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EX-32.1 - EXHIBIT 32.1 - ALCO STORES INCex32_1.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 May 4, 2014
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20269
 
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.)
 
 
751 Freeport Parkway
 
Coppell, Texas
 
75019
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number including area code: (469) 322-2900
 
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 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 o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 o
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company x
(Do not check if a 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 o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
Common Stock, $0.0001 par value, outstanding as of June 17, 2014:  3,258,162 shares
 


ALCO STORES, INC.
TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
 
Item 1.
3
 
 
3
 
 
4
 
 
5
 
Item 2.
11
 
Item 3.
17
 
 
 
 
PART II
OTHER INFORMATION
 
 
Item 1.
18
 
Item 1A.
19
 
Item 2.
19
 
Item 3.
19
 
Item 4.
19
 
Item 5.
19
 
Item 6.
20
 
 
 
 
 
23

PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

ALCO Stores, Inc.
Balance Sheets
(dollars in thousands, except share data)
 
 
 
May 4,
2014
   
February 2,
2014
 
Assets
 
(Unaudited)
   
 
Current assets:
 
   
 
Cash
 
$
1,434
   
$
2,230
 
Receivables
   
14,243
     
12,305
 
Inventories
   
165,751
     
162,670
 
Prepaid expenses
   
3,519
     
3,824
 
Property held for sale
   
568
     
568
 
Total current assets
   
185,515
     
181,597
 
 
               
Property and equipment, at cost:
               
Land and land improvements
   
6,265
     
5,543
 
Buildings and building improvements
   
15,245
     
15,245
 
Furniture, fixtures and equipment
   
78,790
     
78,776
 
Transportation equipment
   
1,009
     
1,009
 
Leasehold improvements
   
19,715
     
19,715
 
Construction work in progress
   
1,700
     
1,445
 
Total property and equipment
   
122,724
     
121,733
 
Less accumulated depreciation and amortization
   
86,531
     
84,805
 
Net property and equipment
   
36,193
     
36,928
 
 
               
Property under capital leases
   
24,957
     
24,957
 
Less accumulated amortization
   
10,648
     
10,424
 
Net property under capital leases
   
14,309
     
14,533
 
 
               
Deferred income taxes — non current
   
41
     
41
 
Other non-current assets
   
2,292
     
1,994
 
Total assets
 
$
238,350
   
$
235,093
 
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Current maturities of equipment financing
 
$
282
   
$
 
Current maturities of capital lease obligations
   
501
     
523
 
Accounts payable
   
46,435
     
28,817
 
Accrued income tax
   
98
     
108
 
Accrued salaries and commissions
   
2,722
     
3,361
 
Accrued taxes other than income taxes
   
4,836
     
4,741
 
Self-insurance claim reserves
   
4,639
     
4,493
 
Deferred income taxes
   
41
     
41
 
Other current liabilities
   
3,109
     
3,935
 
Total current liabilities
   
62,663
     
46,019
 
 
               
Notes payable under revolving loan
   
85,229
     
92,540
 
Notes payable equipment financing
   
1,798
     
 
Capital lease obligations - less current maturities
   
15,225
     
15,345
 
Deferred gain on leases
   
2,570
     
2,666
 
Other noncurrent liabilities
   
2,722
     
2,381
 
Total liabilities
   
170,207
     
158,951
 
 
               
Stockholders’ equity:
               
Common stock, $.0001 par value, authorized 20,000,000 shares;  3,258,162 shares issued and outstanding, respectively
   
1
     
1
 
Additional paid-in capital
   
37,071
     
36,937
 
Retained earnings
   
31,071
     
39,204
 
Total stockholders’ equity
   
68,143
     
76,142
 
Total liabilities and stockholders’ equity
 
$
238,350
   
$
235,093
 
 

See accompanying notes to unaudited financial statements.
ALCO Stores, Inc.
Statements of Operations
(dollars in thousands, except per share amounts)
(Unaudited)

 
 
Thirteen Week Periods Ended
 
 
 
May 4, 2014
   
May 5, 2013
 
Net sales
 
$
104,708
   
$
109,173
 
Cost of sales
   
74,269
     
76,887
 
 
               
Gross margin
   
30,439
     
32,286
 
 
               
Selling, general and administrative
   
32,358
     
31,198
 
Depreciation and amortization expenses
   
1,943
     
2,026
 
 
               
Total operating expenses
   
34,301
     
33,224
 
 
               
Operating loss
   
(3,862
)
   
(938
)
 
               
Interest expense
   
967
     
1,053
 
 
               
Loss from continuing operations before income taxes
   
(4,829
)
   
(1,991
)
 
               
Income tax benefit
   
     
(742
)
 
               
Loss from continuing operations
   
(4,829
)
   
(1,249
)
 
               
Loss from discontinued operations, net of income tax benefit of $0 and $0.3 in 2015 and 2014, respectively
   
(3,304
)
   
(419
)
Net loss
 
$
(8,133
)
 
$
(1,668
)
 
               
Loss per share
               
Basic
               
Continuing operations
 
$
(1.48
)
 
$
(0.38
)
Discontinued operations
   
(1.01
)
   
(0.13
)
 
               
Net loss per share
 
$
(2.49
)
 
$
(0.51
)
 
               
Loss per share
               
Diluted
               
Continuing operations
 
$
(1.48
)
 
$
(0.38
)
Discontinued operations
   
(1.01
)
   
(0.13
)
 
               
Net loss per share
 
$
(2.49
)
 
$
(0.51
)
 

See accompanying notes to unaudited financial statements.

ALCO Stores, Inc.
Statements of Cash Flows
(dollars in thousands)
(Unaudited)

 
 
Thirteen Week Periods Ended
 
 
 
May 4,
2014
   
May 5,
2013
 
 
 
   
 
Cash flows from operating activities:
 
   
 
Net loss
 
$
(8,133
)
 
$
(1,668
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
 
               
Depreciation and amortization
   
1,948
     
2,181
 
Gain on sale of assets
   
     
 
Share-based compensation expense
   
134
     
140
 
Deferred income tax expense
   
     
(1,110
)
Changes in:
               
Receivables
   
(1,937
)
   
405
 
Prepaid expenses
   
306
     
308
 
Inventories
   
(3,081
)
   
(23,944
)
Accounts payable
   
17,620
     
18,995
 
Accrued salaries and commissions
   
(639
)
   
23
 
Accrued taxes other than income
   
95
     
363
 
Self-insured claims reserves
   
146
     
(343
)
Income taxes payable
   
(10
)
   
 
Other assets and liabilities
   
(880
)
   
(2,222
)
Net cash provided by (used in) operating activities
   
5,569
     
(6,872
)
 
               
Cash flows from investing activities:
               
Proceeds from the sale of assets
   
42
     
 
Acquisition of property and equipment
   
(1,035
)
   
(1,383
)
Net cash used in investing activities
   
(993
)
   
(1,383
)
 
               
Cash flows from financing activities:
               
Borrowings on revolving loan credit agreement
   
24,541
     
51,093
 
Repayments on revolving loan credit agreement
   
(31,852
)
   
(42,912
)
Proceeds from equipment financing
   
2,281
     
 
Repayments on equipment financing
(201 )
Principal payments under capital lease obligations
   
(141
)
   
(163
)
Net cash provided by (used in) financing activities
   
(5,372
)
   
8,018
 
 
               
Net decrease in cash and cash equivalents
   
(796
)
   
(237
)
Cash at beginning of period
   
2,230
     
3,160
 
 
               
Cash at end of period
 
$
1,434
   
$
2,923
 
 

 
Supplemental cash flow information:
Interest, excluding interest on capital lease obligations and amortization of debt financing costs
 
$
588
   
$
655
 
Net income tax paid
 
$
10
   
$
101
 
 
See accompanying notes to unaudited financial statements.
ALCO STORES, INC.
Notes to Unaudited Financial Statements
(dollars in thousands, except share data and per share amounts)
 
(1) Basis of Presentation
 
The accompanying unaudited financial statements of ALCO Stores, Inc. (the "Company") are for interim periods and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements.  The accompanying unaudited financial statements should be read in conjunction with the financial statements included in the Company's fiscal 2014 Annual Report on Form 10-K. In the opinion of management of the Company, the accompanying unaudited 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.
 
The Company’s fiscal year ends on the Sunday nearest to January 31.  Fiscal years 2015 and 2014 consist of 52 weeks, further consisting of four thirteen week periods, with each period referred to as a quarter.  The thirteen week periods ended May 4, 2014 and May 5, 2013 are referred to herein as the first quarter of fiscal 2015 and 2014, respectively.
 
Same-stores are those stores which were open at the end of the reporting period, had reached their fourteenth month of operation, and include store locations, if any, that had experienced a remodel, an expansion, or relocation.  Same-stores also include the Company’s transactional website.
 
Non same-stores are those stores which have not reached their fourteenth month of operation.
 
The depreciation and amortization amounts from the Statements of Operations may not agree to the related amounts in the Statements of Cash Flows due to the fact that a portion of the depreciation and amortization is included in loss from discontinued operations, net of income tax benefit in the Statements of Operations.
 
(2)
Recent Accounting Pronouncements
 
Revenue from Contracts with Customers
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of its fiscal year ending January 28, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Financial Statements.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
 
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance amends previous guidance related to the criteria for reporting a disposal as a discontinued operation by elevating the threshold for qualification for discontinued operations treatment to a disposal that represents a strategic shift that has a major effect on an organization’s operations or financial results. This guidance also requires expanded disclosures for transactions that qualify as a discontinued operation and requires disclosure of individually significant components that are disposed of or held for sale but do not qualify for discontinued operations reporting. This guidance is effective prospectively for all disposals or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted, or the beginning of the fiscal year ending January 31, 2016 for the Company. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Financial Statements.

(3) Share-Based Compensation
 
The Company recognizes compensation expense for its share-based payments based on the fair value of the awards at grant date.  Share-based payments consist of stock option grants and the related compensation cost is recognized over the requisite service period of the award.
 
Total share-based compensation expense (a component of selling, general and administrative expenses) is summarized as follows:
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4, 2014
   
May 5, 2013
 
 
 
   
 
Share-based compensation expense before income taxes
 
$
134
     
140
 
Income tax benefit
   
     
(53
)
 
               
Share-based compensation expense net of income tax benefit
 
$
134
     
87
 
 
               
Effect on:
               
Basic earnings per share
 
$
0.04
     
0.03
 
Diluted earnings per share
 
$
0.04
     
0.03
 
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.
 
Equity Incentive Plan
 
In May 2003, the stockholders approved the 2003 ALCO Stores, Inc. Incentive Stock Option Plan and such plan was amended in 2010 to permit optionees to make a cashless, net exercise of their stock options (the 2003 ALCO Stores, Inc. Incentive Stock Option Plan, as amended is hereinafter referred to as the “2003 Plan”).  There are 500,000 shares of Common Stock authorized for issuance upon exercise of options under the 2003 Plan.  According to the terms of the 2003 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 $0.1 million.  In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a nonqualified stock option.  At May 4, 2014, the Company had 280,875 remaining shares authorized for future option grants.  Upon exercise, the Company issues these shares from the unissued shares authorized. The 2003 Plan had a term of ten years and options could no longer be granted under the 2003 Plan after May 2013. Therefore, the Compensation Committee created a new stock option plan that was voted upon by the Company’s stockholders during the 2012 annual meeting to replace the 2003 Plan.
 
On June 27, 2012, the Company's stockholders approved the Company's 2012 Equity Incentive Plan (the "2012 Plan"), which is administered by the Compensation Committee of the Company's Board of Directors.  Under the 2012 Plan, the Company may grant up to 500,000 shares of Company stock in the form of stock options, restricted stock, stock appreciation rights and other stock awards to officers, key employees and consultants of the Company and its affiliates; provided however, the Company's directors are not permitted to be participants in the 2012 Plan.  The Compensation Committee has broad discretion to administer the 2012 Plan, interpret its provisions, and adopt policies for implementing purposes of the 2012 Plan.  This discretion includes the power to select the persons who will receive awards, determine the form, terms and conditions of any such awards, and interpret, construe and apply such terms and conditions. According to the terms of the 2012 Plan, the per share exercise price of stock 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 ten years from the date of grant.  The stock options, awards and rights granted under the Plan vest over a certain period of time, as determined by the Compensation Committee in its sole discretion, beginning from the grant date unless certain Company events occur as further provided under the terms of the Plan.  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 $0.1 million. In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option. No more than 100,000 shares of the Company's stock may be awarded in a single calendar year to any individual participating in the 2012 Plan.  At May 4, 2014, the Company had 402,500. remaining shares authorized for future option grants.  Upon exercise, the Company issues these shares from the unissued shares authorized.  The 2012 Plan will expire on June 27, 2022.
 
Under our Non-Qualified Stock Option Plan for Non-Management Directors (the “Director Plan”), 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 Director 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 Director Plan shall be non-qualified stock options. At May 4, 2014, the Company had 76,457 remaining shares to be issued under this plan. Upon exercise, the Company will issue these shares from the unissued shares authorized.
 
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 assumptions used in determining the fair value of options granted and a summary of the methodology applied to develop each assumption are as follows:
 
 
 
Fiscal 2014 Ended
   
Thirteen Week Periods Ended
 
 
 
February 2, 2014
   
May 4, 2014
   
May 5, 2013
 
Stock options granted
   
129,500
     
     
 
 
                       
Weighted average exercise price
 
$
9.97
   
$
   
$
 
 
                       
Weighted average grant date fair value (per share)
 
$
4.69
   
$
   
$
 
 
                       
Expected price volatility
   
47.11
%
   
N/A
%
   
N/A
%
 
                       
Risk-free interest rate
   
0.60
%
   
N/A
%
   
N/A
%
 
                       
Weighted average expected lives in years
   
7.4
     
N/A
   
N/A
 
                       
Dividend yield
   
0.0
%
   
N/A
%
   
N/A
%

EXPECTED PRICE VOLATILITY — 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 — 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 — 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 ten 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 May 4, 2014, total unrecognized share-based compensation expense related to non-vested stock options is $0.4 million with a weighted average expense recognition period of 2.6 years.
 
(4) Accounting for Income Taxes
 
Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax basis of existing assets and liabilities.  Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary.  The Company generally records income tax expense during interim periods based on its best estimate of the full year’s effective tax rate.  However, income tax expense relating to adjustments to the Company’s liabilities for uncertainty in income tax positions for prior reporting periods are accounted for in the interim period in which it occurs.  Income tax expense relating to adjustments for current year uncertain tax positions are accounted for as a component of the adjusted annualized effective tax rate.
 
In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets.  The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.  Accounting guidance states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining whether a valuation allowance is not needed against deferred tax assets.  As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
 
During fiscal 2014, the Company recorded a valuation allowance on its net deferred tax assets as a result of cumulative losses from operations during the most recent three year periods.  The cumulative operating results during the thirty-six months ended May 4, 2014 resulted in a loss.  As such, the Company recorded no provision for federal income taxes for the quarter ended May 4, 2014 as cumulative losses were negative for the cumulative three year period.
 
The statute of limitations for the Company’s federal income tax returns is open for fiscal 2011 through fiscal 2014.  The Company files in numerous state jurisdictions with varying statutes of limitation.  The Company’s state returns are subject to examination by the taxing authority for fiscal 2010 through 2014 or fiscal 2011 through fiscal 2014, depending on each state’s statute of limitations.
 
The Company is continuing to evaluate the impact of the recent regulations concerning amounts paid to acquire, produce, or improve tangible personal property and recovery of basis upon disposition.  Given that Revenue Procedures were issued in late January of 2014, the Company is determining whether or not any changes in an accounting method are required.  Presently, the Company does not anticipate a material impact on its financial statements.
 
(5) Fair Value Measurements
 
The financial instruments of the Company consist of cash, 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.  For all other financial instruments, including cash, short-term receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.
 
(6) Earnings Per Share
 
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding.  Diluted earnings per share reflect the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised, except for those periods with a loss where the effect would be anti-dilutive.  The weighted average number of shares used in computing earnings per share was as follows:
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4, 2014
   
May 5, 2013
 
Basic
   
3,258,162
     
3,258,162
 
Diluted
   
3,258,162
     
3,258,162
 
 
The anti-dilutive effect of 382,500 and 316,000 stock options has been excluded from diluted weighted average shares outstanding for the thirteen week periods ended May 4, 2014 and May 5, 2013, respectively.

(7) Store Closings and Discontinued Operations
 
When the operation of a store is discontinued and the store is closed, the Company reclassifies historical operating results from continuing operations to discontinued operations.  The Company closed 14 stores during the first quarter of fiscal 2015, whereas the Company did not close any stores during the first quarter of fiscal 2014.
 
Summarized financial information for discontinued operations for the thirteen weeks ended May 4, 2014 and May 5, 2013 is presented below.

 
 
Thirteen Week Periods Ended
 
 
 
May 4,
2014
   
May 5,
2013
 
Net sales
 
$
3,177
     
8,347
 
Cost of sales
   
4,753
     
6,166
 
Gross margin
   
(1,576
)
   
2,181
 
Selling, general and administrative
   
1,728
     
2,903
 
Loss before income taxes
   
(3,304
)
   
(722
)
Income tax benefit
   
     
(303
)
Net loss
 
$
(3,304
)
   
(419
)
 
(8) Long-Term Debt
 
On July 21, 2011, the Company entered into a five-year revolving Credit Agreement (the “Facility”) with Wells Fargo Bank, National Association and Wells Capital Finance, LLC (collectively, the “Lender”).  The $120.0 million Facility replaced the Company’s previous $120.0 million credit facility with Bank of America, N.A. and Wells Fargo Retail Finance, LLC, and expires July 20, 2016.  Additional costs paid to Lender in connection with the new facility were $0.5 million.  Those fees have been deferred and will be amortized over the term of the new facility.  Loan advances are secured by a security interest in the Company’s inventory and credit card receivables. 

Based on the Company’s average excess availability, the amount advanced to the Company on any Base Rate Loan (as such term is defined in the Facility) bears interest at the highest of (a) the rate of interest in effect for such day as publicly announced from time to time by Lender as its “prime rate”; (b) the Federal Funds Rate for such day, plus 1.0%; and (c) the LIBO Rate for a 30 day interest period as determined on such day, plus 2.0%.  Amounts advanced with respect to any LIBO Borrowing for any Interest Period (as those terms are defined in the Facility) shall bear interest at an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of one percent) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate (as defined in the Facility).  The Facility contains various restrictions that are applicable when outstanding borrowings reach certain thresholds, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payment of dividends.

On February 6, 2013, the Board of Directors of the Company unanimously approved a First Amendment (the “Amendment”) to its Credit Agreement with the Lender, amending Section 7.06(c) of the Credit Agreement to permit the Company, subject to certain conditions set forth in the Amendment, to repurchase, redeem or otherwise acquire Equity Interests issued by the Company not to exceed $1.0 million in the aggregate in each fiscal year.  Under the Facility, “Equity Interests” is defined as all of the shares of the capital stock of a person and all of the other warrants, options or other rights of a person to purchase capital stock of such person.  Such amendment was announced on Form 8-K filed by the Company with the Securities and Exchange Commission on February 12, 2013 and a copy of the Amendment is attached to such 8-K.  Except to the extent specifically set forth in the Amendment, no other consent, waiver of, or change in any of the terms, provisions or conditions of the Facility is intended or implied.

On November 22, 2013, pursuant to Section 2.16 of the Facility, the Board of Directors unanimously approved to request an increase the revolving credit commitments of the Company by $10.0 million (the “Commitment Increase”); thereby, increasing the overall Facility from $120.0 million to $130.0 million.  Except for the Commitment Increase, and as discussed below, the Facility remains unchanged and in full force and effect.

On May 30, 2014, the Company closed on an Amended and Restated Credit Agreement (the "Amended Credit Agreement") with Wells Fargo Bank, National Association (“Wells Fargo”).  The Amended Credit Agreement amends and restates the Facility and extends credit to the Company in an aggregate principal amount of up to $142.5 million. The Amended Credit Agreement is for an extended term through 2019 and provides access to additional availability of approximately $17.5 million. The additional availability will be collateralized by certain Company assets including, but not limited to, five Company owned properties and expanded access to inventory assets. As part of the negotiation of the Amended Credit Agreement, the Company pledges certain collateral to Wells Fargo under the terms of an Amended and Restated Security Agreement that was executed as part of the closing on the Amended Credit Agreement on May 30, 2014 (the “Amended Security Agreement”).

Notes payable outstanding at May 4, 2014 and May 5, 2013 under the Amended Credit Agreement aggregated $85.2 million and $71.6 million, respectively.  Wells Fargo had also issued letters of credit aggregating $9.2 million and $8.2 million, respectively, at such dates on behalf of the Company.  The interest rates on the outstanding borrowings at May 4, 2014 were 2.19% on $80.0 million of the outstanding balance and 4.25% on the remaining $5.2 million.  The Company had additional borrowings available at May 6, 2014 under the Amended Credit Agreement amounting to approximately $24.2 million 
 
The Company entered into an equipment financing arrangement with a third party which was finalized on February 3, 2014 whereby certain equipment was sold and subsequently leased back. The company accounts for the lease using the financing method. Under the financing method, the Company accounts for the equipment subject to lease as an asset and the lease payments as interest on the financing obligation.  As of May 4, 2014, the outstanding balance on the financing obligation was $2.1 million and the implicit interest rate was 22.6%.
 
Interest expense on notes payable and long-term debt, excluding capital lease obligations and amortization of debt financing costs, aggregated $0.6 million and $0.7 million during the first quarter of fiscal 2015 and fiscal 2014, respectively.
 
(9) Stock Repurchase
 
On July 27, 2012, the Company entered into a new Rule 10b5-1 and Rule 10b-18 Stock Repurchase Agreement with William Blair and Company, LLC (the “Stock Repurchase Agreement”) whereby the Company authorized the repurchase of up to 175,000 shares of the Company’s Common Stock under the Company’s stock repurchase program (the “Program”).
 
The Program was initially authorized by the Company on March 23, 2006, whereby the Board of Directors of the Company authorized the repurchase of 200,000 shares of the Company's Common Stock, and the Company repurchased 3,337 shares of Common Stock under the Program. The Company's Board of Directors reinstated the Program on August 13, 2008 and the Company repurchased 22,197 shares of Common Stock under the Program during such period of reinstatement. The Board of Directors of the Company approved the reinstatement of the Program again on January 6, 2012 and the Company repurchased an additional 34,407 shares of Common Stock during such reinstatement. On April 25, 2012, the Board of Directors of the Company authorized the Company to repurchase an additional 500,000 shares of Common Stock for a total of 700,000 shares of Common Stock authorized for repurchase under the Program. The Stock Repurchase Agreement only authorizes William Blair and Company, LLC to repurchase a portion of the total shares available for repurchase under the Program as stated above. Under the terms of the Program, the Company can terminate the proposed buy back at any time.
 
There were no shares repurchased by the Company during the first quarter of fiscal 2015.  As of May 4, 2014, the Company repurchased a total of 610,462 shares under the Program since it was initially approved in 2006.  Therefore, there were 89,538 shares of Common Stock available to be repurchased by the Company, as of May 4, 2014.
(10) Legal Proceedings
 
Other than the items delineated below, the Company is not a party to any material litigation, other than routine litigation from time to time in the ordinary course of business.
 
The Company is a defendant in a derivative action stemming from the Company’s proposed Merger with a subsidiary of an affiliate of Argonne Capital Group, LLC as discussed below.  This action arose when two separately filed stockholder actions were consolidated, discussed below.  There was also a third stockholder action, discussed below, but it has been dismissed.
 
On July 25, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mallard Parent, LLC, (“Parent”) and M Acquisition Corporation, (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.  Parent and Acquisition Sub are beneficially owned by an affiliate of Argonne Capital Group, LLC (the “Sponsor”).  The merger consideration was $14.00 per share in cash, without interest, and was to be supported through financing to be obtained by the Sponsor.
 
Under the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares, if any, owned by Parent, Merger Sub, the Company, or any other direct or indirect wholly owned subsidiary of Parent, Merger Sub, or the Company) would have been converted into the right to receive $14.00 per share in cash, without interest.
 
The Merger was subject to the approval by at least a majority of all outstanding shares of common stock.  The Merger was also subject to various other customary conditions, including the absence of any governmental order prohibiting the consummation of the transaction contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement, and compliance with the covenants and agreements in the Merger Agreement in all material respects.
 
The Company was subject to customary “non-solicitation” provisions that limited its ability to solicit, encourage, discuss or negotiate alternative acquisition proposals from third parties or to provide non-public information to third parties.  These non-solicitation provisions were subject to a “fiduciary out” provision that allows the Company to provide non-public information and participate in discussions and negotiations with respect to certain unsolicited written acquisition proposals and to terminate the Merger Agreement and enter into an alternative acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement, provided that the Company’s Board of Directors has concluded that the failure to do so would be inconsistent with its fiduciary obligations under applicable law.
 
The Merger Agreement contained certain termination rights, including the Company’s right to terminate the Merger Agreement to accept a superior proposal, and provided that, upon termination of the Merger Agreement by the Company under specified conditions, a termination fee would have been payable by the Company.  In such circumstances, the Company would have been required to pay Sponsor $2.25 million. Subject to approval by at least a majority of all outstanding shares of common stock, the proposed Merger was expected to close before the end of the 2013 calendar year.
 
On October 30, 2013, the Company held a special meeting of its stockholders to vote on the proposal to adopt the Merger Agreement.  The proposal to adopt the Merger Agreement did not receive approval from more than a majority of the outstanding share of the Company’s common stock, and therefore was not approved by the Company’s Stockholders.  As a result of the failure to receive such stockholder approval, on October 30, 2013, the Company delivered to parent and Merger Sub a written notice (the “Termination Notice”) terminating the Merger Agreement in accordance with Section 7.2(b) of the Merger Agreement.  As a result of the Termination Notice, the Merger Agreement was terminated and the merger contemplated was abandoned.  Because the Termination Notice was delivered because of the failure of the Company’s stockholders to approve the Merger Agreement, no termination fee was paid by either party.
 
Merger related costs for the thirteen weeks ended May 4, 2014, included in SG&A Expenses from Continuing Operations, were $.1 million.
 
On September 5, 2013, Advanced Advisors, a Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001007) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties.  The amount of the damages was unspecified.
 
On September 23, 2013, Paul Hughes, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001096) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties.  The amount of the damages was unspecified.  On March 20, 2014, Plaintiffs filed a notice of dismissal without prejudice.  On April 10, 2014, the court entered a dismissal order and removed the case from the active docket.
 
On September 27, 2013, Jeffery R. Geygan, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001120) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages was unspecified.
On November 21, 2013, the parties filed a joint motion to consolidate the Geygan case and the Advanced Advisors case, discussed above.  On December 18, 2013, the court granted the consolidation motion, and the cases were consolidated under case no. 13C1007.  On January 9, 2014, the Plaintiffs filed their consolidated  and verified derivative petition, citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified.
 
On January 30, 2014, the Company filed a motion to dismiss the Plaintiffs’ consolidated and verified derivative petition.  The court set a July 18, 2014 hearing for the Company’s motion to dismiss.
 
The Company intends to vigorously defend itself in all of the legal proceedings discussed above.
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
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
 
Economic conditions:  The lingering economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased customer traffic and reduced levels of consumer spending, particularly on discretionary items.  The continuing economic recession has impacted the Company’s customers, whom the Company believes to be primarily on a fixed or low income, and has negatively affected their ability to shop in our stores and buy our products.  This decline in consumer and business confidence and the decreased levels of customer traffic and consumer spending have negatively impacted our business.  We cannot predict how long the current economically challenging conditions will persist and how such conditions might affect us and our customers.  Decreased customer traffic and reduced consumer spending, particularly on discretionary items, would, however, over an extended period of time negatively affect our financial condition, operating performance, revenues and income.  In addition, we cannot predict how current or worsening economic conditions will affect our critical suppliers and distributors and any negative impact on our critical suppliers or distributors may also have an adverse impact on our business results or financial condition.
 
The economic slowdown also affects the Company’s business environment.  Due to lower discretionary spending by consumers and a high demand for lower cost goods, the discount retail industry has become highly competitive.  This competitive environment impacts the Company because lower prices and greater markdowns on inventory are necessary to keep the Company’s position in the industry and these factors may result in lower margins and profitability.
 
Another factor that continues to impact the Company is severe weather.  We have experienced severe weather conditions, including snow and ice storms, flood and wind damage, tornadoes and droughts in some states that have slowed consumer confidence and customer traffic.
 
Management does not believe that its merchandising operations, net sales, revenue or results from continuing operations have been materially impacted by inflation during the past two fiscal years.
 
Operations.  The Company is a regional broad line retailer operating in 23 states.
 
For purposes of this management’s discussion and analysis of financial condition and results of operations, the financial numbers are presented in millions.
Strategy.  The Company’s overall business strategy involves identifying and opening stores in locations that will provide the Company with the highest return on investment.  The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, stores, manufacturer’s outlets and the internet.  The Company initiated a transactional web site during November 2011.  In July 2012, the Company expanded the product selection on its website which now includes more than 20,000 items of high-quality merchandise.  Products offered on the ALCOstores.com website include video games and electronics, housewares, appliances and furniture, health & beauty aids, baby goods, office supplies, automotive and sporting goods, and much more.  As in traditional ALCO stores, consumers can choose from a wide range of well-known brand names.  In addition, the website includes brands not found in the Company’s retail stores.
 
The Company uses a variety of broad-based targeted marketing and advertising strategies to reach consumers.  These strategies include full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail.  During fiscal 2015, the Company will distribute approximately 48 circulars in the Company’s markets.  The Company also uses in-store marketing.  The Company’s merchandising and marketing teams work together to present the products in an engaging and innovative manner, which is coordinated so that it is consistent with the current print advertisements.  The Company regularly changes its banners and in-store promotions, which are advertised throughout the year, to attract consumers to the stores, to generate strong customer frequency and to increase average sales per customer.  Net marketing and promotion costs represented approximately 1.5% and 1.1% of net sales in first quarter of fiscal 2015 and 2014, respectively.  Management believes it has developed a comprehensive marketing strategy, intended to increase customer traffic and same-store sales.  The Company continues to operate as a high-low retailer and has included in many of its marketing vehicles cross departmental products.  For example, the Company has used an Elder Care page with over-the-counter products, “as seen on TV” items, and dry meals—all targeting customers who have reached retirement age.  The Company believes that by providing the breadth of these key items to this targeted audience we can serve our customers’ needs more efficiently and garner a greater share of the purchases made by this demographic.  The Company’s stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive,  consumables and commodities, crafts, domestics, electronics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies’, men’s and children’s apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys.  The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance.  Corporate merchandising is provided to each store to ensure a consistent Company-wide store presentation.  To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories: primary, secondary, and convenience.  The primary core receives management’s primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration.  The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers.  The convenience core consists of categories of merchandise for which the Company maintains convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a broad line retail store.  Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic.  The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products. In addition, the Company’s merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment.  All of the Company’s ALCO stores have point-of-service computer terminals that capture sales information and transmit such information to the Company’s data processing facilities where it is used to drive management, financial, and supply chain functions.
 
Store Expansion.  The continued growth of the Company is dependent, in large part, upon the Company’s ability to open and operate new stores on a timely and profitable basis.  The Company opened a total of three stores during fiscal 2014 and anticipates opening no less than three stores during fiscal 2015.  While the Company believes that adequate sites are available for future store openings, the rate of new store openings is subject to various contingencies, many of which are beyond the Company’s control.  These material contingencies include:
 
· the Company’s ability to hire, train, and retain qualified personnel;
 
· the availability of adequate capital resources for us to purchase inventory, equipment, and fixtures and make other capital expenditures necessary for store expansion; and
 
· the ability of our landlords and developers to find appropriate financing in the current credit market to develop property to be leased by the Company.
 
Historically, we have been able to hire, train, and retain qualified personnel and we anticipate being able to do so in the future. In order to address the increase in demand for qualified management, the Company will continue to recruit for those interested in working and living in our communities. Once hired, the management personnel will complete an in-store, hands-on management training program coupled with e-learning modules to ensure operational efficiencies and align to the Company priorities. We believe this training process will allow the Company to see the benefits of prompt time-to-productivity, employee engagement and commitment, and overall employee retention.
 
We currently believe that we will have the capital resources necessary to purchase the inventory, equipment, and fixtures, and to fund the other capital expenditures necessary for future store expansions.  If we lack such capital resources, however, it would limit our expansion plans and negatively impact our operations going forward.  The Company has been working closely with multiple developers and landlords that the Company believes have the financial resources to develop property to be leased by the Company and hold such property as a long-term investment in their portfolios.  If such developers and landlords do not have, and cannot obtain, the financial resources to develop and hold such property, it would limit our expansion plans and negatively impact our operations going forward.
 
Financial Risk:  The Company closely monitors IRS Section 382 regarding technical change of control.  This particular section of the tax code would place an annual limit on the Company’s right to use its net operating loss carry-forwards (“NOLs”) should the aggregate shift in 5% shareholders be more than 50% in the preceding three-year testing period or as a result of certain reorganizations (“Tripping Event”).  The annual limitation approximates 3% of the Company’s market capitalization just prior to the Tripping Event.  In the event of a Tripping Event, management believes the Company would still be able to utilize its NOLs prior to their expiration, albeit over a longer period of time.

In 2010, the “Patient Protection and Affordable Care Act” and the “Health Care and Education Affordability Reconciliation Act of 2010” (the “2010 Healthcare Acts”) were signed into law.  This legislation expands health care coverage to many uninsured individuals and expands coverage for those already insured.  The 2010 Healthcare Acts, as well as other healthcare reform legislation being considered by Congress and state legislatures, may have a negative impact on our business.  This impact could increase our employee healthcare related costs.  While the costs of the 2010 Healthcare Acts will occur after December 31, 2014, due to provisions of this legislation being phased in over time, changes to our healthcare cost structure could have an adverse effect on the Company’s financial condition.  While the Company cannot currently project the full amount of providing health insurance to all employees or the penalties that would be imposed if the Company did not offer health care to all employees, the Company believes that a reasonable range of incremental costs could be between $1.0 and $4.0 million, annually.
 
The Company relocated its corporate headquarters from Abilene, Kansas to Coppell, Texas, a suburb of Dallas, Texas during Fiscal 2014.  If we do not continue to effectively execute our relocation plan, our financial performance could be adversely affected.
 
Recent Events.
 
·
On May 5, 2014, the Board of Directors of the Company determined to increase the size of the Board of Directors from five to seven in accordance with the Company’s Bylaws. The Board of Directors subsequently unanimously elected Paul T. Davies and Leslie A. Ball to the Board of Directors, effective that day.  Mr. Ball will serve on the Audit Committee, Strategy, Budget & Planning Committee and Nominating and Governance Committee of the Company’s Board of Directors. Mr. Davies will serve on the Compensation Committee and Strategy, Budget & Planning Committee of the Company’s Board of Directors.
 
·
On May 7, 2014, the Company entered into a Second Amendment to Rights Agreement (the “Rights Plan Amendment”) with Computershare Trust Company, N.A. (the “Rights Agent”), to the Rights Agreement, dated as of May 3, 2013, and as amended as of July 25, 2013 (the “Rights Agreement”) by and between the Company and Rights Agent. The Rights Plan Amendment allows the record holders of 10% or more of the outstanding shares of the Company’s common stock (“Common Stock”) to direct the Company’s Board of Directors (the “Board”) to call a special meeting of stockholders to consider a resolution authorizing a redemption of all Rights in the event the Company receives a “Qualified Offer.” If the special meeting is not held within sixty business days of being called or if, at the special meeting, the holders of a majority of the shares of Common Stock outstanding (other than shares held by the offeror and its affiliated and associated persons) vote in favor of the redemption of the rights, then the Board will redeem the Rights or take such other action as may be necessary to prevent the Rights from interfering with the consummation of the Qualified Offer.  However, the Company amended and restated the Rights Agreement effective as of June 9, 2014 as further provided below.
 
·
On May 30, 2014, the Company closed on the Amended Credit Agreement with Wells Fargo as discussed above.  The Amended Credit Agreement amends and restates the Company’s current Credit Agreement with Wells Fargo dated July 21, 2011, as amended and extends credit to the Company in an aggregate principal amount of up to $142.5 million. The Amended Credit Agreement is for an extended term through 2019 and provides access to additional availability of approximately $17.5 million. The additional availability will be collateralized by certain Company assets including, but not limited to, five Company owned properties and expanded access to inventory assets. As part of the negotiation of the Amended Credit Agreement, the Company pledges certain collateral to Wells Fargo under the terms of the Amended Security Agreement.  As of the end of the first quarter of fiscal 2015, the Company had $85,228,969 borrowed under the Previous Credit Agreement.
 
·
On June 9, 2014, the Company entered into an Amended and Restated Rights Agreement (the “Restated Rights Agreement”) with the Rights Agent, which amends and restates the Rights Agreement. The Restated Rights Agreement (i) removes changes to the Rights Agreement adopted in a prior amendment exclusively for the purposes of the unconsummated transaction with an affiliate of Argonne Capital Group, LLC, (ii) consolidates changes in prior amendments to the Rights Agreement and (iii) provides that the Rights Agreement will terminate pursuant to its terms unless it is approved by the Company’s stockholders at the upcoming Annual Meeting of Stockholders, or approved by the Company’s stockholders at a later date prior to September 30, 2014.
 
Key Items in the First Quarter of Fiscal 2015.
 
The Company measures itself against a number of financial metrics to assess its performance.  Some of the important financial items, from continuing operations, during the first quarter of fiscal 2015 were:
 
· Net sales from continuing operations during the first quarter of fiscal 2015 decreased 4.1% to $104.7 million, compared to net sales during the first quarter of fiscal 2014 of $109.2 million.
 
· Gross margin percentage is a key measure of the Company’s ability to maximize profit on the purchase and subsequent sale of merchandise, while minimizing promotional and clearance markdowns, shrinkage, damage and returns.  Gross margin percentage is defined as net sales less cost of sales, expressed as a percentage of net sales.
 
Gross margin, as a percentage of net sales, was 29.1% during the first quarter of fiscal 2015, compared to 29.6% during the first quarter of fiscal 2014.
 
· Selling, general and administrative expenses (“SG&A”) are a measure of the Company’s ability to manage and control its expenses to purchase, distribute and sell merchandise.
 
SG&A as a percentage of net sales was 30.9% during the first quarter of fiscal 2015, compared to 28.6% during the first quarter of fiscal 2014.
 
· Earnings per share (“EPS”) is an indicator of the returns generated for the Company’s stockholders.
 
Net loss per diluted share for the first quarter of fiscal 2015 was $2.49, compared to a net loss per diluted share of $0.51 during first quarter of fiscal 2014.
RESULTS OF OPERATIONS
 
The following table sets forth the components of the Company’s statements of operations expressed as percentages of net sales:
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4,
2014
   
May 5,
2013
 
Net sales
   
100.0
%    
100.0
%
Cost of sales
   
70.9
     
70.4
 
Gross margin
   
29.1
     
29.6
 
Selling, general and administrative
   
30.9
     
28.6
 
Depreciation and amortization
   
1.9
     
1.9
 
Total operating expenses
   
32.8
     
30.5
 
Operating loss from continuing operations
   
(3.7
)
   
(0.9
)
Interest expense
   
0.9
     
1.0
 
Loss from continuing operations before income taxes
   
(4.6
)
   
(1.9
)
Income tax benefit
   
     
(0.7
)
Loss from continuing operations
   
(4.6
)
   
(1.2
)
Loss from discontinued operations, net of income tax benefit
   
(3.2
)
   
(0.4
)
Net loss
   
(7.8
)%
   
(1.6
)%
 

Thirteen Weeks Ended May 4, 2014 Compared to Thirteen Weeks Ended May 5, 2013
 
Net sales from continuing operations, including the Company’s transactional website, during the first quarter of fiscal 2015 decreased 4.1% to $104.7 million, compared to net sales during the first quarter of fiscal 2014 of $109.2 million.  Net sales from the Company’s transactional website during the first quarter of fiscal 2015 were $65 thousand, an increase of $41 thousand compared to the first quarter of fiscal 2014.
 
Net sales from same-stores, excluding the Company’s two fuel center locations, decreased 7.1%, or $7.6 million, to $100.1 million during the first quarter of fiscal 2015, compared to $107.7 million during the first quarter of fiscal 2014.  The decrease in same-store sales was primarily due to a 7.1% decrease in customer transactions occurring at a same-store.
 
Net sales from non-same stores during the first quarter of fiscal 2015 increased $3.4 million and net sales from the Company’s two fuel center locations during the first quarter of fiscal 2015 decreased $0.2 million.
 
Gross margin from continuing operations for the first quarter of fiscal 2015 decreased $1.8 million, or 5.7%, to $30.4 million compared to $32.3 million during the first quarter of fiscal 2014.  As a percentage of net sales, gross margin was 29.1% and 29.6% during the first quarter of fiscal 2015 and fiscal 2014, respectively.  Gross margin generated by non same-stores was $1.1 million during the first quarter of fiscal 2015.
 
The decrease in gross margin for the first quarter of fiscal 2015 was primarily attributable to the decline in sales, a decrease in mix of business of higher margin categories, an increase in net freight costs, and an increase in net promotional activity.
 
SG&A from continuing operations increased $1.2 million, or 3.7%, to $32.4 million during the first quarter of fiscal 2015, compared to $31.2 million during the first quarter of fiscal 2014.  The net increase in SG&A is primarily attributable to new stores ($0.6 million),  increase in net advertising  ($0.4 million) and an increase in store support center expenses ($0.5million), primarily payroll and benefits, and partially offset by a decrease in warehouse operations ($0.3 million), primarily payroll and benefits.  As a percentage of net sales, SG&A was 30.9% and 28.6% during the first quarter of fiscal 2015 and fiscal 2014, respectively.  Excluding share-based compensation, costs associated with merger activity and gain on sale of assets, SG&A was 30.7% and 28.4% of net sales for the first quarter of fiscal 2015 and fiscal 2014, respectively.
 
Depreciation and amortization expense from continuing operations decreased $0.1 million or 4.0% to $1.9 million during the first quarter of fiscal 2015 compared to $2.0 million during the first quarter of fiscal 2014.
 
Interest expense decreased $0.1 million, or 8.16%, to $1.0 million during the first quarter of fiscal 2015 compared to $1.1 million during the first quarter of fiscal 2014.  Excluding interest on capital lease obligations and amortization of debt financing costs, interest expense was $0.6 million during the first quarter of fiscal 2015, compared to $0.7 million during the first quarter of fiscal 2014.
 
Income tax benefit on continuing operations was $0.8 million during the first quarter of fiscal 2014.
 
Loss from continuing operations, net of tax benefit, increased $3.6 million to $4.8 million during the first quarter of fiscal 2015 compared to a loss of $1.2 million during the first quarter of fiscal 2014.  As a percentage of net sales, net loss from continuing operations was 4.6% during the first quarter of fiscal 2015 compared to 1.1% during the first quarter of fiscal 2014.
 
Net sales from discontinued operations during the first quarter of fiscal 2015 decreased 61.9% to $3.2 million, compared to net sales during the first quarter of fiscal 2014 of $8.3 million.    
 
Gross margin from discontinued operations during the first quarter of fiscal 2015 decreased 172.3% to a negative $1.6 million, compared to gross margin during the first quarter of fiscal 2014 of $2.2 million.    
 
SG&A from discontinued operations during the first quarter of fiscal 2015 decreased 40.2% to $1.7 million, compared to SG&A during the first quarter of fiscal 2014 of $2.9 million.  Included in SG&A for the first quarter of fiscal 2015 was a closed store provision of $0.4 million.
 
Operating results from discontinued operations during the first quarter of fiscal 2015, decreased $2.9 million to an operating loss of $3.3 million compared to a net operating loss of $0.4 million during the first quarter of fiscal 2014.  Included in the net operating loss during the first quarter of fiscal 2014 was a tax benefit of $0.3 million.     
Certain Non-GAAP Financial Measures
 
The Company has included adjusted SG&A and adjusted earnings before interest taxes depreciation and amortization (“EBITDA”), non-U.S. 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-U.S. 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 U.S. GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted SG&A.  These items are excluded by management as they are non-recurring and/or not relevant to analysis of ongoing business operations and 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 SG&A and Adjusted EBITDA, management also utilizes U.S. GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations.  As a result, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations.
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4,
2014
   
May 4,
2013
 
SG&A Expenses from Continuing Operations
 
   
 
Store support center (1)
 
$
5,722
   
$
5,191
 
Distribution center
   
1,431
     
1,826
 
401K expense
   
125
     
125
 
Same-store SG&A (2)
   
24,341
     
23,916
 
Non same-store SG&A (3)
   
605
     
 
Share-based compensation
   
134
     
140
 
SG&A as reported
   
32,358
     
31,198
 
Less:
               
Share-based compensation
   
(134
)
   
(140
)
Company Merger
   
(124
)
   
 
 
               
Adjusted SG&A from Continuing Operations
 
$
32,100
   
$
31,058
 
 
               
Adjusted SG&A as % of sales
   
30.7
%
   
28.4
%
 
               
Sales per average selling square feet (4)
 
$
25.29
   
$
26.76
 
 
               
Gross Margin dollars per average selling square feet (4)
 
$
7.44
   
$
8.02
 
 
               
Adjusted SG&A per average selling square feet (4)
 
$
7.85
   
$
7.72
 
 
               
Adjusted EBITDA per average selling square feet (4)(5)
 
$
(1.21
)
 
$
0.18
 
 
               
Average inventory per average selling square feet (4)(6)(7)
 
$
35.60
   
$
37.41
 
 
               
Average selling square feet (4)
   
4,090
     
4,024
 
 
               
Total stores operating beginning of period
   
212
     
217
 
Total stores operating end of period
   
198
     
217
 
Total stores less than twelve months old
   
3
     
5
 
Total non-same stores
   
3
     
5
 
 
               
Supplemental Data:
               
Same-store gross margin dollar change
   
-9.1
%
   
-3.1
%
Same-store SG&A dollar change
   
-1.7
%
   
-1.0
%
Same-store total customer count change
   
-7.1
%
   
-7.8
%
Same-store average sale per ticket change
   
.1
%
   
6.1
%
 

 
(1) Store support center includes loss on disposal of fixed assets
(2) Same-stores are those stores which were open at the end of the reporting period, had reached their fourteenth month of operation, and include store locations, if any, that had experienced a remodel, an expansion, or relocation.  Same-stores also include the Company’s transactional website.
(3) Non same-stores are those stores which have not reached their fourteenth month of operation.
(4) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2
(5) Adjusted EBITDA per average selling square foot is calculated as Adjusted EBITDA divided by average selling square feet
(6) Average store level merchandise inventory is calculated as beginning inventory plus ending inventory divided by 2
(7) Excludes inventory for unopened stores
 
Store support center expenses for first quarter of fiscal 2015 increased $0.5 million, or 10.2%.  The net increase was primarily due to an increase in payroll and benefits of $0.4 million and an increase in other expenses of $.1 million.
Reconciliation and Explanation of Non-U.S. GAAP Financial Measures
 
The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss):
 
 
 
52 Weeks
   
Thirteen Week Periods Ended
   
Trailing
52 Weeks Ended
 
 
 
Fiscal 2014
   
May 4,
2014
   
May 5,
2013
   
May 4,
2014
 
Net earnings (loss)
 
$
(26,425
)
   
(8,133
)
   
(1,668
)
   
(32,890
)
Plus:
                               
Interest
   
3,834
     
967
     
1,053
     
3,748
 
Taxes
   
5,032
     
     
(998
)
   
6,030
 
Depreciation and amortization
   
10,545
     
1,948
     
2,183
     
10,310
 
EBITDA
   
(7,014
)
   
(5,218
)
   
570
     
(12,802
)
Plus:
                               
Share-based compensation
   
404
     
134
     
140
     
398
 
(Gain) loss asset disposals
   
337
     
     
     
337
 
Adjusted EBITDA
   
(6,273
)
   
(5,084
)
   
710
     
(12,067
)
 
                               
Cash
   
2,230
     
1,434
     
2,923
     
1,434
 
Debt
   
108,407
     
100,955
     
87,978
     
100,955
 
Debt, net of cash
 
$
106,177
     
99,521
     
85,055
     
99,521
 
 

Liquidity and Capital Resources
 
Working capital (defined as current assets less current liabilities) was $122.9 million and $135.6 million at the end of the first quarter of fiscal 2015 and fiscal 2014, respectively.
 
The Company’s primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility, and vendor trade credit financing.  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.
 
Net cash provided by (used in) operating activities aggregated $5.6 million and ($6.9) million, during the first quarter of fiscal 2015 and fiscal 2014, respectively.  The increase in cash provided in operating activities resulted primarily from a $20.8 million decrease in the change in merchandise inventory, compared to the first quarter of fiscal 2014, offset by a $2.3 million increase in the change in receivables and an increase in pre-tax loss of $6.5 million.
 
Net cash used in investing activities during the first quarter of fiscal 2015 was $1.0 million compared to net cash used during the first quarter of fiscal 2014 of $1.4 million.  Excluding proceeds from sale of assets and decrease in long term investments, net cash used in investing activities during the first quarter of fiscal 2015 and fiscal 2014 totaled $1.0 million and consisted primarily of capital expenditures.  The Company’s long-range strategy is to grow its store count, and it intends to continue to invest in technology and migrate various system applications during the next 36 months.
 
On July 21, 2011, the Company entered into the Facility with the Lender as discussed herein.  The $120.0 million Facility replaced the Company’s previous $120.0 million credit facility with Bank of America, N.A. and Wells Fargo Retail Finance, LLC, and would have expired on July 20, 2016.  Additional costs paid to the Lender in connection with the new Facility were $0.5 million.  Those fees have been deferred and will be amortized over the term of the new facility.  Loan advances are secured by a security interest in the Company’s inventory and credit card receivables. 

Based on the Company’s average excess availability, the amount advanced to the Company on any Base Rate Loan (as such term is defined in the Facility) bears interest at the highest of (a) the rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate”; (b) the Federal Funds Rate for such day, plus 1.0%; and (c) the LIBO Rate for a 30 day interest period as determined on such day, plus 2.0%.  Amounts advanced with respect to any LIBO Borrowing for any Interest Period (as those terms are defined in the Facility) shall bear interest at an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of one percent) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate (as defined in the Facility).  The Facility contains various restrictions that are applicable when outstanding borrowings reach certain thresholds, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payment of dividends.
 
On February 6, 2013, the Board of Directors of the Company unanimously approved a First Amendment (the “Amendment”) to the Facility, amending Section 7.06(c) of the Facility to permit the Company, subject to certain conditions set forth in the Amendment, to repurchase, redeem or otherwise acquire Equity Interests issued by the Company not to exceed $1.0 million in the aggregate in each fiscal year.  Under the Facility, “Equity Interests” is defined as all of the shares of the capital stock of a person and all of the other warrants, options or other rights of a person to purchase capital stock of such person.  Such amendment was announced on Form 8-K filed by the Company with the Securities and Exchange Commission on February 12, 2013 and a copy of the Amendment is attached to such 8-K.  Except to the extent specifically set forth in the Amendment or set forth herein, no other consent, waiver of, or change in any of the terms, provisions or conditions of the Facility is intended or implied.

On November 22, 2013, pursuant to Section 2.16 of the Facility, the Board of Directors unanimously approved to request to increase the revolving credit commitments of the Company by $10.0 million; thereby, increasing the overall Facility from $120.0 million to $130.0 million.  Except for the Commitment Increase, and as set forth herein, the Facility remains unchanged and in full force and effect.
On May 30, 2014, the Company closed on the Amended Credit Agreement with Wells Fargo.  The Amended Credit Agreement amends and restates the Facility and extends credit to the Company in an aggregate principal amount of up to $142.5 million. The Amended Credit Agreement is for an extended term through 2019 and provides access to additional availability of approximately $17.5 million. The additional availability will be collateralized by certain Company assets including, but not limited to, five Company owned properties and expanded access to inventory assets. As part of the negotiation of the Amended Credit Agreement, the Company pledges certain collateral to Wells Fargo under the terms of the Amended Security Agreement that was executed as part of the closing on the Amended Credit Agreement on May 30, 2014.

The revolving note payable outstanding at May 4, 2014 and May 5, 2013 aggregated $85.2 million and $71.6 million, respectively.  Wells Fargo had also issued letters of credit aggregating $9.2 million and $8.2 million, respectively, at such dates on behalf of the Company.  The Company had additional borrowings available at May 6, 2014 under the Amended Credit Agreement amounting to approximately $24.4 million.  
 
The interest rates on the revolving notes payable outstanding borrowings at May 4, 2014 were 2.19% on $80.0 million of the outstanding balance and 4.25% on the remaining $5.2 million. 

The Company entered into an equipment financing arrangement with a third party which was finalized on February 3, 2014 whereby certain equipment was sold and subsequently leased back. The company accounts for the lease using the financing method. Under the financing method, the Company accounts for the equipment subject to lease as an asset and the lease payments as interest on the financing obligation.  As of May 4, 2014, the outstanding balance on the financing obligation was $2.1 million and the implicit interest rate was 22.6%.
 
Net cash provided by (used in) financing activities during the first quarter of fiscal 2015 and fiscal 2014 was ($5.4) million and $8.0 million, respectively.  Net cash provided by financing activities during the first quarter of fiscal 2015 consisted of net borrowings under the Amended Credit Agreement and net proceeds from equipment financing of $2.1 million.
 
The following table sets forth the average revolver balance outstanding, the maximum amount outstanding at end of the fiscal periods, and amounts outstanding for each borrowing type:
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4, 2014
   
May 5, 2013
 
Maximum revolver balance outstanding during period
 
$
91,851
   
$
83,312
 
Average revolver balance outstanding during period
   
84,333
     
76,996
 
Outstanding loan types at end of period:
               
Revolving credit facility
   
85,229
     
71,627
 
Letters of credit
   
9,216
     
8,242
 
 
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 Company’s business activities consist of the operation of ALCO stores.
 
The Company initiated a transactional web site during November 2011.  In July 2012, the Company expanded the product selection on its website which now includes more than 20,000 items of high-quality merchandise.  Products offered on the ALCOstores.com website include video games and electronics, housewares, appliances and furniture, health & beauty aids, baby goods, office supplies, automotive and sporting goods, and much more.  As in traditional ALCO stores, consumers can choose from a wide range of well-known brand names.  In addition, the website includes brands not found in the Company’s retail stores.  Based on its immaterial results of operation, the transactional website has been aggregated with the operating results of the Company’s ALCO stores.
 
The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories:
 
 
 
Thirteen Week Periods Ended
 
 
 
May 4, 2014
   
May 5, 2013
 
Merchandise Category:
 
   
 
Consumables and commodities
   
39
%
   
38
%
Hardlines
   
27
%
   
27
%
Apparel and accessories
   
14
%
   
15
%
Home furnishings and décor
   
20
%
   
20
%
Total
   
100
%
   
100
%

ITEM 3. CONTROLS AND PROCEDURES
 
(a)  Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)  Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting during the fiscal quarter ended May 4, 2014 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
Other than the items delineated below, the Company is not a party to any material litigation, other than routine litigation from time to time in the ordinary course of business.
 
The Company is a defendant in a derivative action stemming from the Company’s proposed Merger with a subsidiary of an affiliate of Argonne Capital Group, LLC as discussed below.  This action arose when two separately filed stockholder actions were consolidated, discussed below.  There was also a third stockholder action, discussed below, but it has been dismissed.
 
On July 25, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mallard Parent, LLC, (“Parent”) and M Acquisition Corporation, (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.  Parent and Acquisition Sub are beneficially owned by an affiliate of Argonne Capital Group, LLC (the “Sponsor”).  The merger consideration was $14.00 per share in cash, without interest, and was to be supported through financing to be obtained by the Sponsor.
 
Under the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares, if any, owned by Parent, Merger Sub, the Company, or any other direct or indirect wholly owned subsidiary of Parent, Merger Sub, or the Company) would have been converted into the right to receive $14.00 per share in cash, without interest.
 
The Merger was subject to the approval by at least a majority of all outstanding shares of common stock.  The Merger was also subject to various other customary conditions, including the absence of any governmental order prohibiting the consummation of the transaction contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement, and compliance with the covenants and agreements in the Merger Agreement in all material respects.
 
The Company was subject to customary “non-solicitation” provisions that limited its ability to solicit, encourage, discuss or negotiate alternative acquisition proposals from third parties or to provide non-public information to third parties.  These non-solicitation provisions were subject to a “fiduciary out” provision that allows the Company to provide non-public information and participate in discussions and negotiations with respect to certain unsolicited written acquisition proposals and to terminate the Merger Agreement and enter into an alternative acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement, provided that the Company’s Board of Directors has concluded that the failure to do so would be inconsistent with its fiduciary obligations under applicable law.
 
The Merger Agreement contained certain termination rights, including the Company’s right to terminate the Merger Agreement to accept a superior proposal, and provided that, upon termination of the Merger Agreement by the Company under specified conditions, a termination fee would have been payable by the Company.  In such circumstances, the Company would have been required to pay Sponsor $2.25 million. Subject to approval by at least a majority of all outstanding shares of common stock, the proposed Merger was expected to close before the end of the 2013 calendar year.
 
On October 30, 2013, the Company held a special meeting of its stockholders to vote on the proposal to adopt the Merger Agreement.  The proposal to adopt the Merger Agreement did not receive approval from more than a majority of the outstanding share of the Company’s common stock, and therefore was not approved by the Company’s Stockholders.  As a result of the failure to receive such stockholder approval, on October 30, 2013, the Company delivered to parent and Merger Sub a written notice (the “Termination Notice”) terminating the Merger Agreement in accordance with Section 7.2(b) of the Merger Agreement.  As a result of the Termination Notice, the Merger Agreement was terminated and the merger contemplated was abandoned.  Because the Termination Notice was delivered because of the failure of the Company’s stockholders to approve the Merger Agreement, no termination fee was paid by either party.
 
Merger related costs for the thirteen weeks ended May 4, 2014, included in SG&A Expenses from Continuing Operations, were $.1 million.
 
On September 5, 2013, Advanced Advisors, a Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001007) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties.  The amount of the damages was unspecified.
 
On September 23, 2013, Paul Hughes, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001096) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties.  The amount of the damages was unspecified.  On March 20, 2014, Plaintiffs filed a notice of dismissal without prejudice.  On April 10, 2014, the court entered a dismissal order and removed the case from the active docket.
On September 27, 2013, Jeffery R. Geygan, an individual Company stockholder, filed a class action petition in the District Court of Shawnee County, Kansas (case no. 13C001120) citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenged the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants included breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages was unspecified.
 
On November 21, 2013, the parties filed a joint motion to consolidate the Geygan case and the Advanced Advisors case, discussed above.  On December 18, 2013, the court granted the consolidation motion, and the cases were consolidated under case no. 13C1007.  On January 9, 2014, the Plaintiffs filed their consolidated  and verified derivative petition, citing, among other parties, the Company and the Company’s directors, Royce Winsten, Terrence Babilla, Dennis Logue, Lolan Mackey, and Richard Wilson, as defendants.  The petition challenges the defendants’ actions in causing the Company to enter into the Merger Agreement under which the Sponsor was to purchase all of the outstanding shares of the Company.  The allegations against the defendants include breaches of fiduciary duties and the aiding and abetting of breaches of fiduciary duties. The amount of the damages is unspecified.
 
On January 30, 2014, the Company filed a motion to dismiss the Plaintiffs’ consolidated and verified derivative petition.  The court has not yet set a hearing date for the Company’s motion to dismiss.
 
The Company intends to vigorously defend itself in all of the legal proceedings discussed above.
 
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 2, 2014.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On July 27, 2012, the Company entered into the Stock Repurchase Agreement, as discussed above, whereby the Company authorized the repurchase of up to 175,000 shares of the Company’s Common Stock under the Company’s Program.
 
The Program was initially authorized by the Company on March 23, 2006, whereby the Board of Directors of the Company authorized the repurchase of 200,000 shares of the Company's Common Stock, and the Company repurchased 3,337 shares of Common Stock under the Program. The Company's Board of Directors reinstated the Program on August 13, 2008 and the Company repurchased 22,197 shares of Common Stock under the Program during such period of reinstatement. The Board of Directors of the Company approved the reinstatement of the Program again on January 6, 2012 and the Company repurchased an additional 34,407 shares of Common Stock during such reinstatement. On April 25, 2012, the Board of Directors of the Company authorized the Company to repurchase an additional 500,000 shares of Common Stock for a total of 700,000 shares of Common Stock authorized for repurchase under the Program. The Stock Repurchase Agreement only authorizes William Blair and Company, LLC to repurchase a portion of the total shares available for repurchase under the Program as stated above. Under the terms of the Program, the Company can terminate the proposed buy back at any time.
 
As of February 2, 2014, the Company repurchased a total of 610,462 shares of Common Stock under the Program since it was initially approved in 2006.  All shares were repurchased at market prices and the Company’s policy is to apply the excess of purchase price over par value to additional paid-in capital.  There were 89,538 shares of Common Stock available to be repurchased by the Company, as of May 4, 2014.
 
As of June 17, 2014, the Company had not repurchased additional shares subsequent to May 4, 2014.
 
Company Repurchases of Common Stock
 
Period
 
Number of
Shares Purchased
   
Weighted
Average Price Paid
Per Share
   
Total Number of
Shares Purchased as Part
Of Publicly Announced
Plans or Programs
   
Total Number of
Shares
Authorized for
Repurchase
   
Maximum Number
of Shares that May Yet
Be Purchased Under
The Plans or Programs
 
As of February 2, 2014
   
610,462
   
$
7.12
     
610,462
     
700,000
     
89,538
 
 
                                       
First quarter:
                                       
Month 1
   
     
     
     
     
 
Month 2
   
     
     
     
     
 
Month 3
   
     
     
     
     
 
As of May 4, 2014
   
610,462
   
$
7.12
     
610,462
     
700,000
     
89,538
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Other than routine litigation from time to time in the ordinary course of business, the Company is not a party to any material litigation.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.
ITEM 6. EXHIBITS
 
The following exhibits are filed or furnished with this Quarterly Report:
 
Number
 
Description
 
 
 
3.1
 
Articles of Incorporation of 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
 
Amended and Restated Bylaws of ALCO Stores, Inc. is incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 27, 2011.
 
 
 
3.3
 
Certificate of Amendment to the Articles of Incorporation of ALCO Stores, Inc. is incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on June 29, 2012.
 
 
 
4.1
 
Specimen of 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 the Amended and Restated Bylaws described under 3.2 above and the Certificate of Amendment to the Articles of Incorporation described under 3.3 above.
 
 
 
10.1
 
Stock Option Agreement between the Company and Tom Canfield, Jr. dated September 16, 2009 is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company dated September 24, 2009.
 
 
 
10.2
 
Employment Agreement dated February 11, 2010 between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company dated February 25, 2010.
 
 
 
10.3
 
Stock Option Agreement, dated February 11, 2010, between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of the Company dated February 25, 2010.
 
 
 
10.4
 
Stock Option Agreement dated September 20, 2010 between the Company and Wayne S. Peterson is incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of the Company dated September 22, 2010.
 
 
 
10.5
 
Indemnification Agreements between the Company and Royce Winsten, Raymond A.D. French, Lolan C. Mackey and Dennis E. Logue all dated June 14, 2010 incorporated herein by reference to Exhibit 10.5 on Current Report Form 8-K filed by the Company on June 18, 2010.
 
 
 
10.6
 
Indemnification Agreement between the Company and Richard E. Wilson dated August 24, 2010 incorporated herein by reference to Exhibit 10.6 on Current Report Form 8-K of the Company dated August 27, 2010.
 
 
 
10.7
 
Indemnification Agreement between the Company and Terrence M. Babilla dated September 2, 2010 incorporated herein by reference to Exhibit 10.7 on Current Report Form 8-K of the Company dated September 9, 2010
 
 
 
10.8
 
Stock Option Agreement between the Company and Terrence M. Babilla dated September 10, 2010 incorporated herein by reference to Exhibit 10.8 to Current Report Form 8-K of the Company dated September 16, 2010.
 
 
 
10.9
 
Credit Agreement dated July 21, 2011, between ALCO Stores, Inc. and Wells Fargo Bank, National Association incorporated by reference to Exhibit 10.9 on Current Report Form 8-K of the Company dated July 27, 2011.
 
 
 
10.10
 
Independent Director Compensation Policy is incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of the Company dated June 27, 2011.
 
 
 
10.11
 
Employment Agreement dated September 20, 2010 between the Company and Wayne S. Peterson is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated September 22, 2010.
 
 
 
10.12
 
Employment agreement entered into by the Company and Wayne S. Peterson dated March 15, 2012 is incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 8-K dated March 22, 2012.
 
 
 
10.13
 
Employment agreement entered into by the Company and Tom L. Canfield, Jr. dated March 15, 2012 is incorporated by reference to Exhibit 10.13 to the Company's Current Report on Form 8-K dated March 22, 2012.
 
 
 
10.14
 
Stock Option Agreement between the Company and Wayne S. Peterson dated April 30, 2012 incorporated herein by reference to Exhibit 10.14 to Current Report Form 8-K of the Company dated May 3, 2012.
 
 
 
10.15
 
Stock Option Agreement between the Company and Tom L. Canfield, Jr. dated April 30, 2012 incorporated herein by reference to Exhibit 10.15 to Current Report Form 8-K of the Company dated May 3, 2012.
10.16
 
Stock Option Agreement between the Company and Dennis E. Logue dated June 29, 2012 incorporated herein by reference to Exhibit 10.16 to Current Report Form 8-K of the Company dated July 10, 2012.
 
 
 
10.17
 
Stock Option Agreement between the Company and Terrence M. Babilla dated June 29, 2012 incorporated herein by reference to Exhibit 10.17 to Current Report Form 8-K of the Company dated July 10, 2012.
 
 
 
10.18
 
Stock Option Agreement between the Company and Lolan C. Mackey dated June 29, 2012 incorporated herein by reference to Exhibit 10.18 to Current Report Form 8-K of the Company dated July 10, 2012.
 
 
 
10.19
 
Stock Option Agreement between the Company and Royce Winsten dated June 29, 2012 incorporated herein by reference to Exhibit 10.19 to Current Report Form 8-K of the Company dated July 10, 2012.
 
 
 
10.20
 
2012 Equity Incentive Plan is incorporated by reference to Exhibit 10.20 to the Form S-8 of the Company dated July 11, 2012.
 
 
 
10.21
 
Incentive Bonus Plan is incorporated by reference to Exhibit 10.21 to the Current Report on Form 8-K of the Company dated July 13, 2012.
 
 
 
10.22
 
Employment agreement entered into by the Company and Brent A. Streit dated March 15, 2012 is incorporated by reference to Exhibit 10.22 to the Company's Current Report on Form 8-K dated July 13, 2012.
 
 
 
10.23
 
Time Based Incentive Stock Option Agreement between the Company and Richard E. Wilson dated July 6, 2012 incorporated herein by reference to Exhibit 10.23 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.24
 
Performance Based Incentive Stock Option Agreement between the Company and Richard E. Wilson dated July 6, 2012 incorporated herein by reference to Exhibit 10.24 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.25
 
Time Based Incentive Stock Option Agreement between the Company and Wayne S. Peterson dated July 6, 2012 incorporated herein by reference to Exhibit 10.25 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.26
 
Performance Based Incentive Stock Option Agreement between the Company and Wayne S. Peterson dated July 6, 2012 incorporated herein by reference to Exhibit 10.26 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.27
 
Time Based Incentive Stock Option Agreements between the Company and Tom L. Canfield dated July 6, 2012 incorporated herein by reference to Exhibit 10.27 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.28
 
Performance Based Incentive Stock Option Agreements between the Company and Tom L. Canfield dated July 6, 2012 incorporated herein by reference to Exhibit 10.28 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.29
 
Time Based Incentive Stock Option Agreements between the Company and Brent A. Streit dated July 6, 2012 incorporated herein by reference to Exhibit 10.29 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.30
 
Performance Based Incentive Stock Option Agreements between the Company and Brent A. Streit dated July 6, 2012 incorporated herein by reference to Exhibit 10.30 to Current Report Form 8-K of the Company dated July 13, 2012.
 
 
 
10.31
 
Appointment of new independent registered public accounting firm incorporated herein by reference to Exhibit 10.31 to Current Report Form 8-K of the Company dated July 17, 2012.
 
 
 
10.32
 
Resignation of Officer. On October 5, 2012, Edmond C. Beaith resigned from the Company and such resignation is incorporated by reference to Exhibit 10.32 to the Current Report on Form 8-K of the Company dated October 11, 2012.
 
 
 
10.33
 
First Amendment to the Credit Agreement, described under 10.11 above, dated February 6, 2013 and incorporated by reference to Exhibit 10.33 to the Current Report on Form 8-K of the Company dated February 12, 2013.
 
 
 
10.34
 
Time Announcement to relocate the Company’s corporate headquarters from Abilene, Kansas to Coppell, Texas, a suburb of Dallas, Texas incorporated by reference to Exhibit 10.34 to the Current Report on Form 8-K of the Company dated April 10, 2013.
 
 
 
10.35
 
Rights Agreement entered into between the Company and Computershare Trust Company, N.A. dated May 3, 2013 incorporated herein by reference to Exhibit 10.35 to Current Report on Form 8-K of the Company dated May 6, 2013.
 
 
 
10.36
 
Lease Agreement entered into between the Company and IIT Freeport Office LP incorporated by reference to Exhibit 10.36 to Current Report on Form 8-K of the Company dated May 8, 2013.
 
 
 
10.37
 
Incentive Bonus Plan is incorporated by reference to Exhibit 10.37 to the Current Report on Form 8-K of the Company dated May 31, 2013.
 
 
 
10.38
 
Employment agreement entered into by the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.38 to the Company's Current Report on Form 8-K dated May 31, 2013.
10.39
 
Time Based Incentive Stock Option Agreement entered into between the Company and Richard E. Wilson dated May 24, 2013 is incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.40
 
Restricted Stock Agreement entered into between the Company and Richard E. Wilson dated May 24, 2013 is incorporated by reference to Exhibit 10.40 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.41
 
Time Based Incentive Stock Option Agreement entered into between the Company and Wayne S. Peterson dated May 24, 2013 is incorporated by reference to Exhibit 10.41 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.42
 
Restricted Stock Agreement entered into between the Company and Wayne S. Peterson dated May 24, 2013 is incorporated by reference to Exhibit 10.42 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.43
 
Time Based Incentive Stock Option Agreement entered into between the Company and Tom L. Canfield, Jr. dated May 24, 2013 is incorporated by reference to Exhibit 10.43 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.44
 
Restricted Stock Agreement entered into between the Company and Tom L. Canfield, Jr. dated May 24, 2013 is incorporated by reference to Exhibit 10.44 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.45
 
Time Based Incentive Stock Option Agreement entered into between the Company and Brent A. Streit dated May 24, 2013 is incorporated by reference to Exhibit 10.45 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.46
 
Restricted Stock Agreement entered into between the Company and Brent A. Streit dated May 24, 2013 is incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.47
 
Time Based Incentive Stock Option Agreement entered into between the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.47 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.48
 
Restricted Stock Agreement entered into between the Company and Ricardo A. Clemente dated May 24, 2013 is incorporated by reference to Exhibit 10.48 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.49
 
Stock Option Award to Royce Winsten, the chairman of the Board of Directors, incorporated herein by reference to Exhibit 10.49 to the Company’s Current Report on Form 8-K dated May 31, 2013.
 
 
 
10.50
 
Stock Option Agreement between the Company and Royce Winsten dated July 1, 2013 incorporated herein by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K dated July 8, 2013.
 
 
 
10.51
 
Stock Option Agreement between the Company and Terrence M. Babilla dated July 1, 2013 incorporated herein by reference to Exhibit 10.51 to the Company’s Current Report on Form 8-K dated July 8, 2013.
 
 
 
10.52
 
Stock Option Agreement between the Company and Dennis E. Logue dated July 1, 2013 incorporated herein by reference to Exhibit 10.52 to the Company’s Current Report on Form 8-K dated July 8, 2013.
 
 
 
10.53
 
Stock Option Agreement between the Company and Lolan C. Mackey dated July 1, 2013 incorporated herein by reference to Exhibit 10.53 to the Company’s Current Report on Form 8-K dated July 8, 2013.
 
 
 
10.54
 
Agreement and Plan of Merger dated July 25, 2013 incorporated herein by reference to Exhibit 10.54 to the Company’s Current Report on Form 8-K dated July 25, 2013.
 
 
 
10.55
 
Resignation of Officer. On April 17, 2014, Tom L. Canfield, Jr. resigned from the Company and such resignation is incorporated by reference to Exhibit 10.55 to the Current Report on Form 8-K of the Company dated April 17, 2014.
 
 
 
10.56
 
The Rights Plan Amendment and the appointment of Leslie Ball and Paul T. Davies to the Company’s Board of Directors incorporated herein by reference to Exhibit 10.56 to the Company’s Current Report on Form 8-K dated May 5, 2014.
 
 
 
10.57
 
Amended Credit Agreement dated May 30, 2014 incorporated herein by reference to Exhibit 10.57 to the Company’s Current Report on Form 8-K dated May 30, 2014.
 
 
 
10.58
Amended and Restated Rights Agreement dated June 9, 2014 incorporated herein by reference to Exhibit 10.58 to the Company’s Current Report on Form 8-K dated June 9, 2014.
 
 
Schedule of change in same-store sales and same-store gross margin dollars.
 
 
 
 
Certification of Chief Executive Officer of ALCO Stores, Inc., dated June 18, 2014, 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.
 
 
 
 
Certification of Chief Financial Officer of ALCO Stores, Inc., dated June 18, 2014, 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.
 
 
 
 
Certification of Chief Executive Officer of ALCO Stores, Inc., dated June 18, 2014, 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 Annual Report on Form 10-K  and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.
 
 
 
 
Certification of Chief Financial Officer of ALCO Stores, Inc., dated June 18, 2014, 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 Annual Report on Form 10-K  and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Signature and Title
 
Date
 
 
 
/s/ Richard E. Wilson
 
June 18, 2014
Richard E. Wilson
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Brian  Assmus
 
June 18, 2014
Brian Assmus
 
 
Vice President – Controller, Treasurer and current Principal Financial and Accounting Officer
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
23