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EX-31.2 - CFO CERTIFICATION - ALCO STORES INCcfocertification.htm
EX-31.1 - CEO CERTIFICATION - ALCO STORES INCceocertification.htm
EX-32.2 - CFO SOX CERTIFICATION - ALCO STORES INCcfosoxcertification.htm
EX-32.1 - CEO SOX CERTIFICATION - ALCO STORES INCceosoxcertification.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 1, 2009

OR

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

Commission File Number 0-20269
 
Company Logo
 
DUCKWALL-ALCO STORES, INC. 
(Exact name of registrant as specified in its charter)

Kansas 
48-0201080
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
401 Cottage Street
Abilene, Kansas 
 
 67410-2832
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number including area code: (785) 263-3350

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES         NO      X   
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES         NO      X   
 
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  X     NO      
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES            NO     X   
 
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 “accelerated filer", "large accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES         NO      X   

APPLICABLE ONLY TO CORPORATE ISSUERS:

3,797,947 shares of common stock, $.0001 par value (the issuer's only class of common stock), were outstanding as of November 1, 2009.
 
 


 
DUCKWALL-ALCO STORES, INC.
 








 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
 

Duckwall-ALCO Stores, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
(dollars in thousands, except share amounts)
 
Assets
 
   
November 1, 2009
   
February 1, 2009
 
   
(Unaudited)
       
Current assets:
           
   Cash and cash equivalents
  $ 5,703       4,744  
   Receivables
    5,998       5,142  
   Prepaid income taxes
    1,527       5,753  
   Inventories
    165,131       146,620  
   Prepaid expenses
    3,688       4,143  
   Deferred income taxes
    2,835       5,348  
  Assets held for sale
    1,531       1,505  
          Total current assets
    186,413       173,255  
                 
Property and equipment, at cost:
               
   Land and land improvements
    1,442       1,420  
   Buildings and building improvements
    11,518       11,369  
   Furniture, fixtures and equipment
    70,803       69,019  
   Transportation equipment
    1,375       1,322  
   Leasehold improvements
    15,166       13,974  
   Construction work in progress
    2,014       745  
          Total property and equipment
    102,318       97,849  
   Less accumulated depreciation
    71,228       65,591  
          Net property and equipment
    31,090       32,258  
                 
Property under capital leases
    11,015       11,015  
   Less accumulated amortization
    9,084       7,958  
          Net property under capital leases
    1,931       3,057  
                 
Other non-current assets
    143       205  
Deferred income taxes
    2,055       -  
          Total assets
  $ 221,632       208,775  
                 
   
Liabilities and Stockholders' Equity
 
Current liabilities:
               
   Current maturities of long-term debt
  $ 1,428       1,362  
   Current maturities of capital lease obligations
    1,929       1,853  
   Accounts payable
    37,290       30,233  
   Accrued salaries and commissions
    5,107       5,375  
   Accrued taxes other than income
    5,410       4,941  
   Self-insurance claim reserves
    5,087       5,309  
   Other current liabilities
    4,280       4,676  
          Total current liabilities
    60,531       53,749  
                 
Long term debt, less current maturities
    1,786       2,865  
Notes payable under revolving loan agreement
    47,510       40,714  
Capital lease obligations - less current maturities
    1,527       3,047  
Deferred gain on leases
    4,309       4,598  
Deferred income taxes, net
    160       138  
Other noncurrent liabilities
    1,682       1,624  
          Total liabilities
    117,505       106,735  
                 
Stockholders' equity:
               
  Common stock, $.0001 par value, authorized 20,000,000 shares; issued and outstanding
               
    3,797,947 shares and 3,797,947 shares, respectively
    1       1  
   Additional paid-in capital
    39,158       38,615  
   Retained earnings
    64,968       63,424  
          Total stockholders' equity
    104,127       102,040  
          Total liabilities and stockholders' equity
  $ 221,632       208,775  
See accompanying notes to unaudited consolidated financial statements.
 
 

 
Duckwall-ALCO Stores, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
(dollars in thousands, except share amounts)
 
(Unaudited)
 
                         
   
For the Thirteen Week
   
For the Thirty-Nine Week
 
   
Periods Ended
   
Periods Ended
 
   
November 1, 2009
   
November 2, 2008
   
November 1, 2009
   
November 2, 2008
 
                         
Net sales
  $ 111,495       114,880       352,191       349,692  
Cost of sales
    75,835       77,756       235,583       237,527  
Gross margin
    35,660       37,124       116,608       112,165  
                                 
Selling, general and administrative
    34,862       38,097       105,187       109,918  
Depreciation and amortization
    2,327       2,118       6,973       5,794  
           Total operating expenses
    37,189       40,215       112,160       115,712  
Operating income (loss) from continuing operations
    (1,529 )     (3,091 )     4,448       (3,547 )
                                 
Interest expense, net
    532       63       1,589       1,218  
                                 
Earnings (loss) from continuing operations before income taxes
    (2,061 )     (3,154 )     2,859       (4,765 )
                                 
                                 
Income tax expense (benefit)
    (626 )     (1,644 )     1,310       (2,329 )
                                 
Earnings (loss) from continuing operations
    (1,435 )     (1,510 )     1,549       (2,436 )
                                 
                                 
Loss from discontinued operations, net of income tax benefit
    (2 )     (155 )     (5 )     (1,825 )
                                 
Net earnings (loss)
  $ (1,437 )     (1,665 )     1,544       (4,261 )
                                 
Earnings (loss) per share
                               
     Basic
                               
         Continuing operations
  $ (0.38 )     (0.40 )     0.41       (0.64 )
         Discontinued operations
    -       (0.04 )     -       (0.48 )
                                 
         Net earnings (loss)
  (0.38 )     (0.44 )     0.41       (1.12 )
                                 
Earnings (loss) per share
                               
     Diluted
                               
         Continuing operations
  (0.38 )     (0.40 )     0.40       (0.64 )
         Discontinued operations
    -       (0.04 )     -       (0.48 )
                                 
         Net earnings (loss)
  (0.38 )     (0.44 )     0.40       (1.12 )
                                 
See accompanying notes to unaudited consolidated financial statements.
                         

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

Duckwall-ALCO Stores, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
(dollars in thousands)
 
(Unaudited)
 
   
For the Thirty-Nine Week
 
   
Periods Ended
 
   
November 1, 2009
   
November 2, 2008
 
             
Cash flows from operating activities:
           
Net earnings (loss)
  $ 1,544       (4,261 )
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
 
                 
Depreciation and amortization
    6,929       5,836  
Gain on sale of assets
    (70 )     14  
Share-based compensation
    601       34  
Deferred income tax expense, net
    422       3,595  
Changes in:
               
   Receivables
    (856 )     1,385  
   Prepaid income taxes
    4,226       (3,963 )
   Inventories
    (18,511 )     (37,859 )
   Prepaid expenses
    455       (770 )
   Accounts payable
    7,057       18,379  
   Accrued salaries and commissions
    (268 )     1,878  
   Accrued taxes other than income
    469       543  
   Self-insurance claim reserves
    (222 )     (253 )
   Other assets and liabilities
    (565 )     (2,519 )
      Net cash provided by (used in) operating activities
    1,211       (17,961 )
                 
Cash flows from investing activities:
               
Proceeds from the sale of assets
    73       169  
Acquisition of property and equipment
    (4,664 )     (7,578 )
      Net cash used in investing activities
    (4,591 )     (7,409 )
                 
Cash flows from financing activities:
               
Net borrowings under revolving loan agreement
    6,796       27,673  
Proceeds from stock sale
    -       90  
Repurchase of common stock
    -       (191 )
Principal payments under term loan
    (1,013 )     (951 )
Principal payments under capital lease obligations
    (1,444 )     (1,432 )
      Net cash provided by financing activities
    4,339       25,189  
                 
      Net increase (decrease) in cash and cash equivalents
    959       (181 )
Cash and cash equivalents at beginning of period
    4,744       5,501  
                 
Cash and cash equivalents at end of period
  $ 5,703       5,320  
                 
Supplemental disclosures of cash flow information:
               
Cash paid (received) during the period for:
               
Interest
  $ 1,594       1,834  
Income taxes
    (3,097     (828 )
                 
See accompanying notes to unaudited consolidated financial statements.
         
 
 
 
 
 
 
 
 
 

 

 
Duckwall-ALCO Stores, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except share and per share amounts or as otherwise noted)
(1)           Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Duckwall-ALCO Stores, Inc. and Subsidiaries (the "Company") are for interim periods and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the consolidated financial statements included in the Company's fiscal 2009 Annual Report. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations and cash flows for the interim periods. Because the Company’s business is moderately seasonal, the results from interim periods are not necessarily indicative of the results to be expected for the entire year.
 
Fiscal 2010 and 2009 are both 52-week years consisting of four thirteen week periods referred to as quarters. The thirteen weeks ended November 1, 2009 and November 2, 2008 are referred to herein as the third quarter of fiscal 2010 and 2009, respectively. 
 
The depreciation and amortization amount from the Consolidated Statements of Operations may not agree to the Consolidated Statements of Cash Flows due to the fact that a portion of the depreciation and amortization from the Consolidated Statements of Cash Flows is included in the loss from discontinued operations, net of income tax benefit line of the Consolidated Statements of Operations.
 
(2)           Principles of Consolidation

The consolidated financial statements include the accounts of the Company.  All significant intercompany transactions and balances have been eliminated in consolidation.
 
(3)           Share-Based Compensation

Effective with fiscal 2007, the Company began recognizing compensation for its share-based payments based on the fair value of the awards. Share-based payments consist of stock option grants. For the thirteen weeks ended November 1, 2009 and November 2, 2008, share-based compensation decreased pre-tax income by $155 and $169, respectively.   For the thirty-nine weeks ended November 1, 2009 and November 2, 2008, share-based compensation decreased pre-tax income by $601 and $34, respectively.  
 
Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.  Actual forfeitures exceeded estimated forfeitures for the thirteen weeks ended May 4, 2008, resulting in a reduction of previously recorded share-based compensation of $480. 
 
Stock Incentive Plan

Under our 2003 Incentive Stock Option Plan, options may be granted to officers and key employees, not to exceed 500,000 shares.  According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant.  Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100. In the event that the foregoing results in a portion of an option exceeding the $100 limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option.  At November 1, 2009, the Company had 95,750 shares authorized for future option grants.  The Company issues these grants from the unissued shares authorized.
  
Under our Non-Qualified Stock Option Plan for Non-Management Directors, options may be granted to Directors of the Company who are not otherwise officers or employees of the Company, not to exceed 200,000 shares.  According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant.  The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur.  All options under the plan shall be non-qualified stock options.  There are 77,500 shares remaining to be issued under this plan. 
 
 
 
 
 
 
 
 
 
 
 

 
 
6

Under our Non-Qualified Stock Option Agreement with Lawrence J. Zigerelli as part of his starting employment with the Company on July 1, 2008, Mr. Zigerelli was granted the right to purchase 10,000 shares of the Company’s common stock.  According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant.  The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur.  The options will terminate if Mr. Zigerelli ceases to be a full time employee of the Company.  The Company issues these grants from the unissued shares authorized. There are no shares remaining to be issued under this plan. 
 
The fair value of each option grant is separately estimated. The fair value of each option is amortized into share-based compensation on a straight-line basis over the requisite service period as discussed above.  We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model.  The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility.
 
The following summarizes information concerning stock option grants during fiscal 2010 and 2009:
 
               
     Fiscal 2009 Ended    
For the Thirteen Week Periods Ended
   
For the Thirty-Nine Week Periods Ended
 
   
February 1, 2009
   
November 1, 2009
   
November 2, 2008
   
November 1, 2009
   
November 2, 2008
 
Stock options granted
    414,500       10,000       10,000       45,000       384,500  
Weighted average exercise price
  $ 12.26       17.89       14.08       13.95       12.43  
Weighted average grant date fair value
  $ 4.16       7.86       5.19       5.95       4.18  

 
The weighted average for key assumptions used in determining the fair value of options granted in the thirteen and thirty-nine week periods ended November 1, 2009 and November 2, 2008, and a summary of the methodology applied to develop each assumption are as follows:
               
 
 
   
Fiscal 2009 Ended
   
For the Thirteen Week Periods Ended
   
For the Thirty-Nine Week Periods Ended
 
   
February 1, 2009
   
November 1, 2009
   
November 2, 2008
   
November 1, 2009
   
November 2, 2008
 
Expected price volatility
    36.6 %     50.2 %     38.0 %     51.3 %     36.1 %
Risk-free interest rate
    2.5 %     1.7 %     2.9 %     1.4 %     2.6 %
Weighted average expected lives in years
    4.5       4.8       4.8       4.3       4.5  
Dividend yield
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
 
EXPECTED PRICE VOLATILITY -- This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.

RISK-FREE INTEREST RATE -- This is the applicable U.S. Treasury rate for the date of the grant over the expected term.  An increase in the risk-free interest rate will increase share-based compensation.

EXPECTED LIVES -- This is the period of time over which the options granted are expected to remain outstanding and is based on management’s expectations in relation to the holders of the options. Options granted have a maximum term of five years. An increase in the expected life will increase share-based compensation.
 
DIVIDEND YIELD --- The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.

As of November 1, 2009, total unrecognized share-based compensation related to non-vested stock options is $1.1 million with a weighted average expense recognition period of 2.5 years.
 
(4)           Accounting for Income Taxes
 
The Company recorded decreases in gross unrecognized tax benefits, inclusive of related interest, of $8 for the thirty-nine week period ended November 1, 2009 and decreases of $2.3 million for the thirty-nine week period ended November 2, 2008, respectively.  None of the amounts recorded as unrecognized tax benefits would impact the effective income tax rate if recognized.

The statute of limitations for our federal income tax returns is open for 2005 through 2007.  We file in numerous state jurisdictions with varying statutes of limitation.  State returns are open from 2004 through 2007 or 2005 through 2007 depending on each state’s statute of limitations. 
   
(5)           Subsequent Events
 
The Company has evaluated subsequent events for potential disclosure or recognition through December 10, 2009, the issuance date of the financial statements.
 
 
 
 
 
7

 
(6)           Fair Value Measurements
  
The financial instruments of the Company consist of cash and cash equivalents, short-term receivables and accounts payable, accrued expenses and long-term debt instruments, including capital leases.   For notes payable under revolving loan, fair value approximates the carrying value due to the variable interest rate. Based on the borrowing rates currently available to the Company for debt with similar terms, the fair value of long-term debt at November 1, 2009 approximates its carrying amount of $3.2 million.  For all other financial instruments including cash and cash equivalents, short-term receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.
 
(7)           Earnings Per Share
 
    Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding.  Diluted net earnings per share reflects the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised, except for those periods with a loss.
 
The average number of shares used in computing earnings per share was as follows:
           
             
Thirteen Weeks Ended
 
Basic
   
Diluted
 
             
November 1, 2009
    3,797,947       3,797,947  
November 2, 2008
    3,811,943       3,811,943  
                 
                 
Thirty-Nine Weeks Ended
 
Basic
   
Diluted
 
                 
November 1, 2009
    3,797,947       3,876,907  
November 2, 2008
    3,812,249       3,812,249  
 
 (8)          Store Closings and Discontinued Operations
 
The Company closed 14 stores (ten ALCO stores and four Duckwall stores) in the first quarter of fiscal 2009.  The Company incurred costs associated with the store closings in the first quarter of fiscal 2009 consisting primarily of $436 of future lease costs (net of estimated sublease income of $1.3 million), lease termination costs of $470, and severance costs of $30.  The operations of these stores were reclassified to discontinued operations in the first quarter of fiscal 2009.  In addition to the 14 stores that were closed in the first quarter of fiscal 2009, three Duckwall stores were closed and were replaced by an ALCO store.  These three stores are shown in continuing operations.  One Duckwall store was closed during the second quarter of fiscal 2010.
 
The future lease costs were adjusted during the thirteen weeks ended November 1, 2009 for lease payments made.  The actual future lease costs could vary from these estimates.  A rollforward of the future lease costs balance is below:
 
Beginning balances as of August 2, 2009
 
$
105
 
Net lease payments made
   
(47
)
Ending balance as of November 1, 2009
 
$
58
 

In addition to the above store closing costs, the Company incurred severance costs of $1.9 million during the first quarter of fiscal 2009.  During the thirty-nine week periods ended November 1, 2009 and November 2, 2008, $511 and $937, respectively, was paid out.
 
(9)           New Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (FASB) modified FASB Accounting Standards Codification (ASC) Topic 825, Financial Instruments, and FASB ASC Topic 270, Interim Reporting, to extend the disclosure requirements related to the fair value of financial instruments to interim financial statements of publicly traded companies.  The Company adopted this guidance in the second quarter of fiscal 2010, the impact of which related only to disclosures and did not have a material effect on the Company’s financial condition, results of operations or cash flows.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8

 
  
In May 2009, the FASB modified FASB ASC Topic 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued and requires entities to disclose the date through which they have evaluated subsequent events. The Company adopted this guidance effective August 2, 2009. The adoption of this guidance changed certain financial statement disclosures but did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-01 Topic 105, Generally Accepted Accounting Principles which establishes the FASB ASC. The FASB ASC is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. The FASB ASC reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections.  The Company adopted this guidance effective August 2, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. This update is effective for the Company's fourth quarter fiscal 2010 and is not expected to have a significant impact on our financial condition, results of operation or cash flows.
 
(dollars in thousands except per share amounts or as otherwise noted)
 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act. These statements are subject to risks and uncertainties, as described below. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, store openings, store closings, payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company's management or Board of Directors, including plans or objectives relating to inventory, store development, marketing, competition, business strategy, store environment, merchandising, purchasing, pricing, distribution, transportation, store locations and information systems, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "could," "intends," "plans," "estimates", "projects" or "anticipates," variations thereof or similar expressions.
 
Forward-looking statements are not guarantees of future performance or results.  They involve risks, uncertainties and assumptions.  The Company's future results of operations, financial condition and business operations may differ materially from the forward-looking statements or the historical information stated in this Quarterly Report on Form 10-Q.  Stockholders and investors are cautioned not to put undue reliance on any forward-looking statement.

There are a number of factors and uncertainties that could cause actual results of operations, financial condition or business contemplated by the forward-looking statements to differ materially from those discussed in the forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company, including those factors described below. Other factors not identified herein could also have such an effect. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements and from historical information include, but are not limited to, those factors described below.

OVERVIEW
 
Operations.  The Company is a multi-regional broad line retailer operating 257 stores in 23 states in the central United States.  The thirteen weeks ended November 1, 2009 and November 2, 2008 are referred to herein as the third quarter of fiscal 2010 and 2009, respectively.  For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands, except as noted. 
 
Strategy.  The Company's overall business strategy involves identifying and opening stores in towns that will provide the Company with the highest return on investment.  The Company competes for retail sales with other entities, such as specialty retailers, mass merchandisers, dollar stores and the internet.
 
 
 
 
 
 
 
 
9

 
The Company is routinely evaluating the appropriate mix of merchandise to improve sales and gross margin performance.  The Company uses centralized purchasing, merchandising, pricing and warehousing to obtain volume discounts, improve efficiencies and achieve consistency among stores and the best overall results.  The Company utilizes information obtained from its point-of-sale system and perpetual inventory system to make more fact based decisions.
 
Recent Events.  The Company completed its store transformation project during June 2009.  The actual store level labor and benefit savings improvement is consistent with expectations, however, shrink improvement is below expectation.
 
Key Items in Third Quarter Fiscal 2010
 
The Company measures itself against a number of financial metrics to assess its performance.  Some of the important financial items during the third quarter of fiscal 2010 were:
 
·
Net sales decreased 2.9% to $111.5 million.  Same-store sales decreased 1.7% compared to the prior year third quarter.
·
Gross margin percentage decreased to 32.0% of sales, compared to 32.3% in the prior year third quarter.
·
Net loss per share was $0.38 in the third quarter of fiscal 2010 compared to net loss of $0.44 per share in the prior year third quarter.
·
The Company’s earnings from continuing operations before interest, taxes, depreciation and amortization, share-based compensation, preopening store costs, inventory review initiative and executive, staff severance and store transformation project costs (“Adjusted EBITDA”) for the third quarter 2010 was $955 compared to the prior year third quarter of $475. 
 
RESULTS OF OPERATIONS

Thirteen Weeks Ended November 1, 2009 Compared to Thirteen Weeks Ended November 2, 2008

Net Sales

Net sales for the third quarter of fiscal 2010 decreased $3.4 million, or 2.9%, to $111.5 million compared to $114.9 million for the third quarter of fiscal 2009.  Same-store sales decreased 1.7% when compared with the prior year same quarter.  
 
Gross Margin

Gross margin for the third quarter of fiscal 2010 decreased $1.5 million, or 3.9%, to $35.7 million compared to $37.1 million in the third quarter of fiscal 2009.  Gross margin as a percentage of sales was 32.0% for the third quarter of fiscal 2010, which decreased when compared to 32.3% for the third quarter of fiscal 2009.   The decrease in the gross margin percentage was primarily due to reduced new store allowances and increased shrink offset by reduced freight costs.  

SG&A

Selling, general and administrative (SG&A) expense decreased $3.2 million or 8.5%, to $34.9 million in the third quarter of fiscal 2010 compared to $38.1 million in the third quarter of fiscal 2009.   As a percentage of net sales, SG&A expenses for the third quarter of fiscal 2010 were 31.3%, compared to 33.2% for third quarter fiscal 2009.  The decrease in SG&A expenses is attributable to reduced store level labor and benefits of $791, store transformation project costs of $937, point-of-sale hardware lease expense of $489, advertising expense of $416 and preopening store costs of $340.  Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 31.1% and 31.9%, as percentage of net sales, for the third quarter fiscal 2010 and 2009, respectively.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense increased $209, or 9.9%, to $2.3 million in the third quarter of fiscal 2010 compared to $2.1 million in the third quarter of fiscal 2009.  
 
Interest Expense

Interest expense increased $469, or 744.4%, to $532 in the third quarter of fiscal 2010 compared to $63 in the third quarter of fiscal 2009.  The increased interest expense was due to the reversal of accrued interest of $605 related to the FIN 48 liability of the Company during the third quarter of fiscal 2009.
 
Income Taxes
 
The Company’s effective tax rate on earnings from continuing operations before income taxes in the third quarter of fiscal 2010 was 30.4% compared to 52.1% in the third quarter of fiscal 2009.  The effective tax rate is lower due to decreased state effective tax rates offset by the impact of permanent book and tax differences related to fiscal 2009 income tax returns.
 
Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $2 in the third quarter of fiscal 2010, compared to a loss of $155, net of income tax benefit, in the third quarter of fiscal 2009.  Three Duckwall stores that were closed during fiscal year 2009 and were replaced by an ALCO store are shown in continuing operations.  In addition, 14 ALCO stores were closed in the first quarter of fiscal 2009.  One Duckwall store was closed during the second quarter of fiscal 2010.   
 
 
 
10

Thirty-nine Weeks Ended November 1, 2009 Compared to Thirty-nine Weeks Ended November 2, 2008

Net Sales

Net sales for the thirty-nine week period of fiscal 2010 increased $2.5 million, or 0.7%, to $352.2 million compared to $349.7 million for the thirty-nine week period of fiscal 2009.  Same-store sales increased 0.2% when compared with the prior year.  
 
Gross Margin

Gross margin for the thirty-nine week period of fiscal 2010 increased $4.4 million, or 4.0%, to $116.6 million compared to $112.2 million in the thirty-nine week period of fiscal 2009.  Gross margin as a percentage of sales was 33.1% for the thirty-nine week period of fiscal 2010, which increased when compared to 32.1% for the thirty-nine week period of fiscal 2009.   The increase in the gross margin percentage was primarily due to reduced markdowns and freight costs offset by reduced new store allowances.  The thirty-nine week period of fiscal 2009 Adjusted Gross Margin as a percentage of sales was 32.5%, excluding the impact of the inventory review initiative.

SG&A

Selling, general and administrative (SG&A) expense decreased $4.7 million or 4.3%, to $105.2 million in the thirty-nine week period of fiscal 2010 compared to $109.9 million in the thirty-nine week period of fiscal 2009.   As a percentage of net sales, SG&A expenses for the thirty-nine week period of fiscal 2010 were 29.9%, compared to 31.4% for thirty-nine week period fiscal 2009.  The decrease in SG&A expenses is attributable to reduced severance charges of $1.9 million, preopening store costs of $1.8 million, point-of-sale hardware lease expense of $1.4 million and store level labor and benefits of $1.2 million offset by increased real property rent expense of $1.3 million and store transformation project costs of $1.2 million.  Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 29.1% and 30.1%, as percentage of net sales, for the thirty-nine week periods of fiscal 2010 and 2009, respectively.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense increased $1.2, or 20.3%, to $7.0 million in the thirty-nine week period of fiscal 2010 compared to $5.8 million in the thirty-nine week period of fiscal 2009.  
 
Interest Expense

Interest expense increased $371, or 30.5%, to $1.6 million in the thirty-nine week period of fiscal 2010 compared to $1.2 million in the thirty-nine week period of fiscal 2009.  The increased interest expense was due to the reversal of accrued interest of $605 related to the FIN 48 liability of the Company during the third quarter of fiscal 2009.
 
Income Taxes
 
The Company’s effective tax rate on earnings from continuing operations before income taxes in the thirty-nine week period of fiscal 2010 was 45.8% compared to 48.9% in the thirty-nine week period of fiscal 2009.  The effective tax rate is lower due to decreased state effective tax rates offset by the impact of permanent book and tax differences related to fiscal 2009 income tax returns.
 
Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $5 in the thirty-nine week period of fiscal 2010, compared to a loss of $1.8 million, net of income tax benefit, in the thirty-nine week period of fiscal 2009.  Three Duckwall stores that were closed during fiscal year 2009 and were replaced by an ALCO store are shown in continuing operations.  In addition, 14 ALCO stores were closed in the thirty-nine week period of fiscal 2009.  One Duckwall store was closed during the thirty-nine week period of fiscal 2010.   
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11

 Certain Non-GAAP Financial Measures

The Company has included Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, non-GAAP performance measures, as part of its disclosure as a means to enhance its communications with stockholders. Certain stockholders have specifically requested this information to assist them in comparing the Company to other retailers that disclose similar non-GAAP performance measures. Further, management utilizes these measures in internal evaluation; review of performance and to compare the Company’s financial measures to those of its peers. Adjusted EBITDA differs from the most comparable GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted Gross Margin and Adjusted SG&A. These items are excluded by management to better evaluate normalized operational cash flow and expenses excluding unusual, inconsistent and non-cash charges.  To compensate for the limitations of evaluating the Company's performance using Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, management also utilizes GAAP performance measures such as gross margin return on investment, return on equity and free cash flow.  As a result, Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations.
 
   
For the Thirteen Week Periods Ended
   
For the Thirty-Nine Week Periods Ended
 
SG&A Expenses Breakout
 
November 1, 2009
   
November 2, 2008
   
November 1, 2009
   
November 2, 2008
 
Store support center (1)
  $ 5,397       6,551       17,515       19,318  
Distribution center
    2,258       2,608       6,490       7,186  
401K expense
    101       115       297       359  
Same-store SG&A
    26,575       27,896       76,690       78,450  
Non same-store SG&A (2)
    376       758       3,594       4,571  
Share-based compensation
    155       169       601       34  
SG&A as reported
    34,862       38,097       105,187       109,918  
Less:
                               
Share-based compensation
    (155 )     (169 )     (601 )     (34 )
Preopening store costs (2)
    (2 )     (342 )     (2     (1,837 )
Executive and staff severance (1)
    -       -       -       (1,942 )
Store transformation project costs (1)
    -       (937 )     (2,096 )     (937 )
Adjusted SG&A
  $ 34,705       36,649       102,488       105,168  
                                 
Adjusted SG&A as % of sales
    31.1 %     31.9 %     29.1 %     30.1 %
                                 
Sales per average selling square foot (3)
  $ 24.60       25.83     $ 77.71       79.98  
                                 
Adjusted Gross Margin dollars per average selling square feet (3)(4)
  $ 7.87       8.35     $ 25.73       25.96  
                                 
Adjusted SG&A per average selling square foot (3)
  $ 7.66       8.24     $ 22.61       24.05  
                                 
Adjusted EBITDA per average selling square foot (3)(5)
  $ 0.21       0.11     $ 3.12       1.91  
                                 
Average inventory per average selling square feet (3)(6)(7)
  $ 28.80       28.95     $ 28.64       28.48  
                                 
Average selling square feet (3)
    4,532       4,447       4,532       4,372  
                                 
Total stores operating beginning of period
    257       257       258       262  
Total stores operating end of period
    257       259       257       259  
Total stores less than twelve months old
                    0          
Total non same-stores
                    1          
                                 
Supplemental Data:
                               
Same-store adjusted gross margin dollar change
    0.0  %     (1.8 )%     1.3  %     (1.4 )%
Same-store SG&A dollar change
    (4.7 )%     (0.9 )%     (2.2 )%     2.5  %
Same-store total customer count change
    (1.2 )%     (5.4 )%     (0.7 )%     (4.0 )%
Same-store average sale per ticket change
    (2.0 )%     4.0  %     (0.6 )%     4.4  %
                                 
                                 
(1) Store support center includes executive and staff severance for first quarter fiscal 2009 and store transformation project costs for first and second quarters fiscal 2010 and the third quarter of fiscal 2009
 
(2) Non same-stores are those stores opened in Fiscal 2009 which have not reached their fourteenth period of operation
 
(3) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2
 
(4) Adjusted Gross Margin includes $1.3 million inventory review initiative charge added back in first quarter fiscal 2009
 
(5) Adjusted EBITDA per selling square foot is calculated as Adjusted EBITDA divided by selling square feet
 
(6) Average store level merchandise inventory for fiscal 2010 and 2009 is calculated as beginning inventory plus ending inventory divided by 2
 
(7) Excludes inventory for unopened stores
                               

 
 
 
 
12

Fiscal 2010 Compared to Fiscal 2009

Store support center expenses for fiscal 2010 decreased $1.8 million, or 9.3%.  The decrease was primarily due to reduced severance costs of $1.9 million, health insurance costs of $406, accounting fees of $321 and market research fees of $274 offset by store transformation project costs of $1.2 million.
 
Same-store SG&A expenses decreased $1.8 million, or 2.2%.  The decrease was primarily due to reduced point-of-sale hardware lease expense of $1.4 million, labor expenses of $1.2 million and benefits expense of $625 offset by increased real property rent expense of $1.3 million.
 
Non same-store SG&A expenses decreased $977, or 21.4%.  The Company has not opened any stores since the third quarter of fiscal 2009.
 
Reconciliation and Explanation of Non-GAAP Financial Measures

The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss) from continuing operations:
 
         
For the Twenty-Six
   
Trailing Twelve
   
For the Thirteen
   
Trailing Twelve
 
         
Week Periods Ended
   
Periods Ended
   
Week Periods Ended
   
Periods Ended
 
   
Fiscal 2009
   
August 2, 2009
   
August 3, 2008
   
August 2, 2009
   
November 1, 2009
   
November 2, 2008
   
November 1, 2009
 
Net earnings (loss) from continuing operations (1)
  $ (2,996 )     2,988       (923 )     915       (1,435 )     (1,510 )     990  
Plus:
                                                       
Interest
    1,867       1,058       1,156       1,769       532       63       2,238  
Taxes (1)
    (2,090 )     1,932       (690 )     532       (626 )     (1,644 )     1,550  
Depreciation and amortization (1)
    9,302       4,645       3,677       10,270       2,327       2,118       10,479  
Share-based compensation
    186       446       (135 )     767       155       169       753  
Preopening store costs (2)
    1,846       -       1,495       351       2       342       11  
Inventory review initiative
    1,345       -       1,345       -       -       -       -  
Executive and staff severance
    1,942       -       1,942       -       -       -       -  
Store transformation project costs
    2,220       2,096       -       4,316       -       937       3,379  
=Adjusted EBITDA (1)(3)(4)(5)
    13,622       13,165       7,867       18,920       955       475       19,400  
                                                         
Cash
    4,744       5,446       4,653       5,446       5,703       5,320       5,703  
Debt
    49,841       48,802       36,964       48,802       54,180       58,303       54,180  
Debt, net of cash
  $ 45,097       43,356       32,311       43,356       48,477       52,983       48,477  
                                                         
(1) These amounts will not agree with the fiscal 2009 first quarter 10-Q filing due to the one store the Company closed in the third quarter of fiscal 2009. These amounts will not agree with the fiscal year end 2009 or fiscal 2010 first quarter 10-Q filing due to the one store the Company closed in the second quarter of fiscal 2010. These stores are now shown in discontinued operations.
 
(2) These costs are not consistent quarter to quarter as the Company does not open the same number of stores in each quarter of each fiscal year. These costs are directly associated with the number of stores that have been or will be opened and are incurred prior to the grand opening of each store.
 
(3) For the trailing twelve periods ended November 1, 2009 the average open weeks for the Company's one non same-store is 59 weeks.
 
(4) During fiscal year 2009, the Company made a change in its Executive Management team and Board of Directors resulting in several initiatives to reduce certain SG&A expenses. For the trailing twelve periods ended November 1, 2009, these initiatives resulted in approximately $5.7 million reduced SG&A expenses when compared to the same prior year trailing twelve periods.  The initiatives include, but are not limited to, executive and staff reduction, reduced ALCO same-store hourly wages, advertising expenses, net of coop offset and floor care services along with reduced total Company insurance and travel expenses.
 
(5) In addition to continued efforts regarding the fiscal 2009 cost reduction initiatives, the Company has also implemented new initiatives for fiscal year 2010. The fiscal 2010 initiatives include, but are not limited to, reduced point-of-sale hardware lease expense, energy expense and accident reduction programs. These initiatives achieved approximately $2.0 million in reduced SG&A savings for the thirty-nine weeks of fiscal 2010 when compared to the prior year same period.
 
 
 
 
 
13

LIQUIDITY AND CAPITAL RESOURCES
 
The Company's primary sources of funds are cash flows from operations and borrowings under its revolving loan credit facility.
 
At November 1, 2009, working capital (defined as current assets less current liabilities) was $125.9 million compared to $129.2 million at November 2, 2008.  The decrease in working capital was primarily attributable to a decrease in prepaid income taxes as the Company received a $3.4 million refund due to fiscal 2009 net loss carrybacks and tax method changes.
 
The Company uses its revolving loan credit facility and vendor trade credit financing (accounts payable) to fund the build up of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements. The revolving loan credit facility provides up to $105 million of financing in the form of notes payable and letters of credit. The loan agreement expires in January 2011. The revolving loan note payable and letter of credit balance at November 1, 2009 was $55.4 million, resulting in an available line of credit at that date of $49.6 million, subject to a borrowing base calculation. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables.  The loan agreement contains various restrictions that are applicable when outstanding borrowings exceed $77.5 million, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payments of dividends. The Company's loan agreement contains various covenants including limitations on additional indebtedness and certain financial tests, as well as various subjective acceleration clauses. As of December 10, 2009, the Company believes it is in compliance with all covenants and subjective acceleration clauses of the debt agreements. The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with Emerging Issues Task Force (EITF) Issue 95- 22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement. Accordingly, this obligation has been classified as a long-term liability in the accompanying consolidated balance sheet.  Short-term trade credit represents a significant source of financing for inventory to the Company. Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases.
 
Cash provided by (used in) operating activities in the thirty-nine week periods of fiscal 2010 and 2009 was $1.2 million and $(18.0) million, respectively.  The increase in the amount of cash provided by operating activities in the thirty-nine week period of fiscal 2010 compared to the thirty-nine week period of fiscal 2009 was primarily due to $8.2 million change in prepaid income taxes, $8.0 million reduction in inventory, net of accounts payable decrease and $5.8 million in increased net earnings.

Cash used in acquisition of property and equipment in the thirty-nine week periods of fiscal 2010 and 2009 was $4.6 million and $7.4 million, respectively.
 
Cash provided by financing activities in the thirty-nine week periods of fiscal 2010 and 2009 was $4.3 million and $25.2 million, respectively.  Net borrowings on the revolving loan generated $6.8 million during the thirty-nine week period ended November 1, 2009 compared to $27.7 million during the same period in the prior fiscal year.

For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended February 1, 2009. There have been no significant developments with respect to our contractual obligations since February 1, 2009.

As of December 10, 2009, the Company has repurchased 22,197 shares of stock since August 13, 2008.  The average price paid was $12.86.  Since the fiscal year end February 1, 2009, the Company has not repurchased any shares.
 
OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that affect the Company’s current or future financial condition.
 
BUSINESS OPERATIONS
 
The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories for the thirteen and thirty-nine week periods of fiscal 2010 and 2009:

   
For the Thirteen Week Periods Ended
   
For the Thirty-Nine Week Periods Ended
 
   
November 1, 2009
   
November 1, 2008
   
November 1, 2009
   
November 1, 2008
 
Merchandise Category:
                       
Consumables and commodities
    32 %     32 %     30 %     32 %
Electronics, entertainment, sporting goods, toys and outdoor living
    21 %     20 %     25 %     25 %
Apparel and accessories
    18 %     22 %     17 %     19 %
Home furnishings and décor
    18 %     14 %     17 %     13 %
Other
    11 %     12 %     11 %     11 %
                                 
Total
    100 %     100 %     100 %     100 %
 
 
 
 
 
 
14

NEW ACCOUNTING PRONOUNCEMENTS
 
In April 2009, the FASB modified FASB ASC Topic 825, Financial Instruments, and FASB ASC 270, Interim Reporting, to extend the disclosure requirements related to the fair value of financial instruments to interim financial statements of publicly traded companies.  The Company adopted this guidance in the second quarter of fiscal 2010, the impact of which related only to disclosures and did not have a material effect on the Company’s financial condition, results of operations or cash flows.
 
In May 2009, the FASB modified FASB ASC Topic 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued and requires entities to disclose the date through which they have evaluated subsequent events. The Company adopted this guidance effective August 2, 2009. The adoption of this guidance changed certain financial statement disclosures but did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In June 2009, the FASB issued ASU No. 2009-01 Topic 105, Generally Accepted Accounting Principles which establishes the FASB ASC. The FASB ASC is the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. The FASB ASC reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections.  The Company adopted this guidance effective August 2, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
 
In August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. This update is effective for the Company's fourth quarter fiscal 2010 and is not expected to have a significant impact on our financial condition, results of operation or cash flows.
 
 
INSTRUMENTS ENTERED INTO OTHER THAN FOR TRADING – INTEREST RATE RISK
 
The Company is exposed to various types of market risk in the normal course of its business, including the impact of interest rate changes.  The Company may enter into interest rate swaps to manage its exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts.  The Company does not currently hold any derivative instruments and would enter into such instruments solely for cash flow hedging purposes and not for trading purposes.

As described under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources", the Company has a variable interest rate debt facility that is subject to interest rate risk.  The Company uses this facility to meet the short-term needs of its capital improvements and inventory purchases and other operating activities.  These obligations expose the Company to variability in interest payments due to changes in interest rates.  If interest rates increase, interest expense increases.  Conversely, if interest rates decrease, interest expense also decreases. Based on the Company’s current borrowings under its revolving credit facility, if interest rates were to increase 100 basis points on an annual basis interest expense would increase $441. 
 
The Company has and continues to analyze its debt structure in relation to interest rate risk and believes the mix of debt instruments utilized by the Company (revolving line of credit, term loans, capital leases and operating leases) adequately addresses these risk issues.  This process of evaluation is continuous and the Company will adjust its debt structure as is appropriate depending on market conditions.
 
 
(a)  Evaluation of Disclosure Controls and Procedures
 
The Company carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of November 1, 2009. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of November 1, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
(b)   Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting during fiscal 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 
15

 
 
There are no material pending legal proceedings other than routine litigation incidental to the business to which the Company is a party or to which any property is subject.

ITEM 1A.  RISK FACTORS
 
There have been no material changes to our risk factors as previously disclosed in our Form 10-K for the fiscal year ended February 1, 2009.
 
 
On March 23, 2006, the Board of Directors of the Company authorized the Company to repurchase up to 200,000 shares of Common Stock, of which 25,534 shares had been purchased as of December 10, 2009.  On August 13, 2008 the Company announced that it was resuming its stock repurchase program.  Since August 13, 2008, 22,197 shares have been repurchased.  The following are details of repurchases under this program for the period covered by this report, in accordance with Rule 10b-1 and Rule 10b-18 of the Securities Exchange Act of 1934:
 
               
Total Number
   
Maximum Number
 
               
of Shares
   
of Shares
 
   
Total Number Of
         
Purchased as Part
   
that May Yet
 
   
Shares
   
Average Price Paid
   
of Publicly Announced
   
Be Purchased Under
 
Period
 
Purchased
   
per Share
   
Plans or Programs
   
the Plans or Programs
 
As of August 2, 2009
   
25,534
   
$
15.16
     
25,534
     
174,466
 
                                 
Third Quarter:
                               
    08/03/09 - 08/30/09
   
-
     
-
     
-
     
174,466
 
    08/31/09 - 10/04/09
   
-
     
-
     
-
     
174,466
 
    10/05/09 - 11/01/09
   
-
     
-
     
-
     
174,466
 
     
-
             
-
     
174,466
 
                                 
As of November 1, 2009
   
25,534
   
$
15.16
     
25,534
     
174,466
 
 
On July 1, 2008, the Company entered into a Stock Purchase Agreement with Lawrence J. Zigerelli as part his starting employment at the Company.  Mr. Zigerelli purchased 10,000 shares of the Company’s common stock.  The purchase price was $9.05 which was the closing price of the stock on the NASDAQ Global Market on the date of the agreement.  The agreement was executed in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act.  The proceeds of this transaction were used by the Company for general purposes.
 
 
Not applicable.
 
 
None.
 
 
None.
 
ITEM 6.  EXHIBITS
 
See the Exhibit Index immediately following the signature page hereto.
 
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.

DUCKWALL-ALCO STORES, INC.
    (Registrant)

/s/ Donny R. Johnson
    Donny R. Johnson
    Chief Financial Officer – Executive Vice President
Signing on behalf of the registrant and as Principal Financial Officer
 
   
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EXHIBIT INDEX

3.1
Articles of Incorporation of Duckwall-ALCO Stores, Inc., amended as of June 13, 1994 and restated solely for filing with the Securities and Exchange Commission (filed as Exhibit 3.1 to Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference).
   
3.2
Bylaws of Duckwall-ALCO Stores, Inc. (filed as Exhibit 3.2 to Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference).
   
4.1
Specimen of Duckwall-ALCO Stores, Inc. Common Stock Certificate.  (filed as Exhibit 4.1 to Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2008 and incorporated herein by reference).
 
4.2
Reference is made to the Amended and Restated Articles of Incorporation described under 3.1 above and Bylaws described under 3.2 above.
 
10.1
Employment Agreement dated August 25, 2008 between the Company and Edmond C. Beaith is incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of the Company dated August 25, 2008.
   
10.2
Separation Agreement and Release, dated as of August 1, 2008, between the Company and Anthony C. Corradi, including consulting agreement is incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of the Company dated August 1, 2008.
   
10.3
Employment Agreement dated December 11, 2009 between the Company and Jim M. Spencer is incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of the Company dated December 17, 2009.
   
10.4
Separation Agreement and Release, dated as of February 4, 2009, between the Company and Phillip D. Hixon is incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of the Company dated February 4, 2009.
   
10.5
Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Mr. Zigerelli is incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K of the Company dated June 3, 2009.
   
10.6
Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Ms. Gilmartin is incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of the Company dated June 3, 2009.
   
31.1
Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated December 10, 2009, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of Chief Financial Officer of Duckwall-ALCO Stores, Inc. dated December 10, 2009, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc, dated December 10, 2009, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended November 1, 2009 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.
   
32.2
Certification of Chief Financial Officer of Duckwall-ALCO Stores, Inc., dated December 10, 2009, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended November 1, 2009 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17

Signature and Title
Date
   
/s/ Lawrence J. Zigerelli
December 10, 2009
Lawrence J. Zigerelli
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
   
/s/ Donny R. Johnson
December 10, 2009
Donny R. Johnson
 
Executive Vice President - Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
   
/s/ Raymond A.D. French
December 10, 2009
Raymond A.D. French
 
Director
 
   
/s/ Dennis E. Logue
December 10, 2009
Dennis E. Logue
 
Director
 
   
/s/ Lolan C. Mackey
December 10, 2009
Lolan C. Mackey
 
Director
 
   
/s/ Royce L. Winsten
December 10, 2009
Royce L. Winsten
 
Director - Chairman of Board
 
   
/s/ James V. Worth
December 10, 2009
James V. Worth
 
Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

18