**
                    

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.  20549****FORM 10-K****(Mark One)

**(X)     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934**

For the fiscal year endedFebruary 3, 2002

**OR**

 (   )**       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**For the transition period from _____________ to ___________

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                                (I.R.S. Employer                      incorporation or organization)                              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:  NONESecurities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.0001 per share(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90 days.               Yes   X          No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]
The aggregate market value of the 1,544,886 shares of Common Stock, par value $.0001 per share, of the registrant held by non-affiliates of the registrant is $20,315,251 on March1, 2002, based on a closing sale price of $13.15.  As of March 1, 2002, there were 4,151,537 shares of Common Stock outstanding.
Documents incorporated by reference:  portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.
 ** 

PART I

ITEM 1.         BUSINESS**History**

Duckwall-ALCO Stores, Inc., (the "Company"or "Registrant"), was founded as a general merchandising operation in 1901 inAbilene, Kansas by A. L. Duckwall. From its founding until 1968, the Companyconducted its retail operations as small variety or "dime" stores.  In1968, the Company followed an emerging trend to discount retailing when itopened its first ALCO discount store.   In 1991, the Company adoptedits current business strategy that focuses on under-served markets that have nodirect competition from another full-line discount retailer.  This strategyincludes opening either an ALCO discount store or a Duckwall variety store,depending upon the market size.  As of April 26, 2002, the Company operates262 retail stores located in the central United States, consisting of 174 ALCO retail discountstores and 88 Duckwall variety stores. 

The Company was incorporated on July 2, 1915 under the lawsof Kansas.  TheCompany's executive offices are located at 401 Cottage Street,Abilene, Kansas  67410-2832, and its telephone number is (785)263-3350.
**General**
The Company is a regional retailer operating 262 stores in 21 states in the central United States.  TheCompany's strategy is to target smaller markets not served by other regional ornational full-line retail discount chains and to provide the most convenient access to retail shopping within each market. The Company's ALCO discount stores offer a full line of merchandiseconsisting of approximately 35,000 items, including automotive, candy, crafts,domestics, electronics, fabrics, furniture, hardware, health and beauty aids,  housewares, jewelry,ladies', men's and children's apparel and shoes, pre-recorded music and video, sporting goods,seasonal items, stationery and toys.  The Company's smaller Duckwall variety stores offer a more limited selection of similar merchandise.
Of the Company's 174 ALCO discount stores, 137 stores are locatedin communities that do not have another full-line discounter.  The Companyintends to continue its strategy of opening ALCO stores in markets that do nothave other full-line discount retailers and where the opening of an ALCO storeis likely to be preemptive to the entry by other full-line discount competitorsin the market.  The ALCO discount stores account for 92% of the Company'snet sales.  While the current ALCO stores average 20,900 square feet ofselling space, the Company's store expansion program is primarily directedtoward stores with a design prototype of approximately 18,000 square feet ofselling space ("Class 18 Stores"), which, based on the Company's experience, hasbeen a design that maximizes return on investment for newly-constructed stores.
The Company's 88 Duckwall variety stores are primarily located in communities of less than 2,500 residents and are designedto act as the primary convenience retailer in these smaller communities.  These stores, which account for the remaining8% of the Company's net sales, average approximately 5,700 square feet ofselling space and offer approximately 12,000 items.  Operating Duckwall stores offer the Companythe opportunity to serve the needs of a community that would not support afull-line retail discount store with a reduced investment per store.

All of the Company's discount and varietystores are serviced by the Company's 352,000 square foot distribution center inAbilene, Kansas.

**Business Strategy**
The Company's focus over the last two fiscalyears has been to implement new merchandising and marketing initiatives in aneffort to increase customer traffic and same-store sales.  One of the initiatives was a remodelprogram.  In Fiscal 2002, the Companyremodeled 32 stores.  These storesfeature an improved merchandise mix, with greater emphasis on everyday lowvalues that are highlighted through a new and more dominant sign program.  On average, the remodeled stores havegenerated significant same-store sales increases, and the Company plans tocontinue its remodeling program next year.New store growth has been slowed during the last two fiscal years.  As same store sales growth and correspondingimproved operating performance continue, the Company intends to re-focus onexecuting a business strategy that includes the following key components:
*Markets:*The Company intends toopen ALCO stores in towns with populations of typically less than 5,000 that are in trade areas with populationsof less than 16,000 where: (1) there is no direct competition from national or 
 
 
 

 

regional full-line discount retailers; (2)economic and demographic criteria indicate the market is able to commercially support a discount retailer; and (3) the opening of an ALCO store wouldsignificantly reduce the likelihood of the entry into such market by anotherfull-line discount retailer. This key component of the Company's strategy hasguided the Company in both its opening of new stores and in its closing ofexisting stores. Since 1991, the Company has opened 122 ALCO discount stores(with an approximate average size of 18,500 square feet of selling space) and 87Duckwall variety stores. Except for eight stores, each of the new ALCO andDuckwall stores was opened in a primary market in which there was no directcompetition from a national or regional full-line discount retailer.

*Market Selection:*  TheCompany has a detailed process that it uses to analyze under-served marketswhich includes examining factors such as distance from competition, trade area,disposable income and retail sales levels.  Markets that are determined to be sizable enough to support an ALCO or aDuckwall store, and that have no direct competition from another full-linediscount retailer, are examined closely and eventually selected or passed overby the Company's experienced management team. 

*Store Expansion:*  The Company's expansion program is designed primarily around the prototype Class 18Store.  This prototype details for eachnew store plans for shelf space, merchandise presentation, store items to beoffered, parking, storage, as well as other store design considerations.  The 18,000 square feet of selling space islarge enough to permit a full line of the Company's merchandise, whileminimizing capital expenditures, required labor costs and general overheadcosts.  The Company will also consideropportunities in acceptable markets to open ALCO stores in available space inbuildings already constructed.  TheCompany's expansion strategy for its Duckwall variety stores is based onopportunities presented to the Company in smaller communities where there is aneed and where existing premises are available for lease with a relatively lowcost and which provide the Company with limited downside exposure. 

*Technology:*  The Company is continuallyimproving its management information technologies to support the operation ofthe Company.  In fiscal 1999, the Companyimplemented a new system for merchandise administration and distribution.  In fiscal 2000, the Company completed theroll-out of new point-of-sale ("POS") store software that has extended the lifeand capabilities of its POS hardware.  Inconjunction with this roll-out of POS software, the stores received radio frequency hand helddevices to allow for additional operating efficiencies.  The Company also devoted resources toidentify and fix or replace software and hardware that was not year 2000compliant.  In fiscal 2001 and fiscal 2002,the Company continued to devote resources to development of long-term projectsthat are expected to improve operational efficiencies and performance,including the selection of a warehouse management software package that isexpected to go into production in fiscal 2003.

*Advertising and Promotion:*  TheCompany utilizes full-color photography advertising circulars of 8 to 28 pagesdistributed by insertion into newspapers or by direct mail where newspaperservice is inadequate.  During fiscal2002, these circulars were distributed 35 times in ALCO markets.  In its Duckwall markets, the Companyadvertises approximately 13 times a year during seasonal promotions. The Company's marketing programis designed to create an awareness, on the part of itsidentified target customer base, of the Company's comprehensiveselection of merchandise and its competitive pricing.  During fiscal 1999, the Company began marketresearch and planning for the initial roll-out in fiscal 2000, of its newpricing strategy "Down Home Savings".  This strategy has benefited customers byoffering sharper prices everyday on products that typically would have beensubject to promotional pricing and markdowns.  During fiscal 2003, the Company will distribute approximately 35circulars in ALCO markets, and advertise approximately 13 times during seasonalpromotions in the Duckwall stores. 

*Store Environment:*  TheCompany's stores are open, clean, bright and offer apleasant atmosphere with disciplined product presentation, attractive displaysand efficient check-out procedures.  TheCompany endeavors to staff its stores with courteous, highly motivated,knowledgeable store associates in order to provide a convenient, friendly andenjoyable shopping experience.

**Store Development** 

The Company expects to open approximately 3to 5 ALCO stores during fiscal year 2003, and approximately 4 ALCO storesduring each of the fiscal years 2004 and 2005.  

The Company's strategy regarding storedevelopment is to increase sales and profitability at existing stores bycontinually refining the merchandising mix and improving operating efficiencies,and through new store openings  
 

 

 

 
in the Company's targeted base ofunder-served markets in the central United States. Since fiscal 1995, theCompany has opened a total of 90 ALCO stores with an average selling area ofapproximately 18,500 square feet, and 67 Duckwall stores. The following tablesummarizes the Company's growth during the past three fiscal years:
   
 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date
   
 

2000

 

2001

 

2002

 

2003
   
 

ALCO

 

Duckwall

 

ALCO

 

Duckwall

 

ALCO

 

Duckwall

 

ALCO

 

Duckwall
   
Stores Opened

12

 

9

 

5

 

0

 

4

 

0

 

0

 

0
   
Stores Closed

5

 

4

 

4

 

3

 

2

 

5

 

2

 

0
   
Net New Stores

7

 

5

 

1

 

(3)

 

2

 

(5)

 

(2)

 

0
   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
The Company intends to primarily utilize the18,000 square foot store profile for new ALCO store openings.  Currently, the Company owns 13 ALCO and 2Duckwall locations, and leases 161 ALCO and 86 Duckwall store locations.  The Company's present intention is to leaseall new Duckwall stores.  The Company mayown some of the ALCO locations, but will generally try to lease these storelocations.

Before entering a new market with an ALCO orDuckwall store, the Company analyzes and screens available competitive, market,and demographic data to evaluate the suitability and attractiveness of thepotential market.  The process involvesan objective review of selection criteria including, among other factors,distance and drive time to discount retail competitors, demographics, retailsales levels, existence and stability of major employers, location of countygovernment and distance from the Company's distributioncenter.  The screening process alsoinvolves a visit by officers of the Company to more subjectively evaluate thepotential new site.  There are currentlyover 100 communities known by the Company to have met the Company's ALCO and Duckwallinitial market selection process.  TheCompany is in the site selection and/or procurement process in approximately 20of those markets, each of which has been approved by the Company for a newstore location. 

The estimated investment to open a new Class18 Store is approximately $1.375 million for the land, building, equipment, andinventory.

**Store Environment and Merchandising**

The Company manages its stores toattractively and conveniently display a full line of merchandise within theconfines of the stores' available square footage.  Corporate merchandising direction is providedto each ALCO and Duckwall store to ensure a consistent company-wide store presentation.  To facilitate long-term merchandisingplanning, the Company divides its merchandise into three core categories drivenby the Company's customer profile:primary, secondary, and convenience.The primary core receives management's primary focus, with a wideassortment of merchandise being placed in the most accessible locations withinthe stores and receiving significant promotional consideration.  The secondary core consists of categories ofmerchandise for which the Company maintains a strong assortment that is easilyand readily identifiable by its customers.The convenience core consists of categories of merchandise for whichALCO will maintain convenient (but limited) assortments, focusing on key itemsthat are in keeping with customers' expectations for a discount store.  Secondary and convenience cores includemerchandise that the Company feels is important to carry, as the targetcustomer expects to find them within a discount store and they ensure a highlevel of customer traffic.  The Companycontinually evaluates and ranks all product lines, shifting productclassifications when necessary to reflect the changing demand for products.

**Purchasing**

Procurement and merchandising of products isdirected by the Company's Senior Vice President - Merchandise, who reports tothe Company's President.  The Senior VicePresident - Merchandise is supported by a staff of three Vice President -  DivisionalMerchandise Managers who are each responsible for specific productcategories.  The Company employs 24merchandise buyers and two assistant buyers who each report to a Vice President- Divisional Merchandise Manager.  Buyersare assisted by a management information system that provides them with currentprice and volume information by SKU, thus allowing them to react quickly withbuying and pricing adjustments dictated by customer buying patterns.

The Company purchases its merchandise fromapproximately 2,200 suppliers.  TheCompany generally does not utilize long-term supply contracts.  No single supplier accounted for more than 5%of the Company's total purchases in fiscal 2002 and competing brand name andprivate label products are available from other suppliers at competitiveprices.  The Company believes that itsrelationships with its suppliers are good and that the loss of any one or moreof its suppliers would not have a material adverse effect on the Company. 

 

**Pricing**

Merchandise pricing is done at the corporatelevel and is essentially the same for all of the ALCO stores, regardless of thelevel of local competition.  This pricingstrategy, with its promotional activities, is designed to bring consistentvalue to the customer.  In fiscal 2003,promotions on various items will be offered approximately 34 times throughadvertising circulars.   Even though thesame general pricing and advertising activities are carried out for all ALCOstores, the impact of such activities is significantly different depending uponthe level of competition in the market.

**Distribution and Transportation**
The Company operates a 352,000 square footdistribution center in Abilene,Kansas, from which it services each of the 174 ALCOdiscount stores and 88 Duckwall variety stores.This distribution center is responsible for distributing approximately80% of the Company's merchandise, with the balance being delivered directly tothe Company's stores by its vendors.This distribution center ships to each of the Company's stores once aweek, primarily through irregular route common carriers.  The Company also utilizes its wholly ownedsubsidiary, SPD Truck Line, Inc. (the"Subsidiary") fordelivery to the stores.  The distributioncenter is fully integrated into the Company's management information system,allowing the Company to utilize such cost cutting efficiencies as perpetualinventories, safety programs, and employee productivity software.
The Subsidiary acts as a contract carrier forthe Company in transporting goods to and from its stores.  The Subsidiary leases and uses five tractorsand 24 trailers for such deliveries.
**Management Information Systems**
The Company has committed significantresources to the purchase and application of available computer hardware andsoftware to its discount retailing operations with the intent to lower costs,improve customer service and enhance general business planning.
In general, the Company's merchandisingsystems are designed to integrate the key retailing functions of seasonalmerchandise planning, purchase order management, merchandise distribution,sales information and inventory maintenance and replenishment.  All of the Company's ALCO discount storeshave POS computer terminals that record certain sales data in a format that canbe transmitted nightly to the Company's data processing facility where it isused to produce daily and weekly management reports.  In fiscal 1999, the Company implemented a newsystem for merchandise administration and distribution.  In fiscal 2000, the Company completed theroll-out of new POS store software that has extended the life and capabilitiesof its POS hardware.  In conjunction withthis roll-out of POS software, the stores received radio frequency hand helddevices to allow for additional operating efficiencies.**In fiscal 2001 and fiscal 2002, theCompany continued to devote resources to development of long-term projects thatwill improve operational efficiencies and performance, including the selectionof a warehouse management software package that is expected to go intoproduction in fiscal 2003.
Approximately 1,000 of the Company'smerchandise suppliers currently participate in the Company's electronic datainterchanges ("EDI") system, which makes it possible for the Company to place purchaseorders electronically.  Many of thesesuppliers are able to utilize additional EDI functions, including transmittinginvoices and advance shipment notices to the Company and receiving saleshistory from the Company.
**Store Locations**
As ofApril 26, 2002, the Companyoperated 174 ALCO stores in 21 states located in smaller communities in thecentralUnited States.  Of the ALCO stores,13 are owned by the Company and 161 are leased to the Company.  The ALCO storesaverage approximately 20,900 square feet of selling space, with an additional5,000 square feet utilized for merchandise processing, temporary storage andadministration.  The Company also operates 88 Duckwall stores in 11 states, twoof which are owned by the Company, and 86 of which are leased by the Company. The geographic distribution of the Company's stores is as follows:
 
 
 
 
 
    
**Duckwall Stores  (88)**

 

 

 

 
   
Arkansas (1)

Colorado (6)

Iowa (6)

Kansas (37)

Missouri (1)

Nebraska (8)
   
New Mexico (1)

North Dakota (1)

Oklahoma (8)

South Dakota (3)

Texas (16)

 
   
 

 

 

 

 

 
   
**ALCO Stores  (174)**

 

 

 

 
   
Arizona (6)

Arkansas (6)

Colorado (11)

Idaho (3)

Illinois (8)

Indiana (14)
   
Iowa (8)

Kansas (24)

Minnesota (7)

Missouri (3)

Montana (1)

Nebraska (16)
   
New Mexico (8)

North Dakota (7)

Ohio (6)

Oklahoma (8)

South Dakota (8)

Texas (23)
 
Utah (3)

Wisconsin (1)

Wyoming (3)

 

 

 

 

**Competition**
While the discount retail business in generalis highly competitive, the Company's business strategy is to locate its ALCOdiscount stores in smaller markets where there is no direct competition withlarger national or regional full-line discount chains, and where it is believedno such competition is likely to develop.Accordingly, the Company's primary method of competing is to offer itscustomers a conveniently located store with a wide range of merchandise atdiscount prices in a primary trade area population under 16,000 that does nothave a large national or regional full-line discount store.  The Company believes that trade area size isa significant deterrent to larger national and regional full-line discountchains.  Duckwall variety stores arelocated in very small markets, and like the ALCO stores, emphasize theconvenience of location to the primary customer base.
In the discount retail business in general,price, merchandise selection, merchandise quality, advertising and customerservice are all important aspects of competing.The Company encounters direct competition with national full-line discountstores in 26 of its ALCO markets, and another 11 ALCO stores are in directcompetition with regional full-line discount stores.  The competing regional and national full-linediscount retailers are generally larger than the Company and the stores of suchcompetitors in the Company's markets are substantially larger, have a somewhatwider selection of merchandise and are very price competitive in some lines ofmerchandise. Where there are no national or regional full-line discount retailstores directly competing with the Company's ALCO stores, the Company'scustomers nevertheless shop at retail discount stores and other retailerslocated in regional trade centers, and to that extent the Company competes withsuch discount stores and retailers.  TheCompany also competes for retail sales with mail order companies, specialtyretailers, mass merchandisers, dollar stores, manufacturersoutlets, and the internet.  In the 124markets in which the Company operates a Class 18 Store, there is no directcompetition from a national or regional full-line discount retailer.  The Company competes with dollar stores inapproximately two-thirds of its ALCO stores and approximately forty percent ofits Duckwall stores.
**Executive Officers of the Company**
The following table sets forth the names,ages, positions and certain other information regarding the executive officers  of theCompany as of April 26, 2002. 
 **Name****Age**
**Position**
Glen L. Shank				57Chairman of the Board and PresidentJames E. Schoenbeck58Senior Vice President - Operations and AdvertisingJames R. Fennema51Senior Vice President - MerchandiseRichard A. Mansfield46Vice President - Finance and Treasurer________Tom L. Canfield, Jr.48Vice President -Distribution and Administration 
Except as set forth below, all of the executiveofficers have been associated with the Company in their present position orother capacity for more than the past five years. There are no familyrelationships among the executive officers of the Company.
 

*Glen L. Shank* has served as President of the Company sinceJune 1988 and as Chairman of the Board since May 1991.  Between 1982 and 1988, Mr. Shank served asVice President of Merchandising of the Company.Prior to 1982, Mr. Shank served as a Buyer and as a Merchandise Managerfor the Company.  Mr. Shank hasapproximately 35 years of experience in the retail industry.
*James E. Schoenbeck* has served as Vice President of StoreOperations and Advertising since 1988.From 1979 to 1988, Mr. Schoenbeck served as the Vice President ofAdministration.  Mr. Schoenbeck hasapproximately 28 years of experience in the retail industry.
*James R. Fennema* has served as Vice President - Merchandiseof the Company since March 1993.  For thefour years prior to that he served as Vice President and a divisionalmerchandise manager with Caldor, Inc., a chain of regional discount stores in New England" and the mid-Atlantic states of the .  Formore than the four years prior to that he served as a divisional merchandisemanager of Fishers Big Wheel, a regional chain discount retailer.  Mr. Fennema has approximately 29 years ofexperience in the retail industry.
*Richard A. Mansfield* has served as Vice President - Finance andTreasurer of the Company since May 1997.For the two years prior to that he served as Chief Financial Officer of Country General Stores, Inc., a regional chain of specialty farm and ranchstores located in the Midwest".  Forthe three years prior to that he served as Chief Financial Officer of AmericanLaminates, Inc. and Relco, Inc.  Mr. Mansfield has approximately 21 years ofexperience in the retail industry.
*Tom L.Canfield, Jr*. has served asVice President - Distribution and Administration since 1992.  From 1973 to 1992, Mr. Canfield served invarious capacities with the Company.  Mr.Canfield has approximately 29 years of experience in the retail industry.
**Employees**
As of April 26, 2002, the Company employed approximately 5,200people, of whom approximately 500 were employed in the general office anddistribution center in Abilene, 4,100 in the ALCO stores and 600 in the Duckwall stores.  Approximately 3,000 additional employees arehired on a seasonal basis, most of whom are sales personnel.   There is no collective bargaining agent forany of the Company's employees.  TheCompany considers its relations with its employees to be excellent.
**ITEM 2.         PROPERTIES**.
The Company owns facilities inAbilene, Kansas that consist of a general office (approximately 35,000 square feet),the Distribution  (approximately 352,000 square feet) andadditional warehouse space adjacent to the general office.
Thirteen of the ALCO stores and two of theDuckwall stores operate in buildings owned by the Company.  The remainder of the storesoperate in properties leased to the Company.  Such ALCO leases expire as follows:approximately 369,922 square feet (8.2%) expire between April 26, 2002 and February 2, 2003;approximately 655,864 square feet (14.5%) expire between February 3, 2003 and February 1, 2004; andapproximately 499,849 square feet (11.1%) expire between February 2, 2004 and January  31, 2005.  The remainder expire through 2021.  All Duckwall store leases have termsremaining of five years or less.
**ITEM 3.         LEGAL PROCEEDINGS.**
Neither the Company nor any of itssubsidiaries is involved in any material pending legal proceedings, other thanroutine litigation incidental to their businesses.
**ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**.
No matters were submitted to a vote of thestockholders of the Company during the fourth quarter of the fiscal year ended February 3, 2002.
 

**PART II**

**ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**.

The Common Stock of the Company is quoted onthe NASDAQ National Market tier of The NASDAQ Stock Market under the symbol"DUCK"  The following table sets forth the range of highand low bid information for the Company's Common Stock for each quarter offiscal 2002 and 2001.
 **High****Low**   Fiscal 2001Firstquarter$9.25$7.50  Second quarter10.137.78  Thirdquarter9.637.63  Fourth quarter8.75 4.63       Fiscal 2002First quarter$7.25$5.25  Second quarter8.806.32  Third quarter8.856.90  Fourth quarter11.037.81      
As of April 5, 2002, there were approximately****1,302 holders of record of the Common Stock of the Company. The Company has notpaid cash dividends on its Common Stock during the last five fiscal years. Theterms of the Loan and Security Agreement, dated as of April 15, 2002, betweenthe Company and Fleet Retail Finance Inc. allow for the payment of dividendsunless certain loan covenants are triggered, which are not expected to occurduring fiscal 2003.
 
**Equity          Compensation Plan Information**
Plan Category
Number of          securities to be issued upon to be issued upon exercise of outstanding          options, warrants and rights
Weighted-average          exercise price of outstanding options, warrants and rights
Number of          securities remaining available for future issuance under equity          compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity          compensation plans
 
 
 
approved by          security holders
491,550
9.42
87,061
Equity          compensation plans
 
 
 
not approved by          security
 
 
 
holders
0
 
0
Total
491,550
9.42
87,061
 
 

 

 

 

 

 

**ITEM 6.**        **SELECTED FINANCIAL DATA.**

**SELECTED CONSOLIDATED FINANCIAL DATA**

**(dollars in thousands, except per share and store data)**

The selected consolidated financial datapresented below for, and as of the end of, each of the last five fiscal yearsunder the captions Statements of Operations Data and Balance Sheet Data havebeen derived from the audited consolidated financial statements of the Company.  This data should be read in conjunction with"Management's Discussion and Analysis ofFinancial Condition and Results of Operations"  (Item 7) and the consolidated financial statements, related notes, andother financial information included herein. 
 
 
 
 
** Fiscal Year Ended **
 
 
**February 3,**
** **
**January 28,**
 
**January 30,**
 
**January 31,**
** **
**February 1,**
 
**Statements of    Operations Data**
**2002**
** **
**2001**
** **
**2000**
** **
**1999**
** **
**1998**
 
Net sales
$411,871 
 
$390,584 
 
$380,504 
 
$363,509 
     
$323,254 
 
Cost of sales
277,272
 
262,040
 
252,691
 
239,442
     
212,982
 
Gross margin
134,599
 
128,544
 
127,813
 
124,067
     
110,272
 
Selling, general and    administrative expenses (including 
     
 
     
 
     
 
     
     
     
 
provision for asset    impairment and store closure)
117,764
 
111,535
 
107,168
 
102,357
     
89,661
 
Depreciation and    amortization
6,380
 
6,233
 
6,396
 
5,974
     
4,805
 
Income from operations
10,455
 
10,776
 
14,249
 
15,736
     
15,806
 
Interest expense
2,778
 
3,254
 
3,672
 
4,234
     
3,525
 
Earnings before income    taxes
7,677
 
7,522
 
10,577
 
11,502
     
12,281
 
Income tax expense
2,923
 
2,843
 
4,019
 
4,287
     
4,790
 
Earnings before    cumulative effect of accounting change
4,754
 
4,679
 
6,558
 
7,215
     
7,491
 
Cumulative effect of    accounting change, net of income
     
 
     
 
     
 
     
     
     
 
tax benefit of $111 in    2001 and $611 in 1999 (1) (2)
0
 
-173
 
0
 
-956
     
0
 
Net earnings 
$4,754 
 
$4,506 
 
$6,558 
 
$6,259 
     
$7,491 
 
 
     
 
     
 
     
 
     
     
     
 
Per Share Information: 
 
 
 
 
 
 
 
 
 
 
Earnings per share -    basic:
 
 
 
 
 
 
 
 
 
 
Earnings before    cumulative effect of accounting change
$1.13 
 
$1.04 
 
$1.32 
 
$1.41 
     
$1.47 
 
Cumulative effect of    accounting change 
0.00
 
-0.04
 
0.00
 
-0.19
     
0.00
 
Net earnings
$1.13 
 
$1.00 
 
$1.32 
 
$1.22 
     
$1.47 
 
 
     
 
     
 
     
 
     
     
     
 
Earnings per share -    diluted: 
     
 
     
 
     
 
     
     
     
 
Earnings before    cumulative effect of accounting change
$1.13 
 
$1.04 
 
$1.32 
 
$1.40 
     
$1.46 
 
Cumulative effect of    accounting change 
0.00
 
-0.04
 
0.00
 
-0.19
     
0.00
 
Net earnings
$1.13 
 
$1.00 
 
$1.32 
 
$1.21 
     
$1.46 
 
 
 
 
     
 
     
 
     
     
     
 
Weighted average shares    outstanding:
 
 
     
 
     
 
     
     
     
 
Basic
4,191,809
 
4,482,153
 
4,967,332
 
5,111,461
     
5,096,322
 
Diluted
4,207,560
 
4,501,106
 
4,967,332
 
5,154,860
     
5,148,818
 
 
 
 
     
 
     
 
     
     
     
 
Operating Data
 
 
     
 
     
 
     
     
     
 
Stores open at year-end
264
 
267
 
269
 
257
     
225
 
Stores in non-competitive    markets at year-end (3) 
221
 
222
 
220
 
206
     
176
 
Percentage of total    stores in 
 
 
     
 
     
 
     
     
     
 
non-competitive markets    (3)
83.71%
 
83.15%
 
81.78%
 
80.20%
     
78.20%
 
Net sales of stores in    non-competitive markets (3)
$317,585 
 
$299,713 
 
$281,263 
 
$259,524 
     
$224,117 
 
Percentage of net sales    from stores in
 
 
     
 
     
 
     
     
     
 
non-competitive markets    (3)
77.12%
 
76.70%
 
73.90%
 
71.40%
     
69.30%
 
Comparable store sales    for all stores (4) 
2.90%
 
0.40%
 
-0.10%
 
0.90%
     
0.60%
 
Comparable store sales    for stores in
 
 
     
 
     
 
     
     
     
 
non-competitive markets    (3)(4)
2.94%
 
1.80%
 
1.80%
 
1.40%
     
1.60%
 
 
 
 
     
 
     
 
     
     
     
 
Balance Sheet Data
 
 
     
 
     
 
     
     
     
 
Total assets
$165,286 
 
$170,094 
 
$178,179 
 
$172,474 
     
$158,114 
 
Total debt (includes    capital lease
 
 
     
 
     
 
     
     
     
 
obligation and current    maturities)
26,437
 
35,153
 
41,761
 
45,608
     
39,718
 
Stockholders' equity
95,590
 
92,506
 
90,218
 
86,426
     
80,394
 
 
 
 
 
 
 
 
 
 
 
 
(1)        Effective October 30, 2000, the Company, in response to the Securities and Exchange CommissionStaff Accounting Bulletin No. 101 (SAB 101), changed its method of accountingfor layaway sales, retroactive to the beginning of the year.  Previously, the Company recognized revenue onthe entire amount of layaway sales at the time merchandise was placed onlayaway.  Under the new method, revenueon layaway sales are recognized upon delivery of themerchandise to the customer.

 

(2)         Effective November 1, 1998, the Company adopted AICPA Statement ofPosition 98-5, Reporting on the Costs of Start upActivities, retroactive to the beginning of the year.  Under the new method, the Company expensesstore preopening costs as incurred rather than overthe initial 12-months of a store's operation.

(3)                   "Non-competitive" markets refer to thosemarkets where there is not a national or regional full-line discount storelocated in the primary market served by the Company.  The Company's stores in such non-competitivemarkets nevertheless face competition from various sources.  See Item 1 "Business-Competition". 

(4)                     Percentages, as adjusted to a comparable 52 week year,reflect the increase or decrease based upon a comparison of the applicablefiscal year with the immediately preceding fiscal year for stores open duringthe entirety of both years.

 

**ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**EXCEPT FOR THE HISTORICALINFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-KARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS, FINANCIALCONDITION OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS,FINANCIAL CONDITION OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIALCONDITION OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.  FACTORS THAT COULD CAUSE OR CONTRIBUTE TOSUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW UNDERTHE CAPTION"FACTORS   THATMAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS," AS WELL AS THOSE DISCUSSEDELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THESECURITIES AND EXCHANGE COMMISSION.**

 Reference is hereby made to the description of the Company's business appearing in Item 1.

The Company's fiscal yearends on the Sunday closest to January 31.Fiscal 2002 consisted of 53 weeks, and Fiscal 2001 and 2000 eachconsisted of 52 weeks.

As used below, the term"competitive market" refers to any market inwhich there is one or more national or regional full-line discount storeslocated in the primary market served by the Company.  The term "non-competitive market" refers to any market inwhich there is no national or regional full-line discount store located in theprimary market served by the Company.Even in a non-competitive market, the Company faces competition from a varietyof sources.  See Item 1 "Business-Competition".

**Critical Accounting Policies**
As discussed in Note 1 (d) to the Consolidated FinancialStatements, inventories are stated at the lower of cost or net realizable valuewith cost determined using the last-in, first-out (LIFO) method.  The retail inventory method ("RIM") used bythe Company is an averaging method that has been widely used in the retailindustry.  This method calculates a costto retail ratio that is applied to the retail value of inventory to calculatecost inventory and the resulting gross margin.

Useof  the RIM method does not eliminate theuse of management judgments and estimates, including markdowns and shrinkage,which significantly impact the ending inventory valuation at cost and theresulting gross margins.  The Companycontinually evaluates product categories to determine if markdown action isappropriate, or if a markdown reserve should be established.  The Company recognizes that the use of theretail inventory method will result in valuing inventories at lower of cost ormarket if markdowns are currently taken as a reduction of the retail value ofinventories.  As of February 3, 2002, the Company had recordedmarkdowns that had not been taken and which served to reduce inventories tolower of cost or market by approximately $1,355,000.

Management believes that the Company's RIM provides aninventory valuation which reasonably approximates cost and results in carryinginventory at the lower of cost or market.

The Company considers determination of impairmentof long-lived assets as a critical accounting policy because determination asto whether the long-lived assets of a store are impaired and, if impaired, thefair value of such assets requires the use of judgment, particularly as itrelates to projecting whether the sum of expected undiscounted future cashflows for the store over an extended period of time will equal or exceed thecarrying value of such assets.Management uses the best information available to make the determination;however, actual future cash flows for the store may vary significantly from thecash flows projected in conjunction with the impairment assessment.  The potential impact on the financialstatements of incorrect judgments regarding impairment of long-lived assets isthat a provision for impairment could be needlessly recorded if projectedfuture cash flows for a store are significantly under estimated or a provisionfor impairment could be deferred until later determined necessary ina future period if initial projected cash flows are over estimated.  See Note 1 of Notes to Consolidated FinancialStatements for a description of the Company's accounting policy for impairmentof long-lived assets.

**Results of Operations**

 The following table sets forth, for the fiscal years indicated, the components of the Company's consolidated statements of operations expressed as a percentage of net sales:
 
 
     
 
 
**Fiscal Year Ended**
 
 
**February 3,**
     
**January 28,**
     
**January 30,**
 
 
**2002**
     
**2001**
     
**2000**
 
Net sales
100.00%
     
100.00%
     
100%
 
Cost of sales
67.3
     
     
67.1
     
     
66.4
     
 
Gross margin
32.7
     
     
32,9
     
     
33.6
     
 
Selling, general and    administrative expenses
28.4
     
     
28.2
     
     
28.1
     
 
Depreciation and    amortization
1.6
     
     
1.6
     
     
1.7
     
 
Provision for asset    impairment and store closure
0.1
     
     
0.4
     
     
0.1
     
 
Total operating    expenses
30.1
     
     
30.2
     
     
29.9
     
 
Income from operations
2.6
     
     
2.7
     
     
3.7
     
 
Interest expense
0.7
     
     
0.8
     
     
1.0
     
 
Earnings before income    taxes
1.9
     
     
1.9
     
     
2.7
     
 
Income tax expense
0.7
     
     
0.7
     
     
1.0
     
 
Earnings before    cumulative effect of accounting change
1.2
     
     
1.2
     
     
1.7
     
 
Cumulative effect of    accounting change, net of tax
0.0
     
     
0.0
     
     
0.0
     
 
Net earnings
1.2%
     
1.2%
     
1.7%
 
 
 
 
 
 
 
 
 
 
 

**Fiscal 2002Compared to Fiscal 2001**
Net sales for fiscal 2002 increased$21.3 million or 5.5% to $411.9 million compared to $390.6 million for fiscal2001.  During fiscal 2002, the Companyopened 4 ALCO stores, all of which were in new non-competitive markets.  Two ALCO and five Duckwall stores wereclosed, resulting in a year end total of 264 stores.  The increase in net sales was due to newstores opened over the last two fiscal years, a comparable store sales increaseof 3.0%, and  $5.9million in sales from the extra week in Fiscal 2002 compared to Fiscal2001.  Net sales for all stores open thefull year in both fiscal 2002 and 2001 (comparable stores), increased by $11.0million or 2.9% in fiscal 2002 compared to fiscal 2001. Sales in the Class 18 Stores, themain focus of the Company'sexpansion efforts, increased $5.5 million, or 3.1%. Sales strengthened in the secondhalf of the year due to the success of the ongoing store remodeling program,along with other merchandising and marketing initiatives designed to improvesales. 
Gross margin for fiscal 2002 increased$6.1 million, or 4.7%, to $134.6 million compared to $128.5 million in fiscal2001.  As a percentage of net sales,gross margin decreased to 32.7% in fiscal 2002 compared to 32.9% in fiscal2001.  The decline in the gross marginpercentage was attributable to higher transportation costs and shrinkage.  Gross margin for the first two quarters ofthe fiscal year declined from 33.4% in fiscal 2001 to 32.5% in fiscal 2002, dueto an unfavorable mix of sales, higher transportation costs and shrinkage.  The results of the third and fourth quarterswere favorably impacted by a more favorable mix of sales, due in part to thestore remodel program and other merchandising and marketing initiatives.  Gross margin for the third and fourthquarters increased from 32.5% in fiscal 2001 to 32.9% in fiscal 2002. 
Selling, general and administrativeexpenses increased $7.1 million or 6.5% to $117.2 million in fiscal 2002compared to $110.0 million in fiscal 2001, primarily due to higher insuranceand distribution center costs.  As apercentage of net sales, selling, general and administrative expenses were28.4% in fiscal 2002 and 28.2% in fiscal 2001.Selling, general and administrative expense was unfavorably impacted bythe sale-leaseback transaction for $2.1 million that was completed at the endof fiscal year 2001.  The sale-leasebackimpacts selling, general and administrative expense through higher store rentexpense, with a corresponding reduction in depreciation and interest expense.
The provision for asset impairmentand store closure decreased $901,000, or 60%, to $601,000 in fiscal 2002compared to $1.5 million in fiscal 2001.Those amounts comprise $498,000 for asset impairment and $103,000 forstore closing in fiscal 2002, and $1.2 million for asset impairment and$320,000 for store closing in fiscal 2001.Long-lived assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of theassets.  For purposes of determiningimpairment, assets are grouped at the store level.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.  A provision for store closure expense isrecorded in the period the decision to close a store is made and a definitiveplan of closure for such store is put in place that will be completed in thenear term.  Such store closure expensesconsist primarily of lease costs and property tax amounts that relate to theperiod subsequent to the date of closure.Store closure expense represents costs to close 2 ALCO and 2 Duckwallstores in fiscal 2002, and 4 ALCO stores and 4 Duckwall stores in fiscal2001.  Included in store closure expenseare expenses accrued for stores expected to be closed as well as others closedduring the current year.  Because thereis a smaller investment in fixtures and leasehold costs, the cost to close aDuckwall store is smaller than the cost to close an ALCO store.  During fiscal 2002 a provision for impairment had been recorded for two fuel centers for whichoperations had not been closed nor had a decision been made to close.  Depreciation expense that the Company willnot experience as a result of the assets impaired in fiscal 2002 will beapproximately $89,000 for fiscal 2003.
Income from operations decreased$321,000, or 3.0%, to $10.5 million in fiscal 2002 compared to $10.8 million infiscal 2001.  Income from operations as apercentage of net sales decreased to 2.5% in fiscal 2002 from 2.7% in fiscal2001.
 Interest expense decreased $476,000,or 14.6%, in fiscal 2002 compared to fiscal 2001.  The reduction in interest expense is dueprimarily to lower interest rates.
Income taxes were $2.9 million infiscal 2002 compared to $2.8 million in fiscal 2001.  The Company's effective tax rate was 38.1% infiscal 2002 and 37.8% in fiscal 2001.
 Earnings before the cumulative effectof accounting change for fiscal 2002 increased by $75,000, or 1.6%, to $4.8million compared to $4.7 million in fiscal 2001.****
**Fiscal 2001 Compared toFiscal 2000**
Net sales for fiscal 2001 increased$10.1 million or 2.7% to $390.6 million compared to $380.5 million for fiscal2000.  During fiscal 2001, the Companyopened 5 ALCO stores, all of which were in new non-competitive markets.  Seven stores were closed, resulting in a yearend total of 267 stores.  Substantiallyall of the increase in net sales was due to new stores opened over the last twofiscal years.  Net sales for all storesopen the full year in both fiscal 2001 and 2000 (comparable stores), increasedby $1.5 million or .4% in fiscal 2001 compared to fiscal 2000. Sales in the Class 18 Stores, themain focus of the Company'sexpansion efforts, increased $2.4 million, or 1.5%. Sales softened in the second halfof the year as consumer spending in the Company's small markets wasimpacted by higher interest rates, high transportation and home heating costs,and a weak farm economy.
 

Gross margin for fiscal 2001 increased$0.7 million, or 0.6%, to $128.5 million compared to $127.8 million in fiscal2000.  As a percentage of net sales,gross margin decreased to 32.9% in fiscal 2001 compared to 33.6% in fiscal2000.  The decline in the gross marginpercentage was attributable to higher transportation costs, markdowns, and themix of sales.
Selling, general and administrativeexpenses increased $3.3 million or 3.1% to $110.0 million in fiscal 2001compared to $106.7 million in fiscal 2000, primarily due to higher advertisingand utilities costs.  Also included areexpenses associated with the development and implementation of key initiativesthat are designed to improve sales and profits in fiscal 2002 and futureyears.  As a percentage of net sales,selling, general and administrative expenses was 28.2% in fiscal 2001 and 28.1%in fiscal 2000.  Selling, general andadministrative expense was unfavorably impacted by the sale-leasebacktransaction for $6.1 million that was completed at the end of fiscal year2000.  The sale-leaseback impactsselling, general and administrative expense through higher store rent expense,with a corresponding reduction in depreciation and interest expense.
The provision for asset impairmentand store closure increased $1.0 million, or 224%, to $1.5 million in fiscal2001 compared to $0.5 million in fiscal 2000.Those amounts comprise $1.2 million for asset impairment and $320,000for store closing in fiscal 2001, and $294,000 for asset impairment and$169,000 for store closing in fiscal 2000.Long-lived assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceed the fair value of theassets.  For purposes of determiningimpairment, assets are grouped at the store level.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.  A provision for store closure expense isrecorded in the period the decision to close a store is made and a definitiveplan of closure for such store is put in place that will be completed in thenear term.  Such store closure expensesconsist primarily of lease costs and property tax amounts that relate to theperiod subsequent to the date of closure.Store closure expense represents costs to close 4 ALCO stores and 4Duckwall stores in fiscal 2001, and 3 ALCO and 5 Duckwall stores in fiscal2000.  Included in store closure expenseare expenses accrued for stores expected to be closed as well as others closedduring the current year.  Because thereis a smaller investment in fixtures and leasehold costs, the cost to close aDuckwall store is smaller than the cost to close an ALCO store.  At the end of fiscal 2001 a provision forimpairment had been recorded for 6 ALCO and 5 Duckwallstores for which stores had not been closed nor had a decision been made toclose such stores.  Depreciation expensethat the Company will not experience as a result of these impairments will beapproximately $210,000 for fiscal 2002. 
Income from operations decreased $3.5million, or 24.4%, to $10.8 million in fiscal 2001 compared to $14.2 million infiscal 2000.  Income from operations as apercentage of net sales decreased to 2.7% in fiscal 2001 from 3.7% in fiscal 2000.
Interest expense decreased $418,000,or 11.4%, in fiscal 2001 compared to fiscal 2000.  The reduction in interest expense is dueprimarily to the reduction in borrowing due to the sale-leaseback transactionspreviously discussed.
Income taxes were $2.8 million in fiscal2001 compared to $4.0 million in fiscal 2000.The Company's effective tax rate was 37.8% in fiscal 2001 and 38.0% infiscal 2000.
Earnings before the cumulative effectof accounting change for fiscal 2001 decreased by $1.9 million, or 28.7%, to$4.7 million compared to $6.6 million in fiscal 2000.
**Seasonality and Quarterly Results**
The following table sets forth the Company's net sales, gross margin, income from operations, and net earnings during each quarter of fiscal 2000,2001, and 2002.   
 

 

**First**

** **

**Second**

** **

**Third**

** **

**Fourth**
   
 

 

**Quarter**

** **

**Quarter**

** **

**Quarter**

** **

**Quarter**
   
 

 

**(dollars in  millions)**
   
   

 

   

   

   

   

   

   

   
   
Fiscal 2000

     Net Sales

$87.0

 

$94.2

 

$87.6

 

$111.7
   
 

     Gross Margin

29.1

 

31.9

 

30.7

 

36.1
   
 

     Income from operations

2.0

 

3.9

 

2.6

 

5.7
   
 

     Net Earnings

0.7

 

1.9

 

1.0

 

3.0
   
 

 

 

 

 

 

 

 

 
   
Fiscal 2001

     Net Sales

91.1

 

99.5

 

89.3

 

110.7
   
 

     Gross Margin

30.3

 

33.3

 

30.0

 

34.9
   
 

     Income from operations

1.7

 

3.9

 

1.1

 

4.1
   
 

     Net Earnings (1)

0.6

 

1.9

 

0.1

 

2.1
   
 

 

 

 

 

 

 

 

 
   
Fiscal 2002

     Net Sales

91.8

 

101.8

 

94.8

 

123.5
   
 

     Gross Margin

29.7

 

33.2

 

32.5

 

39.2
   
 

     Income from operations

0.8

 

2.3

 

1.4

 

6.0
   
 

     Net Earnings

0.1

 

0.9

 

0.4

 

3.4
   
 

 

   

   

   

   

   

   

   
   
                                 (1)  Represents earnings before the cumulative effect of accounting change

   
The Company'sbusiness is subject to seasonal fluctuations.The Company'shighest sales levels occur in the fourth quarter of its fiscal year whichincludes the Christmas holiday selling season.The Company's results of operations in any one quarter are not necessarilyindicative of the results of operations that can be expected for any otherquarter or for the full fiscal year.  TheCompany's results of operations may also fluctuate from quarter to quarter as aresult of the amount and timing of sales contributed by new stores and theintegration of the new stores into the operations of the Company, as well asother factors.  The addition of a largenumber of new stores can, therefore, significantly affect the quarterly resultsof operations.  Also, refer to Impact ofChange in Accounting Principle and Note 10 to the Consolidated FinancialStatements regarding the impact of the accounting change on quarterly results.

**Inflation**
Management does not believe that its merchandising operations have beenmaterially affected by inflation over the past few years.  The Company will continue to monitor costs,take advantage of vendor incentive programs, selectively buy from competitivevendors and adjust merchandise prices based on market conditions.
TheCompany's operating expenses have been impacted by increases in general andmedical insurance, as well as competitive pressures in wages in selectedmarkets.  See additional discussion ofwages in the "Government Regulation" section.
**Liquidityand Capital Resources**
At the end of fiscal 2002, workingcapital (defined as current assets less current liabilities) was $71.1 millioncompared to $94.0 million at the end of fiscal 2001 and $95.9 million at theend of fiscal 2000.  The decrease inworking capital was due to the classification of the revolving loan as acurrent liability as it became due on April 15, 2002.  On  April 15, 2002,that revolving loan was replaced with a new revolving loan that matures inApril 2006.
The Company's primary sources of fundsare cash flow from operations, borrowings under its revolving loan creditfacility, vendor trade credit financing and lease financing.  In fiscal years 2002, 2001 and 2000, theCompany completed a sale-leaseback of a number of its owned stores.  The proceeds from these transactions amountedto $0.6 million, $2.0 million and $6.1 million in fiscal years 2002, 2001 and2000, respectively. 
Cash provided by operatingactivities aggregated $11.1 million, $7.3 million, and $10.5 million, in fiscal2002, 2001 and 2000, respectively.  Theincrease in cash provided in fiscal 2002 relative to fiscal 2001 resultedprimarily from an increase in income taxes payable as well as a similar balancein accounts payable at the end of each fiscal year.  The decrease in cash provided in fiscal 2001relative to fiscal 2000 resulted primarily from earnings as well as a decreasein accounts payable.
The Company uses itsrevolving loan credit facility and vendor trade credit financing to fund thebuild up of inventories periodically during the year for its peak sellingseasons and to meet other short-term cash requirements.  The revolving loan credit facility providesup to $70 million of financing in the form of notes payable and letters ofcredit.  The loan agreement  expires in April 2006.  The Company had borrowings available at February 3, 2002 under the revolving loan credit facility amounting to$49.2 million.  Short-term trade creditrepresents a significant source of financing for inventory to the Company.  Trade credit arises from the willingness ofthe Company's vendors to grant payment terms for inventory purchases.
In fiscal 2002, the Company made net cashpayments on its revolving credit facility of $7.5 million, made cash paymentsof $1.2 million to reduce its long-term debt and capital lease obligations, andrepurchased $1.7 million of Company stock.In fiscal 2001, the Company made net cash payments on its revolvingcredit facility of $4.8 million, made cash payments of $1.8 million to reduceits long-term debt and capital lease obligations, and repurchased $3.0 millionof Company stock.  In fiscal 2000, theCompany made net cash payments on its revolving credit facility of $178,000,made cash payments of $3.7 million to reduce its long-term debt and capitallease obligations, and repurchased $2.8 million of Company stock.  The Company executed operating leases for 36additional stores during the three year period ending in fiscal 2002.  The Company's long-range planassumes growth in the number of stores in smaller markets where there is lesscompetition, and, in accordance with this plan, 4 new stores were opened infiscal 2002 and 3 to 5 new stores are expected to be opened in fiscal2003.  The Company believes that with the$70 million line of credit, sufficient capital is available to fund the Company'splanned expansion.
Cash used for acquisition ofproperty and equipment in fiscal 2002, 2001 and 2000 totaled $6.0 million, $5.9million, and $6.4 million, respectively.A sale-leaseback of store buildings was completed in the amount of $0.6million, $2.0 million, and $6.1 million in fiscal 2002, 2001, and 2000,respectively.  This resulted in net cashused for acquisition of property and equipment in fiscal 2002, 2001, and 2000of $5.4 million, $3.9 million, and $0.3 million, respectively.  Anticipated cash payments for acquisition ofproperty and equipment in fiscal 2003, principally for store buildings andfixtures, are $7.5 million.
During fiscal 1999, the Company'sBoard of Directors approved a plan to repurchase up to 411,000 shares of the Company'sCommon Stock (the"Stock Repurchase Program").  During fiscal 2000, the Company's Board of Directorsapproved the repurchase of an additional 1,000,000 shares.  Purchases pursuant to the Stock RepurchaseProgram are to be made from time to time in the open market or directly fromstockholders at prevailing market prices.The Stock Repurchase Program is anticipated to be funded with internallygenerated cash and borrowing under the Company's credit facility.  As of  February 3, 2002,the Company had purchased and retired 1,010,300 shares of Common Stock for $8.1million, which represents 20% of its outstanding shares.
The following tablesummarizes the Company's significant contractual obligations payable as of February 3, 2002 (in thousands).The long-term debt payments represent principle payments only.  Amounts due under the Company's revolvingloan credit facility (principle balance of $18,137 as of  February 3, 2002) are not included in this table.  The revolving loan which the Company obtainedon  April 15, 2002 is due in April 2006.
 

 

Payments due by Period

 

 

 

 

Less than

 

1-3

 

4-5

 

After

 

Contractual    Obligations

Total

 

1 year

 

years

 

years

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

1,501

 

469

 

1,032

 

0

 

0

 

Capital Lease    Obligations

10,180

 

1,457

 

2,768

 

2,567

 

3,388

 

Operating Leases

72,334

 

10,704

 

16,590

 

12,368

 

32,672

 

 

 

 

 

 

 

 

 

 

 

 

Total    contractual cash obligations

84,015

 

12,630

 

20,390

 

14,935

 

36,060

 

 

 

 

 

 

 

 

 

 

 

 

   

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS**
In order to take advantage ofthe safe harbor provisions for forward-looking statements contained in Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, the Company is hereby identifyingimportant risks and uncertainties that could affect the Company's actual results ofoperations, financial condition or business and could cause the Company'sactual results of operations, financial condition or business to differmaterially from its historical results of operations, financial condition orbusiness, or the results of operations, financial condition or businesscontemplated by the forward-looking statements made herein or elsewhere orallyor in writing, by, or on behalf of, the Company. Factors that could cause orcontribute to such differences include, but are not limited to, those factorsdescribed below.
**Expansion Plans**
The continued growth of theCompany is dependent, in large part, upon the Company's ability to openand operate new stores on a timely and profitable basis.  The Company plans to open approximately 4ALCO stores in the current fiscal year and at least 4 ALCO stores in bothfiscal 2004 and 2005.  While the Companybelieves that adequate sites are currently available, the rate of new storeopenings is subject to various contingencies, many of which are beyond the Company'scontrol.  These contingencies include theavailability of acceptable communities for store locations, the Company'sability to secure suitable store sites on a timely basis and on satisfactoryterms, the Company'sability to hire, train and retain qualified personnel, the availability  of adequate capital resources and thesuccessful integration of new stores into existing operations.  There can be no assurance that the Companywill be able to continue to successfully identify and obtain new store sites orthat once obtained, the new stores will achieve satisfactory sales or profitability. 
**Competition**
The Company's strategy is tolocate its ALCO stores in smaller retail markets where there is no competingfull-line discount retail store within the primary trade area and where theCompany believes the opening of a store would significantly reduce thelikelihood of such a competitor entering the market.  No assurance can be given,however, that competition will not emerge in such markets which, if developed,could seriously reduce the prospect of a profitable store in such market.  In those markets in which the Company has directcompetition, it often competes with national or regional full-line discountstores which often have substantially greater financial and other resourcesthan the Company.
**Government Regulation**
The Company is subject tonumerous federal, state and local government laws and regulations, includingthose relating to the development, construction and operation of the Company'sstores.  The Company is also subject tolaws governing its relationship with employees, including minimum wagerequirements, laws and regulations relating to overtime, working and safetyconditions, and citizenship requirements.Material increases in the cost of compliance with any applicable law orregulation and similar matters could materially and adversely affect theCompany.
In 1996, Congress enacted TheSmall Business Job Protection Act of 1996 (the"Act"), raising the hourly minimumwage from $4.75 to $5.15 effective as of  September 1, 1997.  The majority of the Company's store employeeswere paid hourly wages below these increased minimum wage rates.  As a result, the Act increased the Company'spayroll expense.  Additional increases inthe minimum wage could have a material impact on the results of the Company'soperations if it is unable to pass those increased costs on to customers or ifsales are not increasing at a rate large enough to offset the impact.
**Control by Significant Stockholder**
Kansas Public EmployeesRetirement System ("KPERS") and Jeffrey Macke are principal stockholders of the Company,beneficially owning approximately 17% and 13%, respectively, of the outstandingshares of Common Stock of the Company as of  March 1, 2002. 
**Quarterly Fluctuations**
Quarterly results ofoperations have historically fluctuated as a result of retail consumers' purchasing patterns, withthe highest quarter in terms of sales and profitability being the fourthquarter.  Quarterly results of operationswill likely continue to fluctuate significantly as a result of such patternsand may fluctuate due to the timing of new store openings.
**Economic Conditions**
Similar to other retailbusinesses, the Company'soperations may be affected adversely by general economic conditions and eventswhich result in reduced consumer spending in the markets served by itsstores.  Also, smaller communities wherethe Company'sstores are located may be dependent upon a few large employers or may besignificantly affected by economic conditions in the industry upon which thecommunity relies for its economic viability, such as the agriculturalindustry.  This may make the Company'sstores more vulnerable to a downturn in a particular segment of the economythan the Company'scompetitors, which operate in markets which are larger metropolitan areas wherethe local economy is more diverse.
**Dependence on Officers**
The development of the Company'sbusiness has been largely dependent on the efforts of its current managementteam headed by Glen L. Shank and sixteen other officers.  The loss of the services of one or more ofthese officers could have a material adverse effect on the Company. 
 

**No Recent Dividend Payments; Restrictions on Payment of Dividends**
The Company has not paid acash dividend on the Common Stock for more than five years, and it has no plansto commence paying cash dividends on the Common Stock.  The Company's revolving loancredit facility currently allows the payment of cash dividends unless certainloan covenants are triggered.
**Impact of Change in Accounting Principle**
EffectiveOctober 30, 2000, the Company, in response to the Securities andExchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed itsmethod of accounting for layaway sales, retroactive to the beginning of thatyear.  Previously, the Company recognizedrevenue on the entire amount of layaway sales at the time merchandise wasplaced on layaway.  Under the new method,revenue on layaway sales are recognized upon deliveryof the merchandise to the customer.  Theeffect of adopting the accounting change on earnings before cumulative effectof accounting change, net earnings, and net earnings per share for fiscal 2001is to increase (decrease) such amounts by $(38,000), $(211,000), and $(.05),respectively.  The change is considered acumulative effect-type accounting change and, accordingly, the cumulativeeffect as of  January 31, 2000 has been reported in theaccompanying financial statements.Financial statements for fiscal 2000 and prior periods have not beenrestated.  The Company believes the proforma effect on net earnings and earnings per share forfiscal 2000 and 1999, as if the new accounting method had been appliedconsistently during such periods, is not material.New Accounting StandardsIn August 2001, the FASB issuedSFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144).  SFAS No. 144 addressessignificant issues relating to the implementation of SFAS No. 121, "Accountingfor the Impairment 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 be distinguishedfrom the rest of the entity and (2) will be eliminated from the ongoingoperations 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.  Managementbelieves that the adoption of SFAS No. 144 will not have a significant impacton the financial statements.  
 

**ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
The Company is subject tomarket risk from exposure to changes in interest rates based on its financing,investing and cash management activities.The Company maintains a secured line of credit at variable interestrates to meet the short-term needs of its expansion program and seasonalinventory increases.
Under this loan agreement,the Company converted $30,000,000 from the revolving rate loan to a 7.23% fixedrate loan on  April 15, 1998.  Borrowings by the Company subsequent to April 15, 2001 were obtained pursuant to the Revolving Rate Loan(balance of $3,137,000 as of February 3, 2002) or LIBOR Rate loan (balanceof $15,000,000 as of  February 3, 2002) provisions of the revolvingloan credit facility.
The Company entered into aninterest rate swap in December 2000 with a notional principal amount of$10,000,000 whereby the Company pays a fixed rate of interest and receivesinterest based on LIBOR for the period  April 15, 2001to April 15, 2002 to mitigate its interestrate risk under the LIBOR rate loan.
On April 15, 2002, the Company replaced the existing line of credit witha new line of credit with Fleet Retail Finance Inc. that expires in April2006.  The credit line available is$70,000,000, which carries a variable rate of interest. 
 

**ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**
Financial    Statement Schedules:No    financial statement schedules are included as they arenot    applicable to the Company.
 

 

 

**Independent Auditors' Report**

The Board of Directors and StockholdersDuckwall-ALCO Stores, Inc.:

We have audited the accompanyingconsolidated balance sheets of Duckwall-ALCO Stores, Inc. and subsidiaries as ofFebruary 3, 2002 and January 28, 2001, and the related consolidated statementsof operations, stockholders' equity, and cash flows for each of the years in thethree‐year period ended February 3, 2002. These consolidated financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Duckwall-ALCO Stores, Inc. and subsidiaries as ofFebruary 3, 2002, January 28, 2001, and January 30, 2000, and the results oftheir operations and their cash flows for each of the years in the three‐yearperiod ended February 3, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in note 1 of notes toconsolidated financial statements, the Company changed its method of accountingfor layaway sales in the year ended January 28, 2001.

 

/s/ KPMG LLP

 

 

Wichita, Kansas

March 13, 2002

 

 DUCKWALL-ALCO STORES, INC******
**