ITEM 1. BUSINESS
History
Duckwall-ALCO Stores, Inc., (the "Company" or "Registrant"), was founded as a general merchandising operation at the turn of the century 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 May 1, 1999, the Company operates 263 retail stores located in the central United States, consisting of 167 ALCO retail discount stores and 96 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 Avenue, Abilene, Kansas 67410-2832, and its telephone number is (785) 263-3350.
General
The Company, which was established in 1901, is a regional retailer operating 263 stores in 19 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 merchandise.
Of the Company's 167 ALCO discount stores, 121 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 competitors in the market. The ALCO discount stores account for 91% of the Company's net sales. While the current ALCO stores average 21,700 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 96 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 9% of the Company's net sales, average approximately 5,500 square feet of selling space and offer approximately 12,000 items. Operating Duckwall stores offers 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 and a higher return on investment than the Company's average.
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 believes that its improved operating performance and financial condition over the last five fiscal years is the result of the focused execution of 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 discount retailer. This key component of the Company's strategy has guided the Company in both its opening of new stores and in the closing of existing stores. Since 1991, the Company has opened 105 ALCO discount stores (with an approximate average size 18,400 square feet of selling space) and 83 Duckwall variety stores. Except for eight 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 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 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 and by 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 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, and continued 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, the stores are receiving radio frequency hand held devices to allow for additional operating efficiencies. The Company has also, as discussed separately, devoted resources to identify and fix or replace software and hardware that was not year 2000 compliant.
Advertising and Promotion: The Company utilizes full-color photography advertising circulars of 8 to 28 pages distributed by insertion into newspapers or by direct mail where newspaper service is inadequate. During fiscal 1999, these circulars were distributed 43 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 "New Low Prices Everyday" (NLPE). This strategy will benefit customers by offering sharper prices everyday on products that typically would have been subject to promotional pricing and markdowns. NLPE will also reduce the Company's reliance on advertising circulars and promotions to drive traffic in its stores. During fiscal 2000, the Company will distribute approximately 33 circulars in ALCO markets.
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 plans to open at least 12 ALCO stores and 10 Duckwall stores during fiscal year 2000, and a minimum of 12 ALCO stores and 10 Duckwall stores during each of the fiscal years 2001 and 2002.
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 73 ALCO stores with an average selling area of approximately 18,600 square feet, and 63 Duckwall stores. The following table summarizes the Company's growth during the past three fiscal years:
The Company intends to utilize the 18,000 square foot store profile for new ALCO store openings. Currently, the Company owns 24 ALCO and 2 Duckwall locations, and leases 143 ALCO and 94 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, in general try to lease those store locations.
Before entering a new market with an ALCO store, the Company analyzes available competitive, market, and demographic data to evaluate the suitability and attractiveness of the potential market as part of a screening process. 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 warehouse. The screening process also involves a visit by officers of the Company to more subjectively evaluate the potential new site. There are currently approximately 150 communities known by the Company to have met the Company's market selection process. The Company is in the site selection and/or procurement process in approximately 14 of those markets, each of which has been approved by the Company for a new ALCO location. The Company performs a similar site selection process with new Duckwall stores. However, the process is condensed given the low opening and closing costs of a Duckwall location.
The estimated investment to open a new Class 18 Store is approximately $1.25 million for the land, building, equipment, inventory and pre-opening costs.
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 Vice President - Merchandise, who reports to the Company's President. The Vice President - Merchandise is supported by a staff of four divisional merchandise managers who are each responsible for specific product categories. The Company employs 23 merchandise buyers and one assistant buyer who each report to a 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 2,250 suppliers. The Company does not utilize long-term supply contracts. No single supplier accounted for more than 4% of the Company's total purchases in fiscal 1999 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 2000, promotions on various items will be offered approximately 33 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 167 ALCO discount stores and 96 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 through its wholly owned subsidiary, SPD Truck Line, Inc. (the "Subsidiary") as well as through irregular route common carriers. 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 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 24 trailers for such deliveries.
Management Information Systems
Commencing in fiscal 1989, the Company 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 discount stores have point-of-sale 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, and continued 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, the stores are receiving radio frequency hand held devices to allow for additional operating efficiencies.
Approximately 800 of the Company's merchandise suppliers currently participate in the Company's electronic data interchanges ("EDI") system, which makes it possible for the Company to place purchase orders electronically. When fully implemented, EDI will permit these and additional vendors to transmit advance shipment notices to the Company and receive sales history from the Company.
Store Locations
As of May 1, 1999, the Company operated 167 ALCO stores in 19 states located in smaller communities in the central United States. Of the ALCO stores, 24 are owned and 143 are operated under real estate leases. The ALCO stores average approximately 21,300 square feet of selling space, with an additional 5,000 square feet utilized for merchandise processing, temporary storage and administration. The Company also operates 96 Duckwall stores in 11 states, two of which are owned, and 94 are leased. The geographic distribution of the Company's stores is as follows:
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, being located in very small markets, face limited competition 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 32 of its ALCO markets, and another 14 ALCO stores are in direct competition with regional full-line discount stores. Of the last 119 ALCO stores opened, only nine are in direct competition with a national or regional full-line discount retailer. 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 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, manufacturers outlets, and the internet. The Company has experienced only one instance of new direct competition from a national or regional full-line discount retailer in the 110 Class 18 markets in which it has opened a store.
Employees
As of April 1, 1999, the Company employed approximately 5,150 people, of whom approximately 480 were employed in the general office and distribution center in Abilene, 4,050 in the ALCO stores and 620 in the Duckwall stores. Approximately 3,000 additional employees are hired on a seasonal basis, most of whom are sales personnel. No labor organization is the collective bargaining agent for any of the Company's employees. The Company considers its relations with its employees to be excellent.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's facilities in Abilene, Kansas 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.
The Company owns the general office and leases the Distribution Center under the terms of a lease that was entered into with the City of Abilene, Kansas in connection with the issuance of certain industrial revenue bonds issued by the City. Rental payments are required under the lease in such amounts and at such times as are sufficient to pay the principal and interest becoming due on the bonds. The Company has an option to purchase the facility for a nominal amount upon the payment in full of the bonds. See Note 3 of Notes to Consolidated Financial Statements.
Twenty-four of the ALCO stores and two of the Duckwall stores operate in buildings owned by the Company. The remainder of the stores operate in leased properties. Such ALCO leases expire as follows: approximately 148,992 square feet (3.4%) expire between May 1, 1999 and January 31, 2000; approximately 410,137 square feet (9.3%) expire between February 1, 2000 and January 31, 2001; and approximately 490,950 square feet (11.2%) expire between February 1, 2001 and January 31, 2002. The remainder expire through 2018. All Duckwall store leases have terms of six years or less.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been a party to various legal proceedings which have been reported in this Item 3 of Form 10-K for certain prior fiscal years. The Company's legal proceedings have been resolved sufficiently to render outstanding matters immaterial for purposes of disclosure pursuant to this Item 3.
ITEM 4.
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 anuary 31, 1999.
ITEM 4A. 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 May 1, 1999.
Name Age Position ____________________ ___ _____________________________________ Glen L. Shank 54 Chairman of the Board and President James E. Schoenbeck 55 Vice President-Operations and Advertising James R. Fennema 48 Vice President-Merchandise Richard A. Mansfield 43 Vice President-Finance and Treasurer Charles E. Bogan 63 Vice President, Secretary and General Counsel __________
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 32 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 25 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 chain discount retailer. Mr. Fennema has approximately 26 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 18 years of experience in the retail industry.
Charles E. Bogan has been the Secretary of the Company since 1972. He has served as Vice President and General Counsel since 1984, and was Secretary and a member of the Board of Directors during the period from 1972 to 1985. Prior to becoming Duckwall-ALCO's General Counsel, he served as a partner in private practice with the law firm of Bogan & Johnson, beginning in 1970.
PART II
ITEM 5.
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 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 1999, 1998, 1997 and 1996 and for the fourth quarter of fiscal 1995, (the only full quarter period during that fiscal year for which the Common Stock was so quoted).
As of April 3, 1999, there were approximately 1,339 holders of record of the Common Stock of the Company. The Company has not paid cash dividends on its Common Stock during the last four fiscal years, and is currently prohibited from paying such dividends by the terms of the Third Amended and Restated Loan Agreement dated as of December 31, 1998, among the Company, BA Business Credit, Inc., and Transamerica Business Credit Corporation.
ITEM 6.
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.
(1) 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.
(2) The Company has adopted SFAS No. 128, Earnings Per Share which requires a dual presentation of basic earnings per share (based on the weighted average number of common shares outstanding) and diluted earnings per share which reflects the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised.
(3) "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."
(4) 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.
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 1999 and 1998 consisted of 52 weeks, and fiscal 1997 consisted of 53 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.
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 1999 Compared to Fiscal 1998
Net sales for fiscal 1999 increased $40.3 million or 12.5% to $363.5 million compared to $323.3 million for fiscal 1998. During fiscal 1999, the Company opened 36 stores, 34 of which were in new non-competitive markets. Four stores were closed, resulting in a year end total of 257 stores. Substantially all of the increase in net sales was due to new stores opened over the last two fiscal years. Net sales for all stores open the full year in both fiscal 1999 and 1998 (comparable stores), increased by $2.5 million or .9% in fiscal 1999 compared to fiscal 1998. Sales in non-competitive ALCO stores increased $2.1 million, or 1.3% and the Duckwall variety stores produced an increase of $418,000, or 2.3%.
Gross margin for fiscal 1999 increased $13.8 million or 12.5% to $124.1 million compared to $110.3 million in fiscal 1998. As a percentage of net sales, gross margin remained the same at 34.1% in both fiscal years. Although initial markon on purchases was higher in fiscal 1999, this was offset by higher markdowns (primarily in the fourth quarter). The gross margin percentage was also favorably impacted in fiscal 1999 by a larger LIFO income than in fiscal 1998. The Company anticipates that pre-LIFO gross margin as a percentage of net sales should improve in future periods as the new stores opened in non-competitive markets contribute an increasing percentage of total sales. This improvement should occur because stores in non-competitive markets have a higher gross margin percentage (due to a lower percentage of net sales at promotional pricing and with a lower promotional markdown rate), than the average of all stores (including those stores in competitive markets), and because the Company expects to continue to focus its store expansion in additional non-competitive markets. Management does not anticipate LIFO income to be a general trend for future years, in as much as there is a general expectation for moderate inflation in the cost of merchandise, a factor that generally yields LIFO expense.
Selling, general and administrative expenses increased $12.7 million or 14.2% to $102.4 million in fiscal 1999 compared to $89.7 million in fiscal 1998, primarily due to the increase in total stores. As a percentage of net sales, selling, general and administrative expenses increased to 28.2% in fiscal 1999 from 27.7% in fiscal 1998. The increase in the percentage was due to operating expenses rising faster than the overall same store sales growth. Expense increases included the partial year impact of the minimum wage increase that went into effect September 1, 1997.
Income from operations decreased $70,000, or .4% to $15.7 million in fiscal 1999 compared to $15.8 million in fiscal 1998. Income from operations as a percentage of net sales decreased to 4.3% in fiscal 1999 from 4.9% in fiscal 1998.
Interest expense increased $709,000 or 20.1% in fiscal 1999 compared to fiscal 1998. The increase results from higher borrowing levels to fund the purchases of merchandise, fixtures, and owned store buildings for the store expansion program.
Income taxes were $4.3 million in fiscal 1999 compared to $4.8 million in fiscal 1998. The Company's effective tax rate was 37.3% in fiscal 1999, and 39.0% in fiscal 1998.
Earnings before the cumulative effect of the accounting change for fiscal 1999 decreased by $276,000 or 3.7% to $7.2 million compared to $7.5 million in fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Net sales for fiscal 1998 increased $44.4 million or 15.9% to $323.3 million compared to $278.8 million for fiscal 1997. During fiscal 1998, the Company opened 40 stores, 38 of which were in new non-competitive markets, resulting in a year end total of 225 stores. Substantially all of the increase in net sales was due to new stores opened over the last two fiscal years. Net sales for all stores open the full year in both fiscal 1998 and 1997 (comparable stores), as adjusted to a comparable 52 week year, increased by $1.6 million or .6% in fiscal 1998 compared to fiscal 1997. Sales in non-competitive ALCO stores increased $2.2 million, or 1.5% and the Duckwall variety stores produced an increase of $538,000, or 3.2%.
Gross margin for fiscal 1998 increased $18.0 million or 19.5% to $110.3 million compared to $92.3 million in fiscal 1997. As a percentage of net sales, gross margin increased 1.0% to 34.1% in fiscal 1998 from 33.1% in fiscal 1997. The increase was a result of higher initial markons on purchases in fiscal 1998, as well as LIFO income of $1.0 million, compared to fiscal 1997.
Selling, general and administrative expenses increased $14.0 million or 18.6% to $89.6 million in fiscal 1998 compared to $75.6 million in fiscal 1997, primarily due to the increase in total stores. As a percentage of net sales, selling, general and administrative expenses increased to 27.7% in fiscal 1998 from 27.1% in fiscal 1997. The increase was due to store opening costs associated with the 40 stores opened.
Income from operations increased $2.9 million, or 22.7% to $15.8 million in fiscal 1998 compared to $12.9 million in fiscal 1997. Income from operations as a percentage of net sales increased to 4.9% in fiscal 1998 from 4.6% in fiscal 1997.
Interest expense increased $492,000 or 16.2% in fiscal 1998 compared to fiscal 1997. The increase results from higher borrowing levels to fund the purchases of merchandise, fixtures, and owned store buildings for the store expansion program.
Income taxes were $4.8 million in fiscal 1998 compared to $3.8 million in fiscal 1997. The Company's effective tax rate was 39% in fiscal 1998, and 38.5% in fiscal 1997.
Net earnings for fiscal 1998 increased by $1.4 million or 23.7% to $7.5 million compared to $6.1 million in fiscal 1997.
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 1997, 1998, and 1999.
(1) Represents earnings before the cumulative effect of accounting change
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 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 net 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.
Inflation
Management does not believe that its 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. In 1996, Congress enacted The Small Business Job Protection Act of 1996 ("the Act"), raising the hourly minimum wage from $4.25 to $4.75 effective as of October 1, 1996 and 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 has increased the Company's payroll expense.
Liquidity and Capital Resources
At the end of fiscal 1999, working capital (defined as current assets less current liabilities) was $90.1 million compared to $76.0 million at the end of fiscal 1998 and $60.4 million at the end of fiscal 1997.
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 1999, the Company completed a sale-leaseback of ten of its owned stores. The proceeds from this transaction amounted to $6.2 million. The Company sold 1.089 million shares of its common stock to the public, primarily in the third quarter of fiscal 1997, generating net proceeds to the Company of $13.1 million. The purpose of the offering was to fund store expansion. The funds were used to pay down temporarily the revolving credit facility, pending the investment of the funds in new stores.
Cash provided by (used in) operating activities aggregated $6.6 million, ($6.8) million and $4.2 million in fiscal 1999, 1998 and 1997, respectively. The increase in cash provided in fiscal 1999 relative to fiscal 1998 resulted primarily from a smaller increase in inventory, due to a smaller number of stores opened. The decrease in cash provided in fiscal 1998 relative to fiscal 1997 resulted primarily from an increase in inventory needed to support the 40 new store openings.
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 periods and to meet other short-term cash requirements. The revolving loan credit facility, which provides up to $85 million of financing in the form of notes payable and letters of credit, was executed in April, 1998 and will expire in April 2001. The Company had borrowings available at January 31, 1999 under the revolving loan credit facility amounting to $41,260. 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 1999, the Company made net cash borrowings against its revolving credit facility of $5.0 million, incurred $2.8 million of new long term debt, and made cash payments of $1.9 million to reduce its long-term debt and capital lease obligations. In fiscal 1998 and 1997, the Company made net cash borrowings of $13.4 million and net cash payments of $1.7 million, respectively, to reduce its long-term debt and capital lease obligations. The Company executed operating leases for 98 additional stores during the three year period ending in fiscal 1999. 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, 36 new stores were opened in fiscal 1999 and at least 22 new stores are scheduled to be opened in fiscal 2000. The Company believes that with the $85 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 1999, 1998 and 1997 totaled $10.3 million, $11.7 million, and $11.6 million, respectively. Anticipated cash payments for acquisition of property and equipment in fiscal 2000, principally for store buildings and fixtures, are $11.0 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"). 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 Credit Facility. As of January 31, 1999, the Company had purchased 60,000 shares of Common Stock for $669,000.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
In order to take advantage of the safe harbor provisions for forward- looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, added to those Acts by the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important risks and uncertainties that could affect the Company's actual results of operations, financial condition or business and could cause the Company's actual results of operations, financial condition or business to differ materially from its historical results of operations, financial condition or business, or the results of operations, financial condition or business contemplated by forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company. Factors that could cause or contribute to such differences 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 approximately 22 stores in the current fiscal year and at least 22 stores in both fiscal 2001 and 2002. 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 $4.25 to $4.75 effective as of October 1, 1996 and 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 will increase the Company's payroll expense. The Company intends to continue to offset this increase in expense through the implementation of measures, including, but not limited to, reducing employee hours and increasing gross margins (through increased prices and reduced costs). If these measures are not successful, the higher minimum wage could materially and adversely affect the Company.
Control by Significant Stockholder
Kansas Public Employees Retirement System ("KPERS") is a principal stockholder of the Company, beneficially owning approximately 13% of the outstanding shares of Common Stock of the Company as of March 19, 1999.
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 it 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 fourteen 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 current revolving loan credit facility prohibits the payment of dividends.
The Year 2000 Issue
The information in this Year 2000 section is a Year 2000 Readiness Disclosure under the Year 2000 Information Readiness and Disclosure Act.
Internal Considerations
The Company has been evaluating and adjusting all of its known date- sensitive systems and equipment for Year 2000 readiness. The assessment phase of the Year 2000 project is substantially complete and mission critical systems have been or are in the process of being remediated or replaced. The assessment phase of the project included information technology systems as well as non-information technology equipment. Over 70% of the required coding conversions on information technology have occurred to-date. The Company anticipates completing all known remaining coding conversions during the first half of fiscal 2000. All code conversions dealing with fiscal 2000 (which began on February 1, 1999) have been completed and returned to production prior to February 1, 1999. Virtually all of the Company's remediation efforts have been and will continue to be performed by Company associates and a limited number of selected software and hardware providers.
As systems have been replaced or remediated, system testing has been conducted prior to return to production. However, upon completion of the remediation phase, the Company will conduct additional system testing as deemed necessary. This testing is anticipated to occur during the second and third quarters of fiscal 2000.
Previously reported problems with Store Point-of-Sales systems have been successfully resolved, and roll-outs have resumed to all ALCO stores. Completion of this rollout is currently scheduled for the end of June, 1999. At this point the Company believes the Store systems being rolled out to be Year 2000 ready, however, significant testing and monitoring will continue throughout 1999.
Costs Related to Year 2000
The total estimated cost of the Company's Year 2000 project is $1,000,000. To-date the Company has spent approximately $346,000 on hardware and software upgrades, and expects to spend as much as an additional $354,000. Additionally the Company will incur as much as $300,000 in internal and external programming costs, with maximum expenditures estimated at $1,000,000. Internal programming resources have been adequate to provide some enhancements to proprietary systems, as well as provide Year 2000 ready systems. The hardware replacements have also provided quicker, more reliable systems to the Company. All expenditures related to the Company's Year 2000 readiness initiatives have or will be funded by cash flow from operations, borrowing under the Company's line of credit, or other financing sources, and have or will be capitalized or expensed depending on the classification of the expenditure according to generally accepted accounting principles.
External Considerations
In addition to internal Year 2000 activities, the Company is communicating with other companies with which our systems interface or rely upon. Conversion, testing and implementation of Year 2000 ready EDI transactions are expected to begin in May 1999. This will include EDI trading partners and other external dependencies. Completion of this testing and conversion is expected to be substantially complete by September 1999.
There can be no assurance that there will not be adverse effects on the Company if third parties, such as utility companies or merchandise suppliers, do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. However, management believes that ongoing communications with and assessment of these third parties will minimize these risks.
The Company recognizes the risks and anticipates minimal business disruption will occur as a result of Year 2000 issues. Possible consequences include, but are not limited to, loss of basic utilities within certain locations, inability to process transactions, send or transmit purchase orders, or engage in similar normal business activities. Additionally, due to the lack of a uniform definition of Year 2000 compliance, the Company recognizes the potential of an increase in sales returns of merchandise that contain embedded chips, or hardware or software components. Due to the Company's product mix, and the anticipated cooperation from the Company's suppliers, if returns of merchandise increase, such returns are not expected to be material to the Company's financial condition.
Contingency Plans
The contingency planning phase of the Year 2000 project is scheduled to begin in late April 1999. To-date initial analysis has begun and where needed the Company will establish contingency plans based on actual testing and production experience. External dependency contingency planning will be based on ongoing communications with the Company's suppliers and service providers. The Company anticipates the majority of its contingency plans to be in place by the end of September 1999, in addition the Company intends, during the fourth quarter of 1999 to conduct training with associates on the execution of contingency plans should the need arise.
Summary
The Company believes its IT systems will be ready for the Year 2000. Should incidences of non-compliance occur the Company will dedicate both internal and external resources to resolve any problems. Although the Company is taking the steps it deems reasonable to mitigate external Year 2000 issues, many elements of these risks, and the ability to definitively mitigate them, are outside the control of the Company. Given the importance of certain key vendors and service providers, the inability of these business partners to provide their goods or services to the Company on a timely basis could have a material adverse effect on the Company's operations and financial results. The cost of the conversions and the completion dates are based on management's best estimates and may be updated as additional information becomes available.
Impact of change in Accounting Principle
Effective November 1, 1998, the Company adopted AICPA Statement of Position 98-5, Reporting on the Costs of Start up Activities (SOP 98-5), retroactive to the beginning of the year. Previously, the Company initially capitalized and then amortized preopening costs over the initial 12-months of a store's operation. Under the new method, the Company expenses such store preopening costs as incurred. The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 1999 is to increase (decrease) such amounts $529, ($427), and ($0.8), respectively. The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of February 1, 1998 has been reported in the accompanying audited financial statements. Financial statements for fiscal 1998 and prior periods have not been restated but net earnings and earnings per share computed on a pro forma basis have been reflected in the accompanying audited financial statements for all periods presented as if the accounting change had been applied consistently during all periods affected.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest in any market risk sensitive instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Independent Auditors' Report............................... 17
Financial Statements:
Consolidated Balance Sheets -- January 31, 1999 and February 1, 1998.................. 18
Consolidated Statements of Operations-- Fiscal Years Ended January 31, 1999, February 1, 1998, and February 2, 1997............... 20
Consolidated Statements of Stockholders' Equity --Fiscal Years Ended January 31, 1999, February 1, 1998, and February 2, 1997............... 22
Consolidated Statements of Cash Flows -- Fiscal Years Ended January 31, 1999, February 1, 1998, and February 2, 1997............... 23
Notes to Consolidated Financial Statements............... 25
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 January 31, 1999 and February 1, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 31, 1999. 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 generally accepted auditing standards. 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 January 31, 1999 and February 1, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1999, in conformity with generally accepted accounting principles.
As discussed in note 1 of notes to consolidated financial statements, the Company changed its method of accounting for store preopening costs in the year ended January 31, 1999. 	
/s/KPMG LLP KPMG LLP
Wichita, Kansas March 19, 1999
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
											 DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES											
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES													
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES															
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES													
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.													 													
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (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 midwestern and south central regions of the United States 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 1999 and 1998 consist of 52 weeks, 1997 consists of 53 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 ten years. Estimated useful lives are as follows:
Buildings 25 years Building improvements 10 years Furniture, fixtures and equipment 3-7 years Transportation equipment 3 years Leasehold improvements 5-10 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.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(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
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.
(h) Change in Accounting Principle
Effective November 1, 1998, the Company adopted AICPA Statement of Position 98-5, Reporting on the Costs of Start up Activities (SOP 98-5), retroactive to the beginning of the year. Previously, the Company initially capitalized and then amortized preopening costs over the initial 12-months of a store's operation. Under the new method, the Company expenses such store preopening costs as incurred. The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 1999 is to increase (decrease) such amounts $529, ($427), and ($.08), respectively. The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of February 1, 1998 has been reported in the accompanying financial statements. Financial statements for fiscal 1998 and prior periods have not been restated but net earnings and earnings per share computed on a pro forma basis have been reflected in the accompanying financial statements for all periods presented as if the accounting change had been applied consistently during all periods affected.
(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.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(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 1999, 1998, and 1997, the following amounts were paid for interest and income taxes:
1999 1998 1997 							 Interest, excluding interest on capital lease obligations and amortization of debt financing costs (net of capitalized interest of $46 in fiscal 1999, $72 in fiscal 1998, and $269 in fiscal 1997) $ 3,116 2,431 2,083 Income taxes 4,383 5,001 1,481 							
Noncash financing and investing activities for fiscal 1999, 1998, and 1997 consisted of:
Tax benefit from net operating loss carryforward of $626 which increases additional paid-in capital in fiscal 1997 (note 6).
(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 generally accepted accounting principles. Actual results could differ from those estimates.
(l) Long-lived Assets
Long-lived assets and certain identifiable intangibles 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, 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.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(m) Stock-based Compensation
The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In addition, SFAS No. 123, Accounting for Stock-Based Compensation, requires that pro forma net earnings and pro forma earnings per share disclosures be provided for employee stock option grants made in fiscal year 1996 and subsequent years as if the fair value-based cost measurement method defined in SFAS No. 123 had been applied.
(2) Inventories
Inventories at January 31, 1999 and February 1, 1998 are stated at the lower of cost or net realizable value as determined under the LIFO method of accounting. Inventories at January 31, 1999 and February 1, 1998 are summarized as follows:
1999 1998 					 FIFO cost $ 113,820 106,489 Less LIFO reserve (595) (3,044)
LIFO cost $ 113,225 103,445 					
Earnings before income taxes for fiscal 1999, 1998, and 1997 would have decreased by $2,449 and $950, and increased by $55, respectively, if the FIFO method of valuing inventories had been utilized.
(3) Credit Arrangements, Notes Payable and Long-term Debt
The Company's loan agreement with its lenders provides a revolving loan credit facility of up to $85,000 of long-term financing. The amount advanced (through a note or letters of credit) to the Company bears interest at the prime rate on the Revolving Rate Loan and LIBOR plus 1.50% on the LIBOR Rate Loan and is generally limited to 65% of eligible inventory, as defined. Advances are secured by a security interest in the Company's inventory, accounts receivable and intangible assets. The loan agreement contains various restrictions including limitations on additional indebtedness, sales of assets, and financial covenants related to the ratio of earnings to fixed charges and tangible net worth, all as defined. The loan agreement prohibits the payment of dividends. The loan agreement expires in April 2001 and automatically renews for successive one-year terms thereafter unless terminated by the lenders or the Company.
Under this agreement, the Company converted $30,000 from the Revolving Rate Loan to a 7.23% Fixed Rate Loan on April 15, 1998 which is due in April 2001.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
Notes payable outstanding at January 31, 1999 and February 1, 1998 under the revolving loan credit facility aggregated $30,598 and $25,591, respectively. The lender had also issued letters of credit aggregating $2,261 and $2,692, respectively, at such dates on behalf of the Company. The interest rate on outstanding borrowings at January 31, 1999 was 7.75% on the Revolving Rate Loan payable monthly. There were no borrowings outstanding under the LIBOR Rate Loan at January 31, 1999 or February 1, 1998. The Company had additional borrowings available at January 31, 1999 under the revolving loan credit facility amounting to $41,260.
Long-term debt, exclusive of notes payable under the revolving loan credit facility as described above, at January 31, 1999 and February 1, 1998 consisted of the following:
1999 1998 					 7.15% obligations for Industrial Revenue Bonds, interest payable semiannually with principal payments due annually until final maturity in 1999 $ 175 600 9.875% mortgage note payable due in monthly installments, including interest, through September 2001 310 408 8.41% note payable due in monthly installments, including interest, through March 2001, secured by airplane 468 681 8.77% note payable due in monthly installments, including interest, through September 2000, secured by certain equipment 839 1,287 8.27% note payable due in monthly installments, including interest, through December 2000, secured by certain equipment 148 216 9.2% note payable due in monthly installments, including interest, through March 2009, secured by buildings 1,700 1,787 6.4% note payable due in monthly installments, including interest, through January 2005, secured by equipment 2,741 ---
					 6,381 4,979 					 Less current maturities 1,556 1,333 					 Long-term debt, less current maturities $ 4,825 3,646
The Industrial Revenue Bonds were issued by a municipality to finance warehouse facilities of the Company. The facilities are leased by the Company and the Company has the option to purchase the facilities for a nominal sum at the expiration of the leases.
Interest expense on notes payable and long-term debt in fiscal 1999, 1998, and 1997 aggregated $3,193, $2,418, and $1,853, respectively.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
Maturities of long-term debt, including the notes payable under the revolving loan credit facility, in each of the next five years and thereafter in the aggregate as of January 31, 1999 are as follows:
Fiscal year 			 2000 $ 1,556 2001 31,904 2002 676 2003 611 2004 656 Thereafter 1,576 			 $ 36,979 			
(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. The Company made profit sharing contributions for fiscal 1999, 1998, and 1997 of $775, $800, and $700, respectively.
At January 31, 1999 and February 1, 1998, the Plan owned 79,053 shares of the Company's common stock.
(5) Leases
The Company is lessee under long-term capital leases expiring at various dates. The components of property under capital leases in the accompanying consolidated balance sheets at January 31, 1999 and February 1, 1998 are as follows:
1999 1998 					 Buildings $ 16,624 16,624 Fixtures 3,783 3,783 					 20,407 20,407 					 Less accumulated amortization 14,428 13,811 					 Net property under capital leases $ 5,979 6,596 					
The Company also has noncancelable operating leases, primarily for buildings and transportation equipment, that expire at various dates.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
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 January 31, 1999 are as follows:
Fiscal Year: Capital Operating 					 2000 $ 1,521 7,612 2001 1,521 7,222 2002 1,521 6,135 2003 1,457 5,262 2004 1,384 4,929 Later years 7,972 27,977 					 Total minimum lease payments 15,376 $ 59,137 					 Less amount representing interest 6,747 					 Present value of net minimum lease payments 8,629 					 Less current maturities 540 					 Capital lease obligations, less current maturities $ 8,089 					
Minimum payments have not been reduced by minimum sublease rentals of $120 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 $53, $59, and $39 for fiscal 1999, 1998, and 1997, respectively.
Interest on capital lease obligations in fiscal 1999, 1998, and 1997 aggregated $1,041, $1,107, and $1,180, respectively.
The following schedule presents the composition of total rent expense for all operating leases for fiscal 1999, 1998, and 1997:
1999 1998 1997 Minimum rentals $ 8,216 7,545 5,221 Contingent rentals 415 316 361 Less sublease rentals (109) (104) (124) 							 $ 8,522 7,757 5,458 							 (Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
Sale-Leaseback Transaction
The Company entered into an agreement to sell and leaseback ten stores (land and buildings) in December 1998. The proceeds from the sale-leaseback transaction amounted to $6.2 million and the leaseback term is 20 years. As a result of the sale-leaseback transaction, the Company incurred a gain of $489 which has been deferred for financial reporting purposes and is included within other noncurrent liabilities and is being amortized over the term of the related leases. The Company will use the proceeds to fund the Company's continued store development.
(6) Income Taxes
Total income tax expense (benefit) for fiscal 1999, 1998, and 1997 was allocated as follows:
1999 1998 1997 							 Operations $ 4,287 4,790 3,794 Additional paid-in capital for the tax benefit from utilization of net operating loss carryforwards --- --- (626) 							 Total income tax expense $ 4,287 4,790 3,168
							 Income tax expense (benefit) attributable to operations for fiscal 1999, 1998, and 1997 consists of:
Current Deferred Total 							 1999: Federal $ 3,669 (63) 3,606 State 693 (12) 681 							 $ 4,362 (75) 4,287 							 1998: Federal $ 4,163 (116) 4,047 State 765 (22) 743 							 $ 4,928 (138) 4,790 							 1997: Federal $ 3,061 136 3,197 State 571 26 597 							 $ 3,632 162 3,794 							 (Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
The significant components of deferred income tax expense (benefit) attributable to operations for fiscal 1999, 1998, and 1997 are as follows: 1999 1998 1997 							 Deferred tax expense (exclusive of the effects of the following item) $ (75) (138) 788 Decrease in beginning of the year balance of the valuation allowance for deferred tax assets --- --- (626) 							 $ (75) (138) 162 							
Income tax expense attributable to operations was $4,287, $4,790, and $3,794 for fiscal 1999, 1998, and 1997, respectively, and differs from the amounts computed by applying the Federal income tax rate of 35% in 1999 and 1998, and 34% in 1997 as a result of the following:
1999 1998 1997 							 Computed "expected" tax expense $ 4,026 4,298 3,350 Reduction in income taxes resulting from: State income taxes, net of the Federal income tax benefit 501 483 394 Other, net (240) 9 50 							 $ 4,287 4,790 3,794 							 (Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at January 31, 1999 and February 1, 1998 are presented below:
1999 1998 					 Deferred tax assets: Capital leases $ 1,018 969 Other assets 244 38 Other liabilities 920 579 Net operating loss and tax credit carryforwards 43 85 					 Total gross deferred tax assets 2,225 1,671 					 Less - valuation allowance (43) (85) 					 Net deferred tax assets 2,182 1,586 					
Deferred tax liabilities: Inventories, principally due to differences in the LIFO reserve arising from a prior business combination accounted for as a purchase 2,911 2,998 Property and equipment, due to differences in deprecia- tion and a prior business combination accounted for as a purchase 4,016 3,408 					 Total gross deferred tax liabilities 6,927 6,406 					 Net deferred tax liability $ 4,745 4,820 					
At January 31, 1999, the Company has net operating loss carryforwards for state income tax purposes in various states aggregating $1,657 which are available to offset future state taxable income in those states, if any, expiring at various dates through fiscal 2005.
The valuation allowance relates to the net operating loss (NOL) and tax credit carryforwards. Income tax benefits in fiscal 1997 from the utilization of NOL carryforwards have been recorded as an increase to additional paid-in capital because such income tax benefits are attributable to the loss periods prior to the reorganization in June 1991.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(7) Stock Option Plan
During fiscal 1994, the Company adopted a stock option plan under which options to purchase 125,000 shares of common stock may be granted to key employees. The stock option plan was amended in June 1994 to increase the number of options which may be granted under the plan to 200,000, and was further amended in March 1997 to increase to 450,000. 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 January 31, 1999, February 1, 1998, and February 2, 1997 is presented below:
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in APB 25 and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by Statement 123, net earnings and net earnings per share would have been decreased to the pro forma amounts indicated in the table below: 1999 1998 					 Net earnings, as reported $ 7,215 7,491 Net earnings, pro forma 7,087 7,412 Net earnings per share, as reported: Basic 1.41 1.47 Diluted 1.40 1.46 Net earnings per share, pro forma: Basic 1.39 1.45 Diluted 1.38 1.44 					
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:
1999 1998 				 Expected dividend yield 0% 0% Expected stock price volatility 34.6% 33.0% Risk-free interest rate 5.6% 6.5% Expected life of options 5 years 5 years 				
The weighted average grant date fair value of options granted during 1999 and 1998 is $7.42 and $5.19 per share, respectively.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(8) Stockholders' Equity
During 1998, 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"). 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 January 31, 1999, the Company had purchased 60,000 shares of Common Stock for $669.
The Company completed a secondary public offering of 900,000 shares of its common stock on October 15, 1996 and the Company's underwriters exercised their option to purchase an additional 189,000 common shares on November 15, 1996. The Company received net proceeds from the sale of its common stock (after deducting issuance costs) of $13,068. The net proceeds of the offering were used to fund the opening of new stores. Pending such use, the net proceeds were used to repay outstanding balances under the Company's revolving loan credit facility.
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. Accordingly, the accumulated deficit at June 2, 1991 was charged to additional paid-in capital and a new retained earnings account was established effective the same date. No adjustment was made to the carrying values of the Company's assets and liabilities because such amounts were not in excess of estimated fair values.
(9) Earnings Per Share
The following is a reconciliation of the outstanding shares utilized in the computation of earnings per share:
1999 1998 1997
Outstanding shares: Weighted average shares outstanding (basic) 5,111,461 5,096,322 4,299,502 Effect of dilutive options to purchase common stock 43,399 52,496 40,320 							 As adjusted for diluted calculation 5,154,860 5,148,818 4,339,822 							 Net earnings - basic and diluted $ 7,215 7,491 6,058 							
Earnings per share amounts have been computed on the absolute amount of net earnings whereas the above net earnings amounts have been rounded to the nearest thousand.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(10) Quarterly Financial Information (Unaudited)
(a) The pretax LIFO inventory provision for the fiscal year ended January 31, 1999 was estimated to be expense of $-0- in each of the first three quarters. The annual provision amounted to $2,449 income resulting in a credit of $2,449 in the fourth quarter.
The pretax LIFO inventory provision for the fiscal year ended February 1, 1998 was estimated to be expense of $0, $110 and $60 in each of the first three quarters, respectively. The annual provision amounted to $950 income resulting in a credit of $1,120 in the fourth quarter.
(b) Earnings per share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share in fiscal 1999 does not equal the total computed for the year.
(c) The cumulative effect of adopting the accounting change for store preopening costs was (.19) in the first quarter of fiscal 1999.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(d) Amounts for the first and second quarter of fiscal 1999 have been restated to reflect adoption of the accounting change for store preopening cost discussed in note 1(h). The effect of the restatement was to increase (decrease) the amounts originally reported in the Company's quarterly reports for such quarters as follows: First Second quarter quarter ___________ ___________ Earnings before cumulative effect of accounting change $ (52) 244 Cumulative effect of accounting change (956) --- Net earnings (1,008) 244 Net earnings per share: basic and diluted (.20) .05 					
(11) Fair Value of Financial Instruments
The Company has determined the fair value of its financial instruments in accordance with Statement of Financial Accounting Standards 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 January 31, 1999 and February 1, 1998. 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
Lease payments to related parties amounted to approximately $585 in fiscal 1999, 1998, and 1997.
During fiscal 1999 and 1997, the Company paid a computer consulting firm, whose president or chairman is a director of the Company, $260 and $957, respectively, for point-of-sale software and related services.
(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.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
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.
Property Costs
For ALCO stores for which the Company owns the store building, rent expense is charged to, and the applicable depreciation expense is excluded from, income from operations for purposes of determining the segment information for the ALCO Discount Stores.
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.
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1999, February 1, 1998, and February 2, 1997 (Dollars in thousands, except per share amounts)
A reconciliation of the segment information to the amounts reported in the consolidated financial statements is presented below:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
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 27, 1999, 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 4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 27, 1999, contains under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" certain information required by Item 10 of Form 10-K, and such information is incorporated herein by this reference.
ITEM 11.
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 27, 1999, 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 subcaptions is expressly excluded from such incorporation: "Compensation Committee Report" and "Company Performance").
ITEM 12.
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 27, 1999, 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.
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 27, 1999, contains under the caption "Insider Participation" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules, and Exhibits
(1) Consolidated Financial Statements
The financial statements are listed in the index for Item 8 of this Form 10-K.
(2) Financial Statement Schedules
No financial statement schedules are included as they are not applicable to the Company.
(3) Exhibits
The exhibits filed with or incorporated by reference in this report are listed below:
Number Description ______ _________________________________________________________ 3(a) Amended and Restated Articles of Incorporation (filed as Exhibit 3(a) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
3(b) Certificate of Amendment to the Articles of Incorporation (filed as Exhibit 3(b) to Registrant'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 Registrant's Annual Report on Form 10-K for the fiscal year ended January 29, 1995, and incorporated herein by reference).
3(c) Bylaws (filed as Exhibit 3(b) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
4(a) Specimen Common Stock Certificates (filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-1 and incorporated herein by reference).
4(b) Reference is made to the Amended and Restated Articles of Incorporation and Bylaws described above under 3(a) and 3(c), respectively (filed as Exhibit 4(a) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
4(c) Reference is made to the Certificate of Amendment to the Articles of Incorporation described above under 3(b) (filed as Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 29, 1995, and incorporated herein by reference).
4(d) Form of 10% Subordinated Notes (filed as Exhibit 4(c) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
9(a) Voting Agreement and Irrevocable Proxy, dated as of May 29, 1991, among General Electric Capital Corporation, certain stockholders of the Registrant and the Registrant (filed as Exhibit 9 to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
9(b) Assignment, dated as of February 11, 1993, among General
Electric Credit Corporation, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 9(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference).
10(a) Assignment, dated as of February 11, 1993, among General Electric Credit Corporation, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 9(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference).
10(b) Amended and Restated Loan Agreement, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(c) First Amendment to Security Agreement, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(d) Amendment No. 1, dated as of June 10, 1994, to the Amended and Restated Loan Agreement, dated as of February 11, 1993, among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation.
10(e) Stock Pledge Agreement, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(f) Mortgage, Security Agreement, and Assignment of Leases and Rents, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(g) Mortgage, Security Agreement, and Assignment of Leases and Rents, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(h) Mortgage, Security Agreement, and Assignment of Leases and Rents, dated as of February 11, 1993 among the Registrant, BA Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(j) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(i) Deed of Trust, Security Agreement, and Assignment of Leases and Rents, dated as of February 11, 1993 by the Registrant in favor of The Public Trustee for Morgan County, Colorado (filed as Exhibit 10(k) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(j) Deed of Trust, Security Agreement, and Assignment of
Leases and Rents, dated as of February 11, 1993 by the Registrant in favor of The Public Trustee for Fremont County, Colorado (filed as Exhibit 10(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.)
10(k) Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(d) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
10(l) Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(e) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
10(m) Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(f) to Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference).
10(n) Employment Agreement, dated March 18, 1993 between the Registrant and Glen L. Shank (filed as Exhibit 10(o) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated herein by reference.).*
10(o) Second Amended and Restated Loan Agreement, dated as of October 18, 1995, by and among the Registrant, BankAmerica Business Credit, Inc. and Transamerica Business Credit Corporation.
11 Computation of Company's Earnings Per Share
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
______________________
* Management contracts or compensation plans or arrangements required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Registrant during the fourth quarter of the fiscal year ended January 31, 1999.
(c) Exhibits
The exhibits filed with this report are identified above under Item 14(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 30, 1999
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 30, 1999 Glen L. Shank Chairman of the Board and President (Principal Executive Officer)
/s/ Richard A. Mansfield April 30, 1999 Richard A. Mansfield Vice President - Finance and Treasurer (Principal Financial and Accounting Officer)
/s/ Dennis A. Mullin April 30, 1999 Dennis A. Mullin Director
/s/ Robert L. Barcum April 30, 1999 Robert L. Barcum Director
/s/ Lolan C. Mackey April 30, 1999 Lolan C. Mackey Director
/s/ Jeffrey Macke April 30, 1999 Jeffrey Macke Director
/s/ Robert L. Woodard April 30, 1999 Robert L. Woodard Director