**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,****D.C.****20549**

** **

**FORM 10-Q**

** **

** **

 

(X)**QUARTERLY REPORT PURSUANT TO SECTION 13 or15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterlyperiod ended August 4, 2002

 

**OR**

** **

(  )**TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

Commission FileNumber 0-20269

 

**DUCKWALL-ALCOSTORES, INC.**

(Exact name ofregistrant as specified in its charter)

 

                                                                                             Kansas                                                          48-0201080

                                                      (State or other jurisdiction of                                     (I.R.S.Employer

                                                       incorporation or organization)                                   Identification No.)

 

                                                                                                                                                                                     401  Cottage Street

                                                                 Abilene, Kansas                                               67410-2832

                                                (Address of principalexecutive offices)                                 (ZipCode)

 

 

Registrant's telephone number including area code: (785)263-3350

 

                Indicateby check mark whether the registrant (1) has filed all reports required to be  filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  X No___

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

                4,259,195shares of common stock, $.0001 par value (the issuer's only class of commonstock), were outstanding as of August 4, 2002.

 

 

 

| **Duckwall-ALCO  Stores, Inc.**                                         |
|-------------------------------------------------------------------------|
| **And Subsidiaries**                                                    |
| **Consolidated  Balance Sheets**                                        |
| (Dollars in  Thousands)                                                 |
|                                                                    |   |   |   |   |
|                                                                    |   |   |   |   |
| **Assets**                                                              |
|                                                                    |   |   |   |   |
|                                                                    |   | August 4, |   | February 3, |
|                                                                    |   | 2002 |   | 2002 |
|                                                                    |   | (Unaudited) |   |   |
| Current assets:                                                         |   |   |   |   |
| Cash and cash equivalents                                               |   | $2,260 |   | $3,219 |
| Receivables                                                             |   | 1,650 |   | 1,663 |
| Inventories                                                             |   | 120,911 |   | 125,165 |
| Prepaid expenses                                                        |   | 2,564 |   | 959 |
|                                                                    |   |   |   |   |
| Total  current assets                                                   |   | 127,385 |   | 131,006 |
|                                                                    |   |   |   |   |
| Property and equipment                                                  |   | 81,263 |   | 78,521 |
| Less accumulated depreciation                                           |   | 50,921 |   | 48,723 |
|                                                                    |   |   |   |   |
| Net  property and equipment                                             |   | 30,342 |   | 29,798 |
|                                                                    |   |   |   |   |
| Property under capital leases                                           |   | 20,407 |   | 20,407 |
| Less accumulated  amortization                                          |   | 16,511 |   | 16,226 |
|                                                                    |   |   |   |   |
| Net property  under capital leases                                      |   | 3,896 |   | 4,181 |
|                                                                    |   |   |   |   |
| Other non-current assets                                                |   | 276 |   | 15 |
| Deferred income taxes                                                   |   | 286 |   | 286 |
|                                                                    |   |   |   |   |
| Total  assets                                                           |   | $162,185 |   | $165,286 |
|                                                                    |   |   |   |   |
|                                                                    |   |   |   |   |
| See accompanying notes to unaudited consolidated financial  statements. |

 

 

 

 

 

 

 

 

 

 

 

 

| **Duckwall-ALCO  Stores, Inc.**                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------|
| **And Subsidiaries**                                                                                                                      |
| **Consolidated  Balance Sheets**                                                                                                          |
| (Dollars in  Thousands)                                                                                                                   |
|                                                                                                                                      |   |   |   |
|                                                                                                                                      |   |   |   |
| **Liabilities and  Stockholders' Equity**                                                                                                 |
|                                                                                                                                      |   |   |   |
|                                                                                                                                      |   |   |   |
|                                                                                                                                      |   |   |   |
|                                                                                                                                      | August 4, |   | February 3, |
|                                                                                                                                      | 2002 |   | 2002 |
| Current liabilities:                                                                                                                      | (Unaudited) |   |   |
|       Current  maturities of:                                                                                              |   |   |   |
|              Long term debt                                                                       | $484 |   | $469 |
|              Capital lease  obligations                                                           | 703 |   | 703 |
|        Accounts payable                                                                                               | 26,512 |   | 24,511 |
|        Notes payable  under revolving loan                                                                            | 0 |   | 18,137 |
|        Income taxes  payable                                                                                          | 701 |   | 3,677 |
|        Accrued salaries  and commissions                                                                              | 4,787 |   | 4,289 |
|        Accrued taxes  other than income                                                                               | 4,421 |   | 4,080 |
|        Other current  liabilities                                                                                     | 2,429 |   | 2,581 |
|        Deferred income  taxes                                                                                         | 1,422 |   | 1,458 |
|                                                                                                                                      |   |   |   |
|                         Total  current liabilities                  | 41,459 |   | 59,905 |
|                                                                                                                                      |   |   |   |
| Notes payable under revolving loan                                                                                                        | 12,665 |   | 0 |
| Long term debt - less current maturities                                                                                                  | 786 |   | 1,032 |
| Capital lease obligations - less current maturities                                                                                       | 5,744 |   | 6,096 |
| Other noncurrent liabilities                                                                                                              | 2,182 |   | 1,947 |
| Deferred revenue                                                                                                                          | 804 |   | 716 |
|                                                                                                                                      |   |   |   |
|                         Total  liabilities                          | 63,640 |   | 69,696 |
|                                                                                                                                      |   |   |   |
| Stockholders' equity:                                                                                                                     |   |   |   |
|       Common stock,  $.0001 par value, authorized                                                                     |   |   |   |
|             20,000,000  shares; issued and outstanding                                            |   |   |   |
|             4,259,195 shares  and 4,149,599 shares respectively                                   | 1 |   | 1 |
|            Additional  paid-in capital                                                            | 48,748 |   | 47,609 |
|            Retained earnings                                                                      | 49,796 |   | 47,996 |
|            Accumulated other  comprehensive income (loss), net of income taxes                    | 0 |   | (16) |
|                         Total  stockholders' equity                 | 98,545 |   | 95,590 |
|                                                                                                                                      |   |   |   |
|                         Total  liabilities and stockholders' equity | $162,185 |   | $165,286 |
|                                                                                                                                      |   |   |   |

 

| **Duckwall-ALCO Stores, Inc.**                                          |
|-------------------------------------------------------------------------|
| **And Subsidiaries**                                                    |
| **Consolidated  Statements of Operations**                              |
| (Dollars in  Thousands Except Per Share Amounts)                        |
| (Unaudited)                                                             |
|                                                                    |   |   |   |   |   |   |   |   |
|                                                                    |   | For the Thirteen  Week Periods |   | For the Twenty-Six  Week Periods |
|                                                                    |   |   |   |   |
|                                                                    |   | August 4, 2002 |  | July 29, 2001 |   | August 4, 2002 |  | July 29, 2001 |
|                                                                    |   |   |   |   |   |   |   |   |
| Net sales                                                               |   | $103,470 |   | $101,763 |   | $200,247 |   | $193,557 |
| Cost of sales                                                           |   | 68,990 |   | 68,590 |   | 133,541 |   | 130,729 |
| Gross margin                                                            |   | 34,480 |   | 33,173 |   | 66,706 |   | 62,828 |
|                                                                    |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                     |   | 30,441 |   | 29,341 |   | 59,752 |   | 56,683 |
| Depreciation and amortization                                           |   | 1,684 |   | 1,572 |   | 3,304 |   | 3,115 |
| Provision for asset impairment and store closure                        | 0 |   | 0 |   | 6 |   | (8) |
| Total operating  expenses                                               |   | 32,125 |   | 30,913 |   | 63,062 |   | 59,790 |
|                                                                    |   |   |   |   |   |   |   |   |
| Income from operations                                                  |   | 2,355 |   | 2,260 |   | 3,644 |   | 3,038 |
| Interest expense                                                        |   | 350 |   | 737 |   | 800 |   | 1,478 |
| Earnings before income taxes                                            |   | 2,005 |   | 1,523 |   | 2,844 |   | 1,560 |
| Income tax  expense                                                     |   | 736 |   | 580 |   | 1,044 |   | 594 |
| Net earnings                                                            |   | $1,269 |   | $943 |   | $1,800 |   | $966 |
|                                                                    |   |   |   |   |   |   |   |   |
| Earnings per share - basic                                              |   | $0.30 |   | $0.23 |   | $0.43 |   | $0.23 |
| Earnings per share - diluted                                            |   | $0.29 |   | $0.23 |   | $0.41 |   | $0.23 |
|                                                                    |   |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |   |
| See accompanying notes to unaudited consolidated financial  statements. |   |   |   |   |

 

 

 

| **Duckwall-ALCO  Stores Inc,**                                         |
|------------------------------------------------------------------------|
| **And Subsidiaries**                                                   |
| **Consolidated  Statements of Cash Flows**                             |
| Dollars in  Thousands                                                  |
| (Unaudited)                                                            |
|                                                                   | For the Twenty-Six  Week |   |
|                                                                   | Periods Ended |   |
|                                                                   | August 4, 2002 |   | July 29, 2001 |   |
| Cash Flows From Operating Activities:                                  |   |   |   |   |
| Net earnings                                                           | $1,800 |   | $966 |   |
| Adjustments to reconcile net earnings to net cash provided             |   |   |   |   |
| by  operating activities                                               |   |   |   |   |
|                                                                   |   |   |   |   |
| Amortization of  debt financing costs                                  | 39 |   | 35 |   |
| Depreciation and  amortization                                         | 3,304 |   | 3,115 |   |
| Loss on disposal  and impairment of assets                             | 0 |   | 88 |   |
| (Increase)  decrease in inventories                                    | 4,254 |   | (5,084) |   |
| Increase in  accounts payable                                          | 2,001 |   | 2,997 |   |
| Decrease in  receivables                                               | 13 |   | 470 |   |
| Increase in  prepaid expenses                                          | (1,605) |   | (401) |   |
| Increase in  accrued taxes other than income                           | 341 |   | 329 |   |
| Increase  (decrease) in accrued salaries and commissions               | 498 |   | (893) |   |
| Increase  (decrease) in income taxes payable                           | (2,976) |   | 328 |   |
| Increase  (decrease) in deferred income taxes                          | (36) |   | 53 |   |
| Increase in  deferred revenue                                          | 88 |   | 0 |   |
| Increase  (decrease) in other liabilities                              | 99 |   | (820) |   |
| Net cash provided by operating activities                              | 7,820 |   | 1,183 |   |
|                                                                   |   |   |   |   |
| Cash Flows From Investing Activities:                                  |   |   |   |   |
| Proceeds from  sale of property                                        | 1,034 |   | 721 |   |
| Capital  expenditures                                                  | (4,597) |   | (3,807) |   |
| Net cash used in investing activities                                  | (3,563) |   | (3,086) |   |
|                                                                   |   |   |   |   |
| Cash Flows From Financing Activities:                                  |   |   |   |   |
| Proceeds from  exercise of stock options                               | 1,139 |   | 0 |   |
| Repurchase of  common stock                                            | 0 |   | (1,654) |   |
| Decrease in  revolving loan                                            | (5,472) |   | (195) |   |
| Principal  payments on long term notes                                 | (231) |   | (321) |   |
| Principal  payments on capital leases                                  | (352) |   | (342) |   |
| Debt issue costs                                                       | (300) |   | 0 |   |
| Net cash used in financing activities                                  | (5,216) |   | (2,512) |   |
|                                                                   |   |   |   |   |
| Net decrease in cash and cash equivalents                              | (959) |   | (4,415) |   |
| Cash and cash equivalents at beginning of period                       | 3,219 |   | 7,851 |   |
| Cash and cash equivalents at end of period                             | $2,260 |   | $3,436 |   |
|                                                                   |   |   |   |   |
|                                                                   |   |   |   |   |
| See accompanying notes to unaudited consolidated financial  statements |   |   |   |

 

** **

** **

**Duckwall-ALCO Stores,Inc.**

**And Subsidiaries**

# Notes to Unaudited Consolidated Financial Statements

 

 

(1)    Basis of Presentation

 

                The accompanying unauditedconsolidated financial statements are for interim periods and, consequently, do not include all disclosures required bygenerally accepted accounting principles for annual financial statements.  It is suggested that the accompanyingunaudited consolidated financial statements be read in conjunction with theconsolidated financial statements included in the Company's fiscal 2002 AnnualReport.  In the opinion of management ofDuckwall-ALCO Stores, Inc., the accompanying unaudited consolidated financialstatements reflect all adjustments (consisting of normal recurring accruals)necessary to present fairly the financial position of the Company and theresults of its operations and cash flows for the interim periods.

 

(2)               Principles of Consolidation

 

                The consolidated financialstatements include the accounts of Duckwall-ALCO Stores, Inc. and its whollyowned subsidiaries.  All significantintercompany transactions and balances have been eliminated in consolidation.

 

(3)               Adoptionof New Accounting Policy  (dollarsin thousands)

 

                EffectiveJanuary 29, 2001, the Companyadopted Statement of Financial Accounting Standards (SFAS) No. 133,"Accounting for Derivative Investments and Hedging Activities."  SFAS No. 133 requires that all derivativeinstruments be recorded on the balance sheet at fair value.  The accounting for changes in the fair valueof a derivative depends on its designation and effectiveness.  For derivatives that qualify as effectivehedges, the change in fair value has no net impact on earnings until the hedgedtransaction affects earnings.  Forderivatives that are not designated as hedging instruments, or for theineffective portion of a hedging instrument, the change in fair value isrecognized in current period earnings.  

 

                TheCompany entered into an interest rate swap agreement in December, 2000 with anotional principal amount of $10,000 whereby the Company paid a fixed rate ofinterest and received interest based on LIBOR for the period from April 15, 2001 to April 15, 2002.  The purpose of the interest rate swapagreement was to mitigate the Company's interest rate risk under its revolvingcredit facility.  

 

                Priorto January 29, 2001,the Company had accounted for the interest rate swap agreement as a cash flowhedge.  Upon adoption of SFAS No. 133,the Company elected to not use hedge accounting for the interest rate swapagreement.  Accordingly, a cumulative‐effect‐typeadjustment was made to Accumulated Other Comprehensive Income in the amount of$76 on January 30, 2001,which represented the fair value of the interest rate swap at the date ofadoption of SFAS No. 133 ($123) net of income tax effect ($47).  The cumulative effect adjustment wasamortized to earnings over the period from April 15, 2001 to April 15, 2002.  Duringthe thirteen weeks ended August 4, 2002 and July 29, 2001, respectively, theCompany recorded interest expense of $0 ($0 net of tax), and $31 ($19 net oftax) to amortize the cumulative effect adjustment.

 

 

 

 

 

| The components of  comprehensive income are as follows: |   |   |   |   |   |   |   |  
  

  

Thirteen

Weeks

Ended

  

Thirteen

Weeks Ended

 

  

Twenty-Six

Weeks

Ended

  

Twenty-Six

Weeks

Ended

 
  

  

August 4, 2002

  

July 29, 2001

 

  

August 4, 2002

  

July 29, 2001

Net earnings 

  

$1,269

 

 

$943

 

 

$1,800

 

 

$966

  

Cumulative effect adjustment  upon adoption of SFAS No. 133, net of tax 

  

0

 

 

0

 

 

0

 

 

(76)

  

Other comprehensive income -  amortization of cumulative effect adjustment 

  

0

 

 

19

 

 

16

 

 

22

  

     Comprehensive Income 

  

$1,269

 

 

$962

 

 

$1,816

 

 

$912

  

 

A summary of changes in  accumulated other comprehensive income (loss) for the 13 and 26 week periods  ended August 4, 2002 and July 29, 2001 is as follows: 

 

 

 

 

 

 

 

 

  

  

  

  

  

  

  

  

  

  

 

 
Accumulated other  comprehensive income (loss) at beginning of period 

  

$0 

  

  

($73)

  

  

($16)

  

$0 

 

 
Cumulative effect adjustment  upon adoption of SFAS No. 133, net of tax 

  

0 

  

  

0 

  

  

0 

  

(76)

 

 
Amortization of accumulated  other comprehensive income 

  

0 

  

  

19 

  

  

16 

  

22 

 

 
Accumulated other  comprehensive income (loss) 

  

$0 

  

  

($54)

  

  

$0 

  

($54)

 

 
 

(4)  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.

 

 

 

 

                       The  average number of shares used in computing earnings per share was as follows:

 

 

 

 

 

Thirteen Weeks Ended

Basic

Diluted

 

 

 

 

 

August 4, 2002

4,253,054

4,407,493

 

July 29, 2001

4,149,599

4,149,599

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

Basic

Diluted

 

 

 

 

 

August 4, 2002

4,212,258

4,363,960

 

July 29, 2001

4,235,643

4,235,643

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**ITEM2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*(Dollars in thousands)*

 

The thirteen weeksended August 4, 2002 and July 29, 2001 are referred to hereinas the second quarter of fiscal 2003 and 2002 respectively.

 

As used belowthe term "competitive market" refers to any market wherein there isone or more national or regional full-line discount stores located in themarket served by the Company.  The term"non-competitive market" refers to any market where there is nonational or regional full-line discount store located in the market served bythe Company.  Even in a non-competitivemarket, the Company faces competition from a variety of sources.

 

***RESULTS OF OPERATIONS***

 

**Thirteen and Twenty-Six WeeksEnded August 4, 2002Compared to Thirteen and Twenty-Six Weeks Ended July 29, 2001.**

 

The Company continues to execute its basicstrategy of opening stores in under-served markets that have no competitionfrom national or regional full-line discount retailers.  During the second quarter of fiscal 2003 theCompany opened 1 ALCO store, which was in a new, non-competitive market,resulting in a quarter end total of 264 stores.For the twenty-six week period ending August 4, 2002, the Company opened two stores and closedtwo stores.  As of August 4, 2002, over 80% of the stores werelocated in non-competitive markets.Through the second quarter, the Company has completed the remodel of 16of the planned 32 ALCO stores targeted for the completion in the current fiscalyear.

 

                Netsales for the second quarter of fiscal 2003 increased $1,707 or 1.7% to$103,470 compared to $101,763 for the second quarter of fiscal 2002. When salesare compared to the similar period in the prior year, which ended on August 5, 2001, sales rose $2,082 or2.1%, with same store sales rising $521, or 0.5%.

 

                Netsales for the twenty-six week period ending August 4, 2002 increased $6,690 or3.5% to $200,247 compared to $193,557 in the comparable twenty-six week periodof the prior fiscal year.  When sales arecompared to the similar twenty-six week period in the prior year, which endedon August 5, 2001, salesrose $6,523, or 3.4%, with same store sales rising $3,832, or 2.0%.

 

                Grossmargin for the second quarter of fiscal 2003 increased $1,307 or 3.9% to$34,480 compared to $33,173 in the second quarter of fiscal 2002.  Gross margin as a percentage of sales was33.3% for the second quarter of fiscal 2003 compared to 32.6% for the secondquarter of fiscal 2002.  This wasprimarily due to a more favorable mix of sales and a strong sell through ofspring and summer products, resulting in lower markdowns and reduced shrinkage.

 

                Grossmargin for the twenty-six week period ended August 4, 2002 was $66,706, which was $3,878 or 6.2%higher than last year's twenty-six week gross margin of  $62,828.  As a percent of net sales, gross margin forthe twenty-six week period ended August 4, 2002 was 33.3% compared to 32.5% in the twenty-six week periodof the prior fiscal year.  Theimprovement in gross margin percentage was attributable to a mix of sales thatincluded more higher margin items, lower markdowns,and reduced shrinkage.

 

Selling, generaland administrative expense increased $1,100 or 3.7% to $30,441 in the secondquarter of fiscal 2003 compared to $29,341 in the second quarter of fiscal2002.  As a percentage of net sales,selling, general and administrative expenses in the second quarter of fiscal2003 was 29.4%, compared to 28.8% in the second quarter of fiscal 2002.   The increase in the selling, general andadministrative expense was due to higher distribution center costs related tothe launch of a new warehouse management software package, a reduction inmarketing support from vendors, and higher insurance costs.

 

                Selling,general and administrative expenses increased $3,069 or 5.4% to $59,752 for thetwenty-six week period ended August 4, 2002 compared to $56,683 for the comparable twenty-six week periodof the prior fiscal year.  Selling,general and administrative expense as a percent of net sales was 29.8% for thetwenty-six week period ending August 4, 2002 compared to 29.3% for the twenty-six week period ended July 29, 2001.  The increase in the selling, general, andadministrative expense was due to reduced marketing support and insurance costsmentioned above, along with higher incentive compensation.

 

                Depreciationand amortization expense increased $112 or 7.1% to $1,684 in the second quarterof fiscal 2003 compared to $1,572 in the second quarter of fiscal 2002.  Depreciation and amortization expenseincreased $189 or 6.1% to $3,304 for the twenty-six week period ended August 4, 2002 compared to $3,115 inthe comparable twenty-six week period of the prior fiscal year.

 

                Provisionfor asset impairment and store closure was $0 in the second quarter of bothfiscal 2003 and 2002.

 

                Provisionfor asset impairment and store closure was $6 for the twenty-six week periodended August 4, 2002compared to ($8) for the comparable twenty-six week period of the prior fiscalyear.

 

                Incomefrom operations increased $95 or 4.2% to $2,355 in the second quarter of fiscal2003 compared to $2,260 in the second quarter of fiscal 2002.  Income from operations as a percentage of netsales was 2.3% in the second quarter of fiscal 2003 compared to 2.2% in thesecond quarter of fiscal 2002.

 

                Incomefrom operations increased $606 or 19.9% to $3,644 for the twenty-six weekperiod ended August 4, 2002compared to $3,038 in the comparable twenty-six week period of the prior fiscalyear.

 

                Interestexpense decreased $387 or 52.5% in the second quarter of fiscal 2003 comparedto the second quarter of fiscal 2002.Interest expense decreased $678 or 45.9% to $800 for the twenty-six weekperiod ended August 4, 2002compared to $1,478 in the comparable twenty-six week period of the prior fiscalyear.  Interest  expense decreased because of lowerrates as well as lower levels of borrowing due to reduced levels of inventory.

 

                Netearnings for the second quarter of fiscal 2003 were $1,269, an increase of  $326 or 34.6% overthe net earnings of $943 for the second quarter of fiscal 2002.  Net earnings increased $834 or 86.3% to$1,800 in the comparable twenty-six week period of the prior fiscal year.

 

***LIQUIDITY AND CAPITALRESOURCES***

 

                TheCompany's primary sources of funds are cash flows from operations, borrowingsunder its revolving loan credit facility, mortgage financing and vendor tradecredit financing (increases in accounts payable).

 

                AtAugust 4, 2002 workingcapital (defined as current assets less current liabilities) was $85,926compared to  $71,098at the end of fiscal 2002.  The increasein working capital was due to the classification of the revolving loan as along-term liability as it was replaced by a Senior Secured Revolving creditfacility that is due in April 2006.

 

                Operatingactivities generated cash in the amount of $7,820 and $1,183 in the twenty-sixweek period of fiscal 2003, and 2002 respectively.  The increase in the amount of cash generatedby operating activities in the twenty-six week period of fiscal 2003 comparedto the twenty-six week period of fiscal 2002 was primarily due to a decrease ininventory offset by a reduction of income taxes payable.

 

                Cashused in investing activities in the twenty-six week period of fiscal 2003 and2002 totaled $3,563 and $3,086 respectively.Total anticipated cash payments for acquisition of property andequipment in fiscal 2003, principally for store buildings and store andwarehouse fixtures and equipment, are approximately$7,500.

 

                TheCompany used cash from financing activities in the twenty-six week period offiscal 2003 in the amount of $5,216 and $2,512 in the twenty-six week period offiscal 2002.  Cash was used to pay downthe revolver as well as to make principal payments on long-term notes andcapital leases.

 

 

 

 

***BUSINESS OPERATIONS ANDSEGMENT INFORMATION***

 

                TheCompany's business activities include operation of ALCO discount stores in townswith populations which are typically less than 5,000 not served by otherregional or national full-line discount chains and Duckwall variety stores thatoffer a more limited selection of merchandise which are primarily located incommunities of less than 2,500 residents.

 

                Forfinancial reporting purposes, the Company has established two operatingsegments: "ALCO Discount Stores", and "All Other", which includes the Duckwallvariety stores and other business activities, such as general office, warehouseand distribution activities.

 

 

For The Thirteen  Week

 

For The Twenty-Six  Week

 

Periods Ended

 

Periods Ended

 

 

 

 

 

 

 

 

 

August 4, 2002

 

July 29, 2001

 

August 4, 2002

 

July 29, 2001

 

 

 

 

 

 

 

 

Segment Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales:

 

 

 

 

 

 

 

   ALCO Discount  Stores

$95,190 

 

$92,976 

 

$184,053 

 

$176,918 

   All Other

 

 

 

 

 

 

 

     External

8,280 

 

8,787 

 

16,194 

 

16,639 

     Intercompany

48,534 

 

49,947 

 

107,039 

 

109,013 

 

$152,004 

 

$151,710 

 

$307,286 

 

$302,570 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

   ALCO Discount  Stores

$1,031 

 

$1,018 

 

$2,061 

 

$2,023 

   All Other

653 

 

554 

1,243 

 

1,092 

 

$1,684 

 

$1,572 

 

$3,304 

 

$3,115 

 

 

 

 

 

 

 

 

Income (expense) from Operations:

 

 

 

 

 

 

 

   ALCO Discount  Stores

$8,856 

 

$7,461 

 

$16,419 

 

$13,369 

   All Other

(6,534)

 

(5,222)

(12,841)

 

(10,373)

 

$2,322 

 

$2,239 

 

$3,578 

 

$2,996 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures:

 

 

 

 

 

 

 

   ALCO Discount  Stores

$1,618 

 

$1,841 

 

$3,234 

 

$2,971 

   All Other                                                   

99 

 

389 

1,363 

 

836 

 

$1,717

 

$2,230 

 

$4,597

 

$3,807 

 

 

 

 

 

 

 

 

Identifiable Assets:

 

 

 

 

 

 

 

   ALCO Discount  Stores

$124,427 

 

$131,097 

 

$124,427 

 

$131,097 

   All Other

37,758 

 

38,441 

 

37,758 

 

38,441 

 

$162,185 

 

$169,538 

 

$162,185 

 

$169,538 

 

 

 

Income from operations asreflected in the above segment information has been determined differently thanincome from operations in the accompanying consolidated statements ofoperations as follows:

 

*Intercompany Sales*

Intercompanysales represent transfers of merchandise from the warehouse to ALCO discountstores and Duckwall variety stores.

 

*Intercompany Expense Allocations*

General andadministrative expenses incurred at the general office have not been allocatedto the ALCO Discount Stores for purposes of determining income from operationsfor the segment information.

 

Warehousing anddistribution costs including freight applicable to merchandise purchases, havebeen allocated to the ALCO Discount Stores segment based on the Company'scustomary method of allocation for such costs (primarily as a stipulatedpercentage of merchandise purchases).

 

*Inventories*

Inventories arebased on the FIFO method for segment information purposes and on the LIFO methodfor the consolidated statements of operations.

 

*Leases*

All leases areaccounted for as operating leases for purposes of determining income fromoperations for purposes of determining the segment information for the ALCODiscount Stores whereas capital leases are accounted for as such in theconsolidated statements of operations.

 

 

 

 

For The Thirteen  Week

 

For The Twenty-Six  Week

 

Periods Ended

 

 Periods Ended

 

 

 

 

 

 

 

 

 

August 4, 2002

 

July 29, 2001

 

August 4, 2002

 

July 29, 2001

 

 

 

 

 

 

 

 

Net sales per above segment information

$152,004 

 

$151,710 

 

$307,286 

 

$302,570 

Intercompany elimination

(48,534)

 

(49,947)

 

(107,039)

 

(109,013)

   Net sales per  consolidated statements

$103,470 

 

$101,763 

 

$200,247 

 

$193,557 

     of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations per above segment information

$2,322 

 

$2,239 

 

$3,578 

 

$2,996 

Leases

33 

 

21 

 

66 

 

42 

   Income from  operations per consolidated

        statements of operations

$2,355 

 

$2,260 

 

$3,644 

 

$3,038 

 

 

***CHANGE IN ACCOUNTING PRINCIPLES***

 

Effective January 29, 2001, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 133, "Accounting forDerivative Investments and Hedging Activities."See additional discussion in Note 3 to Unaudited Consolidated FinancialStatements.

 

                InAugust 2001, the FASB issued SFAS No. 144, Accounting for the Impairment orDisposal of Long‐Lived Assets (SFAS No. 144).  SFAS No. 144 addresses significant issuesrelating to the implementation of SFAS No. 121, "Accounting for theImpairment of Long‐Lived Assets and for Long‐Lived Assets to BeDisposed Of," and develops a single accounting method under which long‐livedassets that are to be disposed of by sale are measured at the lower of bookvalue or fair value less cost to sell.Additionally, SFAS No. 144 expands the scope of discontinued operationsto include all components of an entity with operations that (1) can bedistinguished from the rest of the entity and (2) will be eliminated from theongoing operations of the entity in a disposal transaction.  SFAS No. 144 is effective for financialstatements issued for fiscal years beginning after December 15, 2001 and its provisions are to beapplied prospectively.  This accountingprinciple was adopted by the Company effective February 4, 2002.Management believes that the adoption of SFAS No. 144 did not have asignificant impact on the financial statements.

 
MARKET RISK DISCLOSURE
 

                Therevolving credit facility has a floating interest rate that is affected bychanges in market interest rates.  TheCompany entered into an interest rate swap in December 2000 with a notionalprincipal amount of $10,000 whereby the Company paid a fixed rate of interestand received interest based on LIBOR for the period April 15, 2001 to April 15, 2002 to mitigate a portion of its interest raterisk under the revolving credit facility.

 

                On April 15, 2002, the Company replacedthe existing line of credit with a new line of credit with Fleet Retail FinanceInc. that expires in April 2006.  Thecredit line available is $70,000,000, which carries a variable rate ofinterest. 

 
OTHER INFORMATION
 

                                   PART II

 

                                                                                       Item 1.    LegalProceedings

No legal proceedings except thosecovered by insurance occurred during the thirteen-week period ended August 4, 2002.

 

                                                                                       Item 2.    Changes inSecurities

                                                                                                                                   Notapplicable

 

                                                                                       Item 3.    Defaults Upon Senior Securities

                                                                                                                                   NotApplicable

 

                                                                                       Item 4.    Submissionof Matters to a Vote of Security Holders

                                                                                                                                   NotApplicable

 

                                                                                       Item 5.    OtherInformation

                                                                                                                                   None

 

                                                                                       Item 6.    Exhibits andReports on Form 8-K

(a) None

                                                                                                                                       (b)           Reports on Form 8-K

                                                                                                                                                                            Noreports filed

**SIGNATURES**

 

 

                                       Pursuant tothe requirements of the Securities Exchange Act of 1934 the registrant has dulycaused this report to besigned on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

 

**                                                                   DUCKWALL-ALCO STORES, INC.**

***                                                                                         (Registrant)***

 

 

 

 

                                                                       Date, September 16, 2002  /s/ Richard A. Mansfield

                                                                                                                                                                                                                                                                                 RichardA. Mansfield

                                                                                                                                                                                                                                                                                 VicePresident - Finance

                                                                                                                                                                                                                                                                                 ChiefFinancial Officer

 

                                                                                                                                                                                                                                                                                  Signingon behalf of the

                                                                                                                                                                                                                                                                                  registrant and as principal

                                                                                                                                                                                                                                                                                  financial officer

 

 

 

**CERTIFICATIONS**

 

I,  Glen L. Shank, certify that:
-  I have reviewed this quarterly report on Form 10-Q ofDuckwall-ALCO Stores, Inc.; 
-  Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;  
-  Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;  

 

                                                                    Date:  September 16, 2002

                                                                    /s/ *GlenL. Shank*                                                                  President, Chairman of the Board

I,   Richard A. Mansfield, certify that:
-  I have reviewed this quarterly reporton Form 10-Q of Duckwall-ALCO Stores, Inc.; 
-  Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;  
-  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;  

 

                                                                   Date:  September 16, 2002

                                                                   /s/ *Richard A.Mansfield*

                                                                  VicePresident, Chief Financial Officer

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