UNITED STATES

SECURITIES AND EXCHANGE COMMISSION    

Washington, D.C.  20549

FORM 10-K

(Mark One)

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

For the fiscal year ended February 2, 2003

                                                                                                            OR

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

For the transition period from _____________ to ___________

                                                                                  Commission File Number 0-20269

 DUCKWALL-ALCO STORES, INC.         

(Exact name of registrant as specified in its charter)

                                                                                  Kansas                                                           48‑0201080    

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

incorporation or organization)                                Identification No.)

                                                                           401 Cottage Street

                                                                             Abilene, Kansas                                                  67410‑2832     

                                                           (Address of principal executive offices)                           (Zip Code)

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

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

NONE

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

                                                                                                 Common Stock, par value $.0001 per share

                                                                                                                     (Title of Class)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]

The aggregate market value of the 1,544,886 shares of Common Stock, par value $.0001 per share, of the registrant held by non-affiliates of the registrant is $20,701,472 on August 4, 2002, based on a closing sale price of $13.40.  As of April 4, 2003, there were 4,260,535 shares of Common Stock outstanding.

Documents incorporated by reference:  portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

PART I

ITEM 1.  BUSINESS

History

Duckwall-ALCO Stores, Inc., (the "Company" or "Registrant"), was founded as a general merchandising operation in 1901 in Abilene, Kansas by A. L. Duckwall.  From its founding until 1968, the Company conducted its retail operations as small variety or "dime" stores.  In 1968, the Company followed an emerging trend to discount retailing when it opened its first ALCO discount store.   In 1991, the Company adopted its current business strategy that focuses on under-served markets that have no direct competition from another full-line discount retailer.  This strategy includes opening either an ALCO discount store or a Duckwall variety store, depending upon the market size.  As of April 25, 2003, the Company operates 263 retail stores located in the central United States, consisting of 182 ALCO retail discount stores and 81 Duckwall variety stores.

The Company was incorporated on July 2, 1915 under the laws of Kansas.  The Company's executive offices are located at 401 Cottage Street, Abilene, Kansas  67410-2832, and its telephone number is (785) 263-3350. 

General

The Company is a regional retailer operating 263 stores in 21 states in the central United States.  The Company's strategy is to target smaller markets not served by other regional or national full-line retail discount chains and to provide the most convenient access to retail shopping within each market.  The Company's ALCO discount stores offer a full line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies', men's and children's apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys.  The Company's smaller Duckwall variety stores offer a more limited selection of similar merchandise.

Of the Company's 182 ALCO discount stores, 149 stores are located in communities that do not have another full-line discounter.  The Company intends to continue its strategy of opening ALCO stores in markets that do not have other full-line discount retailers and where the opening of an ALCO store is likely to be preemptive to the entry by other full-line discount competitors in the market.  The ALCO discount stores account for 92% of the Company's net sales.  While the current ALCO stores average 20,900 square feet of selling space, the Company's store expansion program is primarily directed toward stores with a design prototype of approximately 18,000 square feet of selling space ("Class 18 Stores"), which, based on the Company's experience, has been a design that maximizes return on investment for newly-constructed stores.

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

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

Business Strategy

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

Markets:  The Company intends to open ALCO stores in towns with populations of typically less than 5,000 that are in trade areas with populations of less than 16,000 where:  (1) there is no direct competition from national or regional full-line discount retailers; (2) economic and demographic criteria indicate the market is able to commercially support a discount retailer; and (3) the opening of an ALCO store would significantly reduce the likelihood of the entry into such market by another full-line discount retailer.  This key component of the Company's strategy has guided the Company in both its opening of new stores and in its closing of existing stores.  Since 1991, the Company has opened 133 ALCO discount stores (with an approximate average size of 18,900 square feet of selling space) and 87 Duckwall variety stores. Except for nine stores, each of the new ALCO and Duckwall stores was opened in a primary market in which there was no direct competition from a national or regional full-line discount retailer.

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

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

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

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

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

Store Development 

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

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

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

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

Store Environment and Merchandising

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

Purchasing

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

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

Pricing

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

Distribution and Transportation

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

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

Management Information Systems

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

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

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

Store Locations

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

Competition

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

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

Executive Officers of the Company

The following table sets forth the names, ages, positions and certain other information regarding the executive officers  of the Company as of April 25, 2003.

__________

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

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

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

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

Richard A. Mansfield has served as Vice President - Finance and Treasurer of the Company since May 1997.  For the two years prior to that he served as Chief Financial Officer of Country General Stores, Inc., a regional chain of specialty farm and ranch stores located in the Midwest.  For the three years prior to that he served as Chief Financial Officer of American Laminates, Inc. and Relco, Inc.  Mr. Mansfield has approximately 22 years of experience in the retail industry.

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

Employees

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

ITEM 2.  PROPERTIES.

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

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

ITEM 3.                          LEGAL PROCEEDINGS.

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

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

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

                                                                                                         PART II

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

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

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

Equity Compensation Plan Information

ITEM 6.  SELECTED FINANCIAL DATA.         

SELECTED CONSOLIDATED FINANCIAL DATA

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

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

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

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

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

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

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

ITEM 7.                         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

                                        CONDITION AND RESULTS OF OPERATIONS         

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

Impairment of Long-Lived Assets:  The Company considers determination of impairment of long-lived assets as a critical accounting policy because determination as to whether the long-lived assets of a store are impaired and, if impaired, the fair value of such assets requires the use of judgment, particularly as it relates to projecting whether the sum of expected undiscounted future cash flows for the store over an extended period of time will equal or exceed the carrying value of such assets.  Management uses the best information available to make the determination; however, actual future cash flows for the store may vary significantly from the cash flows projected in conjunction with the impairment assessment.  The potential impact on the financial statements of incorrect judgments regarding impairment of long-lived assets is that a provision for impairment could be needlessly recorded if projected future cash flows for a store are significantly under estimated or a provision for impairment could be deferred until later determined necessary in a future period if initial projected cash flows are over estimated.  See Note 1(l) of Notes to Consolidated Financial Statements for a description of the Company's accounting policy for impairment of long-lived assets.

Results of Operations

The following table sets forth, for the fiscal years indicated, the components of the Company's consolidated statements of operations expressed as a percentage of net sales:

Fiscal 2003 Compared to Fiscal 2002

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

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

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

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

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

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

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

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

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

Fiscal 2002 Compared to Fiscal 2001

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

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

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

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

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

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

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

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

Seasonality and Quarterly Results

         The following table sets forth the Company's net sales, gross margin, income from operations, and net earnings during each quarter of fiscal 2002 and 2003.

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

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

Inflation

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

During fiscal 1999, the Company's Board of Directors approved a plan to repurchase up to 411,000 shares of the Company's Common Stock (the "Stock Repurchase Program").  During fiscal 2000, the Company's Board of Directors approved the repurchase of an additional 1,000,000 shares.  Purchases pursuant to the Stock Repurchase Program are to be made from time to time in the open market or directly from stockholders at prevailing market prices.  The Stock Repurchase Program is anticipated to be funded with internally generated cash and borrowing under the Company's credit facility.  As of February 3, 2002, the Company had purchased and retired 1,010,300 shares of Common Stock for $8.1 million, which represents 20% of its outstanding shares.  There were no shares repurchases during fiscal 2003.

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

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

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

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

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

Expansion Plans

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

Competition

The Company's strategy is to locate its ALCO stores in smaller retail markets where there is no competing full-line discount retail store within the primary trade area and where the Company believes the opening of a store would significantly reduce the likelihood of such a competitor entering the market.  No assurance can be given, however, that competition will not emerge in such markets which, if developed, could seriously reduce the prospect of a profitable store in such market.  In those markets in which the Company has direct competition, it often competes with national or regional full-line discount stores which often have substantially greater financial and other resources than the Company.

Government Regulation

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

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

Control by Significant Stockholders

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

Quarterly Fluctuations

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

Economic Conditions

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

Dependence on Officers

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

No Recent Dividend Payments; Restrictions on Payment of Dividends

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

Impact of Change in Accounting Principle

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

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

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

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

New Accounting Standards

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

ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities.  The Company maintains a secured line of credit at variable interest rates to meet the short-term needs of its expansion program and seasonal inventory increases.

On April 15, 2002, the Company replaced the existing line of credit with a new line of credit with Fleet Retail Finance Inc. that expires in April 2006.  The credit line available is $70,000,000, which carries a variable rate of interest.

ITEM 8.              FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Statement Schedules:

No financial statement schedules are included as they are

not applicable to the Company.

				/s/  KPMG LLP