operating activities:
Net income		$	25,720		$	18,756
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		8,289			7,139
Amortization of financing fees		399			531
Other non-cash items		55			(59		)
Change in operating assets and liabilities:
Inventories		(119,376		)	(74,476		)
Prepaid and other assets		(2,986		)	(2,916		)
Accounts payable		20,053			15,589
Accrued liabilities		(1,429		)	6,519
Income taxes payable		(8,380		)	(14,518		)
Net cash used in operating activities		(77,655		)	(43,435		)
Net cash flows from investing activities:
Capital expenditures		(18,449		)	(13,051		)
Net cash used in investing activities		(18,449		)	(13,051		)
Net cash flows from financing activities:
Payment of debt and mortgages		—			(4,224		)
Proceeds from revolving credit facility, net		80,700			35,000
Payment of financing fees		(387		)	—
Proceeds from exercise of common stock options and stock purchase plan purchases		838			823
Net cash provided by financing activities		81,151			31,599
Net decrease in cash and cash equivalents		(14,953		)	(24,887		)
Cash and cash equivalents, beginning of period		23,536			31,929
Cash and cash equivalents, end of period		$	8,583		$	7,042

 

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

 

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Tuesday Morning Corporation

Notes to Consolidated Financial Statements

 

1.               Basis of Presentation – The consolidated interim financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the consolidated financial statements and notes thereto in our Form 10-K filing for the year ended December 31, 2003.  Because of the seasonal nature of our business, the results of operations for the quarter are not indicative of the results to be expected for the entire year.

 

2.               Comprehensive income – Comprehensive income is defined as net income plus the change in equity during a period from transactions and other events, excluding those resulting from investments by and distributions to shareholders. Total comprehensive income for the three month period ended September 30, 2004 and 2003 was $7.5 million and $6.3 million, respectively, and for the nine month period ended September 30, 2004 and 2003 was $25.6 million and $18.7 million, respectively.

 

3.               Legal proceedings – During 2001 and 2002, we were named as a defendant in three separate complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs are seeking 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 are also seeking 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.  This settlement agreement was approved by the court on April 2, 2004, but is currently under appeal.

 

In December 2003, we were named as a defendant in a complaint filed in the Superior Court of California, in and for the County of San Diego.  The plaintiffs are alleging failure to pay for minimum reporting time, travel time, split-shift premiums, meal periods and other labor issues.   This lawsuit is still in the discovery phase.

 

In April 2004, we were named as a defendant in a complaint filed by Liz Claiborne, Inc. and L.C. Licensing, Inc., in the U.S. District Court, Northern District of Texas, Dallas Division regarding the sale of costume jewelry.  We reached a settlement agreement with the plaintiffs in September 2004.  There was no material impact to our financial statements related to this settlement agreement.

 

In June 2004, we were named as a defendant in a complaint filed in the U.S. District Court, Central District of California.  The plaintiff, Thomas Kinkade Company (f/k/a/ Media Arts Group Inc.), is alleging copyright infringement and false advertisements on merchandise we sold in the second quarter of 2004.  This lawsuit is in the discovery phase.

 

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

 

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4.               Earnings Per Common Share

 

		Three Months Ended September 30						Nine Months Ended September 30
		2004			2003			2004			2003
Basic earnings per share:
Net income		$	7,522		$	6,381		$	25,720		$	18,756
Net income per common share		$	0.18		$	0.16		$	0.63		$	0.46
Diluted earnings per share:
Net income		$	7,522		$	6,381		$	25,720		$	18,756
Dilutive effect of employee stock options		710			1,210			714			1,171
Weighted average number of common shares outstanding		41,061			40,544			41,029			40,406
Weighted average number of common shares and diluted effect of outstanding employee stock options		41,771			41,754			41,743			41,577
Net income per common share		$	0.18		$	0.15		$	0.62		$	0.45

5.               Revolving Credit Facility – Our $160 million revolving credit facility expires in March 2006.  On June 30, 2004, we amended our revolving credit facility to increase the borrowing capacity from $135 million to $215 million, which includes a $55 million overadvance facility that is only available to us from June 30, 2004 to March 31, 2005.  We incur commitment fees of up to 0.50% on the unused portion of the revolving credit facility. Any borrowings under the revolver incur interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our leverage ratio changes or overadvance declines.

At September 30, 2004, we had $80.7 million outstanding under the revolving credit facility, of which $20 million was considered long-term, with total availability of $126.4 million based on eligible inventory and the $55 million overadvance facility.

6.               Stock-based Compensation – We account 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 is recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant.

The following table represents the effect on net income and earnings per share if we had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and our adoption on January 1, 2003 of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”  The pro forma effects of stock-based compensation on net income and net income per common share are as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)		2004			2003			2004			2003
Net income as reported		$	7,522		$	6,381		$	25,720		$	18,756
Less: Stock-based employee compensation expense determined under the fair value method, net of related tax effects		983			752			2,641			1,806
Pro-forma net income		$	6,539		$	5,629		$	23,079		$	16,950
Net income per common share:
Basic as reported		$	0.18		$	0.16		$	0.63		$	0.46
Basic pro-forma		$	0.16		$	0.14		$	0.56		$	0.42
Diluted as reported		$	0.18		$	0.15		$	0.62		$	0.45
Diluted pro-forma		$	0.16		$	0.13		$	0.56		$	0.41

7.               Certain prior year amounts have been reclassified to conform to the current period presentation.

 

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

 

Overview

 

•      We sell upscale, name brand home furnishings, gifts and related items significantly below retail prices charged by department and specialty stores throughout 641 stores in 43 states. We have a unique event-based selling strategy.

 

•      Our store base has grown at approximately 10% per year for the last five years, and during the first nine months of 2004 we expanded our store base by 68 new stores and had 4 store closures.

 

•      Our long-term vendor relationships and diverse sourcing capabilities continue to provide us with access to merchandise at attractive prices. We believe that there will be an adequate selection and volume of closeout merchandise available to match our anticipated future growth.

 

•      We believe our focus on distribution center efficiencies, inventory management strategies and improved store procedures and training have contributed to our sales growth and improved inventory turnover.

 

•      Our operating profits, combined with more efficient use of working capital and increased inventory turns over the past 3 years, have generated excess cash flow, which has been used to reduce debt. At September 30, 2004 we had $80.7 million in debt outstanding as compared to $104.0 million at September 30, 2003. We anticipate using our revolving credit facility during the remainder of 2004 for inventory purchases and capital expenditures, but we expect to have excess cash flow at the end of 2004. We will be evaluating appropriate uses of our excess cash flow in the future, including the use of capital to expand the business and other alternative uses for our cash.

 

Results of Operations

 

The following table sets forth certain financial information from our consolidated statements of income expressed as a percentage of net sales.  Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the fourth quarter, which includes the holiday season. There can be no assurance that the trends in sales growth or operating results will continue in the future.

 

		Three Months Ended September 30				Nine Months Ended September 30
		2004		2003		2004		2003
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales		63.1		63.7		62.7		63.6
Gross profit		36.9		36.3		37.3		36.4
Selling, general and administrative expense		30.0		29.0		29.7		29.0
Operating income		6.9		7.3		7.6		7.4
Net interest expense and other income (expense)		(0.3	)	(1.3	)	(0.2	)	(1.3	)
Income before income taxes		6.6		6.0		7.4		6.1
Income tax expense		2.6		2.3		2.8		2.4
Net income		4.0	%	3.7	%	4.6	%	3.7	%

 

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Three Months Ended September 30, 2004

Compared to the Three Months Ended September 30, 2003

 

During the third quarter of 2004, net sales increased to $186.1 million from $173.9 million, an increase of $12.2 million or 7.0% compared to the same quarter of 2003. The increase in third quarter sales is primarily due to sales from non-comparable new stores, offset by a 4.0% decrease in comparable store sales.  The impact of severe storms, which affected stores representing  33% of our total sales base, and lower than expected sales in seasonal products were the primary causes of the comparable store sales decrease for the quarter.

 

In the first quarter of 2004, we refined our methodology for calculating our comparable store sales, in light of changes to the timing of store openings during a quarter.  Stores are now included in the same store calculation at the beginning of the quarter following the anniversary date of the store opening.  Previously, stores were included in the same store calculation at the beginning of the quarter that contained the anniversary date of the store opening, since the majority of our store openings used to be only at the beginning of the respective quarter.  Using our refined methodology, the comparable sales increase for the third quarter of 2003 would have been 3.0% compared to the 2.8% previously reported.  Stores that relocated within the same geographic market are still considered same store for purposes of this computation.  The number of days our stores are open may fluctuate from period to period.

 

Comparable store sales decreased 4.0% for the quarter.  The decrease in comparable sales for the second quarter of 2004 was comprised of a 1.2% decrease in the number of transactions and a 2.8% decrease in the average transaction amount.  Average store sales for the third quarter decreased 7.1% when compared to the same prior year quarter.  The decrease in average store sales was primarily due to the aforementioned impact of severe storms, lower than expected sales of seasonal products and an increasing percentage of new stores in the store base.

 

Gross profit increased $5.4 million or 8.6% to $68.6 million for the three months ending September 30, 2004 as compared to last year’s third quarter of $63.2 million, primarily as a result of our increased net sales.  Our gross profit percentage, as a percentage of net sales, increased 0.6% to 36.9% from 36.3% in the prior year’s third quarter.  This 0.6% increase is due to a 0.3% improvement in leveraging of our distribution and freight expenses, and a 0.3% reduction in shrink and damaged merchandise.

 

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

 

Selling, general and administrative expenses increased $5.2 million, or 10.3%, to $55.7 million from $50.5 million in the third quarter of 2003.  The increase was attributable to new stores, and increases in variable expenses.  As a percentage of net sales these expenses increased 1.0% to 30.0% in third quarter of 2004 from 29.0% in the third quarter of 2003.  The increased percentage includes a 0.6% increase in store repair, remodeling and pre-opening expenses, a 1.0% increase related to rent, occupancy and depreciation expense associated with the increase in our store base, and a 0.5% increase in wages and benefits expense due to less sales leveraging, all offset by a 1.1% decrease in advertising.

 

Net interest and other expense decreased $1.6 million compared to the third quarter of 2003.   This reduction is a result of lower debt levels with the repayment of the $69 million senior subordinated debt in the fourth quarter of 2003.

 

The income tax provision for the three month periods ended September 30, 2004 and 2003 was $4.7 million and $4.1 million, respectively, reflecting an effective tax rate of 38.6% and 39.0%, respectively.

 

Nine Months Ended September 30, 2004

Compared to the Nine Months Ended September 30, 2003

 

During the first nine months of 2004, net sales increased to $565.4 million from $501.7 million, an increase of $63.8 million or 12.7% compared to the same period of 2003. The increase in sales for the first nine months is primarily due to sales from non-comparable new stores and a 1.5% increase in comparable store sales.  Year to date comparable store sales for the period ended September 30, 2004 decreased due to the impact of severe storms, which affected stores representing 33% of our total sales base, and lower than expected sales in seasonal products in the third quarter.

 

Nine month comparable store sales are the summation of the individual quarterly results within the year. The 1.5% increase in comparable sales for the first nine months of the year was comprised primarily of a 0.1% increase in the number of transactions and a 1.4% increase in the average transaction amount.  Using our refined methodology, the comparable sales increase for the nine month period of 2003 would have been 3.2% compared to the 2.8% previously reported.  Average store sales for the nine months decreased 0.9% compared to the same prior year period.  The decrease in average store sales was primarily due to the aforementioned impact of severe storms, lower than expected sales of seasonal products and an increasing percentage of new stores in the store base.

 

Gross profit increased $28.6 million or 15.7% to $211.0 million for the nine months ending September 30, 2004 as compared to the nine month period last year of $182.4 million, primarily as a result of our increased net sales.  Our gross profit percentage, as a percentage of net sales, increased 0.9% to 37.3% from 36.4% in the prior year’s nine month period.  This 0.9% increase is primarily due to a 0.6%

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improvement in our leveraging of our distribution and freight expenses and 0.3% reduction in shrink and damaged merchandise and markdowns.

 

Selling, general and administrative expenses increased $22.7 million, or 15.6%, to $168.1 million from $145.4 million in the first nine months of 2003.  The increase was attributable to new stores, and increases in variable expenses.  As a percentage of net sales these expenses increased 0.7% to 29.7% in the first nine months of 2004 from 29.0% in the first nine months of 2003.  The increased percentage includes a 0.7% increase related to rent, occupancy and depreciation expense associated with the increase in our store base, and a 0.4% increase related to general and administrative expenses and store repair expense, all offset by a 0.4% decrease in advertising expense.

 

Net interest and other expense decreased $5.3 million compared to the first nine months of 2003.  This reduction is a result of lower debt levels with the repayment of the $69 million senior subordinated debt in the fourth quarter of 2003.

 

The income tax provision for the nine month periods ended September 30, 2004 and 2003 was $16.1 million and $11.8 million, respectively, reflecting an effective tax rate of 38.5% and 38.7%, respectively.

 

Liquidity and Capital Resources

 

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flow strategy during the last three years has been focused on funding our store growth and distribution improvements and reducing our debt and financing costs associated with our recapitalization in 1997. Our cash flows will continue to be utilized for the expansion of our business, but we are exploring the alternative uses of excess cash for the future. Other than the letters of credit described below, 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 used in operating activities for the nine months ended September 30, 2004 and 2003 was $77.7 million and $43.4 million, respectively, representing a $34.3 million increase. This increase is predominantly due to the growth of our store base and the increased purchases of inventory in the first nine months of 2004 as compared to the first nine months of 2003.  At September 30, 2004, our inventory increased $119.3 million to $262.3 million from $143.0 million at December 31, 2003 primarily due to the normal seasonal build-up of inventory for the holiday season, the increase in the number of stores and to a lesser extent lower than anticipated sales in the third quarter of 2004 compared to planned performance.  Accounts payable balances have increased $20.0 million to $86.1 million as of September 30, 2004 from $66.1 million at December 31, 2003.

 

Capital expenditures principally associated with new store opening and warehouse equipment were $18.4 million and $13.1 million for the nine months ending September 30, 2004 and 2003, respectively.  We expect to spend approximately $2.0 million for additional capital expenditures for the remainder of 2004, which will include the opening of new stores, enhancements of selected stores, and purchases of equipment for our distribution center.

 

We have a $160 million revolving credit facility that expires in March 2006.  On June 30, 2004 we amended our revolving credit facility to increase the borrowing capacity from $135 million to $215 million, which includes a $55 million overadvance facility that is only available to us from June 30, 2004 to March 31, 2005.  Our indebtedness under the credit facility is secured by a lien on our inventory, tangible personal property and our owned real property, as well as a pledge of our ownership interests in all of our subsidiaries.  For 15 consecutive days between November 1 and December 31 of each calendar year, the aggregate principal amount of loans outstanding under the revolving credit facility and any swing loans may not exceed $20 million.  Any borrowings under the revolver incur interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. We incur commitment fees of up to 0.50% on the unused portion of the $160 revolving credit facility. These rates are increased or reduced as our leverage ratio changes or overadvance declines.

 

At September 30, 2004, we had $80.7 million outstanding under our revolving credit facility, of which $20 million was considered long-term, with total availability of $126.4 million based on eligible inventory and the $55 million overadvance facility.  As of September 30, 2004 and 2003, we had outstanding letters of credit of $7.9 million and $6.3 million, respectively, primarily for self-insurance.

 

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, minimum interest coverage and minimum tangible net worth. 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 September 30, 2004, we were in compliance with all covenants contained in our revolving credit facility.

 

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We anticipate that our future net cash flows from operations and unused borrowings under our revolving credit facility will be sufficient to fund our working capital needs, planned capital expenditures and scheduled interest payments for the next 12 months.

Store Openings/Closings

		Nine Months Ended September 30 2004		Nine Months Ended September 30 2003		Twelve Months Ended December 31, 2003
Stores Open at beginning of period		577		515		515
Stores Opened		68		53		74
Stores Closed		(4	)	(12	)	(12	)
Stores Open at end of period		641		556		577

 

Item 3.           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 September 30, 2004, 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.  Our market risk is discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2003.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.  There have been no significant changes in the foreign currency exchange rate or interest rate market risks since December 31, 2003.

Item 4.  Controls and 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) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of September 30, 2004 to ensure that material information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms.

In conjunction with our preparation toward compliance with Section 404 of the Sarbanes-Oxley Act of 2002, we are formalizing and enhancing our financial control processes and general computer controls.  These matters have been discussed with our independent accountants, our audit committee and our Board of Directors.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ending September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

During 2001 and 2002, we were named as a defendant in three separate complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs are seeking 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 are also seeking 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.  This settlement agreement was approved by the court on April 2, 2004, but is currently under appeal.

In December 2003, we were named as a defendant in a complaint filed in the Superior Court of California, in and for the

 

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County of San Diego.  The plaintiffs are alleging failure to pay for minimum reporting time, travel time, split-shift premiums, meal periods and other labor issues.  This lawsuit is still in the discovery phase.

 

In April 2004, we were named as a defendant in a complaint filed by Liz Claiborne, Inc. and L.C. Licensing, Inc., in the U.S. District Court Northern District of Texas, Dallas Division regarding the sale of costume jewelry.  We reached a settlement agreement with the plaintiffs in September 2004.  There was no material impact to our financial statements related to this settlement.

 

In June 2004, we were named as a defendant in a complaint filed in U.S. District Court, Central District of California.  The plaintiff, Thomas Kinkade Company (f/k/a/ Media Arts Group Inc.), is alleging copyright infringement and false advertisements on merchandise we sold in the second quarter of 2004.  This lawsuit is in the discovery phase.

 

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

 

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Item 6.   Exhibits

 

(a)                                  Exhibits

 

Exhibit Number		Title of Exhibit
3.1		Certificate of Incorporation of Tuesday Morning Corporation (the “Company”). (1)
3.2		Certificate of Amendment to the Certificate of Incorporation of the Company. (2)
3.3		Certificate of Designation of the Company. (1)
3.4		By-laws of the Company. (1)
31.1		Certification by the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
31.2		Certification by the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
32.1		Certifications by the Chief Executive Officer and 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. (3)*

 

(1)         Incorporated by reference to the corresponding exhibits of the Company’s Registration Statement on Form S-4 (File No. 333-46017).

(2)         Incorporated by reference to the corresponding exhibits of the Company’s Registration Statement on Form S-1 (File No. 333-74365).

(3)       Provided herewith.

*                The certifications attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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SIGNATURE

 

Pursuant to the requirements 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
		(Registrant)
DATE:	November 3, 2004		By:	/s/ Loren K. Jensen
				Loren K. Jensen, Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer and duly authorized to sign this report on behalf of the registrant)

 

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