Back to GetFilings.com
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 [FEE REQUIRED]
For the fiscal year ended February 2, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 67410-0129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (913) 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 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.
[__]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ____
At March 14, 1997, there were 5,089,823 shares of Common Stock
outstanding, of which 2,145,364 shares were owned by affiliates.
Documents incorporated by reference: portions of the Registrant's Proxy
Statement for the 1997 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 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 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, 1997, the Company operates 202 retail stores located in the
central United States, consisting of 142 ALCO retail discount stores and 60
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 67410-0129, and its telephone number is (913) 263-3350.
General
The Company, which was established in 1901, is a regional retailer
operating 202 stores in 18 states in the central United States. The Company's
strategy is to target smaller markets not served by other regional or national
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 142 ALCO discount stores, 96 stores are located in
communities that do not have another full service discounter. The Company
intends to continue its strategy of opening ALCO stores in markets that do
not have other 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 94% of the Company's net sales. While the
current ALCO stores average 22,300 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, which, based
on the Company's experience, has been a design that maximizes return on
investment for newly-constructed stores ("Class 18 Stores").
The Company's 60 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 6% of the Company's net sales, average
approximately 4,900 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 service 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 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 75 ALCO discount stores (with an
approximate average size 18,500 square feet of selling space) and 45
Duckwall variety stores. Except for six stores, each of the new
ALCO and Duckwall stores was opened in a primary market in which there was
no direct competition from a 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. At the present time, the Company's management
has approximately 150 markets that it has identified and is in the site
selection and/or procurement process in approximately 17 of those markets.
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 expects to incur total costs of
approximately $1.25 million for a new Class 18 discount store (inclusive
of store construction, store fixtures, equipment, inventory and
pre-opening 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 reduce costs, improve customer service, and enhance
general business planning. The Company's accounting and information
systems, merchandise planning, and inventory planning systems have
recently been enhanced and are in the process of being implemented.
In 1996 the Company began an eighteen month, $2.3 million project to
update the back office equipment and software being used at the ALCO
stores for sales processing. The Company expects this project to extend
the life of the current point-of-sale equipment, as well as improve
efficiencies in training and operations. This project is expected to be
completed in fiscal 1998. In conjunction with the project, the discount
stores will receive radio frequency hand held devices to allow for
additional efficiencies in processing inventory receipts and counts.
Advertising and Promotion:
The Company utilizes full-color photography advertising circulars of 8 to
20 pages distributed by insertion into newspapers or by direct mail where
newspaper service is inadequate. These circulars are distributed
approximately 40 times per year in ALCO markets, with two additional
circulars for the larger stores. 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.
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 25 ALCO stores and 15 Duckwall stores
during fiscal year 1998, and a minimum of 16 ALCO stores and 15 Duckwall
stores during each of the fiscal years 1999 and 2000.
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 1994, the Company has opened a
total of 53 ALCO stores with an average selling area of approximately
18,500 square feet, and 34 Duckwall stores. The following table
summarizes the Company's growth during the past three fiscal years:
Year-to-Date
1995 1996 1997 1998
ALCO DUCKWALL ALCO DUCKWALL ALCO DUCKWALL ALCO DUCKWALL
Stores Opened 10 9 13 8 15 15 15 2
Stores Closed 2 0 2 1 1 0 0 0
Net New Stores 8 9 11 7 14 15 15 2
The Company intends to utilize the 18,000 square foot store profile for
new ALCO store openings. Currently, the Company owns 22 and leases 120 ALCO
store locations, and leases all of the Duckwall locations. The Company's
present intention is to own some newly constructed ALCO stores and intends to
lease all new Duckwall stores.
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 17 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
General Merchandise Manager who reports to the Company's President. The
General Merchandise Manager is supported by a staff of four divisional
merchandise managers who are each responsible for specific product
categories. The Company employs 22 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 3% of the Company's total purchases
in fiscal 1997 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, despite the level of local competition.
This pricing strategy, with its promotional activities, is designed to bring
consistent value to the customer. Promotions on various items are offered
approximately 40 times a year through advertising circulars, with two
additional circulars for the larger stores. 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 142 ALCO discount stores
and 60 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
1996 the Company began an eighteen month, $2.3 million project to update
the back office equipment and software being used at the ALCO stores for
sales processing. The Company expects this project to extend the life of the
point- of-sale equipment currently being used, as well as improve
efficiencies in training and operations. This project is expected to be
completed in fiscal 1998. In conjunction with the project, the discount
stores will receive radio frequency hand held devices to allow for
additional efficiencies in processing inventory receipts and counts.
Approximately 550 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, 1997, the Company operated 142 ALCO stores in 17 states
located in smaller communities in the central United States. Of the ALCO
stores, 22 are owned and 120 are operated under real estate leases. The
ALCO stores average approximately 22,300 square feet of selling space, with
an additional 4,800 square feet utilized for merchandise processing,
temporary storage and administration. The Company also operates 60
Duckwall stores in eight states, all of which are leased. The geographic
distribution of the Company's stores is as follows:
Store Locations (202)
ALCO Stores (142)
ARIZONA (3) IOWA (10) NEBRASKA (17) OKLAHOMA (7)
Springerville Atlantic Beatrice Fairview
Holbrook Cherokee McCook Cordell
Taylor Perry Fremont Watonga
Estherville Norfolk Cherokee
ARKANSAS (6) Knoxville Alliance Pawhuska
Russellville Vinton Sidney Wilburton
Harrison West Union North Platte Frederick
Hot Springs Garner Nebraska City
DeWitt Clarinda Ogallala SOUTH DAKOTA (8)
Conway Emmetsburg O'Neill Lead
Hardy Valentine Milbank
KANSAS (24) Gordon Webster
COLORADO (6) Abilene West Point Canton
Fort Morgan Salina Cozad Sisseton
Commerce City Concordia Gering Redfield
Canon City Garden City Ord Chamberlain
Burlington Hays Albion Wagner
Yuma Larned
Wray Pratt NEW MEXICO (7) TEXAS (20)
Goodland Roswell Pampa
ILLINOIS (7) Manhattan Portales Dalhart
Havana Newton Grants Perryton
Shelbyville Hutchinson Belen Monahans
Newton Junction City Tucumcari Andrews
Gibson City So. Hutchinson Lovington Kermit
Nashville Medicine Lodge Bloomfield Spearman
Virden Kingman Vernon
Red Bud Lyons NORTH DAKOTA (7) Littlefield
Fredonia Carrington Winnsboro
INDIANA (10) Beloit Rolla Dimmitt
Cambridge City Eureka Langdon Cameron
Brookville Sabetha Oakes Alpine
Hartford City Hillsboro Lisbon Tulia
Ligonier Phillipsburg Mayville Muleshoe
Nappanee Ellsworth Grafton Clifton
Knox Anthony Coleman
Tipton OHIO (4) Slaton
New Castle MINNESOTA (2) New Bremen Canadian
Demotte Spring Valley Paulding Mt. Vernon
Versailles Caledonia Wapakoneta
Delphos WYOMING (3)
Lander
UTAH (1) Rawlins
Roosevelt Diamondville
Duckwall Stores (60)
ARKANSAS (1) KANSAS (37) KANSAS (continued) MISSOURI (1)
Little Rock Belleville Osage City Salisbury
Lincoln Clearwater
COLORADO (6) Council Grove Osborne NEBRASKA (4)
Brush Wamego Ness City Geneva
Springfield Marion Elkhart Chappel
Walsenburg Scott City Minneapolis Kimball
Las Animas Horton Washington Neligh
Rocky Ford Ulysses Meade
Akron Hugoton Sterling OKLAHOMA (8)
WaKeeney Caldwell Beaver
IOWA (2) Greensburg Stafford Shattuck
Manning St. John Pleasanton Hooker
Villisca Cottonwood Falls Coldwater Seiling
Oberlin Hill City Wewoka
Plainville Atwood Enid
Sedan Leoti Okeene
Hoisington Kinsley Canton
Johnson Herington
LaCrosse TEXAS (1)
Spur
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 retail 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
discount store. The Company believes that trade area size is a significant
deterrent to larger national and regional 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 retail discount stores in 32 of its ALCO markets, and another
14 ALCO stores are in direct competition with regional discount stores. Of
the last 90 ALCO stores opened, only six are in direct competition with a
national or regional discount retailer. The competing regional and national
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 extremely 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 and
manufacturers outlets. The Company has experienced no direct competition
from national or regional discount retailers in any of the 80 Class 18
markets in which it has opened a store.
Employees
As of April 1, 1997, the Company employed approximately 4,400 people,
of whom approximately 400 were employed in the general office or
distribution center in Abilene, 3,650 in the ALCO stores and 350 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. 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 4 of Notes to Consolidated Financial Statements.
Twenty-two of the ALCO stores operate in buildings owned by the
Company. The remainder of the ALCO stores and all of the Duckwall stores
operate in leased properties. Such ALCO leases expire as follows:
approximately 208,690 square feet (5.5%) expire between May 1, 1997 and
January 31, 1998; approximately 508,382 square feet (12.4%) expire between
February 1, 1998 and January 31, 1999; and approximately 309,187 square feet
(8.1%) expire between February 1, 1999 and January 31, 2000. The remainder
expire through 2014. All Duckwall store leases have terms of five years or
less, and many are on a month- to-month or year-to-year tenancy. The Company
has options to renew substantially all of the expiring leases on terms the
Company considers an acceptable basis.
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. 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, 1997.
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, 1997. (1)
Name Age Position
Glen L. Shank 52 Chairman of the Board and President
James E. Schoenbeck 53 Vice President -
Operations and Advertising
James R. Fennema 46 Vice President - Merchandise
Charles E. Bogan 61 Vice President,
Secretary and General Counsel
__________
(1) On March 21, 1997, Bryan M. DeCordova resigned as Vice President -
Finance, Treasurer, and Chief Financial Officer. As of this date,
the position has not been filled.
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 30 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 23 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 24 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. 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 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).
Fiscal 1995 High Low
------------------------- ----------- ----------
Fourth quarter $ 9.75 $ 9.00
Fiscal 1996
-------------------------
First quarter $ 9.75 $ 8.75
Second quarter 10.75 8.75
Third quarter 11.88 10.38
Fourth quarter 11.25 9.50
Fiscal 1997
------------------------
First quarter $11.63 $ 8.75
Second quarter 15.50 12.88
Third quarter 14.50 12.25
Fourth quarter 16.75 12.25
As of April 4, 1997, there were approximately 1,388 holders of record
of the Common Stock of the Company. The Company has not paid cash dividends
on its Common Stock during the last two fiscal years, and is currently
prohibited from paying such dividends by the terms of the Second Amended
and Restated Loan Agreement dated as of October 18, 1995, among the Company,
BA Business Credit, Inc., and Transamerica Business Credit Corporation.
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. These 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.
Fiscal Year Ended
---------------------------------------------------------------------------
February 2, January 28, January 29, January 30, January 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Statements of Operations Data
Net Sales $278,819 $256,454 $242,144 $225,903 $217,236
Cost of Sales 186,531 173,296 163,180 154,217 148,834
Gross Margin 92,288 83,158 78,964 71,686 68,402
Selling, general
and administrative
expenses 75,630 69,018 65,477 59,432 57,086
Depreciation and amortization 3,773 3,093 3,280 3,950 4,278
Income from operations 12,885 11,047 10,207 8,304 7,038
Interest expense 3,033 2,958 3,390 4,091 4,284
Other expense, net 0 (185) 156 823 503
Earnings before income taxes 9,852 8,274 6,661 3,390 2,251
Income tax expense 3,794 3,144 2,531 1,130 692
Net earnings $6,058 $5,130 $4,130 $2,260 $1,559
Historical Per Share Information:
Earnings per common and
common equivalent share (1) $1.40 $1.28 $1.51 $.80 $.57
Weighted average shares
outstanding (2) 4,339,822 4,014,351 2,737,620 2,006,250 2,006,250
Pro Forma Per Share Information (3):
Earnings per common and
common equivalent share $.96 $.66
Weighted average shares
outstanding (2) 2,356,250 2,356,250
Operating Data
Stores open at year-end 185 156 138 121 110
Stores in non-competitive markets
at year-end (4) 137 110 91 72 57
Percentage of total stores in
non-competitive markets (4) 74.1% 70.5% 65.9% 59.5% 51.8%
Net sales of stores
in non-competitive markets (4) $177,939 $151,733 $132,743 $112,590 $96,243
Percentage of net sales
from stores in
non-competitive markets (4) 63.8% 59.2% 54.8% 49.8% 44.3%
Comparable store sales for
all stores (5) (2.9%) (3.2%) 1.1% - (.3%)
Comparable store sales for stores
in non-competitive markets (4)(5) (1.3%) (1.0%) 2.7% 4.0% 2.7%
Balance Sheet Data
Total assets $132,808 $107,723 $92,202 $84,282 $81,326
Total debt (includes capital
lease obligation and
current maturities) 26,285 24,551 16,805 30,244 32,157
Redeemable common stock purchase
warrant 0 0 0 2,303 1,658
Stockholders' equity 72,825 53,061 47,100 26,553 23,281
(1) Earnings per common and common equivalent share for fiscal 1994 and
1993 includes the dilutive effect of accretion in the carrying value
of the redeemable common stock purchase warrant of $645 and $408,
respectively.
(2) Weighted average common shares outstanding includes the dilutive
effect of options to purchase common stock granted by the Company
as discussed in Note 1(i) of Notes to Consolidated Financial
Statements.
(3) Adjusted to reflect the issuance of the shares pursuant to the
exercise of the warrant discussed in Note 10 of Notes to Consolidated
Financial Statements.
(4) "Non-competitive" markets refer to those markets where there is not
a national or regional 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 1997 consisted of 53 weeks, and fiscal 1996 and 1995 each 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 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 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 Year Ended
_______________________________________
February 2, January 28, January 29,
1997 1996 1995
- - --------------------------------------------- ----------- ----------- -----------
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 66.9 67.6 67.4
Gross margin................................. 33.1 32.4 32.6
Selling, general and administrative expenses. 27.1 26.9 27.0
Depreciation and amortization................ 1.4 1.2 1.4
Total operating expenses..................... 28.5 28.1 28.4
Income from operations....................... 4.6 4.3 4.2
Interest expense............................. 1.1 1.2 1.4
Other expense, net........................... .0 (.1) .0
Earnings before income taxes................. 3.5 3.2 2.8
Income tax expense........................... 1.3 1.2 1.1
Net earnings................................. 2.2% 2.0% 1.7%
Fiscal 1997 Compared to Fiscal 1996
Net sales for fiscal 1997 increased $22.3 million or 8.7% to $278.8
million compared to $256.5 million for fiscal 1996. During fiscal 1997,
the Company opened 30 stores, 27 of which were in new non-competitive
markets, and closed one store (which was in competitive market), resulting
in a net increase of 29 stores, and a year end total of 185 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 1997 and 1996 (comparable stores), as adjusted to a
comparable 52 week year, decreased by $6.8 million or 2.9% in fiscal 1997
compared to fiscal 1996. The bulk of this decrease, $5.1 million, occurred
in stores in competitive markets, while the prototype Class 18 Stores
produced a $67,000 decrease, or .1% of sales and the Duckwall variety
stores produced an decrease of $20,000 or .2% of sales. Net sales for all
comparable stores in non-competitive markets decreased by $1.7 million or
1.3%, in fiscal 1997 compared to fiscal 1996. The elimination of five
major promotional circulars, as well as the fact that the Christmas selling
season was one week shorter than the prior year were the major factors in
the reduction of same store sales.
Gross margin for fiscal 1997 increased $9.1 million or 11.0% to $92.3
million compared to $83.2 million in fiscal 1996. As a percentage of net
sales, gross margin increased .7% to 33.1% in fiscal 1997 from 32.4% in
fiscal 1996. The increase was a result of lower promotional markdowns (due
to the elimination of the five promotional circulars) and higher initial
markons on purchases in fiscal 1997, compared to fiscal 1996. The Company
anticipates that gross margin as a percentage of net sales should continue
to 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.
Selling, general and administrative expenses increased $6.6 million or
9.6% to $75.6 million in fiscal 1997 compared to $69.0 million in fiscal
1996, primarily due to the increase in total stores. As a percentage of
net sales, selling, general and administrative expenses increased to 27.1%
in fiscal 1997 from 26.9% in fiscal 1996.
Income from operations increased $1.8 million, or 16.6% to $12.9
million in fiscal 1997 compared to $11.0 million in fiscal 1996. Income
from operations as a percentage of net sales increased to 4.6% in fiscal
1997 from 4.3% in fiscal 1996.
Interest expense increased $75,000 or 2.5% in fiscal 1997 compared to
fiscal 1996. The increase results from higher borrowing levels to fund the
purchases of merchandise, fixtures, and owned store buildings for the store
expansion program.
Other expense, net, was zero in fiscal 1997, compared to a $185,000
one time gain in fiscal 1996 on termination of a store lease.
Income taxes were $3.8 million in fiscal 1997 compared to $3.1 million
in fiscal 1996. The Company's effective tax rate was 38% in both fiscal
years.
Net earnings for fiscal 1997 increased by $928,000 or 18.1% to $6.1
million compared to $5.1 million in fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Net sales for fiscal 1996 increased $14.3 million or 5.9% to $256.5
million compared to $242.1 million for fiscal 1995. During fiscal 1996,
the Company opened 19 stores in new non-competitive markets, relocated two
stores within existing non- competitive markets and closed one store (which
was in competitive market), resulting in a net increase of 18 stores, and a
year end total of 156 stores. Substantially all of the increase in net
sales was due to new stores opened in non-competitive markets over the last
two fiscal years. Net sales for all stores open the full year in both
fiscal 1996 and 1995 (comparable stores) decreased by $7.3 million or 3.2%
in fiscal 1996 compared to fiscal 1995. The bulk of this decrease, $6.1
million, occurred in stores in competitive markets, while the prototype
Class 18 stores produced a $186,000 increase, or .3% of sales and the
Duckwall variety stores produced an increase of $222,000 or 2.8% of sales.
Net sales for all comparable stores in non-competitive markets decreased by
$1.2 million or 1.0%, in fiscal 1996 compared to fiscal 1995. Management
believes that the unseasonably cool and wet weather of the first two
quarters and the poor national retailing climate of the second two quarters
of fiscal 1996 had adverse effects on same stores sales.
Gross margin for fiscal 1996 increased $4.2 million or 5.3% to $83.2
million compared to $79.0 million in fiscal 1995. As a percentage of net
sales, gross margin decreased to 32.4% in fiscal 1996 from 32.6% in fiscal
1995. The decrease was a result of higher promotional markdowns and less
LIFO income, partially offset by higher initial markons on purchases in
fiscal 1996, compared to fiscal 1995. Management believes the decrease in
the fiscal 1996 margin rate is an anomaly, driven by a temporary change in
sales mix toward lower margin and promotional products. The Company
anticipates that the mix will normalize and that 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
periods, 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 $3.5 million or
5.4% to $69.0 million in fiscal 1996 compared to $65.5 million in fiscal
1995, primarily due to the increase in total stores. As a percentage of
net sales, selling, general and administrative expenses decreased to 26.9%
in fiscal 1996 from 27.0% in fiscal 1995.
Income from operations increased $840,000 or 8.2% to $11.0 million in
fiscal 1996 compared to $10.2 million in fiscal 1995. Income from operations
as a percentage of net sales increased to 4.3% in fiscal 1996 from 4.2% in
fiscal 1995. Management anticipates that income from operations as a
percentage of net sales should continue to show an increase in future
periods because of improvements in the gross margin rate and a decrease in
general and administrative expenses (as a percentage of net sales).
Interest expense decreased $432,000 or 12.7% in fiscal 1996 compared to
fiscal 1995. The decrease results from lower borrowing levels due to the
funds generated from the initial public offering in November 1994.
Other expense, net is comprised of a $185,000 one time gain in fiscal
1996 on termination of a store lease, while the $156,000 expense in fiscal
1995 consists primarily of losses associated with closing non-performing
stores in competitive markets.
Income taxes were $3.1 million in fiscal 1996 compared to $2.5 million
in fiscal 1995. The Company's effective tax rate was 38% in both fiscal
years.
Net earnings for fiscal 1995 increased by $1.0 million or 24.2% to
$5.1 million compared to $4.1 million in fiscal 1995.
Seasonality and Quarterly Results
The following table, which is unaudited, sets forth the Company's net
sales, gross margin, income from operations, and net earnings during each
quarter of fiscal 1995, 1996, and 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter
(dollars in millions)
- - -------------------------- ---------- ---------- ---------- ----------
Fiscal 1995
Net sales $53.4 $58.7 $56.5 $73.5
Gross margin 17.0 18.9 18.5 24.6
Income from operations 1.4 1.8 1.3 5.7
Net earnings .4 .6 .2 2.9
Fiscal 1996
Net sales $55.0 $62.6 $60.8 $78.1
Gross margin 18.2 20.2 19.7 25.1
Income from operations 1.6 2.4 1.8 5.2
Net earnings .6 1.0 .6 2.9
Fiscal 1997
Net sales $59.3 $68.4 $64.9 $86.2
Gross margin 19.6 22.3 21.7 28.7
Income from operations 1.8 2.9 2.1 6.1
Net earnings .7 1.2 .7 3.5
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 include 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. Congress recently 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
offset this increase in expense through the implementation of measures,
including, but not limited to, reducing employee hours and increasing
gross margins.
Liquidity and Capital Resources
At the end of fiscal 1997, working capital (defined as current assets
less current liabilities) was $60.4 million compared to $47.4 million at
the end of fiscal 1996 and $39.0 million at the end of fiscal 1995.
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. Additionally, 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, and also sold 1.650 million shares of its common stock to the
public in the fourth quarter of fiscal 1995, generating net proceeds to
the Company of $13.2 million. The purpose of the offerings 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 operating activities aggregated $4.2 million,
$.9 million, and $4.3 million in fiscal 1997, 1996 and 1995, respectively.
The increase in cash provided in fiscal 1997 relative to fiscal 1996
resulted primarily from an increase in income taxes payable, as well as
additional depreciation and LIFO expense. The decrease in cash provided
in fiscal 1996 relative to fiscal 1995 resulted primarily from an $8.8
million increase in inventories (for new stores) with only a $2.4 million
increase in accounts payable.
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
$35.0 million of financing in the form of notes payable and letters of
credit, was executed in February 1993 and amended and extended in
October 1995 to expire in February 1999. The Company anticipates being
able to renew or replace this facility at the end of its extended term.
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 1997, the Company made net cash borrowings against its
revolving credit facility of $80,000, incurred $3.1 million of new long
term debt, and made cash payments of $1.5 million to reduce its long-term
debt and capital lease obligations. In fiscal 1996 and 1995, the Company
has made net cash borrowings of $8.3 million and net cash payments of
$14.4 million, respectively, to reduce its long-term debt and capital lease
obligations. The fiscal 1997 and 1995 cash payments included the temporary
use of the proceeds from the public offerings. The Company incurred new
noncash capital lease obligations in fiscal 1995 aggregating $1.0 million,
and executed operating leases for 63 additional stores during the three
year period ending in fiscal 1997. 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, 30 new stores were opened
in fiscal 1997 and 40 new stores are scheduled to be opened in fiscal 1998.
After the $13.1 million in net proceeds from the October 15, 1996 secondary
public offering is fully invested in the store expansion process, capital
in the form of lease or debt financing must be obtained to continue the
expansion. Based upon its experience over the last three years, the
Company believes that it can obtain sufficient commitments for such
financing.
Cash used for acquisition of property and equipment in fiscal 1997,
1996 and 1995 totaled $11.6 million, $8.8 million and $4.0 million,
respectively. Anticipated cash payments for acquisition of property and
equipment in fiscal 1998, principally for store buildings and fixtures, are
$13.1 million.
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 40 stores in the
current fiscal year and approximately 30 stores in fiscal 1999 and 2000,
respectively. 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 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 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.
Congress recently 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 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 20% of the
outstanding shares of Common Stock of the Company. Accordingly, KPERS
continues to have the ability to exercise significant influence over the
business and affairs of the Company.
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
eight 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.
Impact of new Accounting Pronouncement
The financial Accounting Standards Board has issued SFAS No. 128,
Earnings Per Share ("Statement 128") which replaces the current accounting
standard regarding computation of earnings per share. Statement 128
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 option) were exercised.
Statement 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company believes that adoption of
Statement 128 will not have a material effect on its consolidated financial
statements.
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 ............................ 19
Financial Statements:
Consolidated Balance Sheets --
February 2, 1997 and January 28, 1996 ......... 20
Consolidated Statements of Operations --
Fiscal Years Ended February 2, 1997,
January 28, 1996, and January 29, 1995 ........ 22
Consolidated Statements of Stockholders'
Equity --
Fiscal Years Ended February 2, 1997,
January 28, 1996, and January 29, 1995 ... 23
Consolidated Statements of Cash Flows --
Fiscal Years
Ended February 2, 1997, January 28, 1996,
and January 29, 1995 ..................... 24
Notes to Consolidated Financial Statements ......... 26
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 subsidiary as of February 2, 1997 and
January 28, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended February 2, 1997. 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 subsidiary as of February 2, 1997 and
January 28, 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended February 2, 1997, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Wichita, Kansas
March 18, 1997
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands)
February 2, 1997 and January 28, 1996
February January
Assets 2, 1997 28, 1996
Current assets:
Cash and cash equivalents $ 7,538 177
Receivables (note 3) 3,160 2,545
Inventories (notes 2 and 3) 80,359 71,635
Prepaid expenses 1,785 1,251
Total current assets 92,842 75,608
Property and equipment, at cost (note 3)
Land 2,658 2,297
Buildings 20,991 16,867
Furniture, fixtures and equipment 26,215 22,354
Transportation equipment 1,688 1,473
Leasehold improvements 4,623 3,164
Construction work in progress 2,931 1,389
Total property and equipment 59,106 47,544
Less accumulated
depreciation and amortization 26,527 23,676
Net property and equipment 32,579 23,868
Property under capital leases (note 5) 20,407 20,541
Less accumulated amortization 13,100 12,404
Net property under capital leases 7,307 8,137
Debt financing costs 80 110
$ 132,808 107,723
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Balance Sheets, Continued
(Dollars in Thousands)
February 2, 1997 and January 28, 1996
February January
Liabilities and Stockholders' Equity 2, 1997 28, 1996
Current liabilities:
Current maturities of
long-term debt (note 3) $ 1,242 545
Current maturities of
capital lease obligations (note 5) 607 637
Accounts payable 17,127 16,335
Income taxes payable 2,345 820
Accrued salaries and commissions 3,876 3,614
Accrued taxes other than income 2,929 2,203
Other current liabilities 1,670 1,598
Deferred income taxes (note 6) 2,612 2,467
Total current liabilities 32,408 28,219
Notes payable under revolving loan
credit facility (note 3) 12,095 12,015
Long-term debt, less
current maturities (note 3) 3,193 1,599
Capital lease obligations,
less current maturities (note 5) 9,148 9,755
Other noncurrent liabilities 793 745
Deferred income taxes (note 6) 2,346 2,329
Total liabilities 59,983 54,662
Stockholders' equity (notes 4, 8 and 9):
Common stock, $.0001 par value,
authorized 20,000,000 shares in
1997 and 1996; issued and outstanding
5,089,823 and 3,999,510 shares
in 1997 and 1996, respectively 1 1
Additional paid-in capital,
net of $3,586 accumulated
deficit eliminated on June 2, 1991 54,396 40,690
Retained earnings since June 2, 1991 18,428 12,370
Total stockholders' equity 72,825 53,061
Commitments (note 5)
$ 132,808 107,723
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
Fiscal Years Ended February 2, 1997, January 28, 1996 and January 29, 1995
February January January
2, 1997 28, 1996 29, 1995
- - -------------------------------------- ---------- ---------- ----------
Net sales $ 278,819 256,454 242,144
Cost of sales 186,531 173,296 163,180
Gross margin 92,288 83,158 78,964
Selling, general
and administrative (notes 4 and 5) 75,630 69,018 65,477
Depreciation and amortization 3,773 3,093 3,280
Total operating expenses 79,403 72,111 68,757
Income from operations 12,885 11,047 10,207
Interest expense (notes 3 and 5) 3,033 2,958 3,390
Other expense:
Store closing expense - - 156
Other expense (income) - (185) -
Earnings
before income taxes (note 2) 9,852 8,274 6,661
Income tax expense (note 6) 3,794 3,144 2,531
Net earnings 6,058 5,130 4,130
Accretion in carrying value of
redeemable common
stock purchase warrant (note 8) - - 288
Net earnings
applicable to common stock $ 6,058 5,130 3,842
Earnings per common and
common equivalent share
(note 1(i)) $ 1.40 1.28 1.51
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
Fiscal Years Ended February 2, 1997, January 28, 1996 and January 29, 1995
Retained
Earnings
Additional Since Total
Common Paid-In June 2, Stockholders'
Stock Capital 1991 Equity
- - -------------------------------------- ---------- ---------- ---------- ----------
Balance, January 30, 1994 $ 1 23,154 3,398 26,553
Net earnings for the year
ended January 29, 1995 - - 4,130 4,130
Accretion in carrying value of
redeemable common stock
purchase warrant - - (288) (288)
Tax benefit from net operating
loss carryforward (note 6) - 866 - 866
Issuance of 1,650,000 common shares in
initial public offering (note 8) - 13,246 - 13,246
Exercise of redeemable common stock
purchase warrant for 350,000 common
shares (note 8) - 2,593 - 2,593
Balance, January 29, 1995 1 39,859 7,240 47,100
Net earnings for the year ended
January 28, 1996 - - 5,130 5,130
Tax benefit from net operating loss
carryforward (note 6) - 831 - 831
Balance, January 28, 1996 1 40,690 12,370 53,061
Net earnings for the year ended
February 2, 1997 - - 6,058 6,058
Tax benefit from net operating loss
carryforward (note 6) - 626 - 626
Issuance of 1,089,000 common
shares in secondary public
offering (note 8) - 13,068 - 13,068
Exercise of outstanding options
to purchase 1,313 common shares - 12 - 12
Balance, February 2, 1997 $ 1 54,396 18,428 72,825
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Fiscal Years Ended February 2, 1997, January 28, 1996 and January 29, 1995
February January January
2, 1997 28, 1996 29, 1995
- - -------------------------------------- ---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 6,058 5,130 4,130
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 3,773 3,093 3,280
Amortization of debt
financing costs 40 180 190
Deferred income taxes 162 267 (383)
Loss (gain) on sale or
disposition of property
and equipment (37) (1) 39
Gain on termination of store
capital leases - (185) -
LIFO expense (income) 55 (378) (614)
Increase in receivables (615) (624) (211)
Increase in inventories (8,779) (8,830) (6,338)
Increase in prepaid expenses (537) (216) (114)
Increase in accounts payable 792 2,420 2,130
Increase in income taxes payable 2,151 163 1,772
Increase in accrued
salaries and commissions 262 502 696
Increase in accrued taxes
other than income 726 264 25
Increase (decrease) in
other liabilities 120 (895) (335)
Net cash provided by
operating activities 4,171 890 4,267
Cash flows from investing activities:
Proceeds from sale of
property and equipment 48 67 21
Acquisition of:
Buildings (4,124) (4,403) (614)
Fixtures, equipment and
leasehold improvements (7,538) (4,502) (3,383)
Net cash used in
investing activities (11,614) (8,838) (3,976)
(Continued)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in Thousands)
Fiscal Years Ended February 2, 1997, January 28, 1996 and January 29, 1995
February January January
2, 1997 28, 1996 29, 1995
- - -------------------------------------- ---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in notes
payable under revolving
loan credit facility $ 80 11,777 (13,055)
Proceeds from stock issuance 13,068 - 13,246
Proceeds from exercise of
outstanding stock options 12 - -
Proceeds from exercise of
redeemable common stock
purchase warrant - - 2
Proceeds from issuance of
long-term debt 3,110 - -
Principal payments on
long-term debt (819) (2,849) (745)
Principal payments under
capital lease obligations (637) (617) (641)
Increase (decrease) in
bank overdrafts - (76) 76
Debt financing costs (10) (110) -
Net cash provided by
(used in) financing
activities 14,804 8,125 (1,117)
Net increase (decrease) in cash
and cash equivalents 7,361 177 (826)
Cash and cash equivalents, at
beginning of year 177 - 826
Cash and cash equivalents,
at end of year $ 7,538 177 -
See accompanying notes to consolidated financial statements.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Amounts)
February 2, 1997, January 28, 1996 and January 29, 1995
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Duckwall-ALCO Stores, Inc. and subsidiary (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 subsidiary. 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 1997 consists of 53 weeks, 1996 and 1995
each consist of 52 weeks.
(d) Inventories
Store inventories are stated at the lower of cost or net
realizable value as estimated by the retail inventory method.
Warehouse inventories are stated at the lower of cost or net
realizable value. The Company utilizes the last-in,
first-out (LIFO) method of determining cost of store and
warehouse inventories.
(e) Property and Equipment
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. Amortization of
leasehold improvements and capital leases is computed on a
straight-line basis over the terms of the lease agreements.
Major improvements are capitalized while maintenance and
repairs, which do not extend the useful life of the asset,
are charged to expense as incurred.
(f) Income Taxes
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
(g) Store Opening Costs
Direct incremental costs of opening new stores are deferred and
amortized on a straight-line basis over a 12-month period from
the date the store is opened.
(h) 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.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(1) Summary of Significant Accounting Policies, Continued
(i) Earnings Per Share
Earnings per share has been computed based on the weighted
average number of common shares outstanding during the year plus
common stock equivalents, when dilutive, consisting of the
redeemable common stock purchase warrant until exercised during
fiscal 1995 (see note 8) and stock options (see note 7). For
purposes of the fiscal 1995 computation, the warrant was assumed
to have been exercised since this treatment was the most dilutive
and, therefore, the accretion in the carrying value of the
redeemable common stock purchase warrant has been excluded in the
computation.
The average number of shares used in computing earnings per
share was as follows:
Earnings for
Common and Common
Equivalent Share
_________________
Fiscal 1997 4,339,822
Fiscal 1996 4,014,351
Fiscal 1995 2,737,620
(j) Consolidated Statements of Cash Flows
During fiscal 1997, 1996 and 1995, the following amounts were
paid for interest and income taxes:
1997 1996 1995
Interest, excluding interest on
capital lease obligations and
amortization of debt financing
costs (net of capitalized
interest of $269 in fiscal
1997 and $107 in fiscal 1996) $ 2,083 2,061 1,940
Income taxes 1,481 2,714 1,142
Noncash financing and investing activities for fiscal 1997, 1996
and 1995 consisted of:
Redeemable common stock purchase warrant with a carrying value
of $2,591 was exercised during fiscal 1995 (see note 8).
The carrying value of the redeemable common stock purchase
warrant was increased during fiscal 1995 by $288.
Tax benefit from net operating loss carryforward of $626, $831
and $866 which increases additional paid-in capital in fiscal
1997, 1996 and 1995, respectively (note 6).
Capital leases of buildings with a fair value of $1,002 were
executed in fiscal 1995.
A capital lease was terminated in fiscal 1996 resulting in
elimination of capital lease assets of $380 and capital lease
obligations of $565.
(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.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(1) Summary of Significant Accounting Policies, Continued
(l) Long-Lived Assets
On January 29, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 (Statement
121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Statement 121 requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company has determined that an
impairment loss does not need to be recognized at February 2, 1997.
(m) Stock-Based Compensation
On January 29, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 (Statement
123), Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, Statement 123 also allows entities to apply the
provisions of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees and related
interpretations, which require compensation expense to be
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. The Company
has elected to apply the provisions of APB 25 and provide the
pro forma disclosure provisions of Statement 123.
(2) Inventories
Inventories at February 2, 1997 and January 28, 1996 are stated at the
lower of cost or net realizable value as determined under the LIFO
method of accounting. The Company utilizes the LIFO method of valuing
its inventories because, in the opinion of management, the LIFO method
more nearly matches current costs with current revenue during periods
of rising prices for financial reporting and income tax purposes.
Inventories at February 2, 1997 and January 28, 1996 are summarized as
follows:
1997 1996
FIFO cost $ 84,353 75,574
Less LIFO reserve (3,994) (3,939)
LIFO cost $ 80,359 71,635
Earnings before income taxes for fiscal 1997, 1996 and 1995 would
have been increased by $55, decreased by $378 and decreased by $614,
respectively, if the FIFO method of valuing inventories had been
utilized.
(3) Credit Arrangements, Notes Payable and Long-Term Debt
In October 1995, the Company executed an amendment to the loan
agreement with two lenders which provides a revolving loan credit
facility of up to $35,000 of long-term financing. The amount advanced
(through a note or letters of credit) to the Company bears interest at
the prime rate plus .5% and is generally limited to 55% 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, the number of stores that may be opened in
a fiscal year, sales of assets, and capital expenditures and financial
covenants related to earnings, the ratio of earnings to fixed charges,
working capital and tangible net worth, all as defined. The loan
agreement prohibits the payment of dividends. The loan agreement
expires in February 1999 and automatically renews for successive
one-year terms thereafter unless terminated by the lenders or the
Company.
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(3) Credit Arrangements, Notes Payable and Long-Term Debt, Continued
Notes payable outstanding at February 2, 1997 and January 28, 1996
under the revolving loan credit facility aggregated $12,095 and
$12,015, respectively. The lender had also issued letters of credit
aggregating $2,237 and $2,053, respectively, at such dates on behalf
of the Company. The interest rate on outstanding borrowings at
February 2, 1997 was 8.875%, payable monthly. The Company had
additional borrowings available at that date under the revolving loan
credit facility amounting to $20,668.
Long-term debt, exclusive of notes payable under the revolving loan
credit facility as described above, at February 2, 1997 and
January 28, 1996 consisted of the following:
1997 1996
7.15% to 9.5% obligations for Industrial
Revenue Bonds, interest payable
semi-annually with principal payments
due annually until final maturity
in 1999 $ 1,000 1,375
9.875% mortgage note payable due in
monthly installments, including
interest, through September 2001 498 578
8.41% note payable due in monthly
installments, including interest,
through March 2001, secured
by airplane 861 -
8.77% note payable due in monthly
installments, including interest,
through December 2000, secured by
certain equipment 1,976 -
10% notes payable, due quarterly 100 191
4,435 2,144
Less current maturities 1,242 545
Long-term debt, less current maturities $ 3,193 1,599
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 1997,
1996 and 1995 aggregated $1,853; $1,706 and $2,022, respectively.
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 February 2, 1997 are as follows:
Fiscal Year:
1998 $ 1,242
1999 1,235
2000 13,154
2001 774
2002 125
$ 16,530
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(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 Profit
Sharing 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 1997, 1996 and 1995 of $700, $630 and
$500, respectively.
At February 2, 1997 and January 28, 1996, the Plan owned 81,553 and
327,350 shares, respectively, 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 February 2, 1997 and
January 28, 1996 are as follows:
1997 1996
Buildings $ 16,624 16,758
Fixtures 3,783 3,783
20,407 20,541
Less accumulated amortization 13,100 12,404
Net property under
capital leases $ 7,307 8,137
The Company also has noncancelable operating leases, primarily for
buildings and transportation equipment, that expire at various dates.
Future minimum lease payments under all noncancelable leases together
with the present value of the net minimum lease payments pursuant to
capital leases as of February 2, 1997 are as follows:
Fiscal Year: Capital Operating
1998 $ 1,714 6,253
1999 1,560 5,552
2000 1,521 4,728
2001 1,521 4,291
2002 1,521 3,454
Later years 10,683 15,075
Total minimum lease payments 18,520 $ 39,353
Less amount representing interest 8,765
Present value of net minimum lease
payments 9,755
Less current maturities 607
Capital lease obligations,
less current maturities $ 9,148
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(5) Leases, Continued
The above minimum lease payments include payments applicable to leases
assumed on fourteen stores on January 31, 1997.
Minimum payments have not been reduced by minimum sublease rentals of
$117 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 $39, $51 and $85 for fiscal 1997, 1996 and
1995, respectively.
Interest on capital lease obligations in fiscal 1997, 1996 and 1995
aggregated $1,180; $1,252 and $1,368, respectively.
The following schedule presents the composition of total rent expense
for all operating leases for fiscal 1997, 1996 and 1995:
1997 1996 1995
Minimum rentals $ 5,221 6,049 5,504
Contingent rentals 361 353 316
Less sublease rentals (124) (111) (112)
$ 5,458 6,291 5,708
(6) Income Taxes
Total income tax expense (benefit) for fiscal 1997, 1996 and 1995 was
allocated as follows:
1997 1996 1995
Operations $ 3,794 3,144 2,531
Additional paid-in capital
for the tax benefit from
utilization of net operating
loss carryforwards (626) (831) (866)
Total income tax expense $ 3,168 2,313 1,665
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(6) Income Taxes, Continued
Income tax expense (benefit) attributable to operations for fiscal
1997, 1996 and 1995 consists of:
Current Deferred Total
1997:
Federal $ 3,061 136 3,197
State 571 26 597
$ 3,632 162 3,794
1996:
Federal $ 2,417 224 2,641
State 460 43 503
$ 2,877 267 3,144
1995:
Federal $ 2,443 (323) 2,120
State 471 (60) 411
$ 2,914 (383) 2,531
The significant components of deferred income tax expense (benefit)
attributable to operations for fiscal 1997, 1996 and 1995 are as
follows:
1997 1996 1995
Deferred tax expense
(exclusive of the effects
of the following item) $ 788 1,098 578
Decrease in beginning of the
year balance of the
valuation allowance for
deferred tax assets (626) (831) (961)
$ 162 267 (383)
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(6) Income Taxes, Continued
Income tax expense attributable to operations was $3,794; $3,144 and
$2,531 for fiscal 1997, 1996 and 1995, respectively, and differs from
the amounts computed by applying the Federal income tax rate of 34%
as a result of the following:
1997 1996 1995
Computed "expected" tax expense $ 3,350 2,814 2,265
Reduction in income taxes
resulting from:
Change in the beginning of
the year valuation
allowance for deferred tax
assets due to utilization
of post-reorganization job
tax credit carryforwards - - (95)
State income taxes, net of the
Federal income tax benefit 394 332 271
Job tax credit - - (62)
Other, net 50 (2) 152
$ 3,794 3,144 2,531
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at February 2, 1997
and January 28, 1996 are presented below:
1997 1996
Deferred tax assets:
Capital leases $ 930 857
Other liabilities 323 302
Net operating loss and
tax credit carryforwards 97 723
Total gross deferred tax assets 1,350 1,882
Less - valuation allowance (97) (723)
Net deferred tax assets 1,253 1,159
Deferred tax liabilities:
Inventories, principally due to
differences in the LIFO
reserve arising from a prior business
combination accounted for as a
purchase 3,096 2,960
Property and equipment, due to differences
in depreciation and a prior business
combination accounted for as a purchase 3,115 2,995
Total gross deferred tax liabilities 6,211 5,955
Net deferred tax liability $ 4,958 4,796
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(6) Income Taxes, Continued
At February 2, 1997, the Company has net operating loss carryforwards
for state income tax purposes in various states of $2,565 which are
available to offset future state taxable income, if any, expiring at
various dates through fiscal 2005. The Company also has an
alternative minimum tax credit carryforwards of $19 which are
available to reduce future Federal regular income taxes, if any, over
an indefinite period.
The valuation allowance at February 2, 1997 relates to the net
operating loss (NOL) and tax credit carryforwards. Income tax
benefits 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.
(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. The plan provides that the option price shall
not be less than the fair market value of the shares on the date of
grant and that unexercised options expire five years from that date.
The options become exercisable in equal amounts over a four-year
period from the grant date. Information regarding options which were
outstanding at February 2, 1997, January 28, 1996 and January 29, 1995
is presented below:
Weighted-
Average
Number of Exercise
Shares Price
Options outstanding, January 30, 1994 31,250 $7.20
Issued 87,500 $9.20
Canceled (1,750) $9.20
Options outstanding, January 29, 1995 117,000 $8.67
Issued 44,525 $11.375
Canceled (3,200) $9.51
Options outstanding, January 28, 1996 158,325 $9.41
Issued 37,150 $12.875
Exercised (1,313) $9.41
Canceled (6,637) $10.49
Options outstanding, February 2, 1997 187,525 $10.06
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(7) Stock Option Plan, Continued
Statement 123 encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. 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:
1997 1996
Net earnings, as reported $ 6,058 5,130
Net earnings, pro forma 6,017 5,120
Net earnings per share, as reported 1.40 1.28
Net earnings per share, pro forma 1.39 1.28
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:
1997 1996
Expected dividend yield 0% 0%
Expected stock price volatility 33.5% 31.5%
Risk-free interest rate 6.5% 6.1%
Expected life of options 5 years 5 years
The weighted average grant date fair value of options granted during
1997 and 1996 is $5.28 and $4.43 per share, respectively.
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted-
Range Number Average Weighted- Number Weighted-
of Outstanding Remaining Average Exercisable Average
Exercise at February Contractual Exercise at February Exercise
Price 2, 1997 Life Price 2, 1997 Price
- - --------------------- ----------- ----------- ----------- ----------- -----------
$7.20 to $9.20 109,625 2.02 $8.63 62,626 $8.45
$11.375 to $12.875 77,900 3.84 $12.07 10,413 $11.375
$7.20 to $12.875 187,525 73,039
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(8) Stockholders' Equity
The Company completed a public offering of 1,500,000 shares of its
common stock on November 3, 1994 and the Company's underwriters
exercised their option to purchase an additional 150,000 common shares
on December 2, 1994. The Company received net proceeds from the sale
of its common stock (after deducting issuance costs) of $13,246. The
holder of the redeemable common stock purchase warrant (who had the
right to put the warrant to the Company) exercised the warrant to
acquire 350,000 shares of the Company's common stock and participated
in the offering as a selling shareholder. The net proceeds of the
offering are being 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.
On June 9, 1994, in connection with the Company's initial public
offering, the Company (i) filed an amendment to its Amended and
Restated Articles of Incorporation increasing its authorized shares of
common stock from 1,000,000 to 20,000,000 shares and (ii) effected a
five-for-two stock split. The increase in authorized shares has been
reflected retroactively in the accompanying consolidated financial
statements and all applicable dollar, share and earnings per share
amounts have been restated to give retroactive effect to the stock
split.
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 are being used to fund the opening of new
stores. Pending such use, the net proceeds will be 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.
Financial results by quarter are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
1997:
Net sales $ 59,348 68,426 64,857 86,188
Gross margin (a) 19,642 22,320 21,656 28,670
Net earnings 703 1,224 701 3,430
Net earnings per common
and common equivalent
share (b) .18 .30 .17 .67
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in Thousands Except Per Share Amounts)
(9) Quarterly Financial Information (Unaudited),Continued
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
1996:
Net sales $ 54,940 62,592 60,795 78,127
Gross margin (a) 18,182 20,211 19,680 25,085
Net earnings 604 1,005 592 2,929
Net earnings per common
and common equivalent
share .15 .25 .15 .73
(a) The pretax LIFO inventory provision for the fiscal year ended
February 2, 1997 was estimated to be expense of $-0-, $90 and $90 in
each of the first three quarters, respectively. The annual provision
amounted to $55 expense resulting in a credit of $125 in the fourth
quarter.
The pretax LIFO inventory provision for the fiscal year ended
January 28, 1996 was estimated to be expense of $-0-, $125 and $125
in each of the first three quarters, respectively. The annual
provision was a $378 credit resulting in a credit of $628 in the
fourth quarter.
(b) Earnings per common and common equivalent share are computed
independently for each of the quarters presented. Therefore, the sum
of the quarterly earnings per common and common equivalent share in
fiscal 1997 does not equal the total computed for the year due to the
public offering of common stock which occurred during the third
quarter of fiscal 1997.
(10) 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 February 2, 1997 and
January 28, 1996. 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.
(11) Related Party Transactions
Lease payments to related parties amounted to approximately $585
and $650 in fiscal 1997 and 1996, respectively.
During fiscal 1997, the Company paid a computer consulting firm,
whose president is a director of the Company, $957 under a contract
for point-of-sale software.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on May 22, 1997, 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 22, 1997, 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. EXECUTIVE COMPENSATION.
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on May 22, 1997, 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on May 22, 1997, contains under
the caption "Ownership of Duckwall Common Stock" the information required
by Item 12 of Form 10-K and such information is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on May 22, 1997, 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. 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
______________________
* 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 February 2, 1997.
(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: May 1, 1997
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 May 1, 1997
Glen L. Shank
Chairman of the Board
and President
(Principal Executive Officer)
/s/ Gary W. Lowry May 1, 1997
Gary W. Lowry
Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
/s/ Dennis A. Mullin May 1, 1997
Dennis A. Mullin
Director
/s/ William J. Morgan May 1, 1997
William J. Morgan
Director
/s/ Robert C. Amenta May 1, 1997
Robert C. Amenta
Director
/s/ Robert L. Barcum May 1, 1997
Robert L. Barcum
Director