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 October 31, 2010
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20269
DUCKWALL-ALCO STORES, INC.
(Exact name of registrant as specified in its charter)
| Kansas | 48-0201080 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
401 Cottage Street Abilene, Kansas | 67410-2832 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number including area code: (785) 263-3350
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES NO X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer", "large accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X
APPLICABLE ONLY TO CORPORATE ISSUERS:
3,841,895 shares of common stock, $.0001 par value (the issuer's only class of common stock), were outstanding as of October 31, 2010.
DUCKWALL-ALCO STORES, INC.
| TABLE OF CONTENTS | |||
| PART I | |||
| Item 1. | 3 | ||
| Item 2. | 9 | ||
| Item 3. | 16 | ||
| Item 4. | 17 | ||
| PART II | |||
| Item 1. | 17 | ||
| Item 1A. | 17 | ||
| Item 2. | 18 | ||
| Item 3. | 18 | ||
| Item 4. | 18 | ||
| Item 5. | 18 | ||
| Item 6. | 19 | ||
| Signature | 21 | ||
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| Duckwall-ALCO Stores, Inc. | ||||||||
| Consolidated Balance Sheets | ||||||||
| (dollars in thousands, except share and per share amounts) | ||||||||
| Assets | ||||||||
| October 31, 2010 | January 31, 2010 | |||||||
| (Unaudited) | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,356 | 5,164 | |||||
| Receivables | 5,376 | 7,437 | ||||||
| Prepaid income taxes | 3,996 | 594 | ||||||
| Inventories | 177,335 | 140,375 | ||||||
| Prepaid expenses | 3,727 | 3,517 | ||||||
| Deferred income taxes | 4,073 | 3,863 | ||||||
| Assets held for sale | 935 | 1,631 | ||||||
| Total current assets | 200,798 | 162,581 | ||||||
| Property and equipment, at cost: | ||||||||
| Land and land improvements | 1,454 | 1,455 | ||||||
| Buildings and building improvements | 11,902 | 11,844 | ||||||
| Furniture, fixtures and equipment | 70,467 | 67,304 | ||||||
| Transportation equipment | 1,357 | 1,303 | ||||||
| Leasehold improvements | 16,073 | 14,855 | ||||||
| Construction work in progress | 2,632 | 1,744 | ||||||
| Total property and equipment | 103,885 | 98,505 | ||||||
| Less accumulated depreciation | 73,916 | 67,959 | ||||||
| Net property and equipment | 29,969 | 30,546 | ||||||
| Property under capital leases | 17,815 | 11,015 | ||||||
| Less accumulated amortization | 10,420 | 9,385 | ||||||
| Net property under capital leases | 7,395 | 1,630 | ||||||
| Other non-current assets | 1,096 | 51 | ||||||
| Total assets | $ | 239,258 | 194,808 | |||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 1,522 | 1,451 | |||||
| Current maturities of capital lease obligations | 706 | 1,623 | ||||||
| Accounts payable | 46,011 | 23,076 | ||||||
| Accrued salaries and commissions | 4,942 | 4,122 | ||||||
| Accrued taxes other than income | 6,414 | 4,913 | ||||||
| Self-insurance claim reserves | 4,236 | 4,852 | ||||||
| Other current liabilities | 5,130 | 4,499 | ||||||
| Total current liabilities | 68,961 | 44,536 | ||||||
| Long term debt, less current maturities | 263 | 1,414 | ||||||
| Notes payable under revolving loan agreement | 54,865 | 35,159 | ||||||
| Capital lease obligations, less current maturities | 7,478 | 1,345 | ||||||
| Deferred gain on leases | 3,922 | 4,212 | ||||||
| Deferred income taxes | 858 | 694 | ||||||
| Other noncurrent liabilities | 1,791 | 1,715 | ||||||
| Total liabilities | 138,138 | 89,075 | ||||||
| Stockholders' equity: | ||||||||
| Common stock, $.0001 par value, authorized 20,000,000 shares; issued and outstanding | ||||||||
| 3,841,895 shares and 3,797,947 shares, respectively | 1 | 1 | ||||||
| Additional paid-in capital | 39,955 | 39,313 | ||||||
| Retained earnings | 61,164 | 66,419 | ||||||
| Total stockholders' equity | 101,120 | 105,733 | ||||||
| Total liabilities and stockholders' equity | $ | 239,258 | 194,808 | |||||
| See accompanying notes to unaudited consolidated financial statements. | ||||||||
3
| Duckwall-ALCO Stores, Inc. | ||||||||||||||||
| Consolidated Statements of Operations | ||||||||||||||||
| (dollars in thousands, except per share amounts) | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| For the Thirteen Week | For the Thirty-Nine Week | |||||||||||||||
| Periods Ended | Periods Ended | |||||||||||||||
| October 31, 2010 | November 1, 2009 | October 31, 2010 | November 1, 2009 | |||||||||||||
| Net sales | $ | 110,488 | 111,194 | 341,497 | 351,173 | |||||||||||
| Cost of sales | 75,530 | 75,635 | 233,850 | 234,921 | ||||||||||||
| Gross margin | 34,958 | 35,559 | 107,647 | 116,252 | ||||||||||||
| Selling, general and administrative | 35,428 | 34,709 | 106,373 | 104,740 | ||||||||||||
| Depreciation and amortization | 2,588 | 2,328 | 7,571 | 6,972 | ||||||||||||
| Total operating expenses | 38,016 | 37,037 | 113,944 | 111,712 | ||||||||||||
| Operating income (loss) from continuing operations | (3,058 | ) | (1,478 | ) | (6,297 | ) | 4,540 | |||||||||
| Interest expense, net | 1,015 | 531 | 2,410 | 1,589 | ||||||||||||
| Earnings (loss) from continuing operations before income taxes | (4,073 | ) | (2,009 | ) | (8,707 | ) | 2,951 | |||||||||
| Income tax expense (benefit) | (2,105 | ) | (606 | ) | (3,656 | ) | 1,346 | |||||||||
| Earnings (loss) from continuing operations | (1,968 | ) | (1,403 | ) | (5,051 | ) | 1,605 | |||||||||
| Loss from discontinued operations, net of income tax benefit | (59 | ) | (34 | ) | (204 | ) | (61 | ) | ||||||||
| Net earnings (loss) | $ | (2,027 | ) | (1,437 | ) | (5,255 | ) | 1,544 | ||||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | ||||||||||||||||
| Continuing operations | $ | (0.51 | ) | (0.37 | ) | (1.32 | ) | 0.42 | ||||||||
| Discontinued operations | (0.02 | ) | (0.01 | ) | (0.05 | ) | (0.01 | ) | ||||||||
| Net earnings (loss) per share | $ | (0.53 | ) | (0.38 | ) | (1.37 | ) | 0.41 | ||||||||
| Earnings (loss) per share | ||||||||||||||||
| Diluted | ||||||||||||||||
| Continuing operations | $ | (0.51 | ) | (0.37 | ) | (1.32 | ) | 0.41 | ||||||||
| Discontinued operations | (0.02 | ) | (0.01 | ) | (0.05 | ) | (0.01 | ) | ||||||||
| Net earnings (loss) per share | $ | (0.53 | ) | (0.38 | ) | (1.37 | ) | 0.40 | ||||||||
| See accompanying notes to unaudited consolidated financial statements. | ||||||||||||||||
4
| Duckwall-ALCO Stores, Inc. | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| (dollars in thousands) | ||||||||
| (Unaudited) | ||||||||
| For the Thirty-Nine Week | ||||||||
| Periods Ended | ||||||||
| October 31, 2010 | November 1, 2009 | |||||||
| Cash flows from operating activities: | ||||||||
| Net earnings (loss) | $ | (5,255 | ) | 1,544 | ||||
| Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 7,571 | 6,929 | ||||||
| Gain on sale of assets | (6 | ) | (70 | ) | ||||
| Share-based compensation | 268 | 601 | ||||||
| Tax benefit of stock options exercised | 13 | - | ||||||
| Deferred income tax expense, net | (46 | ) | 422 | |||||
| Changes in: | ||||||||
| Receivables | 2,061 | (856 | ) | |||||
| Prepaid income taxes | (3,402 | ) | 4,226 | |||||
| Inventories | (36,960 | ) | (18,511 | ) | ||||
| Prepaid expenses | (210 | ) | 455 | |||||
| Accounts payable | 22,935 | 7,057 | ||||||
| Accrued salaries and commissions | 820 | (268 | ) | |||||
| Accrued taxes other than income | 1,501 | 469 | ||||||
| Self-insurance claim reserves | (616 | ) | (222 | ) | ||||
| Other assets and liabilities | 590 | (565 | ) | |||||
| Net cash (used in) provided by operating activities | (10,736 | ) | 1,211 | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds from the sale of assets | 842 | 73 | ||||||
| Acquisition of property and equipment | (6,098 | ) | (4,664 | ) | ||||
| Net cash used in investing activities | (5,256 | ) | (4,591 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowings under revolving loan agreement | 19,706 | 6,796 | ||||||
| Revolving loan agreement financing costs | (1,300 | ) | - | |||||
| Proceeds from exercise of outstanding stock options | 442 | - | ||||||
| Principal payments under term loan | (1,080 | ) | (1,013 | ) | ||||
| Principal payments under capital lease obligations | (1,584 | ) | (1,444 | ) | ||||
| Net cash provided by financing activities | 16,184 | 4,339 | ||||||
| Net increase in cash and cash equivalents | 192 | 959 | ||||||
| Cash and cash equivalents at beginning of period | 5,164 | 4,744 | ||||||
| Cash and cash equivalents at end of period | $ | 5,356 | 5,703 | |||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid (received) during the period for: | ||||||||
| Interest | $ | 2,259 | 1,594 | |||||
| Income tax refunds, net of income taxes | (267 | ) | (3,097 | ) | ||||
| See accompanying notes to unaudited consolidated financial statements. | ||||||||
5
Duckwall-ALCO Stores, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except share and per share amounts or as otherwise noted)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Duckwall-ALCO Stores, Inc. (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. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the consolidated financial statements included in the Company's fiscal 2010 Annual Report. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to presen t fairly the financial position of the Company and the results of its operations and cash flows for the interim periods. Because the Company’s business is moderately seasonal, the results from interim periods are not necessarily indicative of the results to be expected for the entire year.
Fiscal 2011 and 2010 are both 52-week fiscal years consisting of four thirteen week periods referred to as quarters. The thirteen weeks ended October 31, 2010 and November 1, 2009 are referred to herein as the third quarter of fiscal 2011 and 2010, respectively.
The depreciation and amortization amount from the Consolidated Statements of Operations may not agree to the Consolidated Statements of Cash Flows due to the fact that a portion of the depreciation and amortization from the Consolidated Statements of Cash Flows is included in the loss from discontinued operations, net of income tax benefit line of the Consolidated Statements of Operations. Certain amounts in prior periods have been reclassified to conform to current period presentation.
The Company opened three new ALCO stores during the thirty-nine weeks of fiscal 2011 that qualified as capital leases. The Company has accounted for these leased stores as capital leased property and recorded $6.8 million in property under capital lease.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All significant intercompany transactions have been eliminated.
(3) Share-Based Compensation
Effective with fiscal 2007, the Company began recognizing compensation for its share-based payments based on the fair value of the awards. Share-based payments consist of stock option grants. For the thirteen weeks ended October 31, 2010 and November 1, 2009, share-based compensation decreased pre-tax income by $68 and $155, respectively. For the thirty-nine weeks ended October 31, 2010 and November 1, 2009 share-based compensation decreased pre-tax income by $268 and $601, respectively.
Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Stock Incentive Plan
Under our 2003 Incentive Stock Option Plan, options may be granted to officers and key employees, not to exceed 500,000 shares. According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Als o, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100. In the event that the foregoing results in a portion of an option exceeding the $100 limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option. At October 31, 2010, the Company had 199,220 shares authorized for future option grants. The Company issues these grants from the unissued shares authorized.
Under our Non-Qualified Stock Option Plan for Non-Management Directors, options may be granted to Directors of the Company who are not otherwise officers or employees of the Company, not to exceed 200,000 shares. According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. All options under the plan shall be non-qualified stock options. There are 78,957 shares remaining to be issued under this plan.
Under our Non-Qualified Stock Option Agreement with Lawrence J. Zigerelli as part of his starting employment with the Company on July 1, 2008, Mr. Zigerelli was granted the right to purchase 10,000 shares of the Company’s common stock. According to the terms of the Agreement, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. The unvested portion of these options terminated during the first quarter of fiscal 2011 due to the separation of Mr. Zigerelli from the Company. Mr. Zigerelli e xercised the 2,500 shares vested under this Agreement on March 19, 2010. The Company issued these grants from the unissued shares authorized. There are no shares remaining to be issued under this Agreement.
6
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 valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility.
The following summarizes information concerning stock option grants during fiscal 2011 and 2010:
| Fiscal 2010 Ended | For the Thirteen Week Periods Ended | For the Thirty-Nine Week Periods Ended | ||||||||||||||||||
| January 31, 2010 | October 31, 2010 | November 1, 2009 | October 31, 2010 | November 1, 2009 | ||||||||||||||||
| Stock options granted | 45,000 | 45,000 | 10,000 | 145,000 | 45,000 | |||||||||||||||
| Weighted average exercise price | $ | 13.95 | 9.25 | 17.89 | 10.34 | 13.95 | ||||||||||||||
| Weighted average grant date fair value | $ | 5.47 | 5.60 | 7.86 | 6.12 | 5.95 | ||||||||||||||
The weighted average for key assumptions used in determining the fair value of options granted in the thirteen and thirty-nine week periods ended October 31, 2010 and November 1, 2009, and a summary of the methodology applied to develop each assumption are as follows:
| Fiscal 2010 Ended | For the Thirteen Week Periods Ended | For the Thirty-Nine Week Periods Ended | ||||||||||||||||||
| January 31, 2010 | October 31, 2010 | November 1, 2009 | October 31, 2010 | November 1, 2009 | ||||||||||||||||
| Expected price volatility | 48.9 | % | 54.0 | % | 50.2 | % | 52.0 | % | 51.3 | % | ||||||||||
| Risk-free interest rate | 1.5 | % | 0.8 | % | 1.7 | % | 1.3 | % | 1.4 | % | ||||||||||
| Weighted average expected lives in years | 4.8 | 4.3 | 4.8 | 4.6 | 4.3 | |||||||||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
EXPECTED PRICE VOLATILITY -- This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.
RISK-FREE INTEREST RATE -- This is the applicable U.S. Treasury rate for the date of the grant over the expected term. An increase in the risk-free interest rate will increase share-based compensation.
EXPECTED LIVES -- This is the period of time over which the options granted are expected to remain outstanding and is based on management’s expectations in relation to the holders of the options. Options granted have a maximum term of five years. An increase in the expected life will increase share-based compensation.
DIVIDEND YIELD --- The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.
As of October 31, 2010, total unrecognized share-based compensation related to non-vested stock options is $842 with a weighted average expense recognition period of 3.1 years.
(4) Accounting for Income Taxes
The Company recorded decreases in gross unrecognized tax benefits, inclusive of related interest, of $6 and $8 for the thirty-nine week periods ended October 31, 2010 and November 1, 2009, respectively. None of the amounts recorded as unrecognized tax benefits would impact the effective income tax rate if recognized.
The statute of limitations for our federal income tax returns is open for 2007 through 2009. We file in numerous state jurisdictions with varying statutes of limitation. State returns are open from 2006 through 2009 or 2007 through 2009 depending on each state’s statute of limitations.
(5) Subsequent Events
The Company has evaluated subsequent events for potential disclosure or recognition to the date of the issuance of the unaudited consolidated financial statements.
(6) Fair Value Measurements
The financial instruments of the Company consist of cash and cash equivalents, short-term receivables and accounts payable, accrued expenses and long-term debt instruments, including capital leases. For notes payable under the revolving loan agreement, fair value approximates the carrying value due to the variable interest rate. Based on the borrowing rates currently available to the Company for debt with similar terms, the fair value of term debt at October 31, 2010 approximates its carrying amount of $1.8 million. For all other financial instruments including cash and cash equivalents, short-term receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.
7
(7) Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding. Diluted net earnings per share reflects the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised, except for those periods with a loss.
| The average number of shares used in computing earnings per share was as follows: | ||||||||
| Thirteen Weeks Ended | Basic | Diluted | ||||||
| October 31, 2010 | 3,840,796 | 3,840,796 | ||||||
| November 1, 2009 | 3,797,947 | 3,797,947 | ||||||
| Thirty-Nine Weeks Ended | Basic | Diluted | ||||||
| October 31, 2010 | 3,829,152 | 3,829,152 | ||||||
| November 1, 2009 | 3,797,947 | 3,876,907 | ||||||
(8) Store Closings and Discontinued Operations
The Company closed four Duckwall stores in the first quarter of fiscal 2011 and one more during the third quarter of fiscal 2011. The Company closed one Duckwall store during the second quarter of fiscal 2010. All prior period amounts for closed stores have been reclassified to discontinued operations.
(9) New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2009-16, which updated Accounting Standards Codification ("ASC") Topic 810, "Accounting for Transfers of Financial Assets", which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The Company adopted this standard as of February 1, 2010. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
In June 2009, the FASB issued an amendment to a previously issued standard regarding consolidation of variable interest entities. This amendment was intended to improve financial reporting by enterprises involved with variable interest entities. Overall, the amendment revises the test for determining the primary beneficiary of a variable interest entity from a primarily quantitative analysis to a qualitative analysis. The provisions of the amendment are effective as of the beginning of the entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company adopted this standard as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position, r esults of operations or cash flows.
In August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820, "Fair Value Measurements and Disclosures" (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update provides clarification of circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. This update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: 1) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements and 3) enhance disclosures of assets and liabilities subject to fair value measurements. The provisions of ASU No. 2010-06 are effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December&# 160;15, 2010. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events ("Topic 855"): Amendments to Certain Recognition and Disclosure Requirements.” The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. ASU No. 2010-09 was effective upon issuance. The adoption of this guidance did not impact the Company’s financial condition, results of operations or cash flows.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands except per share amounts or as otherwise noted)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act. These statements are subject to risks and uncertainties, as described below. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, store openings, store closings, payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company's management or Board of Directors, including plans or objectives relating to inventory, store development, marketing, competition, business strategy, store environment, merchandising, purchasing, pricing, distribution, tran sportation, 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 current 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. 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 con dition, operating performance, revenues and income.
Management does not believe that its merchandising operations, net sales, revenue, or income (loss) from continuing operations have been materially impacted by inflation during the past two fiscal years. The Company will continue to monitor costs, take advantage of vendor incentive programs, selectively buy from competitive vendors and adjust merchandise prices based on market conditions.
Operations.
The Company is a regional broad line retailer operating in 23 states in the central United States. The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal years 2011, 2010 and 2009 consisted of 52 weeks and fiscal year 2008 consisted of 53 weeks. For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands.
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 prefers markets that do not have direct competition from national or regional broad line retail stores. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, dollar stores, manufacturer’s outlets and the internet.
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 2010, these circulars were distributed 47 times in ALCO markets. For fiscal 2011, the Company currently intends to distribute these circulars a similar number of times in the ALCO 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 visit the stores, to generate strong customer frequency and to increase average sales per customer. Net marketing and promotion costs represented approximately 1.0%, 0.8% and 0.9% of net sales in fiscal years 2010, 2009 and 2008. Management believes it has developed a comprehensive marketing strategy that will 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.
9
The Company’s ALCO stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, groceries, 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’s smaller Duckwall stores offer a more limited selection of similar merchandise. 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 facil itate 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 tra ffic. 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.
During fiscal 2011, the Company has elected to shift selected merchandise categories from promotional pricing to that of an everyday value strategy which has the effect of lowering permanent shelf pricing (less promotional markdowns). In these selected categories under the current conventional retail method calculation, the cost of inventory is lower than under other retail inventory method approaches.
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 currently intends to open fewer than 10 ALCO stores in fiscal 2011. While the Company believes that adequate sites are currently available, 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 this contingency, the Company has initiated an Assistant Manager Training Program whereby the Company provides general management training to manager candidates at monthly seminars held at the Company’s corporate offices. We anticipate that this program will increase our ability to train and retain qualified personnel. 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 the 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.
Recent Events.
| · | The Company closed one Duckwall store during the third quarter of fiscal 2011. It was located in an underperforming market and was at the end of lease term. |
| · | On August 25, 2010, the Company became a member in Associated Wholesale Grocers, Inc (AWG). AWG is a retailer-owned cooperative serving over 1,900 retail member stores with a merchandise assortment and extensive distribution network. |
| · | Terrence M. Babilla was elected to the Company's Board of Directors on September 2, 2010 |
| · | The Company entered into a Nonqualified Stock Option Agreement with Mr. Babilla for 20,000 stock options on September 2, 2010 |
| · | Wayne S. Peterson joined the Company on September 20, 2010 to become Senior Vice President - Chief Financial Officer |
| · | The Company entered into both an Employment Agreement and an Incentive Stock Option Agreement for 25,000 stock options with Mr. Peterson dated September 20, 2010 |
| · | The Company announced November 29, 2010 that it would close 43 Duckwall stores. The liquidation and closing of these stores will conclude during the fourth quarter of fiscal year 2011. The Company expects to record expenses of approximately $1.8 million during the fourth quarter for closing costs attributable to severance, lease liability, inventory liquidation and other related costs. Upon conclusion of the closing process, the Company expects to redeploy approximately $4.0 million in capital to the ALCO stores. |
Key Items in Third Quarter Fiscal 2011.
The Company measures itself against a number of financial metrics to assess its performance. Some of the important financial items during the third quarter of fiscal 2011 were:
| · | Net sales decreased 0.6% to $110.5 million. Same-store sales decreased 2.3% compared to the prior year third quarter. |
| · | Gross margin percentage decreased to 31.6% of sales, compared to 32.0% in the prior year third quarter. |
| · | Net loss per share was $0.53 in the third quarter of fiscal 2011 compared to net loss of $0.38 per share in the prior year third quarter. |
| · | The Company’s earnings from continuing operations before interest, taxes, depreciation and amortization, share-based compensation, preopening store costs and store transformation project costs (“Adjusted EBITDA”) for the third quarter 2011 was $471 compared to the prior year third quarter of $1.0 million. |
10
RESULTS OF OPERATIONS
Thirteen Weeks Ended October 31, 2010 Compared to Thirteen Weeks Ended November 1, 2009
Net Sales
Net sales for the third quarter of fiscal 2011 decreased $0.7 million, or 0.6%, to $110.5 million compared to $111.2 million for the third quarter of fiscal 2010. Same-store sales decreased 2.3% when compared with the prior year same quarter. Company sales were negatively impacted by decreases in apparel, home decor and outdoor living, which were offset by increases in electronics and the commodities categories of food and consumables.
Gross Margin
Gross margin for the third quarter of fiscal 2011 decreased $601, or 1.7%, to $35.0 million compared to $35.6 million in the third quarter of fiscal 2010. Gross margin as a percentage of sales was 31.6% for the third quarter of fiscal 2011, which decreased when compared to 32.0% for the third quarter of fiscal 2010. The decrease in the gross margin percentage was primarily due to lower margin as a result of product mix of $2.6 million offset by $2.0 million in lower markdowns.
SG&A
Selling, general and administrative (SG&A) expense increased $719 or 2.1%, to $35.4 million in the third quarter of fiscal 2011 compared to $34.7 million in the third quarter of fiscal 2010. As a percentage of net sales, SG&A expenses for the third quarter of fiscal 2011 were 32.1%, compared to 31.2% for third quarter fiscal 2010. The increase in SG&A expenses is attributable to increased store level labor and benefits of $577, utilities of $152 and merchant services processing fees of $118 offset by reduced accounting fees of $189 and advertising expense of $138. Excluding share-based compensation, preopening store costs and store transformation project costs (Adjusted SG&A expenses) were 31.2% and 31.1%, as percentage of net sales, for the third quarter fiscal 2011 and 2010, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $260, or 11.2%, to $2.6 million in the third quarter of fiscal 2011 compared to $2.3 million in the third quarter of fiscal 2010.
Interest Expense
Interest expense increased $484, or 91.1%, to $1.0 million in the third quarter of fiscal 2011 compared to $531 in the third quarter of fiscal 2010. The increase in interest expense is attributable to a higher interest rate charged with the restated credit agreement and a higher revolver balance.
Income Taxes
The Company’s effective tax rate on earnings from continuing operations before income taxes in the third quarter of fiscal 2011 was 51.7% compared to 30.2% in the third quarter of fiscal 2010. The effective tax rate has increased as a result of projected taxable loss for fiscal 2011. Also contributing to the increase were federal income tax credits which increased cumulative income tax benefits.
Loss from Discontinued Operations
Loss from discontinued operations, net of income tax benefit, was $59 in the third quarter of fiscal 2011, compared to $34, net of income tax benefit, in the third quarter of fiscal 2010. One Duckwall store was closed during the third quarter of fiscal 2011 while no stores were closed during the third quarter of fiscal 2010.
11
Thirty Nine Weeks Ended October 31, 2010 Compared to Thirteen Weeks Ended November 1, 2009
Net Sales
Net sales for the thirty-nine week period of fiscal 2011 decreased $9.7 million, or 2.8%, to $341.5 million compared to $351.2 million for the thirty-nine week period of fiscal 2010. Same-store sales decreased 4.2% when compared with the prior year same thirty-nine week period. Company sales were impacted by decreases in apparel, electronics and hardlines products, which were slightly offset by increases in the commodities categories of food, pet supplies and health care.
Gross Margin
Gross margin for the thirty-nine week period of fiscal 2011 decreased $8.6 million, or 7.4%, to $107.6 million compared to $116.3 million in the thirty-nine week period of fiscal 2010. Gross margin as a percentage of sales was 31.5% for the thirty-nine week period of fiscal 2011, which decreased when compared to 33.1% for the thirty-nine week period of fiscal 2010. The decrease in the gross margin percentage was primarily due to lower margin as a result of product mix of $6.2 million and reduced vendor consideration of $1.0 million offset by reduced markdowns of $1.9 million. Reduced merchandise receipts of certain seasonal and apparel items during the first quarter of fiscal 2011 attributed to the decline in margin due to product mix. The reduced merchandise receipts also resulted in lower vendor consideration.
SG&A
Selling, general and administrative (SG&A) expense increased $1.6 million or 1.6%, to $106.4 million in the thirty-nine week period of fiscal 2011 compared to $104.7 million in the thirty-nine week period of fiscal 2010. As a percentage of net sales, SG&A expenses for the thirty-nine week period of fiscal 2011 were 31.1%, compared to 29.8% for thirty-nine week period fiscal 2010. The increase in SG&A expenses is attributable to increased insurance costs of $1.3 million, store level labor and benefits of $880, executive and staff severance of $540, legal fees of $539, merchant services processing fees of $329, utilities of $213 and advertising costs of $183 offset by reduced store transformation project costs of $2.1 million and accounting fees of $478. Excluding share-based compensation, preopening store costs and store transformation project costs (Adjusted SG&A expenses) were 30.4% and 29.1%, as percentage of net sales, for the thirty-nine week period fiscal 2011 and 2010, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $599, or 8.6%, to $7.6 million in the thirty-nine week period of fiscal 2011 compared to $7.0 million in the thirty-nine week period of fiscal 2010.
Interest Expense
Interest expense increased $821, or 51.7%, to $2.4 million in the thirty-nine week period of fiscal 2011 compared to $1.6 million in the thirty-nine week period of fiscal 2010. The increase in interest expense is attributable to a higher interest rate charged with the restated credit agreement and higher revolver balance.
Income Taxes
The Company’s effective tax rate on earnings from continuing operations before income taxes in the thirty-nine week period of fiscal 2011 was 42.0% compared to 45.6% in the thirty-nine week period of fiscal 2010. The effective tax rate decreased as a result of large decreases in discrete items, primarily related to the true-ups from the fiscal year 2010 income tax returns offset by the effects of a projected taxable loss for fiscal 2011.
Loss from Discontinued Operations
Loss from discontinued operations, net of income tax benefit, was $204 in the thirty-nine week period of fiscal 2011, compared to a loss of $61, net of income tax benefit, in the thirty-nine week period of fiscal 2010. Five Duckwall stores were closed during the thirty-nine week period of fiscal year 2011 while one Duckwall store was closed during the same period of the previous fiscal year.
12
Certain Non-GAAP Financial Measures
The Company has included Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, non-GAAP performance measures, as part of its disclosure as a means to enhance its communications with stockholders. Certain stockholders have specifically requested this information to assist them in comparing the Company to other retailers that disclose similar non-GAAP performance measures. Further, management utilizes these measures in internal evaluation, review of performance and in comparing Company’s financial measures to those of its peers. Adjusted EBITDA differs from the most comparable GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted Gross Margin and Adjusted SG&A. These items are excluded by management to bett er evaluate normalized operational cash flow and expenses excluding unusual, inconsistent and non-cash charges. To compensate for the limitations of evaluating the Company's performance using Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, management also utilizes GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations. As a result, Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations.
| For the Thirteen Week Periods Ended | For the Thirty-Nine Week Periods Ended | |||||||||||||||
| SG&A Expenses Breakout | October 31, 2010 | November 1, 2009 | October 31, 2010 | November 1, 2009 | ||||||||||||
| Store support center (1) | $ | 5,341 | 5,397 | 16,857 | 17,515 | |||||||||||
| Distribution center (2) | 2,534 | 2,258 | 7,104 | 6,490 | ||||||||||||
| 401K expense | 100 | 101 | 225 | 297 | ||||||||||||
| Same-store SG&A (3) | 26,938 | 26,797 | 80,403 | 79,833 | ||||||||||||
| Non same-store SG&A (3)(4) | 447 | 1 | 1,516 | 4 | ||||||||||||
| Share-based compensation | 68 | 155 | 268 | 601 | ||||||||||||
| SG&A as reported | 35,428 | 34,709 | 106,373 | 104,740 | ||||||||||||
| Less: | ||||||||||||||||
| Share-based compensation | (68 | ) | (155 | ) | (268 | ) | (601 | ) | ||||||||
| Preopening store costs (4) | (110 | ) | (2 | ) | (492 | ) | (2 | ) | ||||||||
| Store re-set costs (3) | (494 | ) | - | (895 | ) | - | ||||||||||
| Private label implementation costs (2) | (210 | ) | - | (210 | ) | - | ||||||||||
| Executive and staff severance (1) | (59 | ) | - | (540 | ) | - | ||||||||||
| Store transformation project costs (1) | - | - | - | (2,096 | ) | |||||||||||
| Adjusted SG&A | $ | 34,487 | 34,552 | 103,968 | 102,041 | |||||||||||
| Adjusted SG&A as % of sales | 31.2 | % | 31.1 | % | 30.4 | % | 29.1 | % | ||||||||
| Sales per average selling square foot (5) | $ | 24.06 | 24.41 | $ | 74.51 | 77.95 | ||||||||||
| Gross Margin dollars per average selling square feet (5) | $ | 7.61 | 7.80 | $ | 23.49 | 25.81 | ||||||||||
| Adjusted SG&A per average selling square foot (5) | $ | 7.51 | 7.58 | $ | 22.69 | 22.65 | ||||||||||
| Adjusted EBITDA per average selling square foot (5)(6) | $ | 0.10 | 0.22 | $ | 0.80 | 3.16 | ||||||||||
| Average inventory per average selling square feet (5)(7)(8) | $ | 28.76 | 28.52 | $ | 29.24 | 28.68 | ||||||||||
| Average selling square feet (5) | 4,593 | 4,556 | 4,583 | 4,505 | ||||||||||||
| Total stores operating beginning of period | 257 | 257 | 258 | 258 | ||||||||||||
| Total stores operating end of period | 257 | 257 | 257 | 257 | ||||||||||||
| Total stores less than twelve months old | 5 | 0 | ||||||||||||||
| Total non same-stores | 5 | 1 | ||||||||||||||
| Supplemental Data: | ||||||||||||||||
| Same-store gross margin dollar change | (0.3 | )% | 0.8 | % | (1.3 | )% | 1.1 | % | ||||||||
| Same-store SG&A dollar change | 0.5 | % | (0.6 | )% | 0.7 | % | (0.5 | )% | ||||||||
| Same-store total customer count change | (2.8 | )% | (0.6 | )% | (3.5 | )% | 1.4 | % | ||||||||
| Same-store average sale per ticket change | 0.4 | % | (2.4 | )% | (0.5 | )% | (0.6 | )% | ||||||||
| (1) Store support center includes executive and staff severance costs for fiscal 2011 and store transformation project costs for first and second quarters of fiscal 2010 | ||||||||||||||||
| (2) Warehouse includes implementation costs associated with expanded private label and consolidated shipping programs | ||||||||||||||||
| (3) Store SG&A includes additional labor and supplies to re-set store fixtures and merchandise layout for new strategy | ||||||||||||||||
| (4) Non same-stores are those stores opened in fiscal 2011 and 2010 which have not reached their fourteenth period of operation | ||||||||||||||||
| (5) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2 | ||||||||||||||||
| (6) Adjusted EBITDA per selling square foot is calculated as Adjusted EBITDA divided by selling square feet | ||||||||||||||||
| (7) Average store level merchandise inventory for fiscal 2011 and 2010 is calculated as beginning inventory plus ending inventory divided by 2 | ||||||||||||||||
| (8) Excludes inventory for unopened stores | ||||||||||||||||
13
Fiscal 2011 Compared to Fiscal 2010
Store support center expenses for fiscal 2011 decreased $657, or 3.8%. The decrease was primarily due to reduced store transformation project costs of $2.1 million and reduced accounting fees of $478 offset by increased insurance costs of $747, executive and staff severance of $540 and legal expenses of $539.
Same-store SG&A expenses increased $569, or 0.7%. The increase was primarily due to increased labor and benefits of $494, merchant services processing fees of $274, utilities of $125 and supplies of $108 offset by reduced floor care services of $446.
Non same-store SG&A expenses increased $1.5 million. The Company has opened five stores since the first quarter of fiscal 2010. The Company opened its only new store in fiscal 2010 during the fourth quarter.
Reconciliation and Explanation of Non-GAAP Financial Measures
The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss) from continuing operations:
| For the Twenty-Six | Trailing Twelve | For the Thirteen | Trailing Twelve | |||||||||||||||||||||||||
| Week Periods Ended | Periods Ended | Week Periods Ended | Periods Ended | |||||||||||||||||||||||||
| Fiscal 2010 | August 1, 2010 | August 2, 2009 | August 1, 2010 | October 31, 2010 | November 1, 2009 | October 31, 2010 | ||||||||||||||||||||||
| Net earnings (loss) from continuing operations (1) | $ | 3,111 | (3,083 | ) | 3,008 | (2,980 | ) | (1,968 | ) | (1,403 | ) | (3,545 | ) | |||||||||||||||
| Plus: | ||||||||||||||||||||||||||||
| Interest | 2,149 | 1,395 | 1,058 | 2,486 | 1,015 | 531 | 2,970 | |||||||||||||||||||||
| Taxes (1) | 2,181 | (1,551 | ) | 1,952 | (1,322 | ) | (2,105 | ) | (606 | ) | (2,821 | ) | ||||||||||||||||
| Depreciation and amortization (1) | 9,982 | 4,983 | 4,645 | 10,320 | 2,588 | 2,328 | 10,580 | |||||||||||||||||||||
| Share-based compensation | 757 | 200 | 447 | 510 | 68 | 155 | 423 | |||||||||||||||||||||
| Preopening store costs (2) | 128 | 382 | - | 510 | 110 | 2 | 618 | |||||||||||||||||||||
| Store re-set costs | - | 401 | - | 401 | 494 | - | 895 | |||||||||||||||||||||
| Private label implementation costs | - | - | - | - | 210 | - | 210 | |||||||||||||||||||||
| Executive and staff severance | - | 481 | - | 481 | 59 | - | 540 | |||||||||||||||||||||
| Store transformation project costs | 2,096 | - | 2,096 | - | - | - | - | |||||||||||||||||||||
| =Adjusted EBITDA (1)(3)(4)(5) | 20,404 | 3,208 | 13,206 | 10,406 | 471 | 1,007 | 9,870 | |||||||||||||||||||||
| Cash | 5,164 | 3,690 | 5,446 | 3,690 | 5,356 | 5,703 | 5,356 | |||||||||||||||||||||
| Debt | 40,992 | 34,018 | 48,802 | 34,018 | 64,834 | 54,180 | 64,834 | |||||||||||||||||||||
| Debt, net of cash | $ | 35,828 | 30,328 | 43,356 | 30,328 | 59,478 | 48,477 | 59,478 | ||||||||||||||||||||
| (1) These amounts will not agree with the fiscal year end 2010 or fiscal 2010 second quarter 10-Q filing due to the five stores the Company closed since the second quarter of fiscal 2010. These stores are now shown in discontinued operations. | ||||||||||||||||||||||||||||
| (2) These costs are not consistent quarter to quarter as the Company does not open the same number of stores in each quarter of each fiscal year. These costs are directly associated with the number of stores that have been or will be opened and are incurred prior to the grand opening of each store. | ||||||||||||||||||||||||||||
| (3) For the trailing twelve periods ended October 31, 2010 the average open weeks for the Company's five non same-stores was 22 weeks. | ||||||||||||||||||||||||||||
| (4) The Company implemented new initiatives for fiscal year 2010. The fiscal 2010 initiatives are designed to better control costs and include, but are not limited to, programs to reduce point-of-sale hardware lease and energy expense, as well as accident reduction programs. These initiatives achieved approximately $2.0 million in SG&A savings for the thirty-nine weeks of fiscal 2010 when compared to the prior year same period. | ||||||||||||||||||||||||||||
| (5) The store transformation project completed in fiscal 2010 continues to provide SG&A savings in fiscal 2011. This initiative achieved approximately $458 in SG&A savings for the thirty-nine weeks of fiscal 2011 when compared to the prior year same period. | ||||||||||||||||||||||||||||
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are cash flows from operations and borrowings under its revolving loan credit facility.
At October 31, 2010, working capital (defined as current assets less current liabilities) was $131.8 million compared to $125.9 million at November 1, 2009. The increase in working capital was primarily attributable to increased inventory offset by increased accounts payable.
The Company uses its revolving loan credit facility and vendor trade credit financing (accounts payable) to fund the build-up of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements. The revolving loan credit facility provides up to $120 million of financing in the form of notes payable and letters of credit. The loan agreement expires in February 2014. The revolving loan note payable and letter of credit balance at October 31, 2010 was $63.1 million, resulting in an available line of credit at that date of $56.9 million based upon a borrowing base calculation. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables.
The loan agreement contains various restrictions that are applicable when outstanding borrowings exceed $77.5 million, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payments of dividends. The Company's loan agreement contains various covenants including limitations on additional indebtedness and certain financial tests, as well as various subjective acceleration clauses. As of December 9, 2010, the Company believes it is in compliance with all covenants and subjective acceleration clauses of the debt agreements.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC Topic 470-10-45. Accordingly, this obligation has been classified as a long-term liability in the accompanying consolidated balance sheet. Short-term trade credit represents a significant source of financing for inventory to the Company. Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases.
Cash (used in) provided by operating activities in the thirty-nine weeks of fiscal 2011 and fiscal 2010 was $(10.7) million and $1.2 million, respectively. The decrease in the amount of cash provided by operating activities in the thirty-nine week period of fiscal 2011 compared to the same period of fiscal 2010 was primarily due to the $18.4 million increase in inventory, $7.6 million increase in prepaid income taxes and $6.8 million decrease in net earnings offset by an increase in accounts payable of $15.9 million. Inventory has increased $12.2 million when compared to the third quarter of fiscal 2010. The Company received $3.1 million in income tax refunds during the thirty-nine weeks of fisca l 2010 compared to $267 for the same period of fiscal 2011.This increase in accounts payable is due to a significant effort by the Company of negotiating extended dating with its vendors.
Cash used in investing activities in the thirty-nine weeks of fiscal 2011 and 2010 was $5.3 million and $4.6 million, respectively. The increase is primarily due to $1.3 million spent on new stores for the thirty-nine weeks of fiscal 2011 when compared to $295 for the same period of fiscal 2010.
Cash provided by financing activities in the thirty-nine weeks of fiscal 2011 and 2010 was $16.2 million and $4.3 million, respectively. Net borrowings on the revolving loan increased $19.7 million (including refinancing costs of $1.3 million) during the thirty-nine week period ended October 31, 2010 compared to increasing $6.8 million during the same period in the prior fiscal year. The revolving loan balance has increased $7.4 million when compared to the third quarter of fiscal 2010.
For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended January 31, 2010. There have been no significant developments with respect to our contractual obligations since January 31, 2010.
The Company opened three new ALCO stores during the thirty-nine weeks of fiscal 2011that qualified as capital leases. The Company has accounted for these leased stores as capital leased property and recorded $6.8 million in property under capital lease.
As of December 9, 2010, the Company has repurchased 25,534 shares of stock since March 23, 2006. The average price paid was $15.16. Since the fiscal year end January 31, 2010, the Company has not repurchased any shares.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that affect the Company’s current or future financial condition.
BUSINESS OPERATIONS
The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories for the thirteen and thirty-nine week periods of fiscal 2011 and 2010, respectively:
| For the Thirteen Week Periods Ended | For the Thirty-Nine Week Periods Ended | |||||||||||||||
| October 31, 2010 | November 1, 2009 | October 31, 2010 | November 1, 2009 | |||||||||||||
| Merchandise Category: | ||||||||||||||||
| Consumables and commodities | 44 | % | 43 | % | 42 | % | 40 | % | ||||||||
| Hardlines | 25 | % | 24 | % | 28 | % | 28 | % | ||||||||
| Apparel and accessories | 17 | % | 18 | % | 16 | % | 17 | % | ||||||||
| Home furnishings and décor | 14 | % | 15 | % | 14 | % | 15 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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NEW ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued ASU 2009-16, which updated ASC Topic 810, "Accounting for Transfers of Financial Assets", which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.
In June 2009, the FASB issued an amendment to a previously issued standard regarding consolidation of variable interest entities. This amendment was intended to improve financial reporting by enterprises involved with variable interest entities. Overall, the amendment revises the test for determining the primary beneficiary of a variable interest entity from a primarily quantitative analysis to a qualitative analysis. The provisions of the amendment are effective as of the beginning of the entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company adopted this standard as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position, r esults of operations and cash flows.
In August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820, "Fair Value Measurements and Disclosures" (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update provides clarification of circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. This update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: 1) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements and 3) enhance disclosures of assets and liabilities subject to fair value measurements. The provisions of ASU No. 2010-06 are effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December&# 160;15, 2010. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.
In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events ("Topic 855"): Amendments to Certain Recognition and Disclosure Requirements.” The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. ASU No. 2010-09 was effective upon issuance. The adoption of this guidance did not impact the Company’s financial condition, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INSTRUMENTS ENTERED INTO OTHER THAN FOR TRADING – INTEREST RATE RISK
The Company is exposed to various types of market risk in the normal course of its business, including the impact of interest rate changes. The Company may enter into interest rate swaps to manage its exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts. The Company does not currently hold any derivative instruments and would enter into such instruments solely for cash flow hedging purposes and not for trading purposes.
As described under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources", the Company has a variable interest rate debt facility that is subject to interest rate risk. The Company uses this facility to meet the short-term needs of its capital improvements and inventory purchases and other operating activities. These obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. Based on the Company’s current borrowings under its revolving credit facility, if interest rates were to increase 100 basis points on an annual basis interest expense would increase $346.
The Company has and continues to analyze its debt structure in relation to interest rate risk and believes the mix of debt instruments utilized by the Company (revolving line of credit, term loans, capital leases and operating leases) adequately addresses these risk issues. This process of evaluation is continuous and the Company will adjust its debt structure as is appropriate depending on market conditions.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of October 31, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of October 31, 2010, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commi ssion’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the 1934 Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, 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 fiscal 2011 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
There are no material pending legal proceedings other than routine litigation incidental to the business to which the Company is a party or to which any property is subject.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as previously disclosed in our Form 10-K for the fiscal year ended January 31, 2010.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 23, 2006, the Board of Directors of the Company authorized the Company to repurchase up to 200,000 shares of Common Stock, of which 25,534 shares had been purchased as of December 9, 2010. On August 13, 2008, the Company announced that it was resuming its stock repurchase program. Since August 13, 2008, 22,197 shares have been repurchased. The following are details of repurchases under this program for the period covered by this report, in accordance with Rule 10b-1 and Rule 10b-18 of the Securities Exchange Act of 1934:
| Total Number | Maximum Number | |||||||||||||||
| of Shares | of Shares | |||||||||||||||
| Total Number Of | Purchased as Part | that May Yet | ||||||||||||||
| Shares | Average Price Paid | of Publicly Announced | Be Purchased Under | |||||||||||||
| Period | Purchased | per Share | Plans or Programs | the Plans or Programs | ||||||||||||
| As of August 1, 2010 | 25,534 | $ | 15.16 | 25,534 | 174,466 | |||||||||||
| Third Quarter: | ||||||||||||||||
| 08/02/10 - 08/29/10 | - | - | - | 174,466 | ||||||||||||
| 08/30/10 - 10/03/10 | - | - | - | 174,466 | ||||||||||||
| 10/04/10 - 10/31/10 | - | - | - | 174,466 | ||||||||||||
| - | - | 174,466 | ||||||||||||||
| As of October 31, 2010 | 25,534 | $ | 15.16 | 25,534 | 174,466 | |||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See the Exhibit Index immediately following the signature page hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DUCKWALL-ALCO STORES, INC.
(Registrant)
/s/ Wayne S. Peterson
Wayne S. Peterson
Senior Vice President – Chief Financial Officer
Signing on behalf of the registrant and as Principal Financial Officer
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EXHIBIT INDEX
| 3.1 | Articles of Incorporation of Duckwall-ALCO Stores, Inc., amended as of June 13, 1994 and restated solely for filing with the Securities and Exchange Commission (filed as Exhibit 3.1 to Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference). | |
| 3.2 | Amended and Restated Bylaws of Duckwall-ALCO Stores, Inc. (filed as Exhibit 3.2 to Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2010 and incorporated herein by reference). | |
| 3.3 | Amendment to Bylaws of Duckwall-ALCO Stores, Inc. (filed as Exhibit 99.1 to Form 8-K on April 20, 2010 and incorporated herein by reference). | |
| 4.1 | Specimen of Duckwall-ALCO Stores, Inc. Common Stock Certificate. (filed as Exhibit 4.1 to Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2008 and incorporated herein by reference). | |
| 4.2 | Reference is made to the Amended and Restated Articles of Incorporation described under 3.1 above and Bylaws described under 3.2 above. | |
| 10.1 | Employment Agreement dated January 5, 2006 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.1 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.2 | Employment Agreement dated August 1, 2007 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.2 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.3 | Employment Agreement dated January 5, 2006 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.3 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.4 | Addendum to Employment Agreement dated December 31, 2008 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.4 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.5 | Addendum to Employment Agreement dated December 31, 2008 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.5 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.6 | Addendum to Employment Agreement dated December 31, 2008 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.6 to the Current Report on Form 10-K of the Company dated April 15, 2010. | |
| 10.7 | Employment Agreement dated December 11, 2009 between the Company and James M. Spencer is incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of the Company dated December 17, 2009. |
| 10.8 | Separation Agreement and Release, dated as of February 4, 2009, between the Company and Phillip D. Hixon is incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of the Company dated February 4, 2009. |
| 10.9 | Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Lawrence J. Zigerelli is incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K of the Company dated June 3, 2009. |
| 10.10 | Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Jane F. Gilmartin is incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of the Company dated June 3, 2009. |
| 10.11 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated January 12, 2010. On December 31, 2009, Royce Winsten, the Chairman of the Board of Directors of the Company, was awarded a special bonus for the amount of $50,000. |
| 10.12 | Separation Release, dated as of February 1, 2010, between the Company and James M. Spencer, is incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K of the Company dated February 1, 2010. |
| 10.13 | Amended and Restated Credit Agreement, dated as of February 10, 2010, between the Company and Bank of America, N.A., and Wells Fargo Retail Finance, LLC is incorporated by reference to the Current Report on Form 10-Q of the Company dated June 10, 2010. |
| 10.14 | Employment Agreement dated December 11, 2009 between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K of the Company dated February 25, 2010. |
| 10.15 | Resignation of Director is incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K of the Company dated March 2, 2010. On March 2, 2010 James V. Worth resigned from the Board of Directors |
| 10.16 | Separation Agreement and Release, dated as of March 17, 2010, between the Company and Lawrence J. Zigerelli, is incorporated by reference to Exhibit 10.16 to the Current Report on Form 8-K of the Company dated March 16, 2010. |
| 10.17 | Separation Agreement and Release, dated as of May 13, 2010, between the Company and Jane F. Gilmartin, is incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K of the Company dated May 13, 2010. |
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| 10.18 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements is incorporated by reference to Exhibit 10.18 to the Current Report on Form 8-K of the Company dated September 2, 2010. On September 2, 2010, Terence M. Babilla, was elected to the Board of Directors. |
| 10.19 | Employment Agreement dated September 20, 2010 between the Company and Wayne S. Peterson is incorporated by reference to Exhibit 10.19 to the Current Report on Form 8-K of the Company dated September 20, 2010. |
| 31.1 | Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated December 9, 2010, 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 2003. |
| 31.2 | Certification of Principal Financial Officer of Duckwall-ALCO Stores, Inc. dated December 9, 2010, 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 2003. |
| 32.1 | Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc, dated December 9, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended October 31, 2010 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K. |
| 32.2 | Certification of Principal Financial Officer of Duckwall-ALCO Stores, Inc., dated December 9, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended October 31, 2010 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K. |
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| Signature and Title | Date |
| /s/ Richard E. Wilson | December 9, 2010 |
| Richard E. Wilson | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Wayne S. Peterson | December 9, 2010 |
| Wayne S. Peterson | |
| Senior Vice President - Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | |
| /s/ Terrence M. Babilla | December 9, 2010 |
| Terrence M. Babilla | |
| Director | |
| /s/ Raymond A.D. French | December 9, 2010 |
| Raymond A.D. French | |
| Director | |
| /s/ Dennis E. Logue | December 9, 2010 |
| Dennis E. Logue | |
| Director | |
| /s/ Lolan C. Mackey | December 9, 2010 |
| Lolan C. Mackey | |
| Director | |
| /s/ Royce L. Winsten | December 9, 2010 |
| Royce L. Winsten | |
| Director - Chairman of Board | |
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