**UNITED STATES**

**SECURITIES 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 ended February 2, 2003

 

                                                                                                               **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:  

NONE

 

Securities registered pursuant to Section 12(g) of the Act:  

                                                                                                    Common Stock, par value $.0001 per share

                                                                                                                        (Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be    filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past    90 days.  Yes   X          No _____

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule    12b-2 of the Act).  Yes ___      No   X  

 

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 $20,701,472 on August 4, 2002, based on a closing sale price of $13.40.  As of April 4, 2003, there were 4,260,535 shares of Common Stock outstanding.

 

Documents incorporated by reference:  portions of the Registrant's Proxy Statement for    the 2003 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 in Abilene, Kansas by A. L. Duckwall.  From its founding until 1968, the Company conducted its    retail operations as small variety or "dime" stores.  In 1968, the Company followed an emerging trend to discount retailing when it opened its first ALCO    discount store.   In 1991, the Company adopted its current business strategy that focuses on under-served markets that have no direct competition from another full-line discount retailer.  This strategy includes opening either an ALCO    discount store or a Duckwall variety store, depending upon the market size.  As of April 25, 2003, the Company operates 263 retail stores located in the central United States, consisting of 182 ALCO retail discount stores and 81 Duckwall variety    stores. 

 

The Company was incorporated on July 2, 1915 under the laws of Kansas.  The Company'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 263 stores in 21 states in the central United    States.  The Company's strategy is to target smaller markets not served by other regional or national 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 merchandise consisting 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 182 ALCO discount stores, 149 stores are located in communities that do    not have another full-line discounter.  The Company intends to continue its strategy of opening ALCO stores in markets that do not have other full-line discount retailers and where the opening of an ALCO store is likely to be preemptive to the    entry by other full-line discount competitors in the market.  The ALCO discount stores account for 92% of the Company's net sales.  While the current ALCO stores average 20,900 square feet of selling space, the Company's store expansion    program is primarily directed toward stores with a design prototype of approximately 18,000 square feet of selling space ("Class 18 Stores"), which, based on the    Company's experience, has been a design that maximizes return on investment for newly-constructed stores.

 

The Company's 81 Duckwall variety stores are primarily located in communities of less than    2,500 residents and are designed to act as the primary convenience retailer in these smaller communities.  These stores, which account for the remaining 8% of the Company's net sales, average approximately 5,600 square feet of selling space and    offer approximately 12,000 items.  Operating Duckwall stores offer the Company the opportunity to serve the needs of a community that would not support a full-line retail discount store with a reduced investment per store.

 

All of the Company's discount and variety stores are serviced by the Company's 352,000    square foot distribution center in Abilene, Kansas.

 

**Business Strategy**

 

The Company's focus over the last two fiscal years has been to implement new merchandising    and marketing initiatives in an effort to increase customer traffic and same-store sales.  One of the initiatives was a remodel program.  During each of fiscal 2003 and fiscal 2002, the Company remodeled 32 stores.  These stores    feature an improved merchandise mix, with greater emphasis on everyday low values that are highlighted through a new and more dominant sign program.  The Company plans to continue its remodeling program next year by remodeling approximately 23    stores.  The Company opened four ALCO stores in fiscal 2002, five ALCO stores in fiscal 2003, and plans to open 8 ALCO stores in fiscal 2004.  The Company continues to close non-performing stores in competitive markets, which slows the    growth of overall store count.  The Company intends to focus on executing a business strategy that includes the following key components:

 

*Markets: *The Company intends to open ALCO stores in towns with populations of typically less than    5,000 that are in trade areas with populations of 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 would significantly reduce the likelihood of the entry into such market by another full-line discount retailer.  This key component of the Company's strategy has    guided the Company in both its opening of new stores and in its closing of existing stores.  Since 1991, the Company has opened 133 ALCO discount stores (with an approximate average size of 18,900 square feet of selling space) and 87 Duckwall    variety stores. Except for nine stores, each of the new ALCO and Duckwall stores was opened in a primary market in which there was no direct competition from a national or regional full-line discount retailer.

 

*Market Selection:*  The Company has a detailed process that it uses to    analyze under-served markets which 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 a Duckwall store, and    that have no direct competition from another full-line discount retailer, are examined closely and eventually selected or passed over by the Company's experienced management team. 

 

*Store Expansion:*  The Company's expansion program is designed primarily around the prototype Class    18 Store.  This prototype details for each new store plans for shelf space, merchandise presentation, store items to be offered, parking, storage, as well as other store design considerations.  The 18,000 square feet of selling space is    large enough to permit a full line of the Company's merchandise, while minimizing capital expenditures, required labor costs and general overhead costs.  The Company will also consider opportunities in acceptable markets to open ALCO stores in    available space in buildings already constructed.  The Company's expansion strategy for its Duckwall variety stores is based on opportunities presented to the Company in smaller communities where there is a need and where existing premises are    available for lease with a relatively low cost and which provide the Company with limited downside exposure.  

 

*Technology:*  The Company is continually improving its management information technologies to    support the operation of the Company.  In fiscal 1999, the Company implemented a new system for merchandise administration and distribution.  In fiscal 2000, the Company completed the roll-out of new point-of-sale ("POS") store software    that has extended the life and capabilities of its POS hardware.  In conjunction with this roll-out of POS software, the stores  received radio frequency hand held devices to allow for additional operating efficiencies.  The Company    also devoted resources to identify and fix or replace software and hardware that was not year 2000 compliant.  During the last three fiscal years, the Company has continued to devote resources to development of systems that have improved information    available to management and improved specific operational efficiencies.  The Company also selected a warehouse management software package that is expected to go into production in fiscal 2004.

 

*Advertising and Promotion:*  The Company utilizes full-color photography    advertising circulars of 16 to 28 pages distributed by insertion into newspapers or by direct mail where newspaper service is inadequate.  During fiscal 2003, these circulars were distributed 34 times in ALCO markets.  In its Duckwall    markets, the Company advertises approximately 13 times a year during seasonal promotions.  The Company's marketing program is designed to create an awareness, on the part of its    identified target customer base, of the Company's comprehensive selection of merchandise and its competitive pricing.  During fiscal 1999, the Company began market research and planning for the    initial roll-out in fiscal 2000, of its new pricing strategy "Down Home Savings".  This strategy has benefited customers by offering sharper prices everyday on products that typically would have been subject to promotional pricing and markdowns.     During fiscal 2004, the Company will distribute approximately 34 circulars in ALCO markets, and advertise approximately 16 times during seasonal promotions in the Duckwall stores.  

 

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

** **

**Store Development**  

 

The Company expects to open approximately 8 ALCO stores during fiscal year 2004, and approximately 10 ALCO    stores during each of the fiscal years 2005 and 2006. The Company's strategy regarding store development is to increase sales and profitability at existing stores by continually refining the merchandising mix and improving operating efficiencies, and    through new store openings in the Company's targeted base of under-served markets in the central United States.  Since fiscal 1995, the Company has opened a total of 101 ALCO stores with an average selling area of approximately 19,000 square    feet, and 67 Duckwall stores.  The following table summarizes the Company's growth during the past three fiscal years:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004
 
 
2001
 
2002
 
2003
 
(As of April 25, 2003)
 
 
ALCO
 
Duckwall
 
ALCO
 
Duckwall
 
ALCO
 
Duckwall
 
ALCO
 
Duckwall
Stores Opened
 
5
 
0
 
4
 
0
 
5
 
0
 
6
 
0
Stores Closed
 
4
 
3
 
2
 
5
 
2
 
3
 
2
 
5
Net New Stores
 
1
 
(3)
 
2
 
(5)
 
3
 
(3)
 
4 
 
(5)
 

The Company intends to primarily utilize the 18,000 square foot store profile for new ALCO store openings.     Currently, the Company owns 13 ALCO and 2 Duckwall locations, and leases 169 ALCO and 79 Duckwall store locations.  The Company's present intention is to lease all new Duckwall stores.  The Company may own some of the ALCO locations, but    will generally try to lease these store locations.

 

Before entering a new market with an ALCO or Duckwall store, the Company analyzes and screens available    competitive, market, and demographic data to evaluate the suitability and attractiveness of the potential market.  The process involves an objective review of selection criteria including, among other factors, distance and drive time to discount    retail competitors, demographics, retail sales levels, existence and stability of major employers, location of county government and distance from the Company's distribution center.     The screening process also involves a visit by officers of the Company to more subjectively evaluate the potential new site.  The Company is in the site selection and/or procurement process in approximately 20 of those markets, each of which has    been approved by the Company for a new store location. 

 

The estimated investment to build and open a new Class 18 ALCO Store is approximately $1.375 million for the    land, building, equipment, and inventory.  If the building is leased, the initial investment is approximately $625,000.

 

**Store Environment and Merchandising**

 

The Company manages its stores to attractively and conveniently display a full line of merchandise within the    confines of the stores' available square footage.  Corporate merchandising direction is provided to each ALCO and Duckwall store to ensure a consistent company-wide store presentation.  To facilitate long-term merchandising planning, the    Company divides its merchandise into three core categories driven by the Company's customer profile:  primary, secondary, and convenience.  The primary core receives management's primary focus, with a wide assortment of merchandise being    placed in the most accessible locations within the stores and receiving significant promotional consideration.  The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and    readily identifiable by its customers.  The convenience core consists of categories of merchandise for which ALCO will maintain convenient (but limited) assortments, focusing on key items that are in keeping with customers' expectations for a    discount store.  Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a discount store and they ensure a high level of customer traffic.  The    Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products.

 

**Purchasing**

 

Procurement and merchandising of products is directed by the Company's Senior Vice President - Merchandise, who    reports to the Company's President.  The Senior Vice President - Merchandise is supported by a staff of three Vice President -  Divisional Merchandise Managers who are each responsible for specific product categories.  The Company    employs 21 merchandise buyers and three assistant buyers who each report to a Vice President - Divisional Merchandise Manager.  Buyers are assisted by a management information system that provides them with current price and volume information    by SKU, thus allowing them to react quickly with buying and pricing adjustments dictated by customer buying patterns.

 

The Company purchases its merchandise from approximately 2,000 suppliers.  The Company generally does not    utilize long-term supply contracts.  No single supplier accounted for more than 5% of the Company's total purchases in fiscal 2003 and competing brand name and private label products are available from other suppliers at competitive prices.     The Company believes that its relationships with its suppliers are good and that the loss of any one or more of its suppliers would not have a material adverse effect on the Company.  

**Pricing**

 

Merchandise pricing is done at the corporate level and is essentially the same for all of the ALCO stores,    regardless of the level of local competition.  This pricing strategy, with its promotional activities, is designed to bring consistent value to the customer.  In fiscal 2004, promotions on various items will be offered approximately 34    times through advertising circulars.   Even though the same general pricing and advertising activities are carried out for all ALCO stores, the impact of such activities is significantly different depending upon the level of competition in    the market.

** **

**Distribution and Transportation**

 

The Company operates a 352,000 square foot distribution center in Abilene, Kansas, from which it services each    of the 182 ALCO discount stores and 81 Duckwall variety stores.  This distribution center is responsible for distributing approximately 80% of the Company's merchandise, with the balance being delivered directly to the Company's stores by its    vendors.  This distribution center ships to each of the Company's stores once a week, primarily through irregular route common carriers.  The Company also utilizes its wholly owned subsidiary, SPD Truck Line, Inc. (the "Subsidiary") for delivery to the stores.  The distribution center is fully integrated into the Company's management information system, allowing the    Company to utilize such cost cutting efficiencies as perpetual inventories, safety programs, and employee productivity software.  The Company is in the process of evaluating its distribution center requirements and may proceed with a second    distribution center if the investment is justified.

 

The Subsidiary acts as a contract carrier for the Company in transporting goods to and from its stores.     The Subsidiary leases and uses five tractors and 23 trailers for such deliveries.

 

**Management Information Systems**

 

The Company has committed significant resources to the purchase and application of available computer hardware    and software to its discount retailing operations with the intent to lower costs, improve customer service and enhance general business planning.

 

In general, the Company's merchandising systems are designed to integrate the key retailing functions of    seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment.  All of the Company's ALCO discount stores have POS computer terminals that record certain sales    data in a format that can be transmitted nightly to the Company's data processing facility where it is used to produce daily and weekly management reports.  In fiscal 1999, the Company implemented a new system for merchandise administration and    distribution.  In fiscal 2000, the Company completed the roll-out of new POS store software that has extended the life and capabilities of its POS hardware.  In conjunction with this roll-out of POS software, the stores received radio    frequency hand held devices to allow for additional operating efficiencies.* *During the last three fiscal years, the Company has continued to devote resources to development of systems that have improved information available to    management and improved specific operational efficiencies.  The Company also selected a warehouse management software package that is expected to go into production in fiscal 2004.

 

Approximately 1,000 of the Company's merchandise suppliers currently participate in the Company's electronic    data interchange ("EDI") system, which makes it possible for the Company to place purchase orders electronically.  Many of these suppliers are    able to utilize additional EDI functions, including transmitting invoices and advance shipment notices to the Company and receiving sales history from the Company.

 

**Store Locations**

 

As of April 25, 2003, the Company operated 182 ALCO stores in 21 states located in smaller communities in the    central United States.  Of the ALCO stores, 13 are owned by the Company and 169 are leased to the Company.  The ALCO stores average approximately 20,900 square feet of selling space, with an additional 4,900 square feet utilized for    merchandise processing, temporary storage and administration.  The Company also operates 81 Duckwall stores in 10 states, two of which are owned by the Company, and 79 of which are leased by the Company.  The geographic distribution of the    Company's stores is as follows:

 

 

 

**Duckwall Stores (81)**
 
 
 
 
 
 
 
 
 
 
Arkansas (1)
Colorado (6)
Iowa (6)
Kansas (35)
Nebraska (8)
 
New Mexico (1)
North Dakota (1)
Oklahoma (8)
South Dakota (3)
Texas (12)
 
 
 
 
 
 
 
**ALCO Stores (182)**
 
 
 
 
 
 
 
 
 
 
Arizona (8)
Arkansas (5)
Colorado (13)
Idaho (3)
Illinois (8)
Indiana (13)
Iowa (8)
Kansas (24)
Minnesota (7)
Missouri (5)
Montana (1)
Nebraska (17)
New Mexico (9)
North Dakota (7)
Ohio (6)
Oklahoma (8)
South Dakota (9)
Texas (23)
Utah (4)
Wisconsin (1)
Wyoming (3)
 
 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

**Competition**

 

While the discount retail business in general is highly competitive, the Company's business strategy is to    locate its ALCO discount stores in smaller markets where there is no direct competition with larger national or regional full-line discount chains, and where it is believed no such competition is likely to develop.  Accordingly, the Company's    primary method of competing is to offer its customers a conveniently located store with a wide range of merchandise at discount prices in a primary trade area population under 16,000 that does not have a large national or regional full-line discount    store.  The Company believes that trade area size is a significant deterrent to larger national and regional full-line discount chains.  Duckwall variety stores are located in very small markets, and like the ALCO stores, emphasize the    convenience of location to the primary customer base.

 

In the discount retail business in general, price, merchandise selection, merchandise quality, advertising and    customer service are all important aspects of competing.  The Company encounters direct competition with national full-line discount stores in 25 of its ALCO markets, and another 9 ALCO stores are in direct competition with regional full-line    discount stores.  The competing regional and national full-line discount retailers are generally larger than the Company and the stores of such competitors in the Company's markets are substantially larger, have a somewhat wider selection of    merchandise and are very price competitive in some lines of merchandise. Where there are no national or regional full-line discount retail stores directly competing with the Company's ALCO stores, the Company's customers nevertheless shop at retail    discount stores and other retailers located in regional trade centers, and to that extent the Company competes with such discount stores and retailers.  The Company also competes for retail sales with mail order companies, specialty retailers,    mass merchandisers, dollar stores, manufacturers outlets, and the internet.  In the 133 markets in which the Company operates a Class 18 Store, there is no direct competition from a national or regional full-line discount retailer.  The    Company competes with dollar stores in approximately two-thirds of its ALCO stores and approximately one-third of its 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 the Company as of April 25, 2003. 

 
**Name****Age**
**Position**Glen L. Shank 58Chairman of the Board and PresidentJames E. Schoenbeck59Senior Vice President - Operations and AdvertisingJames R. Fennema52Senior Vice President - MerchandiseRichard A. Mansfield47Vice President - Finance and TreasurerTom L. Canfield, Jr.49Vice President - Distribution and Administration
__________

 

Except as set forth below, all of the executive officers have been associated with the Company in their present position or other    capacity for more than the past five years.  There are no family relationships among the executive officers of the Company.

 

*Glen L. Shank* has served as President of the Company since June 1988 and as Chairman of the Board since    May 1991.  Between 1982 and 1988, Mr. Shank served as Vice President of Merchandising of the Company.  Prior to 1982, Mr. Shank served as a Buyer and as a Merchandise Manager for the Company.  Mr. Shank has approximately 36 years of    experience in the retail industry.

 

*James E. Schoenbeck* has served as Vice President of Store Operations and Advertising since 1988.     From 1979 to 1988, Mr. Schoenbeck served as the Vice President of Administration.  Mr. Schoenbeck has approximately 29 years of experience in the retail industry.

 

*James R. Fennema* has served as Vice President - Merchandise of the Company since March 1993.  For    the four years prior to that he served as Vice President and a divisional merchandise manager with Caldor, Inc., a chain of regional discount stores in New England and the mid-Atlantic states of the United States.  For more than the four years    prior to that he served as a divisional merchandise manager of Fishers Big Wheel, a regional discount store chain.  Mr. Fennema has approximately 30 years of experience in the retail industry.

 

*Richard A. Mansfield* has served as Vice President - Finance and Treasurer 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 ranch stores located in the Midwest.  For the three years prior to that he served as Chief    Financial Officer of American Laminates, Inc. and Relco, Inc.  Mr. Mansfield has approximately 22 years of experience in the retail industry.

 

* Tom L. Canfield, Jr*. has served as Vice President - Distribution and Administration since 1992.     From 1973 to 1992, Mr. Canfield served in various capacities with the Company.  Mr. Canfield has approximately 30 years of experience in the retail industry.

 

**Employees**

 

As of April 25, 2003, the Company employed approximately 5,400 people.  Of these employees, approximately    500 were employed in the general office and distribution center in Abilene, 4,300 in the ALCO stores and 600 in the Duckwall stores.  Additional employees are hired on a seasonal basis, most of whom are sales personnel.   There is no    collective bargaining agent for any of the Company's employees.  The Company considers its relations with its employees to be excellent.

 

 

**ITEM 2.  PROPERTIES**.

 

The Company owns facilities in Abilene, Kansas that consist of a general office (approximately 35,000 square    feet), the Distribution Center (approximately 352,000 square feet) and additional warehouse space adjacent to the general office.

 

Thirteen of the ALCO stores and two of the Duckwall stores operate in buildings owned by the Company.  The    remainder of the stores operate in properties leased to the Company.  Such ALCO leases account for approximately 4,350,000 square feet of lease space, which expire as follows: approximately 630,529 square feet (14.5%) expire between April 25,    2003 and February 1, 2004; approximately 522,890 square feet (12.0%) expire between February 2, 2004 and January 31, 2005; and approximately 393,148 square feet (9.0%) expire between February 1, 2005 and January 30, 2006.  The remainder of the    leases expire through 2021.  All Duckwall store leases have terms remaining of four years or less.

** **

** **

**ITEM 3.                             LEGAL PROCEEDINGS.**

** **

Neither the Company nor any of its subsidiaries is involved in any material pending legal proceedings, other    than routine litigation incidental to their businesses.

 

 

**ITEM 4.                             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**.

 

No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal    year ended February 2, 2003.

 

 

 

                                                                                                            **PART II**

 

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

 

The Common Stock of the Company is quoted on the NASDAQ National Market tier of The NASDAQ Stock Market under    the symbol "DUCK."  The following table sets forth the range of high and low bid information for the Company's Common Stock for each quarter    of fiscal 2003 and 2002.

 
**High****Low**Fiscal 2002First quarter$7.25$5.25 Second quarter8.806.23 Third quarter8.856.90 Fourth quarter11.037.81    Fiscal 2003First quarter$15.50$10.55 Second quarter15.5111.98 Third quarter13.359.15 Fourth quarter11.999.40    
 

As of April 4, 2003, there were approximately****1,280 holders of record of the Common Stock of the    Company. The Company has not paid cash dividends on its Common Stock during the last five fiscal years.  The terms of the Loan and Security Agreement, dated as of April 15, 2002, between the Company and Fleet Retail Finance Inc. allow for the    payment of dividends unless certain loan covenants are triggered, which are not expected to occur during fiscal 2004.

 

 

**Equity Compensation Plan Information**

 
Number of
Weighted-
Number of securities
 
securities to be
average
remaining available
 
issued upon
exercise price
for future issuance
 
exercise of
of
under equity
 
outstanding
outstanding
compensations
***Plan Category***
options
options
plans
 
 
 
 
1993 Incentive Stock Option Plan
434,375
$9.53
0
2003 Incentive Stock Option Plan (1)
0
 
500,000
Equity compensation plans not approved by Stockholders
0
 
0
 
 
 
 
(1) Pursuant to Proposal 2 described under the Company's proxy statement, the 
 
 
stockholders will vote whether to approve the 2003 Duckwall-ALCO Stores, Inc. 
 
 
Incentive Stock Option Plan which would authorize issuance of up to 500,000 shares.
 
 
 

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

 

**SELECTED CONSOLIDATED FINANCIAL DATA**

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

 

The selected consolidated financial data presented below for, and as of the end of, each of    the last five fiscal years under the captions Statements of Operations Data and Balance Sheet Data have been derived from the audited consolidated financial statements of the Company.  This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 7) and the consolidated financial statements, related notes,    and other financial information included herein (Item 8).

 

 
 **Fiscal Year Ended**
 
**February 2,**
** **
**February 3,**
** **
**January 28,**
 
**January 30,**
 
**January 31,**
**Statements of Operations Data**
**2003**
** **
**2002**
** **
**2001**
** **
**2000**
** **
**1999**
  Net sales
$408,756 
 
$407,233 
 
$386,037 
 
$375,904 
 
$359,406 
  Cost of sales
272,337
 
273,991
 
258,836
 
249,452
 
236,612
  Gross margin
136,419
 
133,242
 
127,201
 
126,452
 
122,794
  Selling, general and administrative expenses (including 
 
 
 
 
 
 
 
 
 
    provision for asset impairment and store closure)
119,092
 
116,308
 
110,147
 
105,793
 
101,129
  Depreciation and amortization
6,885
 
6,344
 
6,144
 
6,312
 
5,910
  Income from continuing operations
10,442
 
10,590
 
10,910
 
14,347
 
15,755
  Interest expense
1,609
 
2,778
 
3,254
 
3,672
 
4,234
  Earnings from continuing operations before income taxes,
 
 
 
 
 
 
 
 
 
     discontinued operations and  cumulative  effect of
 
 
 
 
 
 
 
 
 
     accounting change
8,833
 
7,812
 
7,656
 
10,675
 
11,521
  Income tax expense
3,243
 
2,974
 
2,894
 
4,057
 
4,294
  Earnings from continuing operations before discontinued
 
 
 
 
 
 
 
 
 
     operations and cumulative effect of accounting change
5,590
 
4,838
 
4,762
 
6,618
 
7,227
  Loss from discontinued operations, net of income tax (1)
(236)
 
(84)
 
(83)
 
(60)
 
(12)
  Cumulative effect of accounting change, net of income
 
 
 
 
 
 
 
 
 
      tax benefit of $111 in 2001 and $611 in 1999 (2) (3)
0 
 
0 
 
(173)
 
0 
 
(956)
  Net earnings 
$5,354 
 
$4,754 
 
$4,506 
 
$6,558 
 
$6,259 
  
 
 
 
 
 
 
 
 
 
 Per Share Information: 
 
 
 
 
 
 
 
 
 
    Earnings per share - basic:
 
 
 
 
 
 
 
 
 
          Earnings before discontinued operations          and  
 
 
 
 
 
 
 
 
 
            cumulative effect of          accounting change
$1.32 
 
$1.15 
 
$1.06 
 
$1.33 
 
$1.41 
          Discontinued operations
(0.06)
 
(0.02)
 
(0.02)
 
(0.01)
 
0.00 
          Cumulative effect of accounting change          
0.00 
 
0.00 
 
(0.04)
 
0.00 
 
(0.19)
          Net earnings
$1.26 
 
$1.13 
 
$1.00 
 
$1.32 
 
$1.22 
 
 
 
 
 
 
 
 
 
 
     Earnings per share - diluted: 
 
 
 
 
 
 
 
 
 
          Earnings before discontinued operations          and  
 
 
 
 
 
 
 
 
 
             cumulative effect of          accounting change
$1.28 
 
$1.15 
 
$1.06 
 
$1.33 
 
$1.40 
          Discontinued operations
(0.05)
 
(0.02)
 
(0.02)
 
(0.01)
 
0.00 
          Cumulative effect of accounting change          
0.00 
 
0.00 
 
(0.04)
 
0.00 
 
(0.19)
          Net earnings
$1.23 
 
$1.13 
 
$1.00 
 
$1.32 
 
$1.21 
 
 
 
 
 
 
 
 
 
 
 Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
          Basic
4,235,911
 
4,191,809
 
4,482,153
 
4,967,332
 
5,111,461
          Diluted
4,355,653
 
4,207,560
 
4,501,106
 
4,967,332
 
5,154,860
 
 
 
 
 
 
 
 
 
 
Operating Data
 
 
 
 
 
 
 
 
 
  Stores open at year-end
264
 
264
 
267
 
269
 
257
  Stores in non-competitive markets at year-end (4) 
229
 
221
 
222
 
220
 
206
  Percentage of total stores in 
 
 
 
 
 
 
 
 
 
    non-competitive markets (4)
86.74%
 
83.71%
 
83.15%
 
81.78%
 
80.20%
  Net sales of stores in non-competitive markets (4)
$334,811 
 
$317,585 
 
$299,713 
 
$281,263 
 
$259,524
  Percentage of net sales from stores in
 
 
 
 
 
 
 
 
 
    non-competitive markets (4)
81.53%
 
77.12%
 
76.70%
 
73.90%
 
71.40%
  Comparable store sales for all stores (5) 
-0.05%
 
2.90%
 
0.40%
 
-0.10%
 
0.90%
  Comparable store sales for stores in
 
 
 
 
 
 
 
 
 
    non-competitive markets (4)(5)
0.09%
 
2.94%
 
1.80%
 
1.80%
 
1.40%
 
 
 
 
 
 
 
 
 
 
**Balance Sheet Data**
 
 
 
 
 
 
 
 
 
  Total assets
$169,900 
 
$165,286 
 
$170,094 
 
$178,179
 
$172,474
  Total debt (includes capital lease
 
 
 
 
 
 
 
 
 
     obligation and current maturities)
24,611
 
26,437
 
35,153
 
41,761
 
45,608
  Stockholders' equity
102,110
 
95,590
 
92,506
 
90,218
 
86,426
 

 (1)      Effective February 4, 2002, the    Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of.  The statement also changes the criteria for classifying    an asset as held for sale, broadens the scope of assets to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.  The adoption of SFAS No. 144 resulted in the    reclassification of certain prior year revenue and expense activity related to five stores closed during fiscal year 2003 as discontinued operations.

 

 (2)      Effective October 30, 2000, the    Company, in response to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed its method of accounting for layaway sales, retroactive to the beginning of the year.  Previously, the Company recognized revenue    on the entire amount of layaway sales at the time merchandise was placed on layaway.  Under the new method, revenue on layaway sales are recognized upon delivery of the merchandise to the customer. 

 
(3)       Effective November 1, 1998, the    Company adopted AICPA Statement of Position 98-5, Reporting on the Costs of Start up Activities, retroactive to the beginning of the year.  Under the new method, the Company expenses store preopening costs as incurred rather than over the    initial 12-months of a store's operation..

 

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

 

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

 

 

 

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

**                                           CONDITION AND RESULTS OF OPERATIONS**          

 

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

 

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

 

The Company's fiscal year ends on the Sunday closest to January 31.  Fiscal 2003    consisted of 52 weeks, fiscal 2002 consisted of 53 weeks, and fiscal 2001 consisted of 52 weeks.

 

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

 

Effective February 4, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment    or Disposal of Long-Lived Assets.  SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of.  The statement also changes the criteria for classifying an asset as held for sale, broadens the scope of assets to    be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.  The adoption of SFAS No. 144 resulted in the reclassification of certain prior year revenue and expense    activity related to five stores closed during fiscal year 2003 as discontinued operations.

 
Critical Accounting Policies
 

*Inventory*:  As discussed in Note 1 (d) to the Consolidated Financial Statements,    inventories are stated at the lower of cost or net realizable value with cost determined using the last-in, first-out (LIFO) method.  The retail inventory method ("RIM") used by the Company is an averaging method that has been widely used in the    retail industry.  This method calculates a cost to retail ratio that is applied to the retail value of inventory to calculate cost inventory and the resulting gross margin.  Use of  the RIM method does not eliminate the use of management    judgments and estimates, including markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins.  

 

The Company continually evaluates product categories to determine if markdown action is    appropriate, or if a markdown reserve should be established.  The Company recognizes that the use of the RIM will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of    inventories.  As of February 2, 2003 and February 3, 2002, the Company had recorded markdowns that had not been taken and which served to reduce inventories to lower of cost or market by approximately $943,000 and $1,355,000, respectively.

 

Management believes that the RIM provides an inventory valuation which reasonably    approximates cost and results in carrying inventory at the lower of cost or market.

 

*Property and Equipment*:  The Company's policy is to capitalize property and    equipment if it has a useful life beyond one year.  Major improvements are capitalized, while maintenance and repairs, which do not extend the useful life of the asset, are expensed as incurred.

 

*Impairment of Long-Lived Assets*:  The Company considers determination of impairment of long-lived assets as a critical accounting    policy because determination as to whether the long-lived assets of a store are impaired and, if impaired, the fair value of such assets requires the use of judgment, particularly as it relates to projecting whether the sum of expected undiscounted    future cash flows for the store over an extended period of time will equal or exceed the carrying 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 the cash flows projected in conjunction with the impairment assessment.  The potential impact on the financial statements of incorrect judgments regarding impairment of long-lived assets is that a provision for    impairment could be needlessly recorded if projected future cash flows for a store are significantly under estimated or a provision for impairment could be deferred until later determined necessary in a future period if initial projected cash flows    are over estimated.  See Note 1(l) of Notes to Consolidated Financial Statements for a description of the Company's accounting policy for impairment of 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 2,
February 3,
January 28,
 
2003
2002
2001
 
 
 
 
 
 
 
Net sales
100.0
%
100.0
%
100.0
%
Cost of sales
66.6
 
67.3 
67.1
 
Gross margin
33.4 
32.7 
32.9
 
Selling, general and administrative expenses
29.1
 
28.4
 
28.1
 
Depreciation and amortization
1.7
 
1.6
 
1.6
 
Provision for asset impairment and store closure
0.0 
0.1 
0.4
 
Total operating expenses
30.8 
30.1 
30.1
 
Income from continuing operations
2.6
 
2.6
 
2.8
 
Interest expense
0.4 
0.7 
0.8
 
Earnings from continuing operations before income 
 
 
 
 
 
 
   taxes, discontinued operations and cumulative
 
 
 
 
 
 
   effect of accounting change
2.2
 
1.9
 
2.0
 
Income tax expense 
0.8 
0.7 
0.8
 
Earnings from continuing operations before discontinued
 
 
 
 
 
 
   operations and cumulative effect of accounting change
1.2
 
1.2
 
1.2
 
Loss from discontinued operations, net of income tax
0.1
 
0.0
 
0.0
 
Cumulative effect of accounting change, net of tax
0.0 
0.0 
0.0
 
Net earnings
1.3
%
1.2
%
1.2
%
 

 

**Fiscal 2003 Compared to Fiscal 2002**

** **

          Net sales for fiscal 2003 increased $1.5 million or 0.4% to $408.8    million compared to $407.2 million for fiscal 2002.  During fiscal 2003, the Company opened five ALCO stores, all of which were in new non-competitive markets.  Two ALCO and three Duckwall stores were closed, resulting in a year end total    of 264 stores.  The increase in net sales was due to new stores opened over the last two fiscal years.  This increase was partially offset because fiscal 2002 had sales from a 53rd week of $5.9 million  Fiscal 2003 only had sales    from 52 weeks.  Net sales for all stores open the full year in both fiscal 2003 and 2002 (comparable stores), increased by $186,000 or 0.1% in fiscal 2003 compared to fiscal 2002.  Sales in the Class 18 Stores, the main focus of the Company's    expansion efforts, increased $1.2 million, or 0.6%.  Strong sales during the first half of the year gave way to a softer second half, when economic and consumer spending trends deteriorated throughout the United States.

 

         Gross margin for fiscal 2003 increased $3.2 million, or 2.4%,    to $136.4 million compared to $133.2 million in fiscal 2002.  As a percentage of net sales, gross margin increased to 33.4% in fiscal 2003 compared to 32.7% in fiscal 2002.  The increase in the gross margin percentage was attributable to a    reduction in both markdowns and shrinkage.  

 

         Selling, general and administrative    expenses increased $3.4 million or 2.9% to $119.1 million in fiscal 2003 compared to $115.7 million in fiscal 2002, primarily due to higher insurance and distribution center costs.  As a percentage of net sales, selling, general and    administrative expenses were 29.1% in fiscal 2003 and 28.4% in fiscal 2002.  The selling, general and administrative expense percentage was unfavorably impacted as a result of Fiscal 2003 having one less week compared to the 53 week Fiscal 2002.    

 

              In fiscal 2003, there was no expense for asset    impairment, and store closing costs were included in Discontinued Operations.  The provision for asset impairment and store closure in fiscal 2002 was $601,000, which consisted of $498,000 for asset impairment and $103,000 for closing stores.     Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the    carrying amount of an asset to 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 the assets.  For purposes of determining impairment, assets are grouped at the store level.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.                                                                                                                                                              

 

         Income from continuing operations    decreased $148,000, or 1.4%, to $10.4 million in fiscal 2003 compared to $10.6 million in fiscal 2002.  Income from continuing operations as a percentage of net sales was 2.6% in both fiscal 2003 and fiscal 2002.  

      

         Interest expense decreased $1.2 million, or 42.1%,    in fiscal 2003 compared to fiscal 2002.  The reduction in interest expense is due primarily to lower interest rates.

 

         Income taxes were $3.2 million in fiscal    2003 compared to $3.0 million in fiscal 2002.  The Company's effective tax rate was 36.7% in fiscal 2003 and 38.1% in fiscal 2002.  Increased earnings in fiscal 2003 generated a higher income tax expense compared to fiscal 2002 even though    the effective tax rate decreased.

 

         Earnings before loss from discontinued    operations and the cumulative effect of accounting change for fiscal 2003 increased by $752,000, or 15.5%, to $5.6 million compared to $4.8 million in fiscal 2002.

 

          Loss from discontinued operations,    net of income taxes was $236,000 in fiscal 2003, compared to $84,000 in fiscal 2002.     ** **

 

**Fiscal 2002 Compared to Fiscal 2001**

** **

          Net sales for fiscal 2002 increased    $21.2 million or 5.5% to $407.2 million compared to $386.0 million for fiscal 2001.  During fiscal 2002, the Company opened 4 ALCO stores, all of which were in new non-competitive markets.  Two ALCO and five Duckwall stores were closed,    resulting in a year end total of 264 stores.  The increase in net sales was due to new stores opened over the last two fiscal years, a comparable store sales increase of 3.0%, and  $5.9 million in sales from the extra week in Fiscal 2002    compared to Fiscal 2001.  Net sales for all stores open the full year in both fiscal 2002 and 2001 (comparable stores), increased by $11.0 million or 2.9% in fiscal 2002 compared to fiscal 2001.  Sales in the Class 18 Stores, the main focus    of the Company's expansion efforts, increased $5.5 million, or 3.1%.  Sales strengthened in the second half of the year due to the success of the ongoing store remodeling    program, along with other merchandising and marketing initiatives designed to improve sales. 

 

         Gross margin for fiscal 2002 increased $6.0 million, or 4.7%, to $133.2    million compared to $127.2 million in fiscal 2001.  As a percentage of net sales, gross margin decreased to 32.7% in fiscal 2002 compared to 33.0% in fiscal 2001.  The decline in the gross margin percentage was attributable to higher    transportation costs and shrinkage.  Gross margin for the first two quarters of the fiscal year declined from 33.4% in fiscal 2001 to 32.5% in fiscal 2002, due to an unfavorable mix of sales, higher transportation costs and shrinkage.  The    results of the third and fourth quarters were favorably impacted by a more favorable mix of sales, due in part to the store remodel program and other merchandising and marketing initiatives.  Gross margin for the third and fourth quarters    increased from 32.5% in fiscal 2001 to 32.9% in fiscal 2002. 

 

         Selling, general and administrative    expenses increased $7.1 million or 6.5% to $115.7 million in fiscal 2002 compared to $108.6 million in fiscal 2001, primarily due to higher insurance and distribution center costs.  As a percentage of net sales, selling, general and    administrative expenses were 28.4% in fiscal 2002 and 28.1% in fiscal 2001.  Selling, general and administrative expense was unfavorably impacted by the sale-leaseback transaction for $2.1 million that was completed at the end of fiscal year    2001.  The sale-leaseback impacts selling, general and administrative expense through higher store rent expense, with a corresponding reduction in depreciation and interest expense.

 

          The provision for asset impairment and store closure    decreased $901,000, or 60%, to $601,000 in fiscal 2002 compared to $1.5 million in fiscal 2001.  Those amounts comprise $498,000 for asset impairment and $103,000 for store closing in fiscal 2002, and $1.2 million for asset impairment and    $320,000 for store closing in fiscal 2001.   Included in store closure expense are expenses accrued for stores expected to be closed as well as others closed during the current year.  Because there is a smaller investment in fixtures and    leasehold costs, the cost to close a Duckwall 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 which operations had not been closed nor had a    decision been made to close.  Depreciation expense that the Company will not experience as a result of the assets impaired in fiscal 2002 was approximately $89,000 for fiscal 2003.

                                                                                                                           

              Income from continuing operations decreased $320,000,    or 2.9%, to $10.6 million in fiscal 2002 compared to $10.9 million in fiscal 2001.  Income from continuing operations as a percentage of net sales decreased to 2.6% in fiscal 2002 from 2.8% in fiscal 2001.   

 

         Interest expense decreased $476,000, or    14.6%, in fiscal 2002 compared to fiscal 2001.  The reduction in interest expense is due primarily to lower interest rates.

 

         Income taxes were $3.0 million in fiscal    2002 compared to $2.9 million in fiscal 2001.  The Company's effective tax rate was 38.1% in fiscal 2002 and 37.8% in fiscal 2001.

 

         Earnings before discontinued operations    and the cumulative effect of accounting change for fiscal 2002 increased by $76,000, or 1.6%, to $4.8 million compared to $4.8 million in fiscal 2001.

** **

 

**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 2002 and 2003. 

 

 
 
**First**
** **
**Second**
** **
**Third**
** **
**Fourth**
 
 
**Quarter**
** **
**Quarter**
** **
**Quarter**
** **
**Quarter**
 
 
**  (dollars in millions)**
 
 
 
 
 
 
 
 
 
Fiscal 2002
     Net Sales
$90.7
 
$100.7
 
$93.7
 
$122.1
 
     Gross Margin
29.4
 
32.8
 
32.2
 
38.8
 
     Earnings from continuing operations
0.0
 
0.9
 
0.5
 
3.4
 
     Net Earnings
0.0
 
0.9
 
0.4
 
3.4
 
 
 
 
 
 
 
 
 
Fiscal 2003
     Net Sales
$96.1
 
$103.1
 
$92.9
 
$116.7
 
     Gross Margin
32.1
 
34.4
 
32.7
 
37.4
 
     Earnings from continuing operations
0.6
 
1.3
 
0.5
 
3.2
 
     Net Earnings
0.5
 
1.3
 
0.5
 
3.1
 

           See Note 10 of Notes to Consolidated Financial Statements for quarterly earnings per share    information.

 

         The Company's    business is subject to seasonal fluctuations.  The Company's highest sales levels occur in the fourth quarter of its fiscal year which includes the Christmas holiday selling season.  The    Company's results of operations in any one quarter are not necessarily indicative of the results of operations that can be expected for any other quarter or for the full fiscal year.  The Company's results of operations may also fluctuate from    quarter to quarter as a result of the amount and timing of sales contributed by new stores and the integration of the new stores into the operations of the Company, as well as other factors.  The addition of a large number of new stores can,    therefore, significantly affect the quarterly results of operations.  Also, refer to Impact of Change in Accounting Principle and Note 10 to the Consolidated Financial Statements regarding the impact of the accounting change on quarterly    results. 

 

**Inflation**

 

         Management does not believe that its merchandising operations have been materially affected    by inflation over the past few years.  The Company will continue to monitor costs, take advantage of vendor incentive programs, selectively buy from competitive vendors and adjust merchandise prices based on market conditions.

 

         The Company's operating expenses have been impacted by increases in general and medical    insurance, as well as competitive pressures in wages in selected markets.  See additional discussion of wages in the "Government Regulation" section.

** **

**Liquidity and Capital Resources**

 

         At the end of fiscal 2003, working    capital (defined as current assets less current liabilities) was $93.4 million compared to $70.4 million at the end of fiscal 2002 and $94.0 million at the end of fiscal 2001.  The increase in working capital between the end of fiscal 2002 and    fiscal 2003 was due to the classification of the revolving loan as a long term liability.  On April 15, 2002, the revolving loan was replaced with a new revolving loan that matures in April 2006.

 

         The Company's primary sources of funds    are cash flow from operations, borrowings under its revolving loan credit facility, vendor trade credit financing and lease financing.  In fiscal years 2003, 2002 and 2001, the Company completed a sale-leaseback of a number of its owned stores.     The proceeds from these transactions amounted to $1.3 million, $0.6 million, and $2.0 million in fiscal years 2003, 2002 and 2001, respectively.  

 

Cash provided by operating activities aggregated $5.4 million, $11.1 million, and $7.3    million, in fiscal 2003, 2002 and 2001, respectively.  The decrease in cash provided in fiscal 2003 relative to fiscal 2002 resulted primarily from a larger increase in inventory as well as a reduction in income taxes payable.  The increase    in cash provided in fiscal 2002 relative to fiscal 2001 resulted primarily from an increase in income taxes payable as well as a similar balance in accounts payable at the end of each fiscal year.  

 

The Company uses its revolving loan credit facility and vendor trade credit financing to fund    the build up of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements.  The revolving loan credit facility provides up to $70 million of financing in the form of notes payable and    letters of credit.  The loan agreement expires in April 2006.  The Company had borrowings available at February 2, 2003 under the revolving loan credit facility amounting to $48.3 million.  Short-term trade credit represents a    significant source of financing for inventory to the Company.  Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases. 

 

 In fiscal 2003, the Company made net cash payments on its revolving credit facility of    $654,000 and made cash payments of $1.2 million to reduce its long-term debt and capital lease obligations.  The Company received $1.2 million in proceeds from the exercise of outstanding stock options.  In fiscal 2002, the Company made net    cash payments on its revolving credit facility of $7.5 million, made cash payments of $1.2 million to reduce its long-term debt and capital lease obligations, and repurchased $1.7 million of Company stock.  In fiscal 2001, the Company made net    cash payments on its revolving credit facility of $4.8 million, made cash payments of $1.8 million to reduce its long-term debt and capital lease obligations, and repurchased $3.0 million of Company stock.  The Company executed operating leases    for 24 additional stores during the three year period ending in fiscal 2003.  The Company's long-range plan assumes growth in the number of stores in smaller markets where there is less    competition, and, in accordance with this plan, 5 new ALCO stores were opened in fiscal 2003 and 8 new ALCO stores are expected to be opened in fiscal 2004.  The Company believes that with the $70 million line of credit, sufficient capital is    available to fund the Company's planned expansion.

 

Cash used for acquisition of property and equipment in fiscal 2003, 2002 and 2001 totaled    $7.6 million, $6.0 million, and $5.9 million, respectively.  A sale-leaseback of store buildings was completed in the amount of $1.3 million, $0.6 million, and  $2.0 million in fiscal 2003, 2002, and 2001, respectively.  This resulted in    net cash used for acquisition of property and equipment in fiscal 2003, 2002, and 2001 of $6.3 million, $5.4 million, and $3.9 million, respectively.  Anticipated cash payments for acquisition of property and equipment in fiscal 2004,    principally for store buildings and fixtures, are $8 million.

 

During fiscal 1999, the Company's Board of    Directors approved a plan to repurchase up to 411,000 shares of the Company's Common Stock (the "Stock Repurchase Program").  During    fiscal 2000, the Company's Board of Directors approved the repurchase of an additional 1,000,000 shares.  Purchases pursuant to the Stock Repurchase Program are to be made from time to time in    the open market or directly from stockholders at prevailing market prices.  The Stock Repurchase Program is anticipated to be funded with internally generated 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 $8.1 million, which represents 20% of its outstanding shares.  There were no shares repurchases during fiscal 2003.

 

**               **The following    table summarized the Company's significant contractual obligations payable as of February 2, 2003 (in thousands).  Payments due under the  revolving loan credit facility and long-term debt represent principle payments only.  

 

 
Payments due by Period
 
 
 
Less than
 
1-3
 
4-5
 
After
Contractual Obligations
Total
 
1 year
 
years
 
years
 
5 years
 
 
 
 
 
 
 
 
 
 
Revolving Loan Credit Facility
17,483
 
0
 
0
 
17,483
 
0
Long-Term Debt
1,032
 
500
 
532
 
0
 
0
Capital Lease Obligations
9,210
 
1,384
 
2,723
 
2,243
 
2,860
Operating Leases
74,474
 
11,096
 
17,520
 
13,821
 
32,037
 
 
 
 
 
 
 
 
 
 
Total contractual cash obligations
102,199
 
12,980
 
20,775
 
33,547
 
34,897
** **

** **

**CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE    RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS**

 

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

 

Forward-looking statements are not guarantees of future performance or results.  They    involve risks, uncertainties and assumptions.  The Company's future results of operations, financial condition and business operations may differ materially from the forward-looking statements or the historical information stated in this Annual    Report on Form 10-K.  Stockholders and investors are cautioned not to put undue reliance on any forward-looking statement.

  

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

** **

**Expansion Plans**

 

The continued growth of the Company is dependent, in large part, upon the Company's    ability to open and operate new stores on a timely and profitable basis.  The Company plans to open 8 ALCO stores in the current fiscal year and at least 10 ALCO stores in both fiscal 2005 and 2006.  While the Company believes that adequate    sites are currently available, the rate of new store openings is subject to various contingencies, many of which are beyond the Company's control.  These contingencies include the availability of acceptable    communities for store locations, the Company's ability to secure suitable store sites on a timely basis and on satisfactory terms, the Company's ability to hire,    train and retain qualified personnel, the availability of adequate capital resources and the successful integration of new stores into existing operations.  There can be no assurance that the Company will be able to continue to successfully    identify and obtain new store sites or that once obtained, the new stores will achieve satisfactory sales or profitability.

** **

**Competition**

 

The Company's strategy is    to locate its ALCO stores in smaller retail markets where there is no competing full-line discount retail store within the primary trade area and where the Company believes the opening of a store would significantly reduce the likelihood 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 direct competition, it often competes with national or regional full-line discount stores which often have substantially greater financial and other resources than the Company.

 

**Government Regulation**

 

The Company is subject to numerous federal, state and local government laws and regulations,    including those relating to the development, construction and operation of the Company's stores.  The Company is also subject to laws governing its relationship with employees,    including minimum wage requirements, laws and regulations relating to overtime, working and safety conditions, and citizenship requirements.  Material increases in the cost of compliance with any applicable law or regulation and similar matters    could materially and adversely affect the Company.

 

In 1996, Congress enacted The Small Business Job Protection Act of 1996 (the "Act"), raising the hourly minimum wage from $4.75 to $5.15 effective as of September 1, 1997.  The majority of the Company's    store employees were paid hourly wages below these increased minimum wage rates.  As a result, the Act increased the Company's payroll expense.  Additional increases in the minimum wage could have a    material impact on the results of the Company's operations if it is unable to pass those increased costs on to customers or if sales are not increasing at a rate large enough to offset the impact.

 

**Control by Significant Stockholders**

 

Kansas Public Employees Retirement System ("KPERS")    and Jeffrey Macke are principal stockholders of the Company, beneficially owning approximately 17% and 16%, respectively, of the outstanding shares of Common Stock of the Company as of March 1, 2003. 

 

**Quarterly Fluctuations**

 

Quarterly results of operations have historically fluctuated as a result of retail consumers'    purchasing patterns, with the highest quarter in terms of sales and profitability being the fourth quarter.  Quarterly results of operations will likely continue to fluctuate significantly as a result of such patterns and may fluctuate due to    the timing of new store openings.

 

 

**Economic Conditions**

 

Similar to other retail businesses, the Company's    operations may be affected adversely by general economic conditions and events which result in reduced consumer spending in the markets served by its stores.  Also, smaller communities where the Company's    stores are located may be dependent upon a few large employers or may be significantly affected by economic conditions in the industry upon which the community relies for its economic viability, such as the agricultural industry.  This may make    the Company's stores more vulnerable to a downturn in a particular segment of the economy than the Company's competitors, which operate in markets which are    larger metropolitan areas where the local economy is more diverse.

 

**Dependence on Officers**

 

The development of the Company's    business has been largely dependent on the efforts of its current management team headed by Glen L. Shank and sixteen other officers.  The loss of the services of one or more of these officers could have a material adverse effect on the Company.

 

**No Recent Dividend Payments; Restrictions on Payment of Dividends**

 

The Company has not paid a cash dividend on the Common Stock for more than five years, and it    has no plans to commence paying cash dividends on the Common Stock.  The Company's revolving loan credit facility currently allows the payment of cash dividends unless certain    loan covenants are triggered.

 

**Impact of Change in Accounting Principle**

 

Effective February 2, 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based    Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123.  This Statement required additional disclosures in the consolidated financial statements.

 

Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards    (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities.  The adoption of this statement had the    effect of delaying when the Company records liabilities associated with store closures.

 

The Company adopted Emerging Issues Task Force Issue 02-16, Accounting by a Customer    (including a Reseller) for Certain Consideration Received from a Vendor, (EITF 02-16).  EITF 02-16 provides guidance on the income statement classification of amounts received by a customer, including a reseller (including reimbursements for    expenses such as cooperative advertising), for transactions entered into after December 31, 2002, and limited guidance regarding timing of recognition for volume rebates, for transactions entered into after November 21, 2002.  The adoption of    EITF 02-16 did not have a significant impact on the Company's financial statements for the year ended February 2, 2003. 

 

Effective February 4, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment    or Disposal of Long-Lived Assets.  SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of.  The statement also changes the criteria for classifying an asset as held for sale, broadens the scope of assets to    be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.  The adoption of SFAS No. 144 resulted in the reclassification of certain prior year revenue and expense    activity related to five stores closed during fiscal year 2003 as discontinued operations.

 

**New Accounting Standards**

** **

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.     SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the    acquisition, construction, development, and/or normal use of the assets.  The Company also records a corresponding asset that is depreciated over the life of the asset.  Subsequent to the initial measurement of the asset retirement    obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.  The Company is required to adopt SFAS No. 143 effective February 3,    2003.  The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial statements.   

 

**ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES    ABOUT MARKET RISK**

 

The Company is subject to market 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 interest rates to meet the short-term needs of its expansion program and seasonal inventory increases.

 

On April 15, 2002, the Company replaced the existing line of credit with a new line of credit    with Fleet Retail Finance Inc. that expires in April 2006.  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 are

not applicable to the Company.

 

** **

 

**Independent Auditors' Report**

 

 

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

 

We have audited the accompanying consolidated balance sheets of Duckwall-ALCO Stores, Inc. and subsidiaries as of February 2, 2003 and February 3,        2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three‐year period ended February 2, 2003. These consolidated financial statements are the responsibility of the        Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we        plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial        statements. An audit also includes assessing the accounting principles used and significant estimates made by management, 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 financial statements referred to above present fairly, in all material respects, the financial position of        Duckwall-ALCO Stores, Inc. and subsidiaries as of February 2, 2003, February 3, 2002, and January 28, 2001, and the results of their operations and their cash flows for each of the years in the three‐year period ended February 2, 2003, in        conformity with accounting principles generally accepted in the United States of America.

 

As discussed in note 1 of the notes to consolidated financial statements, the Company changed its method of accounting for layaway sales        in the year ended January 28, 2001.
  				/s/  KPMG LLP 
 

Wichita, Kansas        March 19, 2003

 

 

 

 
 
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Consolidated Statements of OperationsFiscal years ended February 2, 2003, February 3, 2002, and January 28, 2001(Dollars in thousands, except per share amounts)        2003 2002 2001Net sales   $408,756    407,233    386,037   Cost of sales  272,337    273,991    258,836       Gross margin 136,419    133,242    127,201   Selling, general, and administrative (notes 4 and 5) 119,092    115,707    108,645   Depreciation and amortization 6,885    6,344    6,144   Provision for asset impairment and store closure --     601    1,502       Total operating expenses 125,977    122,652    116,291       Income from continuing operations 10,442    10,590    10,910   Interest expense (notes 3 and 5) 1,609    2,778    3,254      Earnings from continuing operations           before income taxes, discontinued          operations, and cumulative effect of           accounting change 8,833    7,812    7,656   Income tax expense (note 6) 3,243    2,974    2,894      Earnings from continuing operations           before discontinued operations and          cumulative effect of accounting change 5,590    4,838    4,762   Loss from discontinued operations, net of       income tax benefit of $137, $51, and $51       in 2003, 2002, and 2001 respectively (236)   (84)   (83)  Cumulative effect of accounting change,        net of income tax benefit of $111 in        2001 (note 1) --     --     (173)       Net earnings$5,354    4,754    4,506   Earnings per share:       Basic (note 9):        Earnings before discontinued operations and         cumulative effect of accounting change$1.32    1.15    1.06     Discontinued operations (0.06)   (0.02)   (0.02)    Cumulative effect of accounting change --     --     (0.04)       Net earnings$1.26    1.13    1.00   Earnings per share:       Diluted (note 9):        Earnings before discontinued operations and         cumulative effect of accounting change$1.28    1.15    1.06     Discontinued operations (0.05)   (0.02)   (0.02)    Cumulative effect of accounting change --     --     (0.04)       Net earnings$1.23    1.13    1.00    
See accompanying notes to consolidated financial statements.   
 

**DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES**
Consolidated Balance Sheets
February 2, 2003 and February 3, 2002
(Dollars in thousands)
**Assets**
 
**2003**
 
**2002**
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
$
1,356   
 
3,219   
 
Receivables 
 
 
2,015   
 
1,663   
 
Inventories (note 2)
 
129,677   
 
125,165   
 
Prepaid expenses
 
2,415   
 
959   
 
 
 
 
 
Total current assets
 
135,463   
 
131,006   
Property and equipment, at cost:
 
 
 
 
 
Land and land improvements
 
3,047   
 
2,839   
 
Buildings and building improvements
 
16,729   
 
17,616   
 
Furniture, fixtures, and equipment
 
49,312   
 
44,701   
 
Transportation equipment
 
2,769   
 
2,088   
 
Leasehold improvements
 
11,390   
 
9,972   
 
Construction work in progress
 
908   
 
1,305   
 
 
 
 
 
Total property and equipment
 
84,155   
 
78,521   
 
Less accumulated depreciation and amortization
 
54,125   
 
48,723   
 
 
 
 
 
Net property and equipment
 
30,030   
 
29,798   
Property under capital leases (note 5)
 
20,120   
 
20,407   
 
Less accumulated amortization
 
16,509   
 
16,226   
 
 
 
 
 
Net property under capital leases
 
3,611   
 
4,181   
Other assets
 
 
 
239   
 
15   
Deferred income taxes (note 6)
 
557   
 
286   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
169,900   
 
165,286   
See accompanying notes to consolidated financial statements.
 
 
 

** **
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
**Liabilities and Stockholders' Equity**
 
**2003**
 
**2002**
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt (note 3)
$
500   
 
469   
 
Notes payable under revolving loan credit facility (note 3)
 
--    
 
18,137   
 
Current maturities of capital lease obligations (note 5)
 
712   
 
703   
 
Accounts payable
 
25,241   
 
24,511   
 
Income taxes payable
 
1,326   
 
3,677   
 
Accrued salaries and commissions
 
5,372   
 
4,971   
 
Accrued taxes other than income
 
3,935   
 
4,080   
 
Other current liabilities
 
2,836   
 
2,581   
 
Deferred income taxes (note 6)
 
2,164   
 
1,458   
 
 
 
 
 
Total current liabilities
 
42,086   
 
60,587   
 
 
 
 
 
 
 
 
 
 
 
Notes payable under revolving loan credit facility (note 3)
 
17,483   
 
--    
Long-term debt, less current maturities (note 3)
 
532   
 
1,032   
Capital lease obligations, less current maturities (note 5)
 
5,384   
 
6,096   
Other noncurrent liabilities
 
1,448   
 
1,265   
Deferred revenue
 
857   
 
716   
 
 
 
 
 
Total liabilities
 
67,790   
 
69,696   
Stockholders' equity (notes 4, 7, and 8):
 
 
 
 
 
Common stock, $0.0001 par value. Authorized 20,000,000 
 
 
 
 
 
 
shares in 2003 and 2002; issued and outstanding
 
 
 
 
 
 
4,260,557 and 4,149,599 shares in 2003 and 2002,
 
 
 
 
 
 
respectively
 
1   
 
1   
 
Additional paid-in capital
 
48,759   
 
47,609   
 
Retained earnings
 
53,350   
 
47,996   
 
Accumulated other comprehensive income (loss)
 
--    
 
(16)  
 
 
 
 
 
Total stockholders' equity
 
102,110   
 
95,590   
Commitments (note 5)
 
 
 
 
 
 
 
 
 
 
 
$
169,900   
 
165,286   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

**DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES**
Consolidated Statements of Stockholders' Equity
Fiscal years ended February 2, 2003, February 3, 2002, and January 28, 2001
(Dollars in thousands)
 
 
 
 
 
 
 
 
** **
** **
** **
** **
** **
** **
**Accumulated**
** **
** **
 
 
 
 
 
 
 
 
** **
** **
**Additional**
** **
** **
** **
**other**
** **
**Total**
 
 
 
 
 
 
 
 
**Common**
** **
**paid-in**
** **
**Retained**
** **
**comprehensive**
** **
**stockholders'**
 
 
 
 
 
 
 
 
**stock**
** **
**capital**
** **
**earnings**
** **
**income (loss)**
** **
**equity**
Balance, January 30, 2000
$
1   
 
51,481   
 
38,736   
 
--    
 
90,218   
Net earnings for the year ended
 
 
 
 
 
 
 
 
 
 
 
January 28, 2001
 
--    
 
--    
 
4,506   
 
--    
 
4,506   
Income tax benefit relating to period
 
 
 
 
 
 
 
 
 
 
 
prior to reorganization (note 8)
 
--    
 
754   
 
--    
 
--    
 
754   
Repurchase and retirement of 352,700
 
 
 
 
 
 
 
 
 
 
 
common shares
 
--    
 
(2,972)  
 
--    
 
--    
 
(2,972)  
Balance, January 28, 2001
 
1   
 
49,263   
 
43,242   
 
--    
 
92,506   
Net earnings for the year ended
 
 
 
 
 
 
 
 
 
 
 
February 3, 2002
 
--    
 
--    
 
4,754   
 
--    
 
4,754   
Cumulative effect adjustment upon
 
 
 
 
 
 
 
 
 
 
 
adoption of SFAS No. 133, net
 
 
 
 
 
 
 
 
 
 
 
of tax (note 1)
 
--    
 
--    
 
--    
 
(76)  
 
(76)  
Amortization of cumulative effect
 
 
 
 
 
 
 
 
 
 
 
adjustment
 
 
--    
 
--    
 
--    
 
60   
 
60   
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
4,738   
Repurchase and retirement of 270,000
 
 
 
 
 
 
 
 
 
 
 
common shares
 
--    
 
(1,654)  
 
--    
 
--    
 
(1,654)  
Balance, February 3, 2002
 
1   
 
47,609   
 
47,996   
 
(16)  
 
95,590   
Net earnings for the year ended
 
 
 
 
 
 
 
 
 
 
 
February 2, 2003
 
--    
 
--    
 
5,354   
 
--    
 
5,354   
Amortization of cumulative effect
 
 
 
 
 
 
 
 
 
 
 
adjustment
 
 
--    
 
--    
 
--    
 
16   
 
16   
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
5,370   
Options exercised to purchase
 
 
 
 
 
 
 
 
 
 
 
110,958 shares
 
--    
 
1,150   
 
--    
 
--    
 
1,150   
Balance, February 2, 2003
$
1   
 
48,759   
 
53,350   
 
--    
 
102,110   
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 

**DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES**
Consolidated Statements of Cash Flows
Fiscal years ended February 2, 2003, February 3, 2002, and January 28, 2001
(Dollars in thousands)
 
 
 
 
 
 
 
 
**2003**
 
**2002**
 
**2001**
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings 
$
5,354   
 
4,754   
 
4,506   
 
Adjustments to reconcile net earnings to cash
 
 
 
 
 
 
 
 
provided by operating activities:
 
 
 
 
 
 
 
 
 
Cumulative effect of accounting change, 
 
 
 
 
 
 
 
 
 
 
net of income tax benefit
 
--    
 
--    
 
173   
 
 
 
Depreciation and amortization
 
6,912   
 
6,380   
 
6,233   
 
 
 
Amortization of debt financing costs
 
76   
 
70   
 
103   
 
 
 
Deferred income taxes
 
425   
 
(1,568)  
 
(225)  
 
 
 
(Gain) loss on disposition or impairment of property
 
 
 
 
 
 
 
 
 
 
and equipment
 
(268)  
 
687   
 
1,183   
 
 
 
(Increase) decrease in receivables
 
(352)  
 
534   
 
(434)  
 
 
 
Increase in inventories
 
(4,512)  
 
(1,420)  
 
(1,237)  
 
 
 
Increase in prepaid expenses
 
(1,456)  
 
(406)  
 
(86)  
 
 
 
Increase in other assets
 
--    
 
--    
 
(9)  
 
 
 
Increase (decrease) in accounts payable
 
730   
 
(79)  
 
(2,191)  
 
 
 
(Decrease) increase in income taxes payable
 
(2,351)  
 
2,971   
 
(1,137)  
 
 
 
Increase (decrease) in accrued salaries and 
 
 
 
 
 
 
 
 
 
 
commissions
 
401   
 
171   
 
(12)  
 
 
 
(Decrease) increase in accrued taxes other
 
 
 
 
 
 
 
 
 
 
than income
 
(145)  
 
(89)  
 
147   
 
 
 
Increase (decrease) in other liabilities
 
464   
 
(884)  
 
425   
 
 
 
Increase (decrease) in deferred revenue
 
141   
 
--    
 
(136)  
 
 
 
 
 
Net cash provided by operating activities
 
5,419   
 
11,121   
 
7,303   
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from sale of property and equipment
 
1,316   
 
618   
 
2,060   
 
Acquisition of:
 
 
 
 
 
 
 
 
Buildings
 
 
(252)  
 
(517)  
 
(2,110)  
 
 
Fixtures, equipment, and leasehold improvements
 
(7,370)  
 
(5,484)  
 
(3,824)  
 
 
 
 
 
Net cash used in investing activities
 
(6,306)  
 
(5,383)  
 
(3,874)  
Cash flows from financing activities:
 
 
 
 
 
 
 
Decrease in notes payable under revolving loan
 
 
 
 
 
 
 
 
credit facility
 
(18,137)  
 
(7,469)  
 
(4,814)  
 
Net borrowings under revolving loan credit facility
 
17,483   
 
--    
 
--    
 
Proceeds from exercise of outstanding stock options
 
1,150   
 
--    
 
--    
 
Repurchase of stock
 
--    
 
(1,654)  
 
(2,972)  
 
Principal payments on long-term debt
 
(469)  
 
(564)  
 
(1,187)  
 
Principal payments under capital lease obligations
 
(703)  
 
(683)  
 
(607)  
 
Debt issuance costs
 
(300)  
 
--    
 
--    
 
 
 
 
 
Net cash used in financing activities
 
(976)  
 
(10,370)  
 
(9,580)  
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(1,863)  
 
(4,632)  
 
(6,151)  
Cash and cash equivalents at beginning of year
 
3,219   
 
7,851   
 
14,002   
Cash and cash equivalents at end of year
$
1,356   
 
3,219   
 
7,851   
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

 

 

**DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

February 2, 2003, February 3, 2002, and January 28, 2001

(Dollars in thousands, except per share amounts)

 

**(1)     Summary of Significant Accounting Policies**

**(a)     Nature of Business**

Duckwall-ALCO Stores, Inc. and subsidiaries (the Company) is engaged in the business of retailing general merchandise throughout the central portion of the United                States of America through discount department and variety store outlets. Merchandise is purchased for resale from many vendors, and transactions with individual vendors and customers do not represent a significant portion of total                purchases and sales.

**(b)     Principles of Consolidation**

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany account balances have                been eliminated in consolidation.

**(c)     Basis of Presentation**

The Company's fiscal year ends on the Sunday nearest to January 31. Fiscal 2003 consists of 52 weeks, fiscal 2002 consists of 53 weeks, and fiscal 2001 consists of                52 weeks.

**(d)     Inventories**

Store inventories are stated at the lower of cost or net realizable value as estimated by the retail inventory method. Warehouse inventories are stated at the                lower of cost or net realizable value. The Company utilizes the last-in, first-out (LIFO) method of determining cost of store and warehouse inventories.

**(e)     Property and Equipment**

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Amortization of capital leases is computed on a                straight-line basis over the terms of the lease agreements. Leasehold improvements are amortized on a straight-line basis over the lesser of the remaining lease term, or 10 years. Estimated useful lives are as follows:
 
Buildings
 
 
 
 
25 years 
Building improvements
 
10 years 
Furniture, fixtures, and equipment
 
3-8 years 
Transportation equipment
 
3-5 years 
Leasehold improvements
 
2-10 years
 

Major improvements are capitalized while maintenance and repairs, which do not extend the useful life of the asset, are charged to expense as incurred.

**(f)      Income Taxes**

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences                attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are                measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is                recognized in income in the period that includes the enactment date.

**(g)     Net Sales and Deferred Revenue**

Sales are recorded in the period of sale. Sales returns, which are not material, are recorded in the period of return as a reduction of sales. Vendor rebates                received in advance of meeting the criteria for recognition in the consolidated statements of operations are recorded as deferred revenue.

**(h)     Change in Accounting Principle**

Effective February 2, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 148, *Accounting for Stock‐based Compensation - Transition                and Disclosure, an Amendment of FASB Statement No. 123*. This Statement required additional disclosures in the consolidated financial statements.

Effective January 1, 2003, the Company adopted SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*. SFAS No. 146 addresses                financial accounting and reporting for costs associated with exit or disposal activities. The adoption of this statement had the effect of delaying when the Company records liabilities associated with store closures (see note 1(m)).

The Company adopted Emerging Issues Task Force Issue 02-16, *Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor*                (EITF 02-16). EITF 02-16 provides guidance on the income statement classification of amounts received by a customer, including a reseller (including reimbursements for expenses such as cooperative advertising), for transactions entered                into after December 31, 2002 and limited guidance regarding timing of recognition for volume rebates for transactions entered into after November 21, 2002. The adoption of EITF 02-16 did not have a significant impact on the Company's                financial statements for the year ended February 2, 2003.

Effective February 4, 2002, the Company adopted SFAS No. 144, *Accounting for the Impairment or Disposal of Long-lived Assets.*SFAS No. 144 provides a single                accounting model for long‐lived assets to be disposed of. The statement also changes the criteria for classifying an asset as held for sale, broadens the scope of assets to be disposed of that qualify for reporting as discontinued                operations, and changes the timing of recognizing losses on such operations. The adoption of SFAS No. 144 resulted in the reclassification of certain prior year revenue and expense activity related to five stores closed during fiscal year                2003 as discontinued operations.

In accordance with SFAS No. 144, long‐lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for                impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to                estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of                the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.                The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Prior to the adoption of SFAS No. 144, the Company accounted                for long‐lived assets in accordance with SFAS No. 121, *Accounting for Impairment of Long‐lived Assets and for Long‐lived Assets to Be Disposed Of*. 

Effective January 29, 2001, the Company adopted SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*. SFAS No. 133 requires that all                derivative instruments be recorded on the balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on its designation and effectiveness. For derivatives that qualify as effective hedges, the change                in fair value has no net impact on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value is                recognized in current period earnings.

At January 29, 2001, the Company held one derivative instrument, an interest rate swap agreement entered into in December 2000 with a notional principal amount of                $10,000, whereby the Company pays a fixed rate of interest and receives interest based on LIBOR for the period from April 15, 2001 to April 15, 2002. The purpose of the interest rate swap agreement was to mitigate the Company's interest                rate risk under its revolving credit facility.

Prior to January 29, 2001, the Company had accounted for the interest rate swap agreement as a cash flow hedge. Upon adoption of SFAS No. 133, the Company elected                to not use hedge accounting for the interest rate swap agreement. Accordingly, a cumulative-effect-type adjustment was made to accumulated other comprehensive income in the amount of $76, which represents the fair value of the interest                rate swap at the date of adoption of SFAS No. 133 ($123) net of income tax effect ($47). The cumulative effect adjustment was amortized to earnings over the period from April 15, 2001 to April 15, 2002. During 2002, the Company recorded                interest expense of $97 ($60 net of tax) to amortize the transition adjustment. Subsequent to the adoption of SFAS No. 133, the Company recorded a reduction in interest expense of $16 to reflect the change in fair value of the interest                rate swap agreement.

Effective October 30, 2000, the Company, in response to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed its method of                accounting for layaway sales, retroactive to the beginning of the year. Previously, the Company recognized revenue on the entire amount of layaway sales at the time merchandise was placed on layaway. Under the new method, revenue on                layaway sales is recognized upon delivery of the merchandise to the customer. The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 2001                is to increase (decrease) such amounts by $(38), $(211), and $(0.05), respectively. The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of January 31, 2000 has been reported in                the accompanying financial statements. 

**(i)      Net 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. See note 9.

**(j)      Consolidated Statements of Cash Flows**

For purposes of the consolidated statements of cash flows, the Company considers cash and cash equivalents to include currency on hand and money market funds.

During fiscal 2003, 2002, and 2001, the following amounts were paid for interest and income taxes:

 
 
 
 
 
 
 
 
**2003**
 
**2002**
 
**2001**
Interest, excluding interest on 
 
 
 
 
 
 
 
capital lease obligations and
 
 
 
 
 
 
 
amortization of debt financing 
 
 
 
 
 
 
 
costs (net of capitalized 
 
 
 
 
 
 
 
interest of $31 in fiscal 2003,
 
 
 
 
 
 
 
$26 in fiscal 2002, and $59 in
 
 
 
 
 
 
 
fiscal 2001)
 
$
802   
 
2,031   
 
2,141   
Income taxes
 
 
5,032   
 
1,520   
 
4,205   
**(k)     Use of Estimates**

Management of the Company has made certain estimates and assumptions in the reporting of assets and liabilities to prepare these financial statements in conformity                with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

**(l)      Long‐lived Assets**

Long‐lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.                Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to 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 exceeds the fair value of the assets. For purposes of determining impairment, the Company groups assets at the store level. Assets to be                disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Provisions for asset impairment of $0, $498, and $1,182 for fiscal 2003, 2002, and 2001, respectively, are included in the consolidated                statements of operations.

**(m)    Store Closure Expenses**

Prior to January 1, 2003, the Company recorded a provision for store closure expenses and a related liability in the period the expense to put in place a                definitive plan of closure for each store was incurred. Such store closure expenses consist primarily of lease costs and property tax amounts that relate to the period subsequent to the date of closure. The liability is charged as the                related amounts are paid. There were no significant adjustments to the liability in fiscal 2003, 2002, or 2001. 

Beginning with store closures for which the definitive plan was established after January 1, 2003, a provision for such store closure expenses is recorded when the                Company discontinues using the facility. A summary of the expense and liability (included in other current liabilities) related to store closures as of and for the years ended February 2, 2003, February 3, 2002 and January 28, 2001, is as                follows:

 
 
 
 
 
 
 
 
**2003**
 
**2002**
 
**2001**
Store closure liability at beginning
 
 
 
 
 
 
 
of year
 
 
 
$
                  76 
 
                218 
 
                189 
Store closure expense (included in
 
 
 
 
 
 
 
discontinued operations in 2003)
 
                172 
 
                103 
 
                320 
Payments
 
 
 
 
               (102)
 
               (245)
 
               (291)
 
 
Store closure liability at end of year
$
                146 
 
                  76 
 
                218 
**(n)     Stock‐based Compensation**

The Company applies the intrinsic‐value‐based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting for                Stock Issued to Employees,* and related interpretations to account for its fixed‐plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock                exceeded the exercise price. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, net earnings and net earnings per share would have been decreased to the pro forma                amounts indicated in the table below:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Net earnings as reported
$
5,354    
 
4,754    
 
4,506    
Pro forma stock-based employee compensation
 
 
 
 
 
 
 
cost, net of tax
 
(230)   
 
(206)   
 
(398)   
Pro forma net earnings
$
5,124    
 
4,548    
 
4,108    
Earnings per share as reported:
 
 
 
 
 
 
 
 
Basic
 
 
$
1.26    
 
1.13    
 
1.00    
 
 
Diluted
 
 
 
1.23    
 
1.13    
 
1.00    
Earnings, per share, pro forma:
 
 
 
 
 
 
 
 
Basic
 
 
 
1.21    
 
1.08    
 
0.92    
 
 
Diluted
 
 
 
1.18    
 
1.08    
 
0.91    
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 
 
 
 
 
 
 
 
**2003**
** **
**2001**
 
Expected dividend yield
 
0   
%
0   
%
Expected stock price volatility
 
38.6   
 
37.8   
 
Risk-free interest rate
 
5.0   
 
5.6   
 
Expected life of options
 
5 years
 
5 years
 
The weighted average grant date fair value of options granted during 2003 and 2001 is $5.23 and $3.35 per share, respectively. No options were issued during fiscal                year 2002.

**(2)     Inventories**

Inventories at February 2, 2003 and February 3, 2002 are stated at the lower of cost or net realizable value as determined under the LIFO method of            accounting. Inventories at February 2, 2003 and February 3, 2002 are summarized as follows:

 
 
 
 
 
 
 
 
**2003**
 
**2002**
FIFO cost
 
 
$
130,272   
 
125,760   
 
Less LIFO reserve
 
(595)  
 
(595)  
 
 
 
 
 
LIFO cost
$
129,677   
 
125,165   
**(3)     Credit Arrangements, Notes Payable, and Long-term Debt**

The Company entered into a loan agreement with its lenders on April 15, 2002, that provides a revolving loan credit facility of up to $70,000 of long-term financing.            This agreement replaced a similar agreement previously outstanding with another lender. The amount advanced (through a note or letters of credit) to the Company bears interest at (i) the prime rate plus a margin, as defined, which varies            based on the amount outstanding (Base Loan) or (ii) based on the Euro dollar rate plus a margin, as defined, (Index Loan). The amount advanced is generally limited to 70% of eligible inventory, as defined. Advances are secured by a security            interest in the Company's inventory. The loan agreement contains various restrictions that are applicable when outstanding borrowings reach certain thresholds, including limitations on additional indebtedness, acquisitions of assets and            payment of dividends. The loan agreement expires on April 15, 2006. 

The Company entered into an interest rate swap in December 2000 with a notional principal amount of $10,000, whereby the Company paid a fixed rate of interest and            receives interest based on LIBOR for the period April 15, 2001 to April 15, 2002 to mitigate its interest rate risk under the LIBOR Rate Loan. This interest rate swap agreement was terminated during April 2002. Interest expense for fiscal            2003 includes $27 of interest paid by the Company under the interest rate swap agreement. 

Notes payable outstanding at February 2, 2003 and February 3, 2002 under the revolving loan credit facility aggregated $17,483 and $18,137, respectively. The lender had            also issued letters of credit aggregating $4,123 and $2,661, respectively, at such dates on behalf of the Company. The interest rates on outstanding borrowings at February 2, 2003 were 4.25% on the Base Loan ($3,483) and 2.87% (on $10,000)            and 2.84% (on $4,000) on the Index Loans. The Company had additional borrowings available at February 2, 2003 under the revolving loan credit facility amounting to $48,329.

Long‐term debt, exclusive of notes payable under the revolving loan credit facility as described above, at February 2, 2003 and February 3, 2002 consisted            of the following:

 
 
 
 
 
 
 
 
**2003**
 
**2002**
6.4% note payable, due in monthly installments, including
 
 
 
 
 
interest, through January 2005; secured by equipment
$
1,032   
 
1,501   
 
 
 
 
 
 
 
 
 
 
 
Less current maturities
 
500   
 
469   
 
 
 
 
 
Long-term debt, less current maturities
$
532   
 
1,032   
Interest expense on notes payable and long-term debt in fiscal 2003, 2002, and 2001 aggregated $855, $1,941, and $2,341, respectively.

Maturities of long‐term debt, including the notes payable under the revolving loan credit facility, in each of the next four years as of February 2, 2003 are as            follows:

Fiscal year:
 
 
 
 
 
2004
 
 
 
$
500   
 
2005
 
 
 
 
532   
 
2006
 
 
 
 
--    
 
2007
 
 
 
 
17,483   
 
 
 
 
 
 
 
$
18,515   
**(4)     Employee Benefits**

The Company has a trusteed Profit Sharing Plan (Plan) for the benefit of eligible employees. The Plan provides for an annual contribution of not more than 20% of            earnings for the year before the profit sharing contribution and Federal and state income taxes, limited to 15% of the annual compensation of the participants in the Plan. Contributions by the Company vest with the participants over a            seven-year period. The Company reserves the right to discontinue its contributions at any time. Expense arising from such Plan for fiscal 2003, 2002, and 2001 amounted to $573, $512, and $505, respectively.

**(5)     Leases**

The Company is lessee under long-term capital leases expiring at various dates. The components of property under capital leases as of February 2, 2003 and            February 3, 2002 are as follows:

 
 
 
 
 
 
 
 
**2003**
 
**2002**
Buildings
 
 
 
$
16,624   
 
16,624   
Fixtures
 
 
 
 
3,496   
 
3,783   
 
 
 
 
 
 
 
 
20,120   
 
20,407   
Less accumulated amortization
 
16,509   
 
16,226   
 
 
 
 
 
Net property under capital leases
$
3,611   
 
4,181   
The Company also has noncancelable operating leases, primarily for buildings and transportation equipment, that expire at various dates.

Future minimum lease payments under all noncancelable leases, together with the present value of the net minimum lease payments pursuant to capital leases, as of            February 2, 2003 are as follows:

 
 
 
 
 
 
 
 
**Capital**
 
**Operating**
 
 
 
 
 
 
 
 
**leases**
 
**leases**
Fiscal year:
 
 
 
 
 
 
 
2004
 
 
 
$
1,384   
 
11,096    
 
2005
 
 
 
 
1,384   
 
9,145    
 
2006
 
 
 
 
1,339   
 
8,375    
 
2007
 
 
 
 
1,229   
 
7,492    
 
2008
 
 
 
 
1,014   
 
6,329    
 
Later years
 
 
2,860   
 
32,037    
 
 
 
 
 
Total minimum lease payments
 
9,210   
$
74,474    
 
Less amount representing interest
 
3,114   
 
 
 
 
 
 
 
Present value of net minimum lease payments
 
6,096   
 
 
 
Less current maturities
 
712   
 
 
 
 
 
 
 
Capital lease obligations, less current maturities
$
5,384   
 
 
Minimum payments have not been reduced by minimum sublease rentals of $68 under operating leases due in the future under noncancelable subleases. They also do not            include contingent rentals, which may be paid under certain store leases on the basis of percentage of sales in excess of stipulated amounts. Contingent rentals applicable to capital leases amounted to $82, $105, and $59 for fiscal 2003,            2002, and 2001, respectively.

Interest on capital lease obligations in fiscal 2003, 2002, and 2001 aggregated $754, $838, and $913, respectively.

The following schedule presents the composition of total rent expense for all operating leases for fiscal 2003, 2002, and 2001:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Minimum rentals
$
10,441   
 
10,096   
 
10,083   
Contingent rentals
 
744   
 
681   
 
298   
Less sublease rentals
 
(157)  
 
(152)  
 
(183)  
 
 
 
 
 
 
 
$
11,028   
 
10,625   
 
10,198   
***Sale‐leaseback Transaction***

The Company has sold and leased back certain stores (land and buildings). The net proceeds from the sale-leaseback transactions amounted to approximately $1,316, $609,            and $2,000 for fiscal 2003, 2002, and 2001, respectively. As a result of the sale-leaseback transactions, the Company incurred gains of $285, $36, and $0 in fiscal 2003, 2002, and 2001, respectively, which have been deferred for financial            reporting purposes. Such deferred gains are included within other non-current liabilities and are being amortized over the term of the related leases (15-20 years).

**(6)     Income Taxes**

The Company's income tax expense (benefit) consists of the following: 

 
 
 
 
 
 
 
 
**2003**
 
**2002**
 
**2001**
Income tax expense (benefit) allocated
 
 
 
 
 
 
 
to continuing operations
$
3,243   
 
2,974   
 
2,894   
Income tax expense (benefit) allocated
 
 
 
 
 
 
 
to discontinued operations
 
(137)  
 
(51)  
 
(51)  
 
 
 
 
 
Total income tax expense
$
3,106   
 
2,923   
 
2,843   
Income tax expense (benefit) for fiscal 2003, 2002, and 2001 consists of:

 
 
 
 
 
 
 
 
**Current**
 
**Deferred**
 
**Total**
2003:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
$
2,269   
 
354   
 
2,623   
 
State
 
 
 
 
412   
 
71   
 
483   
 
 
 
 
 
 
 
$
2,681   
 
425   
 
3,106   
2002:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
$
3,839   
 
(1,306)  
 
2,533   
 
State
 
 
 
 
652   
 
(262)  
 
390   
 
 
 
 
 
 
 
$
4,491   
 
(1,568)  
 
2,923   
2001:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
$
2,623   
 
(187)  
 
2,436   
 
State
 
 
 
 
445   
 
(38)  
 
407   
 
 
 
 
 
 
 
$
3,068   
 
(225)  
 
2,843   
Income tax expense was $3,106, $2,923, and $2,843 for fiscal 2003, 2002, and 2001, respectively, and differs from the amounts computed by applying the            Federal income tax rate of 35% in 2003, 2002, and 2001 as a result of the following:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Computed "expected" tax expense
$
2,961   
 
2,687   
 
2,633   
State income taxes, net of the Federal
 
 
 
 
 
 
 
income tax benefit
 
314   
 
254   
 
265   
Other, net
 
 
 
 
(169)  
 
(18)  
 
(55)  
 
 
 
 
 
 
 
$
3,106   
 
2,923   
 
2,843   
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at February 2, 2003 and February 3,            2002 are presented below:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
Deferred tax assets:
 
 
 
 
 
Capital leases
$
950   
 
1,001   
 
Other assets
 
 
--    
 
65   
 
Other liabilities
 
1,211   
 
1,015   
 
State net operating loss carryforwards
 
31   
 
5   
 
 
 
 
 
Total gross deferred tax assets
 
2,192   
 
2,086   
 
Less valuation allowance
 
(31)  
 
(5)  
 
 
 
 
 
Net deferred tax assets
 
2,161   
 
2,081   
Deferred tax liabilities:
 
 
 
 
 
Inventories, principally due to differences in the LIFO
 
 
 
 
 
 
reserve arising from a prior business combination
 
 
 
 
 
 
accounted for as a purchase
 
2,398   
 
1,725   
 
Property and equipment, due to differences in depreciation
 
 
 
 
 
 
and a prior business combination accounted for as
 
 
 
 
 
 
a purchase
 
1,348   
 
1,528   
 
Other assets
 
 
22   
 
--    
 
 
 
 
 
Total gross deferred tax liabilities
 
3,768   
 
3,253   
 
 
 
 
 
Net deferred tax liability
$
1,607   
 
1,172   
At February 2, 2003, the Company has net operating loss carryforwards for state income tax purposes in various states aggregating $622, which are available to offset            future state taxable income in those states, if any, expiring at various dates through fiscal 2006. The valuation allowance relates to the net operating loss (NOL) carryforwards.

**(7)    Stock Option Plan**

The Company has a stock option plan under which options to purchase 650,000 shares of common stock may be granted to key employees. The plan provides that            the option price shall not be less than the fair market value of the shares on the date of grant and that unexercised options expire five years from that date. The options become exercisable in equal amounts over a four‐year period from the            grant date. Information regarding options which were outstanding at February 2, 2003, February 3, 2002, and January 28, 2001 is presented below:

 
 
 
 
 
 
 
 
** **
 
**Weighted**
 
 
 
 
 
 
 
 
**Number**
 
**average**
 
 
 
 
 
 
 
 
**of**
 
**exercise**
 
 
 
 
 
 
 
 
**shares**
 
**price**
Options outstanding, January 30, 2000
 
548,987   
$
9.86   
Issued
 
 
 
 
 
58,900   
 
7.94   
Canceled
 
 
 
 
(59,600)  
 
10.54   
Options outstanding, January 28, 2001
 
548,287   
 
9.58   
Issued
 
 
 
 
 
--    
 
--    
Canceled
 
 
 
 
(56,737)  
 
10.93   
Options outstanding, February 3, 2002
 
491,550   
 
9.42   
Issued
 
 
 
 
 
65,000   
 
12.50   
Exercised
 
 
 
 
(117,475)  
 
10.63   
Canceled
 
 
 
 
(4,700)  
 
11.46   
Options outstanding, February 2, 2003
 
434,375   
$
9.53   
 
 
**Options outstanding**
 
**Options exercisable**
 
 
**Number**
 
**Weighted**
 
** **
 
**Number**
 
** **
**Range**
 
**outstanding**
 
**average**
 
**Weighted**
 
**exercisable**
 
**Weighted**
**of**
 
**at**
 
**remaining**
 
**average**
 
**at**
 
**average**
**exercise**
 
**February 2,**
 
**contractual**
 
**exercise**
 
**February 2,**
 
**exercise**
**price**
 
**2003**
 
**life**
 
**price**
 
**2003**
 
**price**
$7.94 to $12.50
 
398,075   
 
2.30   
$
8.71   
 
237,225   
$
7.98   
$18.50   
 
36,300   
 
0.30   
 
18.50   
 
36,300   
 
18.50   
$7.94 to $18.50
 
434,375   
 
 
 
 
 
273,525   
 
 
**(8)     Stockholders' Equity**

The Company's board of directors has approved a plan to repurchase up to 1,411,000 shares of the Company's common stock (the Stock Repurchase Program). Purchases            pursuant to the Stock Repurchase Program are to be made from time to time in the open market or directly from stockholders at prevailing market prices. The Stock Repurchase Program is anticipated to be funded with internally generated cash            and borrowings under the Credit Facility. As of February 2, 2003, the Company had purchased 1,010,300 shares of common stock for $8,131.

The Company has accounted for the confirmation of its plan of reorganization under Chapter 11 of the federal bankruptcy laws, which was confirmed by the Bankruptcy            Court on May 17, 1991 as a quasi-reorganization. During fiscal 2001, the Company recorded the remaining income tax benefit from loss periods prior to the quasi-reorganization as a reduction of noncurrent deferred income tax liability and an            increase to additional paid-in capital.

**(9)     Earnings Per Share**

The following is a reconciliation of the outstanding shares utilized in the computation of earnings per share:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Outstanding shares:
 
 
 
 
 
 
 
Weighted average shares outstanding (basic)
 
4,235,911   
 
4,191,809   
 
4,482,153   
 
Effect of dilutive options to purchase
 
 
 
 
 
 
 
 
common stock
 
119,742   
 
15,751   
 
18,953   
 
 
 
 
 
As adjusted for diluted calculation
 
4,355,653   
 
4,207,560   
 
4,501,106   
** (10)  Quarterly Financial Information (Unaudited)**

Financial results by quarter are as follows:

 
 
 
 
 
 
 
 
**First**
 
**Second**
 
**Third**
 
**Fourth**
 
 
 
 
 
 
 
 
**quarter**
 
**quarter**
 
**quarter**
 
**quarter**
2003:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales (b)
$
96,123   
 
103,106   
 
92,880   
 
116,647   
 
Gross margin (b)
 
32,060   
 
34,354   
 
32,652   
 
37,353   
 
Earnings from 
 
 
 
 
 
 
 
 
 
 
continuing operations (b)
 
625   
 
1,282   
 
481   
 
3,202   
 
Net earnings
 
 
531   
 
1,269   
 
469   
 
3,085   
 
Net earnings per share (a):
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
0.12   
 
0.30   
 
0.11   
 
0.72   
 
 
Diluted
 
 
 
0.13   
 
0.29   
 
0.11   
 
0.71   
2002:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales (b)
 
90,724   
 
100,725   
 
93,657   
 
122,127   
 
Gross margin (b)
 
29,407   
 
32,788   
 
32,220   
 
38,827   
 
Earnings from
 
 
 
 
 
 
 
 
 
 
continuing operations (b)
 
41   
 
946   
 
475   
 
3,376   
 
Net earnings
 
 
23   
 
943   
 
412   
 
3,376   
 
Net earnings per share (a):
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
0.01   
 
0.23   
 
0.10   
 
0.81   
 
 
Diluted
 
 
 
0.01   
 
0.23   
 
0.10   
 
0.80   
(a)    Earnings per share amounts are computed independently for each of the quarters presented.        Therefore, the sum of the quarterly earnings per share in fiscal 2003 and fiscal 2002 does not equal the total computed for the year.

(b)    The amounts shown for net sales, gross margin and earnings from continuing operations for the        first, second and third quarters do not agree to previously reported amounts due to reclassifications that have been made for discontinued operations (see also note 1(h)).

**(11)   Fair Value of Financial Instruments**

The Company has determined the fair value of its financial instruments in accordance with SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*.            For long-term debt, the fair value is estimated by discounting the future cash flows at rates currently available for similar types of debt instruments. Such fair value approximated the carrying value of long‐term debt at February 2, 2003 and            February 3, 2002. For notes payable under revolving loan credit facility, fair value approximates the carrying value due to the variable interest rate.

For all other financial instruments including cash, receivables, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to the short            maturity of those instruments.

** (12)  Related Party Transactions**

Operating lease payments to related parties (board members and related companies) amounted to approximately $683, $670, and $663 in fiscal 2003, 2002, and 2001,            respectively.

During fiscal 2003, 2002, and 2001, the Company paid a consulting firm $178, $275, and $1,002, respectively, to develop certain retailing initiatives. A board member of            the Company has an ownership interest in the consulting firm.

** (13)  Business Operations and Segment Information**

The Company's business activities include operation of ALCO Discount Stores, in towns with populations which are typically less than 5,000 not served by other regional            or national retail discount chains, and Duckwall variety stores that offer a more limited selection of merchandise, which are primarily located in communities of less than 2,500 residents.

For financial reporting purposes, the Company has established two operating segments: "ALCO Discount Stores" and "All other," which includes the Duckwall variety stores            and other business activities, such as general office, warehouse, and distribution activities.

***Segment Information***

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Net sales:
 
 
 
 
 
 
 
 
 
 
ALCO Discount Stores
$
377,893   
 
377,042   
 
355,651   
 
All other:
 
 
 
 
 
 
 
 
 
 
External
 
 
32,753   
 
34,829   
 
34,933   
 
 
Intercompany
 
227,053   
 
223,420   
 
213,542   
 
 
 
 
 
 
 
$
637,699   
 
635,291   
 
604,126   
Depreciation and amortization:
 
 
 
 
 
 
 
ALCO Discount Stores
$
4,206   
 
4,123   
 
4,060   
 
All other
 
 
 
2,679   
 
2,221   
 
2,084   
 
 
 
 
 
 
 
$
6,885   
 
6,344   
 
6,144   
Income (expense) from continuing
 
 
 
 
 
 
 
operations:
 
 
 
 
 
 
 
 
ALCO Discount Stores
$
33,436   
 
32,167   
 
29,810   
 
All other
 
 
 
(23,212)  
 
(21,746)  
 
(18,974)  
 
 
 
 
 
 
 
$
10,224   
 
10,421   
 
10,836   
Capital expenditures:
 
 
 
 
 
 
 
ALCO Discount Stores
$
6,028   
 
4,593   
 
4,262   
 
All other
 
 
 
1,594   
 
1,408   
 
1,672   
 
 
 
 
 
 
 
$
7,622   
 
6,001   
 
5,934   
Identifiable assets:
 
 
 
 
 
 
 
ALCO Discount Stores
$
126,892   
 
122,644   
 
126,511   
 
All other
 
 
 
39,797   
 
41,382   
 
42,945   
 
 
 
 
 
 
 
$
166,689   
 
164,026   
 
169,456   
Income from operations as reflected in the above segment information has been determined differently than income from operations in the accompanying            consolidated statements of operations as follows:

**Intercompany Sales**

Intercompany sales represent transfers of merchandise from the warehouse to ALCO Discount Stores and Duckwall variety stores.

**Intercompany Expense Allocations**

General and administrative expenses incurred at the general office have not been allocated to the ALCO Discount Stores for purposes of determining                income from operations for the segment information.

Warehousing and distribution costs, including freight applicable to merchandise purchases, have been allocated to the ALCO Discount Stores segment based                on the Company's customary method of allocation for such costs (primarily as a stipulated percentage of merchandise purchases).

**Inventories**

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

**Leases**

All leases are accounted for as operating leases for purposes of determining income from operations for purposes of determining the segment information                for the ALCO Discount Stores, whereas capital leases are accounted for as such in the consolidated statements of operations.

Identifiable assets as reflected in the above segment information include cash and cash equivalents, receivables, inventory, property and equipment, and            property under capital leases.

A reconciliation of the segment information to the amounts reported in the consolidated financial statements is presented below:

 
 
 
 
 
 
 
 
**2003**
** **
**2002**
** **
**2001**
Net sales per above segment information
$
637,699   
 
635,291   
 
604,126   
Intercompany elimination
 
(227,053)  
 
(223,420)  
 
(213,542)  
Sales included in discontinued operations
 
(1,890)  
 
(4,638)  
 
(4,547)  
 
 
 
 
 
Net sales per consolidated
 
 
 
 
 
 
 
 
 
 
 
 
statements of operations
$
408,756   
 
407,233   
 
386,037   
Income from continuing operations per
 
 
 
 
 
 
 
above segment information
$
10,224   
 
10,421   
 
10,836   
Inventory method
 
--    
 
--    
 
--    
Property costs
 
 
85   
 
85   
 
82   
Leases
 
 
 
 
 
133   
 
84   
 
(8)  
 
 
 
 
 
Income from continuing 
 
 
 
 
 
 
 
 
 
 
 
 
operations per consolidated
 
 
 
 
 
 
 
 
 
 
 
 
statements of operations
$
10,442   
 
10,590   
 
10,910   
 

 

 

 

**ITEM 9.                CHANGES IN        AND DISAGREEMENTS WITH ACCOUNTANTS ON**

**                              ****ACCOUNTING AND FINANCIAL DISCLOSURE**.

 

None

 

 

**PART III**

 

**ITEM 10.               DIRECTORS AND EXECUTIVE OFFICERS        OF THE REGISTRANT**.

 

The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held        on May 22, 2003, contains under the caption "Election of Directors" certain information required by Item 10 of Form 10-K, and such information        is incorporated herein by this reference.  The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 1 of this Form 10-K.  

 

The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held        on May 22, 2003, contains under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" certain information required by Item 10        of Form 10-K, and such information is incorporated herein by this reference.  

** **

**ITEM 11.               EXECUTIVE COMPENSATION**.

 

The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held        on May 22, 2003, contains under the caption "Executive Compensation and Other Information" the information required by Item 11 of Form 10-K, and such        information is incorporated herein by this reference (except that the information set forth under the following sub-captions is expressly excluded from such incorporation: "Compensation Committee Report",        "Audit Committee Report", and "Company Performance").

 

**ITEM 12.               SECURITY OWNERSHIP OF CERTAIN        BENEFICIAL OWNERS AND MANAGEMENT**.

 

The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held        on May 22, 2003, contains under the caption "Ownership of Duckwall Common Stock" the information required by Item 12 of Form 10-K and such        information is incorporated herein by this reference.  

 

**ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED        TRANSACTIONS**.

 

The Registrant's Proxy Statement to be used in connection with the Annual Meeting of        Stockholders to be held on May 22, 2003, contains under the caption "Compensation Committee Interlocks and Related Party Transactions" the        information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.

 

**ITEM 14.               CONTROLS AND PROCEDURES**

** **

**               **Based on an evaluation of        disclosure controls and procedures for the period ended February 2, 20023 conducted by our President and Chief Financial Officer, we conclude that our disclosure controls and procedures are effective. The President and Chief Financial Officer        conducted this evaluation on April 9, 2003.

 

The company has in place a system of internal controls which it believes are adequate. There have been no        significant deficiencies or material weaknesses identified and we have not made any significant changes in our internal controls or in other factors that could significantly affect internal controls.

 

** **

** **

**PART IV**

 

**ITEM 15.               EXHIBITS, FINANCIAL STATEMENT        SCHEDULES, AND REPORTS**

**                              ****ON FORM 8-K**.

 

(a)   Financial Statements, Financial Statement Schedules, and Exhibits
-  Consolidated Financial Statements
The financial statements are listed in the index for Item 8 of this Form 10-K.
-  Financial Statement Schedules
No financial statement schedules are included as they are not applicable to the            Company.
-  Exhibits
The exhibits filed with or incorporated by reference in this report are listed below:

 

 

Number
Description3.1
Amended and Restated Articles of Incorporation (filed as Exhibit 3(a) to Company's Registration              Statement on Form S-1 and hereby incorporated herein by reference).3.2Certificate of Amendment to the Articles of Incorporation (filed as Exhibit 3(b) to Company's Annual Report on Form 10-K for the fiscal year ended              January 29, 1995, and incorporated herein by reference) (filed as Exhibit 3(b) to Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995, and incorporated herein by reference.)3.3Bylaws (filed as Exhibit 3(b) to Company's Registration Statement on Form S-1 and hereby incorporated herein by reference).4.1Specimen Common Stock Certificates (filed as Exhibit 4.1 to Company's Registration Statement on Form S-1 and incorporated herein by reference).4.2Reference is made to the Amended and Restated Articles of Incorporation and Bylaws described above under 3(1) and 3(3), respectively (filed as              Exhibit 4(a) to Company's Registration Statement on Form S-1 and hereby incorporated herein by reference).4.3Reference is made to the Certificate of Amendment to the Articles of Incorporation described above under 3(2) (filed as Exhibit 3(2) to Company's              Annual Report on Form 10-K for the fiscal year ended January 29, 1995, and incorporated herein by reference).4.4Form of 10% Subordinated Notes (filed as Exhibit 4(c) to Company's Registration Statement on Form S-1 and herby incorporated herein by reference).10.11Employment Agreement dated December 28, 2000 between the Company and Glen L. Shank.10.12Employment Agreement dated December 28, 2000 between the Company and James E. Schoenbeck.10.13Employment Agreement dated December 28, 2000 between the Company and James R. Fennema.10.14Employment Agreement dated December 28, 2000 between the Company and Richard A. Mansfield.10.15Employment Agreement dated December 28, 2000 between the Company and Tom L. Canfield, Jr.10.16Loan and Security Agreement, dated as of April 15, 2002, between the Company and Fleet Retail Finance Inc.10.17Joinder Agreement and First Amendment to Loan and Security Agreement dated September 9, 2002 among the Company, Fleet Retail Finance Inc, and DA              Good Buys, Inc.21.1Amended and Restated List of Subsidiaries of the Company.99.1Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated April 25, 2003, which is accompanying this Annual Report on Form 10-K              for the year ended February 2, 2003 and is treated as not filed in reliance on the Commission's Interim Guidance Regarding Filing Procedures.99.2Certification of Chief Financial Officer of Duckwall-ALCO Stores, Inc. dated April 25, 2003, which is accompanying this Annual Report on Form 10-K              for the year ended February 2, 2003 and is treated as not filed in reliance on the Commission's Interim Guidance Regarding Filing Procedures.
             

___________________

 
 (b)Reports on Form 8-K. (c)Exhibits  The exhibits filed with this report are identified above under Item 15(a)(3) (d)Financial Statement Schedules.  No financial statement schedules are included as they are not applicable to the Company.
 

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused        this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DUCKWALL-ALCO STORES, INC.

 

by */s/ Glen L. Shank                            *   

        Glen L. Shank

Chairman of the Board

and President

 

Dated: April 25, 2003

 

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the        following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

 

**           Signature and Title            **                                                                            **        Date_____          **

 

 

 

 /s/ *Glen L. Shank*                                                                                                              April 25, 2003

    Glen L. Shank

         Chairman of the Board

         and President

         (Principal Executive Officer)

 

* /s/ Richard A. Mansfield                         *                                                                  April 25, 2003

    Richard A. Mansfield

         Vice President - Finance and Treasurer

         (Principal Financial and Accounting Officer)

 

* /s/ Dennis A. Mullin                                 *                                                                  April 25, 2003

    Dennis A. Mullin

         Director

 

* /s/ Lolan C. Mackey                                *                                                                   April 25, 2003

   Lolan C. Mackey

 Director

 

* /s/ Jeffrey Macke                                               *                                                                  April 25, 2003

    Jeffrey Macke

         Director

 

*                 /s/ Robert L. Woodard                             *                                                                  April 25, 2003

   Robert L. Woodard

         Director

 

 

 

** **

**CERTIFICATIONS**

 

I, Glen L. Shank, certify that:

 

1.             I have reviewed this annual report on Form 10-K of Duckwall-ALCO Stores, Inc.

2.            Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances        under which such statements were made, not misleading with respect to the period covered by this annual report; 

3.           Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations        and cash flows of the registrant as of, and for, the periods presented in this annual report; 

4.           The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the        registrant and we have:

a.          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those        entities, particularly during the period in which this annual report is being prepared;

b.           evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c.            presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.           The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons        performing the equivalent function):

a.            all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have        identified for the registrant's auditors any material weaknesses in internal controls; and

b.           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.            The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly        affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: April 25, 2003

/s/ *Glen L. Shank*Glen L. Shank        Chairman of the Board and President

 

 

 

 

 

 

I, Richard A. Mansfield, certify that:

 

1.            I have reviewed this annual report on Form 10-K of Duckwall-ALCO Stores, Inc.

2.           Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances        under which such statements were made, not misleading with respect to the period covered by this annual report; 

3.           Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations        and cash flows of the registrant as of, and for, the periods presented in this annual report; 

4.           The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the        registrant and we have:

a.          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those        entities, particularly during the period in which this annual report is being prepared;

b.           evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c.           presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.           The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons        performing the equivalent function):

a.            all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have        identified for the registrant's auditors any material weaknesses in internal controls; and

b.           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.           The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly        affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: April 25, 2003

/s/ *Richard A. Mansfield*Richard A. Mansfield        Vice President - Finance, and Treasurer

 

 

 

 

**DIRECTORS**

** **

Glen L. Shank

Dennis A. Mullin

Lolan C. Mackey

Jeffrey Macke

Robert L. Woodard

 

 

 

 
**Officers**
 
Chairman of the Board and President
Glen L. Shank
 
Senior Vice President- Operations and Advertising
James E. Schoenbeck
 
Senior Vice President- Merchandising
James R. Fennema
 
Vice President- Finance and Treasurer
Richard A. Mansfield
 
Vice President- Administration and Distribution
Tom L. Canfield, Jr.
 
Vice President- Secretary and General Counsel
Charles E. Bogan
 
Vice President- Personnel
Dennis P. Alesio
 
Vice President- Real Estate
John E. Hedeen
 
Vice President- Divisional Merchandise Manager
Michael J. Gawin
 
Vice President- Duckwall Division
Michael L. Bowman
 
Vice President- ALCO Division
Dean P. Van Horn
 
Vice President- ALCO Division
Kalen D. Gunderson
 
Vice President- Divisional Merchandise Manager
Robert E. Swartz, Jr.
 
Vice President- Divisional Merchandise Manager
Edward B. Teske
 
Vice President- Controller
David W. Mills
 
Vice President- Information Technology
Steven R. Spatz
 
Vice President-Training and Recruiting
Daniel J. Curoe
 

 
 
**TRANSFER AGENT**
** **
**INDEPENDENT AUDITORS** 
 
 
  
UMB Bank, N.A.
 
KPMG LLP 
928 Grand Avenue
 
345 Riverview, Suite 100 
P.O. Box 410064
 
Wichita, KS 67203 
Kansas City, MO 64141-0064
 
(316) 267-8341 
(816) 860-7761
 
 
 

 

 

**STOCK LISTING**

 

NASDAQ National Market tier of the NASDAQ Stock Market under the symbol         "DUCK"

 

 

 

**FORM 10-K REPORT**

 

A copy of the Company's Annual Report on        Form 10-K, as filed with the Securities and Exchange Commission for the year end February 2, 2003, excluding exhibits, which includes audited financial statements, is included in this Annual Report. Additional copies are available upon request.        Requests should be directed to Charles E. Bogan, Duckwall-ALCO Stores, Inc., 401 Cottage, Abilene, KS 67410.  A list of the excluded exhibits is included under Item 15 of Part IV of the Annual Report on Form 10-K and the Company will provide        copies of any such exhibit upon the Company's receipt of a request and a payment of a fee of $.20 per page, which fee does not exceed the Company's reasonable expenses in furnishing such exhibit.

 

**ANNUAL MEETING**

 

The Annual Meeting of the Stockholders of Duckwall-ALCO Stores, Inc. will be held at 10:00 A.M. CDT,        Thursday, May 22, 2003 at the principal executive offices of the Company, located at 401 Cottage, Abilene, KS 67410.