DUCKWALL ALCO STORES INC, 424B4, 1996-10-15

DUCKWALL ALCO STORES INC
424B4, 1996-10-15
VARIETY STORES

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<PAGE> 1

Filed Pursuant to Rule 424(b)(4)
of the Securities Act of 1933, as amended

PROSPECTUS

dated October 15, 1996

1,260,000 SHARES

DUCKWALL-ALCO STORES, INC.

COMMON STOCK

Of the 1,260,000 shares of Common Stock of Duckwall-ALCO Stores, Inc. (the
``Company'') offered hereby, 900,000 shares are being sold by the Company and
360,000 shares are being sold by certain stockholders (``Selling
Stockholders''). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See ``Principal and Selling
Stockholders.''

The Common Stock of the Company is traded on the Nasdaq National Market under
the symbol ``DUCK.'' On October 14, 1996, the last reported sale price of the
Common Stock on the Nasdaq National Market was $13.125 per share. See ``Price
Range of Common Stock.''

SEE ``RISK FACTORS'' BEGINNING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=================================================================================================================================

PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT <F1> COMPANY <F2> SELLING STOCKHOLDERS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share.......................... $13.00 $.77 $12.23 $12.23
- ---------------------------------------------------------------------------------------------------------------------------------
Total <F3>......................... $16,380,000 $970,200 $11,007,000 $4,402,800
=================================================================================================================================
<FN>

<F1> The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See ``Underwriting.''

<F2> Before deducting expenses estimated at $275,000, which will be paid by the
Company.

<F3> The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 189,000 additional shares of Common Stock, solely to cover
over-allotments, if any, at the per share Price to Public less the
Underwriting Discount. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $18,837,000, $1,115,730 and $13,318,470, respectively. See
``Underwriting.''
</TABLE>

--------------------------

The shares of Common Stock are offered by the several Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about
October 18, 1996.

PIPER JAFFRAY INC.

THE ROBINSON-HUMPHREY COMPANY, INC.

STIFEL, NICOLAUS & COMPANY

INCORPORATED

<PAGE> 2
[PICTURES]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET SYSTEM IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE ``UNDERWRITING.''

<PAGE> 3
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise noted, all information in this Prospectus
assumes the Underwriters' over-allotment option has not been exercised (see
``Underwriting''). The Company operates on a fiscal year basis which ends on the
Sunday which falls most closely to January 31 of each year. The Company is
currently operating in fiscal 1997. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed in the forward-looking statements.
Factors that might cause such a disparity include, but are not limited to, those
discussed in ``Risk Factors.'' Prospective investors should carefully consider
the information set forth under the heading ``Risk Factors.''

THE COMPANY

Duckwall-ALCO Stores, Inc. (the ``Company''), which was established in 1901,
is a regional retailer operating, as of September 4, 1996, 173 stores in 16
states in the central United States. Under the names ``ALCO'' and ``Duckwall,''
the Company's strategy is to target smaller markets not served by other regional
or national retail discount chains and 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 121 ALCO discount stores, 77 stores are located in
communities which 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 would
significantly reduce the likelihood of the entry by other competitors in the
market. The ALCO stores accounted for approximately 95% of the Company's fiscal
1996 net sales. While the current ALCO stores average approximately 23,300
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
(referred to as ``Class 18 Stores'').

The Company's 52 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 accounted
for the remaining 5% of the Company's fiscal 1996 net sales, average
approximately 4,800 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.

The Company believes that its strong operating performance and improved
financial condition over the last four fiscal years and the first twenty-six
weeks of the current fiscal year 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 which 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 strategy has guided the Company in both its opening of new stores and
in the closing of existing stores.

Market Selection: The Company has a detailed process which 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. As of September 4, 1996,
the Company's management had approximately 166 markets which it had
identified for possible ALCO stores and was in the site selection or
development process in 34 of those markets.

<PAGE> 4
Store Expansion: The Company's expansion program for ALCO stores 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. Generally,
the Company has expanded its ALCO stores through internal development
efforts on a location-by-location basis. Recently, however, the Company
entered into a definitive agreement to assume 14 leases and purchase the
related fixtures for ALCO stores in eastern Indiana and western Ohio (the
``Real Estate Transaction''). The Company's expansion strategy for the
Duckwall variety store is based on opportunities presented to the Company in
and by those communities where there is demand and where existing premises
are available for lease at a relatively low cost and with limited financial
commitment.

Technology: The Company is continually improving its management
information technologies in order to reduce costs, improve customer service,
and enhance general business planning. The Company's accounting and
information systems and merchandise and inventory planning systems have
recently been enhanced and are in the process of being implemented. The
Company has undertaken a $2.3 million project to upgrade the back office
equipment and software being used at the ALCO stores for sales processing.
This project is expected to extend the life of the current point-of-sale
equipment, as well as to improve efficiencies in training and operations and
is expected to be completed in fiscal 1998. In conjunction with the project,
the ALCO stores will be equipped with 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 direct mail where newspaper service is inadequate. These
circulars are distributed approximately 41 times per year in ALCO markets.
In its Duckwall markets, the Company advertises approximately 12 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 strives
to staff its stores with courteous, highly motivated, knowledgeable store
associates in order to provide a convenient, friendly and enjoyable shopping
experience.

The Company's growth strategy is to increase sales and profitability at
existing stores by continually refining the merchandising mix and improving
operating efficiencies, and to open new stores in under-served markets in the
central United States. The Company plans to open a total of 15 ALCO stores and
15 Duckwall stores and close 1 ALCO store in the current fiscal year, and open
25 ALCO stores (including the 14 locations involved with the Real Estate
Transaction) and at least 15 Duckwall stores during fiscal year 1998, and a
minimum of 16 ALCO stores and 15 Duckwall stores during fiscal year 1999.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered:

By the Company.............................. 900,000 shares

By the Selling Stockholders................. 360,000 shares

Total................................... 1,260,000 shares

Common Stock outstanding after the offering..... 4,900,523 shares <F1>

Use of proceeds................................. The Company intends to use the net proceeds of the
offering to fund the opening of new stores. Pending such use,
the Company intends to use the net proceeds to repay
indebtedness under its revolving loan credit facility.

Nasdaq National Market symbol................... DUCK

<FN>
- --------

<F1> Excludes 188,325 Shares of Common Stock for which options have been
granted under the Company's Incentive Stock Option Plan and includes 1,013
Shares of Common Stock issued in August and September of 1996 pursuant to
options exercised by former employees of the Company.
</TABLE>

<PAGE> 5

<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------- ---------------------
FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28, JULY 30, JULY 28,
1992<F1> 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales......................... $210,812 $217,236 $225,903 $242,144 $256,454 $117,532 $127,774
Gross margin...................... 66,181 68,402 71,686 78,964 83,158 38,393 41,962
Income from operations............ 5,561 7,038 8,304 10,207 11,047 4,012 4,715
Interest expense.................. 5,197 4,284 4,091 3,390 2,958 1,417 1,592
Net earnings (loss)............... $ (794) $ 1,559 $ 2,260 $ 4,130 $ 5,130 $ 1,609 $ 1,927
Earnings (loss) per common and
common equivalent
share<F2><F3>................... $ (.50) $ .57 $ .80 $ 1.51 $ 1.28 $ .40 $ .48
Weighted average common and common
equivalent shares
outstanding<F3>................. 1,575,813 2,006,250 2,006,250 2,737,620 4,014,351 4,007,909 4,033,522
OPERATING DATA:
Stores open at period-end......... 104 110 121 138 156 146 170
Stores in noncompetitive markets
at period-end<F4>............... 48 57 72 91 110 100 123
Percentage of total stores in
non-competitive markets<F4>..... 46.2% 51.8% 59.5% 65.9% 70.5% 68.4% 72.4%
Net sales of stores in non-
competitive markets<F4>......... $ 84,835 $ 96,243 $112,590 $132,743 $151,733 $ 69,252 $ 80,793
Percentage of net sales from
stores in non-competitive
markets<F4>..................... 40.2% 44.3% 49.8% 54.8% 59.2% 58.9% 63.2%
Comparable store sales for all
stores<F5>...................... (4.2%) (0.3%) 0.0% 1.1% (3.2%) (4.2%) (1.5%)
Comparable store sales for stores
in non-competitive
markets<F4><F5>................. 0.0% 2.7% 4.0% 2.7% (1.0%) (1.4%) 0.2%

<CAPTION>
JULY 28, 1996
---------------------------
ACTUAL AS ADJUSTED<F6>
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................. $ 56,786 $ 56,786
Total assets................................................................ 123,072 123,072
Total debt (includes capital lease obligation and current maturities)....... 35,719 24,987
Stockholders' equity........................................................ 55,614 66,346

<FN>
- ---------

<F1> Net loss and the related loss per share amounts for the fiscal year ended
February 2, 1992 as presented above exclude an extraordinary gain from
discharge of indebtedness of $43,101 related to the Company's 1991
Reorganization. The extraordinary gain has been excluded from the above
table because it is not relevant to ongoing operations.

<F2> Earnings per common and common equivalent share for fiscal 1993 and 1994
includes the dilutive effect of accretion in the carrying value of a
redeemable common stock purchase warrant of $408 and $645, respectively.
See Note 1(i) of Notes to Consolidated Financial Statements.

<F3> Pro forma earnings (loss) per common and common equivalent share for
fiscal 1992, 1993 and 1994 amounted to $(.41), $.66 and $.96,
respectively, based on pro forma weighted average common and common
equivalent shares outstanding of 1,925,813, 2,356,250 and 2,356,250,
respectively. See Note 1(i) of Notes to Consolidated Financial Statements.

<F4> ``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
``Business--Competition.''

<F5> Percentages 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.

<F6> Adjusted to reflect the issuance of 900,000 shares of Common Stock
offered by the Company hereby, based on an offering price of
$13.00 per share, less the underwriting discount and estimated offering
expenses, and the application of the net proceeds therefrom. See ``Use of
Proceeds'' and ``Capitalization.''
</TABLE>

<PAGE> 6
RISK FACTORS

Prospective investors should carefully consider the following risk factors
as well as the other information contained in this Prospectus.

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 30 stores in the current fiscal
year and 40 (assuming the Real Estate Transaction is completed) and 31 in fiscal
1998 and 1999, respectively. If the Real Estate Transaction is not completed,
the Company will open fewer stores in fiscal 1998. 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.
See ``Business--Competition.''

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 and 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 employees are 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 and a Selling Stockholder in this offering. Upon
consummation of this offering, KPERS will be the beneficial owner of 20.8% of
the outstanding shares of Common Stock (or 20.0% if the Underwriters'
over-allotment option is fully exercised). Accordingly, KPERS will continue to
have the ability to exercise significant influence over the business and affairs
of the Company. See ``Principal and Selling Stockholders'' for certain
information as to shared voting and investment powers under investment advisory
agreements with respect to the shares owned by KPERS.

<PAGE> 7
QUARTERLY FLUCTUATIONS

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

ECONOMIC CONDITIONS

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

DEPENDENCE ON OFFICERS

The development of the Company's business has been largely dependent on the
efforts of its current management team headed by Glen L. Shank and nine 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.

<PAGE> 8
THE COMPANY

The Company 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. From 1975 to 1985, the Company's sales
increased from $92 million to $364 million and the number of stores grew from
105 to 158.

In September 1985, the Company was purchased by a group of investors in a
leveraged buyout. Soon thereafter, the Company began to suffer losses
principally caused by increased competition from larger competitors, such as
Wal-Mart, and its increased debt service. During 1987 and 1988, it became
evident that many of the Company's stores were suffering sales declines and
either were unprofitable or were soon to become unprofitable. Since virtually
all of these stores were operated under long-term leases, it was financially
difficult to close a store unless the lease could be assigned or the property
sublet. During the period from February 1, 1986 to February 1, 1989, the Company
closed 20 stores but was able to sublet or assign only one lease.

In mid-1988, Glen L. Shank, then vice president of merchandising, became the
president of the Company. Although management attempted to deal with the
Company's problems, the financial burdens placed on the Company by declining
sales, the increased debt service requirements from the leveraged buyout and its
inability to close non-performing stores on an acceptable basis made improvement
extremely difficult. As a result, on May 8, 1989, the Company filed a Chapter 11
petition to reorganize its affairs in the United States Bankruptcy Court for the
District of Kansas (the ``Bankruptcy Proceeding''). After operating
approximately two years under the Bankruptcy Proceeding, the Company
successfully effected a reorganization in May 1991 (the ``1991
Reorganization''). In addition to restructuring the Company's equity and
indebtedness, the Bankruptcy Proceeding and the 1991 Reorganization enabled the
Company to close 51 stores on an acceptable basis primarily where there was
direct competition from national retail discounters. The 1991 Reorganization
also allowed the Company to renegotiate lease terms on 23 other stores and
develop its current business strategy.

As of September 4, 1996, the Company operated 173 retail stores located in
the central United States, consisting of 121 ALCO retail discount stores and 52
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.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 900,000 shares of
Common Stock offered by the Company hereby are estimated to be $10,732,000
(based on a public offering price of $13.00 per share) after deducting
the underwriting discount and estimated offering expenses payable by the
Company. The net proceeds of the offering will be 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 ``Revolving
Loan Credit Facility''). Advances under the Revolving Loan Credit Facility bear
interest at the prime rate plus 0.5%. The Revolving Loan Credit Facility expires
in February 1999, and, provided such agreement is not otherwise renewed or
extended, all advances shall be then due. Funds advanced to the Company pursuant
to the Revolving Loan Credit Facility during the last fiscal year were used as
working capital, in particular to fund the building of new stores, purchase of
inventory, and to meet other short term cash requirements.

The Company will not receive any proceeds from the sale of the 360,000
shares of Common Stock offered by the Selling Stockholders hereby.

DIVIDEND POLICY

The Company has not paid any dividends on the Common Stock for more than
five years, and it is not anticipated that dividends will be declared in the
foreseeable future. The Company's Revolving Loan Credit Facility prohibits the
payment of dividends by the Company. See Note 4 of Notes to Consolidated
Financial Statements.

<PAGE> 9
CAPITALIZATION

(DOLLARS IN THOUSANDS)

The following table sets forth (i) the actual short-term debt and
capitalization of the Company at July 28, 1996 and (ii) the short-term debt and
capitalization of the Company as adjusted to give effect to the issuance and
sale of the 900,000 shares of Common Stock offered by the Company hereby at a
public offering price of $13.00 per share, less the underwriting discount and
estimated offering expenses, and the application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
JULY 28, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
INDEBTEDNESS:
Current maturities of long-term debt............................................. $ 752 $ 752
Current maturities of capital lease obligations.................................. 637 637
------- -------
Total current maturities of long-term debt and capital lease obligations..... $ 1,389 $ 1,389
======= =======
Notes payable under Revolving Loan Credit Facility............................... $21,353 $10,621
Long-term debt, excluding current maturities..................................... 3,540 3,540
Capital lease obligations, excluding current maturities.......................... 9,437 9,437
------- -------
Total long-term debt and capital lease obligations, excluding current
maturities................................................................... 34,330 23,598
------- -------
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 20,000,000 shares authorized; 3,999,510 shares
issued and outstanding, actual; 4,899,510 issued and outstanding, as adjusted
<F1>............................................................................ 1 1
Additional paid-in capital....................................................... 41,316 52,048
Retained earnings since June 2, 1991............................................. 14,297 14,297
------- -------
Total stockholders' equity................................................... 55,614 66,346
------- -------
Total capitalization..................................................... $89,944 $89,944
======= =======

<FN>
- --------

<F1> Excludes 188,325 shares of Common Stock for which options have been
granted under the Company's Incentive Stock Option Plan and 1,013 shares of
Common Stock issued in August and September of 1996 pursuant to options
exercised by former employees of the Company.
</TABLE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol ``DUCK.'' The table below sets forth for the periods indicated the high
and low sale prices for the Company's Common Stock as reported by the Nasdaq
National Market.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1995
Third quarter (Initial trade made on October 27, 1994)....................... $ 9 1/2 $ 9
Fourth quarter............................................................... 9 3/4 9

FISCAL 1996
First quarter................................................................ $ 9 3/4 $ 8 3/4
Second quarter............................................................... 10 3/4 8 3/4
Third quarter................................................................ 11 7/8 10 3/8
Fourth quarter............................................................... 11 1/4 9 1/2

FISCAL 1997
First quarter................................................................ $11 5/8 $ 8 3/4
Second quarter............................................................... 15 1/2 12 7/8
Third quarter (through October 14, 1996)..................................... 14 1/2 12 1/4
</TABLE>

On October 14, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $13.125 per share. As of October 10, 1996, there
were approximately 1,400 holders of record of the Common Stock.

<PAGE> 10
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. The selected consolidated
financial data as of July 28, 1996 and for the twenty-six week periods ended
July 30, 1995 and July 28, 1996 have been derived from the unaudited
consolidated financial statements of the Company for such periods and include,
in the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the financial position and
results of operations at and for such periods. The Company's results of
operations for the twenty-six week period ended July 28, 1996 may not be
indicative of its results of operations for the full year. This data should be
read in conjunction with ``Management's Discussion and Analysis of Financial
Condition and Results of Operations'' and the consolidated financial statements,
related notes, and other financial information included herein.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
------------------------------------------------------------------- -----------------------
FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28, JULY 30, JULY 28,
1992<F1> 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................... $210,812 $217,236 $225,903 $242,144 $256,454 $117,532 $127,774
Cost of sales.................. 144,631 148,834 154,217 163,180 173,296 79,139 85,812
--------- --------- --------- --------- --------- --------- ---------
Gross margin................... 66,181 68,402 71,686 78,964 83,158 38,393 41,962
Selling, general and
administrative expenses...... 56,388 57,086 59,432 65,477 69,018 32,884 35,458
Depreciation and
amortization................. 4,232 4,278 3,950 3,280 3,093 1,497 1,789
--------- --------- --------- --------- --------- --------- ---------
Income from operations......... 5,561 7,038 8,304 10,207 11,047 4,012 4,715
Interest expense............... 5,197 4,284 4,091 3,390 2,958 1,417 1,592
Other expense (income), net.... 1,520 503 823 156 (185) 0 0
--------- --------- --------- --------- --------- --------- ---------
Earnings before income taxes... (1,156) 2,251 3,390 6,661 8,274 2,595 3,123
Income tax expense (benefit)... (362) 692 1,130 2,531 3,144 986 1,196
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)............ $ (794) $ 1,559 $ 2,260 $ 4,130 $ 5,130 $ 1,609 $ 1,927
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per common
and common equivalent
share<F2><F3>................ $ (.50) $ .57 $ .80 $ 1.51 $ 1.28 $ .40 $ .48
Weighted average common
and common equivalent
shares outstanding<F3>....... 1,575,813 2,006,250 2,006,250 2,737,620 4,014,351 4,007,909 4,033,522
OPERATING DATA:
Stores open at period-end...... 104 110 121 138 156 146 170
Stores in non-competitive
markets at period-end<F4>.... 48 57 72 91 110 100 123
Percentage of total stores in
non-competitive
markets<F4>.................. 46.2% 51.8% 59.5% 65.9% 70.5% 68.4% 72.4%
Net sales of stores in
non-competitive
markets<F4>.................. $ 84,835 $ 96,243 $112,590 $132,743 $151,733 $ 69,252 $ 80,793
Percentage of net sales from
stores in non-competitive
markets<F4>.................. 40.2% 44.3% 49.8% 54.8% 59.2% 58.9% 63.2%
Comparable store sales for all
stores<F5>................... (4.2%) (0.3%) 0.0% 1.1% (3.2%) (4.2%) (1.5%)
Comparable store sales for
stores in non-competitive
markets<F4><F5>.............. 0.0% 2.7% 4.0% 2.7% (1.0%) (1.4%) 0.2%
BALANCE SHEET DATA:
Working capital................ $ 35,912 $ 35,081 $ 36,248 $ 38,954 $ 47,389 $ 56,786
Total assets................... 81,923 81,326 84,282 92,202 107,723 123,072
Total debt (includes capital
lease obligation and current
maturities).................. 37,466 32,157 30,244 16,805 24,551 35,719
Redeemable common stock
purchase warrant............. 1,250 1,658 2,303 0 0 0
Stockholders' equity........... 21,536 23,281 26,553 47,100 53,061 55,614

<FN>
- ----------

<F1> Net loss and the related loss per share amounts for the fiscal year ended
February 2, 1992 as presented above exclude an extraordinary gain from
discharge of indebtedness of $43,101 ($27.35 per share actual and $22.38
per share pro forma) related to the Company's 1991 Reorganization. The
extraordinary gain has been excluded from the above table because it is
not relevant to ongoing operations.

<F2> Earnings per common and common equivalent share for fiscal 1993 and 1994
includes the dilutive effect of accretion in the carrying value of the
redeemable common stock purchase warrant of $408 and $645, respectively.
See Note 1(i) of Notes to Consolidated Financial Statements.

<F3> Pro forma earnings (loss) per common and common equivalent share for
fiscal year 1992, 1993 and 1994 amounted to $(.41), $.66 and $.96,
respectively, based on pro forma weighted average common and common
equivalent shares outstanding of 1,925,813, 2,356,250 and 2,356,250,
respectively. See Note 1(i) of Notes to Consolidated Financial Statements.

<F5> Percentages 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.
</TABLE>

<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Company's fiscal year ends on the Sunday closest to January 31. The
Company is currently operating in fiscal 1997. Fiscal 1994, 1995 and 1996 each
consisted of 52 weeks.

As used in this Prospectus, 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 ``Business--Competition''.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
----------------------------------------- -----------------------
JANUARY 30, JANUARY 29, JANUARY 28, JULY 30, JULY 28,
1994 1995 1996 1995 1996
----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 68.3 67.4 67.6 67.3 67.2
----- ----- ----- ----- -----
Gross margin............................ 31.7 32.6 32.4 32.7 32.8
----- ----- ----- ----- -----
Selling, general and administrative..... 26.3 27.0 26.9 28.0 27.7
Depreciation and amortization........... 1.7 1.4 1.2 1.3 1.4
----- ----- ----- ----- -----
Total operating expenses................ 28.0 28.4 28.1 29.3 29.1
----- ----- ----- ----- -----
Income from operations.................. 3.7 4.2 4.3 3.4 3.7
Interest................................ 1.8 1.4 1.2 1.2 1.3
Other expense, net...................... 0.4 0.0 (0.1) 0.0 0.0
----- ----- ----- ----- -----
Earnings before income taxes............ 1.5 2.8 3.2 2.2 2.4
Income tax expense...................... 0.5 1.1 1.2 0.8 0.9
----- ----- ----- ----- -----
Net earnings............................ 1.0% 1.7% 2.0% 1.4% 1.5%
===== ===== ===== ===== =====
</TABLE>

TWENTY-SIX WEEKS ENDED JULY 28, 1996 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 30,
1995

Net sales for the twenty-six week period ended July 28, 1996 increased $10.2
million or 8.7% to $127.8 million compared to $117.5 million for the comparable
twenty-six week period of the prior fiscal year. During the first twenty-six
weeks of fiscal 1997, the Company opened 14 stores, 13 of which were in new
non-competitive markets resulting in a quarter end total of 170 stores. Net
sales of comparable stores for the twenty-six week period decreased by $1.7
million or 1.5% from the comparable twenty-six week period of the prior fiscal
year. Management believes the decrease was attributable to the cancellation of
two promotional events in the first quarter of the current fiscal year, which
accounted for $1.1 million of the decrease, and the effect of increased
competition in three competitive markets. The prototype Class 18 ALCO Stores and
the Duckwall variety stores produced comparable store sales increases of
$300,000 or 0.9% and $179,000 or 3.3%, respectively.

Gross margin for the twenty-six week period ended July 28, 1996 increased
$3.6 million or 9.3% to $42.0 million compared to $38.4 million for the
comparable twenty-six week of the prior fiscal year. As a percent of net sales,
gross margin for the twenty-six week period ended July 28, 1996 increased to
32.8% from 32.7% last year, with the percentage increase due to lower markdowns.

Selling, general and administrative expenses increased $2.6 million or 7.8%
to $35.5 million for the twenty-six week period ended July 28, 1996 compared to
$32.9 million for the comparable twenty-six week period of the prior fiscal
year. Selling, general and administrative expense as a percent of net sales was
27.7% for the twenty-six week period ended July 28, 1996 compared to 28.0% in
the comparable twenty-six week period last year. The increase in selling,
general and administrative expense in fiscal 1997 is primarily due to a 16.0%
increase in the number of stores. The decrease in the expense as a percentage of
sales is primarily due to the leveraging effect that new stores have on
semi-fixed expenses, such as those associated with the general office and
distribution center.

<PAGE> 12
Depreciation and amortization expense increased $292,000 or 19.5% to $1.8
million for the twenty-six week period ended July 28, 1996 compared to $1.5
million for the comparable twenty-six week period of the prior fiscal year. The
increase in depreciation and amortization is due to additional buildings and
equipment associated with the store expansion program.

Income from operations increased $703,000 or 17.5% to $4.7 million for the
twenty-six week period ended July 28, 1996 compared to $4.0 million in the
comparable twenty-six week period of the prior fiscal year. Income from
operations as a percentage of net sales increased to 3.7% in the first
twenty-six weeks of fiscal 1997 compared to 3.4% in the first twenty-six weeks
of fiscal 1996.

Interest expense increased $175,000 or 12.4% in the first twenty-six weeks
of fiscal 1997 compared to the first twenty-six weeks of fiscal 1996. The
increase in interest expense results from higher borrowing levels due to
purchases of inventory, buildings and equipment to support the new store
openings.

Net earnings for the twenty-six week period ending July 28, 1996 were $1.9
million, an increase of $318,000 or 19.8% over the net earnings of $1.6 million
for the comparable twenty-six week period of the prior fiscal year.

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 a
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 comparable store sales
increase of $186,000 or 0.3% and the Duckwall variety stores produced a
comparable store sales increase of $222,000 or 2.8%. 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 last 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 does not anticipate LIFO income to be a general trend for
future periods, inasmuch 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. With the addition of more stores, management believes
that the Company should realize the benefit from the relatively fixed costs at
the general office and distribution center, yielding a lower expense as a
percentage of net sales.

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 Company's 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.

<PAGE> 13
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.

FISCAL 1995 COMPARED TO FISCAL 1994

Net sales for fiscal 1995 increased $16.2 million or 7.2% to $242.1 million
compared to $225.9 million for fiscal 1994. During fiscal 1995, the Company
opened 19 stores in new non-competitive markets and closed two stores (both of
which were in competitive markets), resulting in a net increase of 17 stores,
and a year end total of 138 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 comparable stores in non-competitive markets
increased by $2.8 million or 2.7%, in fiscal 1995 compared to fiscal 1994. Net
sales for all stores open the full year in both fiscal 1995 and 1994 (comparable
stores) increased by $2.2 million or 1.1% in fiscal 1995 compared to fiscal
1994. Management believes that the warm weather in the third and fourth quarters
of fiscal 1995 had an adverse affect on net sales levels in that it
significantly reduced the demand for outerwear and other seasonal merchandise.

Gross margin for fiscal 1995 increased $7.3 million or 10.2% to $79.0
million compared to $71.7 million in fiscal 1994. The increase, as a percentage
of net sales, to 32.6% in fiscal 1995 compared to 31.7% in fiscal 1994 resulted
from lower cost of merchandise purchased due to increased participation in
vendor incentive programs (higher initial mark on), lower markdowns, and lower
shrinkage. The Company continued to see improvements in markdowns (as a
percentage of net sales) due to the overall change in the mix of markets from
larger highly competitive to smaller less competitive situations. The
improvement in shrinkage was aided by the installation of more effective
technologies (leased article surveillance equipment), resulting in lower
shrinkage and slightly higher store operating expense. The increase in gross
margin percentage was assisted by LIFO income of $614,000 in fiscal 1995,
whereas the Company reported LIFO expense of $438,000 in fiscal 1994.

Selling, general and administrative expenses increased $6.0 million or 10.2%
to $65.5 million in fiscal 1995 compared to $59.4 million in fiscal 1994,
primarily due to the increase in total stores. As a percentage of net sales,
selling, general and administrative expenses increased 0.7% to 27.0% in fiscal
1995 from 26.3% in fiscal 1994, reflecting additional variable compensation and
profit-sharing on the higher earnings, start-up costs associated with a third
party damaged goods consolidator/processor, and increased store opening
activities.

Income from operations increased $1.9 million or 22.9% to $10.2 million in
fiscal 1995 compared to $8.3 million in fiscal 1994. Income from operations as a
percentage of net sales increased to 4.2% in fiscal 1995 from 3.7% in fiscal
1994, or a 13.5% increase.

Interest expense decreased $701,000 or 17.1% in fiscal 1995 compared to
fiscal 1994. The decrease was due to lower borrowing levels in fiscal 1995,
offset partially by higher interest rates, and $250,000 of debt discount
amortization in fiscal 1994.

Other expense, net is comprised primarily of losses associated with closing
non-performing stores in competitive markets. During fiscal 1995, the Company
closed two stores as compared to four stores in the prior fiscal year.

Income taxes were $2.5 million or 38.0% of earnings before taxes in fiscal
1995 compared to $1.1 million or 33.3% of earnings before income taxes in fiscal
1994. The Company's effective tax rate was lower than the statutory rate in
fiscal 1994 due to the use of job tax credits to reduce Federal income taxes.

Net earnings for fiscal 1995 increased by $1.9 million or 82.7% to $4.1
million compared to $2.3 million in fiscal 1994.

SEASONALITY AND QUARTERLY RESULTS

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

<PAGE> 14
Company, as well as other factors. The addition of a large number of new stores
can, therefore, significantly affect the quarterly results of operations.

The following table, which is unaudited, sets forth the Company's net sales,
gross margin, income from operations, net earnings (loss), earnings per common
and common equivalent share and common and common equivalent shares outstanding
(the two immediately preceding items are referred to as earnings per share and
weighted average shares, respectively, in the following table) during each
quarter of fiscal 1994, 1995, and 1996 and the first two quarters of fiscal
1997:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Fiscal 1994
Net sales....................................................... $49.6 $53.3 $54.2 $68.8
Gross margin.................................................... 15.8 17.2 17.4 21.3
Income from operations.......................................... 1.0 1.6 1.0 4.7
Net earnings (loss)............................................. (0.2) 0.3 0.1 2.1

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.................................................... 0.4 0.6 0.2 2.9
Earnings per share.............................................. $ .74
Weighted average shares (in thousands).......................... 3,885

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.................................................... 0.6 1.0 0.6 2.9
Earnings per share.............................................. $ .15 $ .25 $ .15 $ .73
Weighted average shares (in thousands).......................... 4,006 4,010 4,027 4,016

Fiscal 1997
Net sales....................................................... $59.3 $68.4
Gross margin.................................................... 19.6 22.3
Income from operations.......................................... 1.8 2.9
Net earnings.................................................... 0.7 1.2
Earnings per share.............................................. $ .18 $ .30
Weighted average shares (in thousands).......................... 4,017 4,050
</TABLE>

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.
The Small Business Job Protection Act of 1996 will increase the Company's wage
expense and will impact the Company's operations. See ``Risk Factors--Government
Regulation.''

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are cash flow from operations,
borrowings under its revolving loan credit facility (the ``Revolving Loan Credit
Facility''), vendor trade credit financing and lease financing of its stores.
Additionally, the Company sold 1,650,000 shares of 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 offering was to fund store expansion. The
funds were used to pay down temporarily the Revolving Loan Credit Facility,
pending the investment of the funds in new stores.

<PAGE> 15
At July 28, 1996, working capital (defined as current assets less current
liabilities) was $56.8 million compared to $47.4 million at the end of fiscal
1996.

Cash provided by operating activities aggregated $.9 million, $4.3 million
and $5.9 million in fiscal 1996, 1995 and 1994, respectively. The decrease in
cash provided in fiscal 1996 relative to fiscal 1995 resulted primarily from a
$8.8 million increase in inventories (for new stores) with only a $2.4 million
increase in accounts payable.

Cash generated (used) by financing activities was $8.1 million, ($1.1
million) and ($4.7 million) in fiscal 1996, 1995 and 1994, respectively. The
increase in cash generated in fiscal 1996 was due to net cash borrowings against
the Revolving Loan Credit Facility of $11.8 million, offset by cash payments of
$3.5 million to reduce its long-term debt and capital lease obligations. In
fiscal 1995 and 1994, the Company made net cash payments aggregating $14.4
million and $4.2 million, respectively, to reduce its long-term debt and capital
lease obligations. The fiscal 1996 and 1995 cash payments included the temporary
use of the proceeds from the fiscal 1995 public offering. The Company incurred
new non-cash capital lease obligations in fiscal 1995 and 1994 aggregating $1.0
million and $2.0 million, respectively, for six new stores and executed
operating leases for 40 additional stores during the three-year period ending in
fiscal 1996. 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, 21 new stores were opened in fiscal 1996 and 30 new stores are
scheduled to be opened in fiscal 1997.

The Company uses the 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.
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.

Cash used for acquisition of property and equipment in fiscal 1996, 1995 and
1994 totaled $8.9 million, $4.0 million and $2.0 million, respectively.
Anticipated cash payments for acquisition of property and equipment in fiscal
1997, principally for store buildings and fixtures, are estimated to be
approximately $13 million.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued SFAS No. 123,
``Accounting for Stock-Based Compensation'' (Statement No. 123), which
establishes a fair value based method of accounting for stock-based compensation
plans. Entities are encouraged to adopt all provisions of Statement No. 123 and
are required to comply with the disclosure requirements of Statement No. 123.
However, it is permissible to continue to account for stock-based compensation
under the intrinsic value method of Accounting Principles Board Opinion No. 25
rather than the fair value based method of Statement No. 123. Statement No. 123
is effective for financial statements for fiscal years beginning after December
15, 1995. The provisions of Statement No. 123, when adopted, will not have a
material effect on the consolidated financial condition or operating results of
the Company, as the Company does not intend to adopt the fair value based
measurement concept.

The Financial Accounting Standards Board has also issued SFAS No. 121,
``Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of'' (Statement No. 121). Statement No. 121 requires that
long-lived assets and certain intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Statement No. 121 is effective for financial statements
for fiscal years beginning after December 15, 1995. The Company believes that
the adoption of Statement No. 121 will not have a material effect on its
consolidated financial statements.

<PAGE> 16
BUSINESS

GENERAL

The Company, which was established in 1901, is a regional retailer
operating, as of September 4, 1996, 173 stores in 16 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 121 ALCO discount stores, 77 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
stores accounted for 95% of the Company's fiscal 1996 net sales. While the
current ALCO stores average 23,300 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 52 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 accounted
for the remaining 5% of the Company's net sales, average approximately 4,800
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.

BUSINESS STRATEGY

The Company believes that its strong operating performance and improved
financial condition over the last four 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.

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. As of September 4, 1996,
the Company's management had approximately 166 markets for ALCO stores that
it had identified and was in the site selection or development process in
approximately 34 of those markets.

Store Expansion: The Company's expansion program for ALCO stores 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. Generally,
the Company has expanded its ALCO stores through internal development
efforts on a location-by-location basis. Recently, however, the Company
entered into a definitive agreement to assume 14 leases and purchase the
related fixtures for ALCO stores in eastern Indiana and western Ohio (the
``Real Estate Transaction''). See ``Business--Store Development--The Real
Estate Transaction.'' The Company expects to incur total costs of
approximately $1.25 million

<PAGE> 17
for a new Class 18 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
by smaller communities where there is demand for a variety store and where
existing premises are available for lease at a relatively low cost and with
limited financial commitment by the Company.

Technology: The Company is continually improving its management
information technologies in order to reduce costs, improve customer
service, and enhance general business planning. The Company's accounting
and information systems and merchandise and inventory planning systems have
recently been enhanced and are in the process of being implemented. The
Company has undertaken a $2.3 million project to upgrade the back office
equipment and software being used at the ALCO stores for sales processing.
This project is expected to extend the life of the current point-of-sale
equipment, as well as to improve efficiencies in training and operations
and is expected to be completed in fiscal 1998. In conjunction with the
project, the ALCO stores will be equipped with 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 41 times per year in ALCO markets.
In its Duckwall markets, the Company advertises approximately 12 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 DEVELOPMENT

General

The Company plans to open 15 ALCO stores and 15 Duckwall stores and close 1
ALCO store during the current fiscal year, open 25 ALCO stores (including the 14
locations involved with the Real Estate Transaction) and at least 15 Duckwall
stores during fiscal 1998, and a minimum of 16 ALCO stores and 15 Duckwall
stores during fiscal 1999.

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 1993, the Company has opened a total of 39 ALCO stores with an
average selling area of approximately 17,600 square feet, and 33 Duckwall
stores. The following table summarizes the Company's growth during the past
three fiscal years and fiscal 1997 through September 3, 1996:

<TABLE>
<CAPTION>
FISCAL 1997 THROUGH
1994 1995 1996 SEPTEMBER 3, 1996
---------------- ---------------- ---------------- -------------------
ALCO DUCKWALL ALCO DUCKWALL ALCO DUCKWALL ALCO DUCKWALL
---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores Opened.......................... 8 7 10 9 13 8 8 9
Stores Closed.......................... 3 1 2 0 2 1 0 0
- - -- - -- - - -
Net New Stores......................... 5 6 8 9 11 7 8 9
</TABLE>

The Company intends to utilize the prototype Class 18 Store profile for new
ALCO store openings. Currently, the Company owns 18 and leases 103 ALCO store
locations, and leases all of the 52 Duckwall locations.

Before entering a new market with an ALCO store, the Company analyzes
available competitive, market, and demographic data to evaluate the suitability
and attractiveness of the potential market as part of a screening process. The
process initially 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,

<PAGE> 18
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. As of September 4, 1996, there
were approximately 166 communities known by the Company to have met its initial
market selection criteria. At that time, the Company was in the site selection
or development process in approximately 34 of those markets, each of which had
been approved 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 Real Estate Transaction

On September 10, 1996, the Company signed a definitive agreement providing
for the Company's assumption of 14 leases and the purchase of the related
fixtures for ALCO stores in eastern Indiana and western Ohio (the ``Real Estate
Transaction''). The Company plans to complete this transaction in late fiscal
1997. These 14 stores average approximately 22,000 square feet, with an average
selling space of approximately 19,000 square feet. The average population in the
towns in which these sites are located is approximately 5,400. The Company
intends to remodel and stock the stores with new inventory and open such stores
as new ALCO stores over a sixty day period beginning in March 1997. The Company
anticipates that it will expend approximately $6.8 million on inventory and $2.7
million on capital expenditures to complete this process.

STORE ENVIRONMENT AND MERCHANDISING

The Company designs 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.

The Company's primary, secondary and convenience cores include the following
merchandise departments:

<TABLE>
<CAPTION>
PRIMARY SECONDARY CONVENIENCE
- -------------------- ------------------------ -----------------------
<S> <C> <C>
Ladieswear/Menswear Girlswear/Boyswear Tobacco Products
Domestics Infants/Toddlers Pet Food & Supplies
Housewares/Glassware Footwear Hardware
Small Appliances Lingerie/Hosiery Automotive
Toys Jewelry Film Developing/Cameras
Seasonal Sewing/Notions/Crafts
Outdoor Living Pre-recorded Music/Video
Health & Beauty Sporting Goods
Stationery
Candy/Foods
</TABLE>

The Company's stores carry a consistent mix of merchandise throughout the
year, tailored to include important seasonal items such as holiday goods and
lawn and garden items expected to be in demand at certain times throughout the
year. The Company believes it builds customer loyalty by offering a broad range
of items with a seasonal emphasis.

<PAGE> 19
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 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 1996 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 41 times a year through advertising circulars. Even though the
same general pricing and advertising activities are carried out for all ALCO
stores, the result of such activities is significantly different depending upon
the level of competition in the market. In general, sales at promotional prices
account for a higher percentage of total ALCO sales than total sales for ALCO
stores in non-competitive markets.

DISTRIBUTION AND TRANSPORTATION

The Company operates a 352,000 square foot distribution center in Abilene,
Kansas, from which it services each of the 121 ALCO discount stores and 52
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''). The
distribution center is fully integrated into the Company's management
information system, allowing the Company to utilize such cost cutting
efficiencies as perpetual inventories, safety programs, and employee
productivity software. The Company believes its distribution center currently is
of sufficient size and properly equipped to handle planned expansion through
fiscal 1999 and is capable of being expanded in the future to accommodate store
growth.

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 and hires irregular route common carriers for such deliveries.

MANAGEMENT INFORMATION SYSTEMS

In recent years, the Company has committed significant resources to the
purchase and implementation 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. The Company has undertaken
a $2.3 million project to upgrade the back office equipment and software being
used at the ALCO stores for sales processing. This project is expected to extend
the life of the point-of-sale equipment currently being used, as well as to
improve efficiencies in training and operations and is expected to be completed
in fiscal 1998. In conjunction with the project, the ALCO stores will be
equipped with radio frequency hand held devices to allow for additional
efficiencies in processing inventory receipts and counts.

<PAGE> 20
Approximately 550 of the Company's 2,250 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.

PROPERTIES AND STORE LOCATIONS

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 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.

Eighteen 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 180,914 square
feet (5.3%) expire between September 3, 1996 and January 31, 1997; approximately
253,836 square feet (7.5%) expire between February 1, 1997 and January 31, 1998;
and approximately 459,525 square feet (13.6%) expire between February 1, 1998
and January 31, 1999. The remainder expire through 2014. All Duckwall store
leases have terms of five years or less. The Company has options to renew
substantially all of the expiring leases on terms the Company considers an
acceptable basis.

As of September 4, 1996, the Company operated 121 ALCO stores in 15 states
located in smaller communities in the central United States. The ALCO stores
average approximately 23,300 square feet of selling space, with an additional
4,900 square feet utilized for merchandise processing, temporary storage and
administration. The Company also operates 52 Duckwall stores in eight states,
all of which are leased. The geographic distribution of the Company's stores is
as follows:

STORE LOCATIONS (173)

DUCKWALL STORES (52)

ARKANSAS (1)
Little Rock

COLORADO (6)
Brush
Springfield
Walsenburg
Las Animas
Rocky Ford
Akron

IOWA (2)
Manning
Villisca

KANSAS (34)
Belleville
Lincoln
Council Grove
Wamego
Marion
Scott City
Horton
Ulysses
Hugoton
WaKeeney
Greensburg
St. John
Cottonwood Falls
Oberlin
Plainville
Sedan
Hoisington
Johnson
LaCrosse
Osage City
Clearwater
Osborne
Ness City
Elkhart
Minneapolis
Washington
Meade
Sterling
Caldwell
Stafford
Pleasanton
Coldwater
Hill City
Atwood

MISSOURI (1)
Salisbury

NEBRASKA (4)
Geneva
Chappel
Kimball
Neligh

OKLAHOMA (3)
Beaver
Shattuck
Hooker

TEXAS (1)
Spur

<PAGE> 21
ALCO STORES (121)

ARIZONA (2)
Springerville
Holbrook

ARKANSAS (6)
Russellville
Harrison
Hot Springs
Dewitt
Conway
Hardy

COLORADO (6)
Fort Morgan
Commerce City
Canon City
Burlington
Yuma
Wray

ILLINOIS (4)
Havana
Shelbyville
Newton
Gibson City

IOWA (10)
Atlantic
Cherokee
Perry
Estherville
Knoxville
Vinton
West Union
Garner
Clarinda
Emmetsburg

KANSAS (25)
Abilene
Salina
Concordia
Dodge City
Garden City
Hays
Larned
Pratt
Goodland
Manhattan
Newton
Hutchinson
Junction City
So. Hutchinson
Medicine Lodge
Kingman
Lyons
Fredonia
Beloit
Eureka
Sabetha
Hillsboro
Phillipsburg
Ellsworth
Anthony

MINNESOTA (1)
Spring Valley

NORTH DAKOTA (6)
Carrington
Rolla
Langdon
Oakes
Lisbon
Mayville

NEBRASKA (17)
Beatrice
McCook
Fremont
Norfolk
Alliance
Sidney
North Platte
Nebraska City
Ogallala
O'Neill
Valentine
Gordon
West Point
Cozad
Gering
Ord
Albion

NEW MEXICO (7)
Roswell
Portales
Grants
Belen
Tucumcari
Lovington
Bloomfield

OKLAHOMA (6)
Fairview
Cordell
Watonga
Cherokee
Pawhuska
Wilburton

SOUTH DAKOTA (8)
Lead
Milbank
Webster
Canton
Sisseton
Redfield
Chamberlain
Wagner

TEXAS (19)
Pampa
Dalhart
Perryton
Monahans
Andrews
Kermit
Spearman
Vernon
Littlefield
Winnsboro
Dimmitt
Cameron
Alpine
Tulia
Muleshoe
Clifton
Coleman
Slaton
Canadian

UTAH (1)
Roosevelt

WYOMING (3)
Lander
Rawlins
Diamondville

PERSONNEL AND TRAINING

The Company recognizes that a growing, geographically diverse retail
business requires a strong, decentralized store operating capability and
considers its ALCO store managers to be important factors in the Company's
success. Each ALCO store is managed by a store manager who has the primary
responsibilities of displaying and presenting the store's merchandise, staffing
the store, providing customer service and ensuring the security of the store's
merchandise. The Company recruits store manager trainees from the retail
industry and colleges, usually within its trade territory. A trainee without
prior retail experience typically requires thirty months to complete the
Company's training program. Most of the Company's store manager trainees are
hired in the industry with some level of retail store experience and require
comparatively less training. These trainees progress through several levels of
training both at the store to which they are assigned and through more
formalized training at the Company's headquarters.

A store manager candidate must be recommended by a district manager for a
management assessment profile. The profile includes detailed sessions with,
among others, the President, managers of Sales & Advertising, Loss Prevention,
Store Planning, Merchandising, Personnel, and Finance. Upon passing the profile
testing, the candidate is placed on ready status to become a manager of an
available store.

<PAGE> 22
Overseeing and supporting store managers are 11 ALCO and 4 Duckwall district
managers responsible for overall sales and profit performance of stores within a
region of the Company's geographic operating market. Each store is subject to an
annual quality assurance audit by a district manager, measuring adherence to
store procedure manuals, record keeping, merchandise display, cleanliness and
other objective performance criteria. Store manager bonuses are determined in
part by the results of the quality assurance audit.

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 12 ALCO stores are in
direct competition with regional discount stores. Of the last 68 ALCO stores
opened, only three 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 61 Class
18 markets in which it has opened a store.

EMPLOYEES

As of September 3, 1996, the Company employed approximately 3,900 people, of
whom approximately 400 were employed in the general office or distribution
center in Abilene, Kansas, 3,200 in the ALCO stores and 300 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.

<PAGE> 23
MANAGEMENT

OFFICERS AND DIRECTORS

The following table sets forth the names, ages, positions and certain other
information regarding the directors and officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Glen L. Shank.............................. 51 Chairman of the Board and President
James E. Schoenbeck........................ 52 Vice President--Operations and Advertising
Bryan M. DeCordova......................... 40 Vice President--Finance and Treasurer
James R. Fennema........................... 45 Vice President--Merchandise
Charles E. Bogan........................... 60 Vice President, Secretary and General Counsel
Dennis P. Alesio........................... 56 Vice President--Personnel
Tom L. Canfield, Jr........................ 42 Vice President--Distribution and Administration
John E. Hedeen............................. 52 Vice President--Real Estate
Gary W. Lowry.............................. 59 Vice President--Finance and Controller
David W. Mills............................. 41 Assistant Secretary
Dennis A. Mullin <F1>...................... 48 Director
Robert L. Barcum <F2>...................... 47 Director
William J. Morgan <F1><F2>................. 42 Director
Robert C. Amenta <F1><F2>.................. 30 Director

<FN>
- --------

<F1> Member of the Audit Committee of the Board

<F2> Member of the Compensation Committee of the Board
</TABLE>

Except as set forth below, all of the directors and officers have been
associated with the Company in their present position or other capacity for more
than the past five years. Except for James R. Fennema, Bryan M. DeCordova and
John E. Hedeen, each was an officer of the Company at the time the Bankruptcy
Proceeding was initiated. There are no family relationships among the 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 29 years of experience in the retail industry.

JAMES E. SCHOENBECK has served as Vice President of Operations and
Advertising since 1988. From 1979 to 1988, Mr. Schoenbeck served as the Vice
President of Administration. Mr. Schoenbeck has approximately 22 years of
experience in the retail industry.

BRYAN M. DECORDOVA has served as Vice President--Finance since September
1990 and as Treasurer since May 1991. From 1986 to 1990, Mr. DeCordova served as
a director of finance for Payless Shoe Source, Inc., a nationwide discount shoe
retailer. From 1984 to 1986, Mr. DeCordova served as Chief Financial
Officer/Controller and Director of D&R Enterprises, Inc., a chain of upscale
apparel retail stores. Mr. DeCordova has 14 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 23 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

<PAGE> 24
to 1985. Prior to becoming the Company's General Counsel, he served as a partner
in private practice with the law firm of Bogan & Johnson, beginning in 1970.

DENNIS P. ALESIO has served as Vice President of Personnel since March 1983.
Mr. Alesio has approximately 34 years of experience in the personnel field.

TOM L. CANFIELD, JR. has served as Vice President of Distribution and
Administration since April 1994. From 1988 to 1994, Mr. Canfield served as
General Manager of Distribution and Administration. Mr. Canfield has
approximately 23 years of experience in the retail industry.

JOHN E. HEDEEN has served as Vice President of Real Estate since March,
1993. From 1992 to 1993, Mr. Hedeen served as Director of Real Estate. From
October 1991 to June 1992, Mr. Hedeen was part owner of two corporations
involved in hotel development. For the nine years prior to 1991, Mr. Hedeen was
employed as a Senior Vice President of Landmark Hotel Corporation. Mr. Hedeen
has approximately 23 years experience in the real estate industry.

GARY W. LOWRY has served as Vice President of Finance and Controller since
1990. From 1977 to 1990, Mr. Lowry served as Vice President of Finance and
Treasurer. Mr. Lowry has approximately 27 years experience in the retail
industry.

DAVID W. MILLS has served as Assistant Secretary since 1990. From 1985 to
1990, Mr. Mills served as Assistant Secretary/Assistant Treasurer.

DENNIS A. MULLIN is the President and Chief Operating Officer of Steel &
Pipe Supply Co., Inc., and has served in various capacities with that company or
more than the last five years.

ROBERT L. BARCUM has been President of Applied Intelligence Group, Inc., a
computer consulting firm, since 1985.

WILLIAM J. MORGAN has been the President of Pacholder Associates, Inc.,
since December 1983. Pacholder oversees private and public investment funds for
institutional investors including certain investments of the Kansas Public
Employees Retirement System. He serves as a director of the following: ICO,
Inc., an oil field related services company; Kaiser Ventures, Inc., a land and
environmental development company; USF&G Pacholder Fund, Inc., a closed-end
mutual fund; and Munsingwear, Inc., an apparel manufacturer.

ROBERT C. AMENTA is a Senior Vice President of Pacholder Associates, Inc.,
and has been employed by Pacholder Associates, Inc. since he graduated from Ohio
State University in June 1990 with an MBA concentrating in finance and real
estate.

<PAGE> 25
EXECUTIVE COMPENSATION

The following table sets forth for the fiscal years ending January 28, 1996,
January 29, 1995 and January 30, 1994, respectively, the compensation of the
Company's chief executive officer and of each of the Company's four other most
highly compensated executive officers whose remuneration for fiscal 1996 was in
excess of $100,000 for services to the Company in all capacities:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL
NAME AND FISCAL -------------------- OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY BONUS # COMPENSATION
------------------ ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Glen L. Shank 1996 $ 157,925 $ 49,250 4,750 $5,890<F1>
Chairman and President 1995 151,737 77,000 9,750 4,547<F2>
1994 144,735 25,000 5,750 3,452<F3>

James E. Schoenbeck 1996 126,276 39,000 3,300 6,081<F1>
Vice President-- 1995 122,667 63,000 7,000 4,586<F2>
Operations and Advertising 1994 120,001 20,000 4,375 2,951<F3>

Bryan M. DeCordova 1996 121,172 37,500 3,000 5,505<F1>
Vice President--Finance 1995 117,450 55,000 6,250 3,869<F2>
and Treasurer 1994 115,125 20,000 4,375 2,307<F3>

James R. Fennema 1996 120,900 37,500 3,000 5,924<F1>
Vice President-- 1995 117,360 55,000 5,000 5,061<F2>
Merchandise 1994<F4> 96,826 20,000 2,500 60,208<F3>

Charles E. Bogan 1996 114,850 24,000 2,300 7,938<F1>
Vice President, Secretary 1995 112,425 34,000 5,250 6,094<F2>
and General Counsel 1994 110,425 14,000 3,500 4,599<F3>

<FN>
- --------

<F1> Includes contributions made by the Company for fiscal 1996 to the named
individual's account in the Duckwall-ALCO Stores, Inc. Profit Sharing Plan
and Trust (the ``Profit Sharing Plan") (together with forfeitures) in the
amounts of $4,989 each for Mr. Shank, Mr. Schoenbeck, Mr. DeCordova, Mr.
Fennema and Mr. Bogan. Also includes premiums paid by the Company with
respect to whole life insurance for each of the named individuals for
fiscal 1996 in the amounts of $901 for Mr. Shank, $1,092 for Mr.
Schoenbeck, $516 for Mr. DeCordova, $935 for Mr. Fennema and $2,949 for
Mr. Bogan.

<F2> Includes contributions made by the Company for fiscal 1995 to the named
individual's account in the Profit Sharing Plan (together with
forfeitures) in the amounts of $3,646 for Mr. Shank, $3,494 for Mr.
Schoenbeck, $3,353 for Mr. DeCordova, $3,646 for Mr. Fennema and $3,144
for Mr. Bogan. Also includes premiums paid by the Company with respect to
whole life insurance for each of the named individuals for fiscal 1995 in
the amounts of $901 for Mr. Shank, $1,092 for Mr. Schoenbeck, $516 for Mr.
DeCordova, $935 for Mr. Fennema and $2,949 for Mr. Bogan. Mr. Fennema's
balance includes $480 associated with the Company's expenses for his
relocation.

<F3> Includes contributions made by the Company for fiscal 1994 to the named
individual's account in the Profit Sharing Plan (together with
forfeitures) in the amount of $2,302 for Mr. Shank, $1,859 for Mr.
Schoenbeck, $1,791 for Mr. DeCordova and $1,655 for Mr. Bogan. Also
includes premiums paid by the Company with respect to whole life insurance
for each of the named individuals for fiscal 1994 in the amount of $1,150
for Mr. Shank, $1,092 for Mr. Schoenbeck, $516 for Mr. DeCordova and
$2,944 for Mr. Bogan. The entire balance for Mr. Fennema is for the
Company's expenses associated with his relocation.

<F4> Mr. Fennema became an executive officer of the Company on March 29, 1993.
</TABLE>

<PAGE> 26
The following table provides further information concerning grants of stock
options pursuant to the Duckwall-ALCO Stores, Inc., Incentive Stock Option Plan
during fiscal 1996 to the named executive officers:

<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS<F1> POTENTIAL
---------------------------------------------------------------- REALIZED VALUE AT
% OF ASSUMED ANNUAL
TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL OR BASE ------------------
NAME GRANTED (#) YEAR PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($)
---- ----------- ---------- ------------ ---------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Glen L. Shank........................... 4,750 10.67% 11.38 August 29, 2000 14,934 33,013
James E. Schoenbeck..................... 3,300 7.41% 11.38 August 29, 2000 10,375 22,935
Bryan M. DeCordova...................... 3,000 6.74% 11.38 August 29, 2000 9,432 20,850
James R. Fennema........................ 3,000 6.74% 11.38 August 29, 2000 9,432 20,850
Charles E. Bogan........................ 2,300 5.17% 11.38 August 29, 2000 7,231 15,985

<FN>
- --------

<F1> The options were granted with an exercise price equal to the fair market
value of the Company's Common Stock on August 29, 1995. Except in the
event of death, if an optionee ceases to be employed by the Company, his
or her option shall terminate on the earlier of (i) the expiration of the
option or (ii) the thirtieth day following such termination of employment.
In the event of death of optionee, the option may be exercised by his or
her legal representatives on the earlier of (i) the expiration of the
option or (ii) within twelve months of the date of death. Upon a merger,
consolidation, reorganization or liquidation of the Company, the option
may, in the discretion of the Compensation Committee, become immediately
exercisable until the day immediately prior to the date the contemplated
transaction is consummated. The options granted were granted on August 29,
1995 and expire on August 29, 2000. The options become exercisable in
equal amounts over a four year period beginning one year subsequent to
their grant date.
</TABLE>

No options were exercised by any of the named executive officers during
fiscal 1996. The following table provides information with respect to the named
executive officers concerning unexercised options held as of the end of fiscal
1996:

<TABLE>
<CAPTION>
LAST FISCAL YEAR END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)<F1>
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Glen L. Shank............................... 5,312/14,938 8,671/11,353
James E. Schoenbeck......................... 3,937/10,738 6,540/8,468
Bryan M. DeCordova.......................... 3,749/9,876 6,436/8,157
James R. Fennema............................ 2,500/8,000 3,876/5,251
Charles E. Bogan............................ 3,062/7,988 5,185/6,628

<FN>
- --------

<F1> Assumes a fair market value of $7.20 per share on date of grant and $9.75
per share as of January 28, 1996, for the options to purchase 5,750,
4,375, 4,375, 2,500 and 3,500 shares of Common Stock granted to Glen L.
Shank, James E. Schoenbeck, Bryan M. DeCordova, James R. Fennema and
Charles E. Bogan, respectively, on June 4, 1993. Assumes a fair market
value of $9.20 per share on date of grant and $9.75 per share as of
January 28, 1996, for the options to purchase 9,750, 7,000, 6,250, 5,000
and 5,250 shares of Common Stock granted to Glen L. Shank, James E.
Schoenbeck, Bryan M. DeCordova, James R. Fennema and Charles E. Bogan,
respectively on April 28, 1994. Also assumes a fair market value of $11.38
per share on date of grant and $9.75 per share as of January 28, 1996, for
the options to purchase 4,750, 3,300, 3,000, 3,000 and 2,300 shares of
Common Stock granted to Glen L. Shank, James E. Schoenbeck, Bryan M.
DeCordova, James R. Fennema and Charles E. Bogan, respectively on August
29, 1995.
</TABLE>

<PAGE> 27
EMPLOYEE STOCK OPTION PLAN

In May 1993, the Company adopted the Duckwall-ALCO Stores, Inc. Incentive
Stock Option Plan (the ``Plan'') to encourage key employees of the Company to
participate in the ownership of the Company and promote the success of the
business of the Company. Presently, 200,000 shares of Common Stock are
authorized for issuance upon exercise of options under the Plan. The number of
shares and option price covered by outstanding options may be adjusted in the
event of any stock dividend, stock split, reorganization, merger, consolidation,
liquidation or any combination or exchange of shares of Common Stock. The Plan
is administered by the Compensation Committee consisting of not less than two
nor more than five members of the Board of Directors who are appointed by the
Board. The price of each option shall be its fair market value as determined by
the Compensation Committee if the Common Stock is not traded on the public
market. Employees of the Company eligible to receive options are those selected
by the Compensation Committee in its sole discretion on the basis that such
employees have made material contributions to the successful performance of the
Company in the past, or are expected to make material contributions in the
future.

Of the 200,000 shares of Common Stock available for the grant of options
under the Plan, as of October 11, 1996, an aggregate of 188,325 shares were
subject to options and options for 1,013 shares had been exercised.

DIRECTOR COMPENSATION

Non-employee directors of the Company receive compensation of $500 for each
meeting of the Board of Directors attended and an additional $500 for each
committee meeting attended, plus reimbursement for expenses incurred in
connection with attendance at Board of Directors meetings.

EMPLOYMENT AGREEMENT

The Company and Glen L. Shank, President of the Company, are parties to an
employment agreement which automatically renews for successive annual terms in
January of each year unless the Company provides timely notice of termination.
The employment agreement provides that Mr. Shank's minimum base salary shall be
$144,400, subject to increase by the Board of Directors, together with bonuses,
if any, in such amount as shall be determined by the Board of Directors. In the
event of death or disability, Mr. Shank or his representative shall be entitled
to his salary through the end of the month in which his death occurs or on the
last day of the sixth consecutive month of his disability, as the case may be.
In addition to setting forth the duties and responsibilities of Mr. Shank, the
employment agreement provides that under certain circumstances either the
Company or Mr. Shank may terminate the employment agreement.

COMPENSATION COMMITTEE INTERLOCKS

Robert C. Amenta, Robert L. Barcum and William J. Morgan each served on the
Compensation Committee of the Board of Directors during fiscal 1996.

Robert C. Amenta and William J. Morgan, directors of the Company, are
employees of Pacholder Associates, Inc., an investment advisor to the Kansas
Public Employees Retirement System (``KPERS''). As of September 3, 1996, KPERS
owned 1,171,337 shares of Common Stock. KPERS is a Selling Stockholder in this
offering. See ``Principal and Selling Stockholders.''

<PAGE> 28
CERTAIN TRANSACTIONS

Dennis A. Mullin is President and Chief Operating Officer of Steel & Pipe
Supply Co., Inc. Mr. Mullin is also a partner in, or stockholder or officer of,
five partnerships or corporations which own stores leased to the Company. During
fiscal 1996, fiscal 1995 and fiscal 1994, the Company paid fixed rentals
aggregating approximately $585,066, $585,065 and $585,065 and percentage rentals
aggregating approximately $6,575, $14,730 and $12,946, respectively, to these
entities. During the current fiscal year through September 3, 1996, the Company
had paid fixed rentals aggregating approximately $390,044 and no percentage
rentals to these entities. The Company also pays the taxes, insurance and
maintenance on the stores leased from these entities. One of these store's
leases has a remaining term of approximately 23 months while each of the other
store leases has a remaining term of more than two years.

Robert L. Barcum is President of Applied Intelligence Group, Inc.,
(``AIG''), a computer consulting firm. During fiscal 1996, the Company entered
into contracts with AIG totaling $982,023 for the purchase of software and
services related to upgrading the Company's point-of-sale systems. During fiscal
1996, the Company paid AIG $29,167 under the contracts and $1,662 in associated
expenses. During the current fiscal year through September 3, 1996, the Company
had paid AIG $952,856 under the contracts and $3,675 in associated expenses. The
Company has used AIG as a source for point-of-sale software and related services
since 1987.

<PAGE> 29

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information as of September 3, 1996
(as of December 31, 1995 for Wellington Management Company, Heartland Advisors,
Inc. and Wanger Asset Management, L.P.) regarding the beneficial ownership of
Common Stock by each person known to the Board of Directors to own beneficially
5% or more of the Company's Common Stock, by each director of the Company, by
each executive officer named in the Summary Compensation Table under
``Executive Compensation" and by all directors and officers of the Company as a
group. All information with respect to beneficial ownership has been furnished
by the respective directors, officers or 5% or more stockholders, as the case
may be, or by documents filed with the Securities and Exchange Commission.

<TABLE>
<CAPTION>
BEFORE OFFERING NUMBER OF AFTER OFFERING
------------------- SHARES BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ------ ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
Glen L. Shank <F1><F2><F3>................................. 13,775 <F*> 0 13,775 <F*>
James E. Schoenbeck <F1><F2><F4>........................... 10,106 <F*> 0 10,106 <F*>
Bryan M. DeCordova <F1><F2><F5>............................ 8,456 <F*> 0 8,456 <F*>
James R. Fennema <F1><F6>.................................. 7,025 <F*> 0 7,025 <F*>
Charles E. Bogan <F1><F2><F7>.............................. 7,475 <F*> 0 7,475 <F*>
Dennis A. Mullin <F8>...................................... 124,689 3.12 0 124,689 2.54
Robert L. Barcum <F9>...................................... 0 <F*> 0 0 <F*>
William J. Morgan <F10>.................................... 0 <F*> 0 0 <F*>
Robert C. Amenta <F10>..................................... 0 <F*> 0 0 <F*>
KDF, a Massachusetts Nominee <F10>......................... 1,171,337 29.29 154,203 1,017,134 20.76
Boatmen's Trust Company, as Trustee for
Duckwall-ALCO Profit Sharing Plan & Trust <F2>........... 287,350 7.18 205,797 81,553 1.66
Wellington Management Company <F11>........................ 332,400 8.31 0 332,400 6.78
Heartland Advisors, Inc. <F12>............................. 290,000 7.25 0 290,000 5.92
Wanger Asset Management, L.P. <F13>........................ 230,000 5.75 0 230,000 4.69
All directors and officers as a group (9 in group)......... 171,526 4.11 0 171,526 3.47

<FN>
- --------

<F*> Less than one percent.

<PAGE> 30

<F1> The address for this person is 401 Cottage Street, Abilene, Kansas
67410-6129.

<F2> Glen L. Shank, Chairman of the Board and President of the Company,
Charles E. Bogan, a Vice President of the Company, James E. Schoenbeck, a
Vice President of the Company, and Bryan M. DeCordova, a Vice President
of the Company, are four of the six members of the administrative
committee of the Duckwall-ALCO Stores, Inc., Profit Sharing Plan and
Trust (the ``Profit Sharing Plan''), however each has disclaimed
beneficial ownership of any shares of Common Stock owned by the Profit
Sharing Plan. The address of the Profit Sharing Plan is Boatmen's Trust
Company, Trustee, 10th and Baltimore, P.O. Box 419038, Kansas City,
Missouri 64183.

<F3> Mr. Shank owns options to purchase 24,250 shares of Common Stock. Of
those options, 10,375 are currently exercisable.

<F4> Mr. Schoenbeck owns options to purchase 17,675 shares of Common Stock. Of
those options, 7,606 are currently exercisable.

<F5> Mr. DeCordova owns options to purchase 16,425 shares of Common Stock. Of
those options, 7,156 are currently exercisable.

<F6> Mr. Fennema owns options to purchase 13,300 shares of Common Stock. Of
those options, 5,125 are currently exercisable.

<F7> Mr. Bogan owns options to purchase 12,850 shares of Common Stock. Of
those options, 5,825 are currently exercisable.

<F8> Dennis A. Mullin is the President and Chief Operating Officer of Steel &
Pipe Supply Co., Inc., which owns 114,009 shares of Common Stock. The
address of Steel & Pipe Supply Co., Inc., is 555 Poyntz, Manhattan,
Kansas 66502. Mr. Mullin is also an executive officer of Manhattan
Buildings, Inc. and Business Buildings, Inc. each of which own 840 shares
of Common Stock. Mr. Mullin is also an executive officer of MBI, Inc.,
which owns 5,000 shares of Common Stock.

<F9> The address for Mr. Barcum is Applied Intelligence Group, Inc., 501 East
Fifteenth Street, Edmond, Oklahoma 73013.

<F10> KDF is the nominee holder of shares of Common Stock on behalf of the
Kansas Public Employees Retirement System (``KPERS''). KPERS, Pacholder
Associates, Inc. (``Pacholder'') and Portfolio Advisers, Inc. (``PAI''),
share investment and voting power with regard to these shares. Pacholder
and PAI are investment advisors to KPERS. In the event KPERS terminated
either such arrangement, the terminated advisor would no longer have any
such power with respect to these shares. William J. Morgan and Robert C.
Amenta are the President and Senior Vice President, respectively, of
Pacholder. Each of these individuals has disclaimed beneficial ownership
of all shares of Common Stock beneficially owned by Pacholder, KDF and
KPERS. The address of KPERS is c/o Pacholder Associates, Inc., Bank One
Towers, 8044 Montgomery Road, Suite 382, Cincinnati, Ohio 45236. The
address of PAI is 760 Hopmeadow Street, P.O. Box 689, Simsbury,
Connecticut, 06070-0689.

<F11> The address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109.

<F12> The address of Heartland Advisors, Inc. is 790 North Milwaukee Street,
Milwaukee, Wisconsin 53202.

<F13> The number of shares of Common Stock held by Wanger Asset Management, L.P.
("Wanger"), includes 220,000 shares of Common Stock held by Acorn
Investment Trust, Series Designated Acorn Fund, which is controlled
by Wanger. The address of Wanger is 227 West Monroe Street, Suite 3000,
Chicago, Illinois 60606. The address of Acorn Investment Trust, Series
Designated Acorn Fund is 227 West Monroe Street, Suite 3000, Chicago,
Illinois 60606.
</TABLE>

<PAGE> 31
DESCRIPTION OF CAPITAL STOCK

DESCRIPTION OF COMMON STOCK

The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.0001 par value.

There are 4,000,523 shares of Common Stock outstanding, which as of
October 10, 1996, were held of record by approximately 1,400 stockholders.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders. Holders of Common Stock do not
have cumulative voting rights in the election of directors and have no
preemptive, subscription, redemption or conversion rights. All outstanding
shares of Common Stock are, and those offered hereby will be, validly issued,
fully paid and nonassessable. Holders of Common Stock are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon the liquidation, dissolution or winding-up of the
Company, the assets legally available for distribution to stockholders are
distributable ratably among the holders of Common stock at that time
outstanding, subject to prior distribution rights of creditors of the Company.

The transfer agent for the Common Stock is Boatmen's Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
Upon completion of the offering, there will be 4,900,523 shares of Common Stock
outstanding, assuming the Underwriters' over-allotment option is not exercised
and none of management's currently exercisable options are exercised. Of these
shares, the 1,260,000 shares offered hereby and 2,406,397 shares held by certain
stockholders will be freely transferable without restriction under the Act
unless acquired by an ``affiliate'' (as that term is defined under the Act) of
the Company, in which case they will be subject to the resale limitations of
Rule 144 under the Act.

In general, under Rule 144 as currently in effect, persons who may be deemed
to be affiliates of the Company would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale, provided that
the Company has filed certain periodic reports with the Securities and Exchange
Commission (or made publicly available certain information concerning it) and
the sale is made in a ``broker's transaction'' or in a transaction directly with
a ``market-maker,'' as those terms are used in Rule 144, without the
solicitation of buy orders by the broker or such person, and without such person
making any payment to any person other than the broker who executes the order to
sell the shares of Common Stock.

In addition to the requirements of Rule 144, the Company, the Selling
Stockholders and the officers and the directors of the Company personally
holding shares of Common Stock as of September 3, 1996 have agreed with the
Underwriters not to sell or otherwise dispose of any shares of Common Stock for
a period 120 days after the date of this Prospectus, other than the grant of
stock options pursuant to the Company's Plan.

No precise predictions can be made about the effect, if any, that public
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock of the Company in the public market
could have an adverse impact on the prevailing market price.

<PAGE> 32
UNDERWRITING

The Company and the Selling Stockholders have entered into a Purchase
Agreement (the ``Purchase Agreement'') with Piper Jaffray Inc., The
Robinson-Humphrey Company, Inc., and Stifel, Nicolaus & Company, Incorporated
(the ``Underwriters''). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company and the Selling Stockholders have agreed to sell
to the Underwriters, and each of the Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite such
Underwriter's name in the table below:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
Piper Jaffray Inc.................................................................. 420,000
The Robinson-Humphrey Company, Inc................................................. 420,000
Stifel, Nicolaus & Company, Incorporated........................................... 420,000
---------
Total.......................................................................... 1,260,000
=========
</TABLE>

Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Purchase Agreement if any is purchased (excluding shares covered by the
over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or
decreased or the Purchase Agreement may be terminated.

The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose to offer the Common Stock to the public initially at
the Price to Public set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not in excess of $0.45 per
share. Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share on sales to certain other brokers
and dealers. After the offering, the Price to Public, concession and reallowance
may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable by the
Underwriters during the 30 day period after the date of this Prospectus, under
which the Underwriters may purchase up to an additional 189,000 shares of Common
Stock at the Price to Public less the Underwriting Discount set forth on the
cover page of this Prospectus. If the Underwriters purchase any of such
additional shares pursuant to this option, each Underwriter will be committed to
purchase such additional shares in approximately the same proportion as set
forth in the table above. The Underwriters may exercise the option only to cover
over-allotments, if any.

The Company, the Selling Stockholders and the officers and the directors of
the Company personally holding shares of Common Stock as of September 3, 1996
have agreed that they will not, without the prior written consent of Piper
Jaffray Inc., sell, offer to sell, or otherwise dispose of any shares of Common
Stock or any options or rights to purchase any shares of Common Stock for a
period of 120 days after the date of this Prospectus.

In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended. Passive
market making consists of displaying bids on the Nasdaq National Market limited
by the bid prices of market makers not connected with this offering and making
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period prior to the filing of this prospectus
with the Commission and must be discontinued when such limit is reached. Passive
market making may stabilize the market price of the Common Stock at a level
above that which might otherwise prevail, and, if commenced, may be discontinued
at any time.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.

<PAGE> 33
LEGAL MATTERS

The validity of the shares of Common Stock offered hereby and certain other
matters will be passed upon for the Company by Stinson, Mag & Fizzell, P.C.,
1201 Walnut Street, Kansas City, Missouri 64106. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Bryan
Cave LLP, 7500 College Boulevard, Suite 1100, Overland Park, Kansas 66210-4035.

EXPERTS

The consolidated financial statements of the Company as of January 29, 1995
and January 28, 1996 and for each of the years in the three-year period ended
January 28, 1996 included herein have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the ``Exchange Act'') and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the ``Commission''). Such reports, proxy statements and other
information concerning the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Seven World Trade Center, New York, New York 10048 and at Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained upon written request addressed to the Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy
statements and other information the Company files electronically with the
Commission. The address of this Web site is http://www.sec.gov. The Common Stock
is included for quotation on the Nasdaq National Market, and such reports, proxy
statements and other information should be available for inspection and copying
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Act concerning the
Common Stock offered by this Prospectus. Certain portions of the Registration
Statement have not been included in this Prospectus as permitted by the
Commission's regulations. For further information concerning the Company and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement and its exhibits, which may be inspected at the offices of the
Commission, without charge. Copies of the material contained therein may be
obtained from the Commission upon payment of the prescribed copying charges.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete; where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions of such exhibit, to which reference
is hereby made for a full statement of the provisions thereof.

<PAGE> 34
DUCKWALL-ALCO STORES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE

----

<S> <C>

Independent Auditors' Report................................................................................................ F-2

Consolidated Balance Sheets as of January 29, 1995, January 28, 1996 and July 28, 1996 (unaudited).......................... F-3

Consolidated Statements of Operations for the Fiscal Years Ended January 30, 1994, January 29, 1995 and January 28, 1996 and
the Twenty-Six Week Periods Ended July 30, 1995 (unaudited) and
July 28, 1996 (unaudited)................................................................................................. F-4

Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended January 30, 1994, January 29, 1995 and January
28, 1996 and the Twenty-Six Week Periods Ended July 28, 1996 (unaudited).................................................. F-5

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 30, 1994, January 29, 1995 and January 28, 1996 and
the Twenty-Six Week Periods Ended July 30, 1995 (unaudited) and July 28, 1996 (unaudited)................................. F-6

Notes to Consolidated Financial Statements.................................................................................. F-7

</TABLE>

F-1

<PAGE> 35
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 January 29, 1995 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
January 28, 1996. 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 January 29, 1995 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 January 28, 1996, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Wichita, Kansas
March 21, 1996

F-2

<PAGE> 36
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JANUARY JANUARY JULY
29, 1995 28, 1996 28, 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ -- $ 177 $ 1,804
Receivables (note 4).................................... 1,921 2,545 2,828
Inventories (notes 3 and 4)............................. 62,427 71,635 80,119
Property held for sale.................................. 55 41 41
Prepaid expenses........................................ 994 1,210 1,973
------- -------- --------
Total current assets................................ 65,397 75,608 86,765
------- -------- --------
Property and equipment, at cost (note 4):
Land.................................................... 1,956 2,297 2,379
Buildings............................................... 12,464 16,867 18,070
Furniture, fixtures and equipment....................... 19,418 22,354 23,978
Transportation equipment................................ 1,060 1,473 1,580
Leasehold improvements.................................. 2,476 3,164 3,837
Construction work in progress........................... 1,324 1,389 3,652
------- -------- --------
Total property and equipment........................ 38,698 47,544 53,496
Less accumulated depreciation and amortization.......... 21,469 23,676 25,011
------- -------- --------
Net property and equipment.......................... 17,229 23,868 28,485
------- -------- --------
Property under capital leases (note 6)...................... 21,156 20,541 20,541
Less accumulated amortization........................... 11,760 12,404 12,819
------- -------- --------
Net property under capital leases................... 9,396 8,137 7,722
------- -------- --------
Debt financing costs........................................ 180 110 100
------- -------- --------
$92,202 $107,723 $123,072
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts......................................... $ 76 $ -- $ --
Current maturities of long-term debt (note 4)........... 755 545 752
Current maturities of capital lease obligations (note
6).................................................... 630 637 637
Accounts payable........................................ 13,915 16,335 20,015
Income taxes payable.................................... 1,488 820 476
Accrued salaries and commissions........................ 3,112 3,614 2,096
Accrued taxes other than income......................... 1,939 2,203 2,430
Other current liabilities............................... 2,526 1,598 1,081
Deferred income taxes (note 7).......................... 2,002 2,467 2,492
------- -------- --------
Total current liabilities........................... 26,443 28,219 29,979
Notes payable under revolving loan credit facility (note
4)........................................................ 238 12,015 21,353
Long-term debt, less current maturities (note 4)............ 4,238 1,599 3,540
Capital lease obligations, less current maturities (note
6)........................................................ 10,944 9,755 9,437
Other noncurrent liabilities................................ 712 745 794
Deferred income taxes (note 7).............................. 2,527 2,329 2,355
------- -------- --------
Total liabilities................................... 45,102 54,662 67,458
------- -------- --------
Stockholders' equity (notes 2, 9 and 10):
Common stock, $.0001 par value, authorized 20,000,000
shares; issued and outstanding 3,999,510 shares....... 1 1 1
Additional paid-in capital, net of $3,586 accumulated
deficit eliminated on June 2, 1991.................... 39,859 40,690 41,316
Retained earnings since June 2, 1991.................... 7,240 12,370 14,297
------- -------- --------
Total stockholders' equity.......................... 47,100 53,061 55,614
Commitments (note 6)
------- -------- --------
$92,202 $107,723 $123,072
======= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>

F-3

<PAGE> 37
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
FISCAL YEARS ENDED PERIODS ENDED
-------------------------------------- -----------------------
JANUARY JANUARY JANUARY JULY JULY
30, 1994 29, 1995 28, 1996 30, 1995 28, 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>

<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>

Net sales........................................... $225,903 $242,144 $256,454 $117,532 $127,774
Cost of sales....................................... 154,217 163,180 173,296 79,139 85,812
-------- -------- -------- -------- --------
Gross margin................................ 71,686 78,964 83,158 38,393 41,962
-------- -------- -------- -------- --------
Selling, general and administrative
(notes 5 and 6)................................... 59,432 65,477 69,018 32,884 35,458
Depreciation and amortization 3,950 3,280 3,093 1,497 1,789
-------- -------- -------- -------- --------
Total operating expenses.................... 63,382 68,757 72,111 34,381 37,247
-------- -------- -------- -------- --------
Income from operations...................... 8,304 10,207 11,047 4,012 4,715

Interest expense (notes 4 and 6).................... 4,091 3,390 2,958 1,417 1,592
Other expense:
Store closing expense (note 8).................. 833 156 -- -- --
Other expense (income).......................... (10) -- (185) -- --
-------- -------- -------- -------- --------
Earnings before income taxes (note 3)....... 3,390 6,661 8,274 2,595 3,123

Income tax expense (note 7)......................... 1,130 2,531 3,144 986 1,196
-------- -------- -------- -------- --------
Net earnings................................ 2,260 4,130 5,130 1,609 1,927

Accretion in carrying value of redeemable common
stock purchase warrant (note 10).................. 645 288 -- -- --
-------- -------- -------- -------- --------
Net earnings applicable to common stock..... $ 1,615 $ 3,842 $ 5,130 $ 1,609 $ 1,927
======== ======== ======== ======== ========
Earnings per common and common equivalent share
(note 1(i))....................................... $ .80 $ 1.51 $ 1.28 $ .40 $ .48
======== ======== ======== ======== ========
Pro forma earnings per common and common equivalent
share (note 1(i))................................. $ .96
========

See accompanying notes to consolidated financial statements.
</TABLE>

F-4

<PAGE> 38
DUCKWALL-ALCO STORES INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED
EARNINGS
ADDITIONAL SINCE TOTAL
COMMON PAID-IN JUNE 2, STOCKHOLDERS'
STOCK CAPITAL 1991 EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 31, 1993............................................. $ 1 $21,497 $ 1,783 $23,281
Net earnings for the year ended January 30, 1994.................. -- -- 2,260 2,260
Accretion in carrying value of redeemable common stock purchase
warrant......................................................... -- -- (645) (645)
Tax benefit from net operating loss carryforward (note 7)......... -- 1,657 -- 1,657
----- ------- ------- -------
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 7)......... -- 866 -- 866
Issuance of 1,650,000 common shares in initial public offering
(note 10)....................................................... -- 13,246 -- 13,246
Exercise of redeemable common stock purchase warrant for 350,000
common shares (note 10)......................................... -- 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 7)......... -- 831 -- 831
----- ------- ------- -------
Balance, January 28, 1996............................................. 1 40,690 12,370 53,061
Net earnings for twenty-six week period ended July 28, 1996
(unaudited)..................................................... -- -- 1,927 1,927
Tax benefit from net operating loss carryforward (unaudited)...... -- 626 -- 626
----- ------- ------- -------
Balance, July 28, 1996 (unaudited).................................... $ 1 $41,316 $14,297 $55,614
===== ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>

F-5

<PAGE> 39
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TWENTY-SIX WEEK
FISCAL YEARS ENDED PERIODS ENDED
------------------------------------ ----------------------
JANUARY JANUARY JANUARY JULY JULY
30, 1994 29, 1995 28, 1996 30, 1995 28, 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 2,260 $ 4,130 $ 5,130 $ 1,609 $ 1,927
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.............. 3,950 3,280 3,093 1,497 1,789
Amortization of debt discount.............. 250 -- -- -- --
Amortization of debt financing costs....... 181 190 180 90 20
Deferred income taxes...................... (555) (383) 267 -- 51
Loss (gain) on sale or disposition of
property and equipment................... 14 39 (1) -- --
Gain on termination of store capital
leases................................... -- -- (185) -- --
LIFO expense (income)...................... 438 (614) (378) 125 90
Decrease (increase) in receivables......... 36 (211) (624) (40) (283)
Increase in inventories.................... (3,732) (6,338) (8,830) (8,349) (8,574)
(Increase) decrease in prepaid expenses.... (68) (114) (216) 70 (763)
Increase in accounts payable............... 572 2,130 2,420 4,702 3,680
Increase (decrease) in income taxes
payable.................................. 1,260 1,772 163 (944) 282
Increase (decrease) in accrued salaries and
commissions.............................. 214 696 502 (1,013) (1,518)
Increase in accrued taxes other than
income................................... 208 25 264 387 227
Increase (decrease) in other liabilities... 910 (335) (895) (1,261) (468)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities................ 5,938 4,267 890 (3,127) (3,540)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment....... 99 21 67 -- --
Acquisition of:
Buildings...................................... (11) (614) (4,403) (1,604) (1,203)
Fixtures, equipment and leasehold
improvements................................. (2,026) (3,383) (4,502) (1,549) (4,788)
--------- --------- --------- --------- ---------
Net cash used in investing
activities.......................... (1,938) (3,976) (8,838) (3,153) (5,991)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in notes payable under
revolving loan credit facility................... (15,710) (13,055) 11,777 8,853 9,338
Proceeds from notes payable -- -- -- -- 2,668
Proceeds from notes payable under revolving loan
credit facility.................................. 13,293 -- -- -- --
Proceeds from stock issuance....................... -- 13,246 -- -- --
Proceeds from exercise of redeemable common stock
purchase warrant................................. -- 2 -- -- --
Principal payments on long-term debt............... (892) (745) (2,849) (645) (520)
Principal payments under capital lease
obligations...................................... (869) (641) (617) (315) (318)
Increase (decrease) in bank overdrafts............. -- 76 (76) (76) --
Debt financing costs............................... (551) -- (110) (25) (10)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities................ (4,729) (1,117) 8,125 7,792 11,158
--------- --------- --------- --------- ---------
Net increase (decrease) in cash........................ (729) (826) 177 1,512 1,627
Cash, at beginning of year............................. 1,555 826 -- -- 177
--------- --------- --------- --------- ---------
Cash, at end of year................................... $ 826 $ -- $ 177 $ 1,512 $ 1,804
========= ========= ========= ========= =========

See accompanying notes to consolidated financial statements.

</TABLE>
F-6

<PAGE> 40
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(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 in the central 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.

The Company's fiscal year ends on the Sunday nearest to January 31. Fiscal
1994, 1995 and 1996 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.

(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 10) and stock options (see note 9). For
purposes of the fiscal 1995 computation, the warrant was assumed to have been
exercised since this treatment was the most dilutive and,

F-7

<PAGE> 41
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

therefore, the accretion in the carrying value of the redeemable common stock
purchase warrant has been excluded in the computation. For purposes of the
fiscal 1994 computation, net earnings was adjusted for accretion in the carrying
value of the redeemable common stock purchase warrant, and the warrant was
assumed to have been put to the Company, rather than exercised, since this
treatment was more dilutive for this fiscal year.

Pro forma earnings per share information for fiscal 1994 is presented herein
due to the exercise of the warrant by the holder pursuant to the Company's
public offering of common shares in fiscal 1995 as described in note 10. Such
pro forma information excludes the effect of accretion in the carrying value of
the redeemable common stock purchase warrant in fiscal 1994 and includes the
effect of the issuance of 350,000 shares of common stock pursuant to the
exercise of the warrant.

The average number of shares used in computing earnings per share was as
follows:

<TABLE>
<CAPTION>
EARNINGS PER PRO FORMA EARNINGS
COMMON AND COMMON PER COMMON AND
EQUIVALENT SHARE COMMON EQUIVALENT SHARE
----------------- -----------------------
<S> <C> <C>
Fiscal 1994.................................. 2,006,250 2,356,250
Fiscal 1995.................................. 2,737,620 --
Fiscal 1996.................................. 4,014,351 --
Twenty-six week periods ended:
July 30, 1995 (unaudited)................ 4,007,909 --
July 28, 1996 (unaudited)................ 4,033,522 --
</TABLE>

(J) CONSOLIDATED STATEMENTS OF CASH FLOWS

During fiscal 1994, 1995 and 1996 and for the twenty-six week periods ended
July 30, 1995 and July 28, 1996, the following amounts were paid for interest
and income taxes:
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
FISCAL YEARS ENDED --------------------
---------------------------- JULY 30, JULY 28,
1994 1995 1996 1995 1996
------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest, excluding interest on capital lease obligations and
amortization of debt financing costs (net of capitalized interest of
$21, $107, $46 (unaudited) and $76 (unaudited) in fiscal years 1995 and
1996 and the twenty-six week periods ended July 30, 1995 and July 28,
1996, respectively).................................................... $2,260 $1,940 $2,061 $ 781 $ 1,000
Income taxes............................................................. 425 1,142 2,714 1,930 863
</TABLE>

Noncash financing and investing activities for fiscal 1994, 1995 and 1996
and the twenty-six week periods ended July 30, 1995 and July 28, 1996 consisted
of:

Redeemable common stock purchase warrant with a carrying value of $2,591 was
exercised during fiscal 1995 (see note 10).

The carrying value of the redeemable common stock purchase warrant was
increased during fiscal 1994 and 1995 by $645 and $288, respectively.

Tax benefit from net operating loss carryforward of $1,657, $866, $831, $437
(unaudited) and $626 (unaudited) which increases additional paid-in capital in
fiscal 1994, 1995 and 1996 and the twenty-six week periods ended July 30, 1995
and July 28, 1996, respectively.

F-8

<PAGE> 42
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Capital leases of buildings with a fair value of $2,015 and $1,002 were
executed in fiscal 1994 and 1995, respectively.

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.

(L) INTERIM FINANCIAL DATA

The interim financial statements as of July 28, 1996 and the twenty-six week
periods ended July 30, 1995 and July 28, 1996 are unaudited. In the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial
statements for the interim periods presented. Interim periods operating results
are not necessarily indicative of the results to be expected for the full fiscal
year.

(2) BANKRUPTCY AND REORGANIZATION

On May 8, 1989, the Company filed a petition for relief under Chapter 11 of
the Federal bankruptcy laws in the United States Bankruptcy Court for the
District of Kansas. On May 17, 1991, the Company's plan of reorganization
(Plan), as amended, was confirmed by the Bankruptcy Court.

The Company has accounted for the confirmation of the Plan 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.

(3) INVENTORIES

Inventories at January 29, 1995, January 28, 1996 and July 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 are as follows for the
dates indicated:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, JULY 28,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
FIFO cost.............................................. $66,744 $75,574 $84,148
Less LIFO reserve...................................... (4,317) (3,939) (4,029)
------- ------- -------
LIFO cost.......................................... $62,427 $71,635 $80,119
======= ======= =======
</TABLE>

Earnings before income taxes for fiscal 1994, 1995 and 1996 and for the
twenty-six week periods ended July 30, 1995 and July 28, 1996 would have been
increased by $438, decreased by $614, decreased by $378, increased by $125
(unaudited) and increased by $90 (unaudited), respectively, if the FIFO method
of valuing inventories had been utilized.

During fiscal 1994, 1995 and 1996, liquidation of LIFO inventories with
lower prior year costs had the effect of increasing (decreasing) earnings before
income taxes by $106, $3 and $(7), respectively.

F-9

<PAGE> 43
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(4) 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 0.5% 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.

Notes payable outstanding at January 29, 1995, January 28, 1996 and July 28,
1996 under the revolving loan credit facility aggregated $238, $12,015 and
$21,353 (unaudited), respectively. The lender had also issued letters of credit
aggregating $1,440, $2,053 and $3,622 (unaudited), respectively, at such dates
on behalf of the Company. The interest rate on outstanding borrowings at January
28, 1996 and July 28, 1996 was 9% and 8.75% (unaudited), payable monthly. The
Company had additional borrowings available at January 28, 1996 and July 28,
1996 under the revolving loan credit facility amounting to $20,932 and $10,025
(unaudited), respectively.

Long-term debt, exclusive of notes payable under the revolving loan credit
facility as described above, consisted of the following at the dates indicated
below:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, JULY 28,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
7.15% to 9.5% obligations for Industrial Revenue Bonds,
interest payable semi-annually with principal payments
due annually until final maturity in 1999............. $ 1,925 $ 1,375 $ 1,000
9.875% mortgage note payable due in monthly
installments, including interest, through September
2001.................................................. 650 578 532
10% subordinated notes.................................. 2,100 -- --
10% notes payable, due quarterly........................ 318 191 146
8.41% note payable, due monthly until final maturity in
2001 (unaudited)...................................... -- -- 946
7.93% note payable, due monthly until final maturity in
2002 (unaudited)...................................... -- -- 1,668
------- ------- -------
4,993 2,144 4,292
Less current maturities................................. 755 545 752
------- ------- -------
Long-term debt, less current maturities................. $ 4,238 $ 1,599 $ 3,540
======= ======= =======
</TABLE>

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 1994, 1995
and 1996 and the twenty-six week periods ended July 30, 1995 and July 28, 1996
aggregated $2,688, $2,022, $1,706, $740 (unaudited) and $1,002 (unaudited),
respectively.

F-10

<PAGE> 44
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Maturities of long-term debt, including the notes payable under the
revolving loan credit facility, in each of the next five years and thereafter in
the aggregate as of January 28, 1996 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR:
------------
<S> <C>
1997.................................... $ 545
1998.................................... 590
1999.................................... 524
2000.................................... 12,299
2001.................................... 120
Thereafter.............................. 81
--------
$ 14,159
========
</TABLE>

(5) EMPLOYEE BENEFITS

The Company has a trusteed Profit Sharing Plan (Plan) for the benefit of
eligible employees. The Plan provides for an annual contribution of not more
than 20% of earnings for the year before the profit sharing contribution and
Federal and state income taxes, limited to 15% of the annual compensation of the
participants in the Plan. Contributions by the Company vest with the
participants over a seven-year period. The Company reserves the right to
discontinue its contributions at any time. The Company made profit sharing
contributions for fiscal 1994, 1995 and 1996 and for the twenty-six week periods
ended July 30, 1995 and July 28, 1996 of $270, $500, $630, $150 (unaudited) and
$190 (unaudited), respectively.

At January 29, 1995, January 28, 1996 and July 28, 1996, the Plan owned
327,350, 327,350 and 287,350 (unaudited) shares, respectively, of the Company's
common stock.

(6) 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 are as follows for the dates indicated below:

<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, JULY 28,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings.............................................. $17,373 $16,758 $16,758
Fixtures............................................... 3,783 3,783 3,783
------- ------- -------
21,156 20,541 20,541
Less accumulated amortization.......................... 11,760 12,404 12,819
------- ------- -------
Net property under capital leases.................. $ 9,396 $ 8,137 $ 7,722
======= ======= =======
</TABLE>

The Company also has noncancelable operating leases, primarily for buildings
and transportation equipment, that expire at various dates.

F-11

<PAGE> 45
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Future minimum lease payments under all noncancelable leases together with
the present value of the net minimum lease payments pursuant to capital leases
as of January 28, 1996 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR: CAPITAL OPERATING
- ------------ ------- ---------
<S> <C> <C>
1997..................................................... $ 1,816 $ 4,092
1998..................................................... 1,714 3,526
1999..................................................... 1,560 2,926
2000..................................................... 1,521 2,390
2001..................................................... 1,521 2,068
Later years.............................................. 12,176 7,478
------- -------
Total minimum lease payments......................... 20,308 $22,480
=======
Less amount representing interest........................ 9,916
-------
Present value of net minimum lease payments.............. 10,392
Less current maturities.................................. 637
-------
Capital lease obligations, less current maturities....... $ 9,755
=======
</TABLE>

Lease payments to related parties amounted to approximately $600, $600, $292
(unaudited) and $292 (unaudited) in fiscal 1995 and 1996 and the twenty-six week
periods ended July 30, 1995 and July 28, 1996, respectively.

Minimum payments have not been reduced by minimum sublease rentals of $101
under operating leases due in the future under noncancelable subleases. They
also do not include contingent rentals which may be paid under certain store
leases on the basis of percentage of sales in excess of stipulated amounts.
Contingent rentals applicable to capital leases amounted to $82, $85 and $51 for
fiscal 1994, 1995 and 1996, respectively.

Interest on capital lease obligations in fiscal 1994, 1995 and 1996 and the
twenty-six week periods ended July 30, 1995 and July 28, 1996 aggregated $1,403,
$1,368, $1,252, and $677 (unaudited) and $590 (unaudited), respectively.

The following schedule presents the composition of total rent expense for
all operating leases for the periods indicated below:

<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
FISCAL YEARS ENDED -------------------
-------------------------- JULY 30, JULY 28,
1994 1995 1996 1995 1996
---- ---- ---- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rentals...................................................... $5,541 $5,504 $6,049 $ 2,980 $ 2,762
Contingent rentals................................................... 265 316 353 132 137
Less sublease rentals................................................ (204) (112) (111) (56) (53)
------ ------ ------ ------- -------
$5,602 $5,708 $6,291 $ 3,056 $ 2,846
====== ====== ====== ======= =======
</TABLE>

F-12

<PAGE> 46
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(7) INCOME TAXES

Total income tax expense (benefit) was allocated as follows for the periods
indicated below:

<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
FISCAL YEARS ENDED -------------------
-------------------------- JULY 30, JULY 28,
1994 1995 1996 1995 1996
---- ---- ---- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operations............................................................ $1,130 $2,531 $3,144 $ 986 $ 1,196
Additional paid-in capital for the tax benefit from utilization of net
operating loss carryforwards........................................ (1,657) (866) (831) (437) (626)
------ ------ ------ ------ -------
Total income tax expense (benefit).................................... $ (527) $1,665 $2,313 $ 549 $ 570
====== ====== ====== ====== =======
</TABLE>

Income tax expense (benefit) attributable to operations consists of the
following for the periods indicated below:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Fiscal 1994:
Federal............................................... $ 1,385 $ (467) $ 918
State................................................. 300 (88) 212
------- ------ -------
$ 1,685 $ (555) $ 1,130
======= ====== =======
Fiscal 1995:
Federal............................................... $ 2,443 $ (323) $ 2,120
State................................................. 471 (60) 411
------- ------ -------
$ 2,914 $ (383) $ 2,531
======= ====== =======
Fiscal 1996:
Federal............................................... $ 2,417 $ 224 $ 2,641
State................................................. 460 43 503
------- ------ -------
$ 2,877 $ 267 $ 3,144
======= ====== =======
Twenty-six week periods ended:
July 30, 1995 (unaudited):
Federal........................................... $ 830 $ -- $ 830
State............................................. 156 -- 156
------- ------ -------
$ 986 $ -- $ 986
======= ====== =======
July 28, 1996 (unaudited):
Federal........................................... $ 965 $ 43 $ 1,008
State............................................. 180 8 188
------- ------ -------
$ 1,145 $ 51 $ 1,196
======= ====== =======
</TABLE>

F-13

<PAGE> 47
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The significant components of deferred income tax expense (benefit)
attributable to operations are as follows for the periods indicated below:

<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
FISCAL YEARS ENDED -------------------
-------------------------- JULY 30, JULY 28,
1994 1995 1996 1995 1996
---- ---- ---- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred tax expense (exclusive of the effects of the
following item)..................................................... $ 1,244 $ 578 $1,098 $ 437 $ 677
Decrease in beginning of the year balance of the valuation allowance
for deferred tax assets............................................. (1,799) (961) (831) (437) (626)
------- ----- ------ ------ ------
$ (555) $(383) $ 267 $ -- $ 51
======= ===== ====== ====== ======
</TABLE>

Income tax expense attributable to operations was $1,130, $2,531, $3,144,
$986 (unaudited) and $1,196 (unaudited) for fiscal 1994, 1995 and 1996 and the
twenty-six week periods ended July 30, 1995 and July 28, 1996, respectively, and
differs from the amounts computed by applying the Federal income tax rate of 34%
as a result of the following:

<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
FISCAL YEARS ENDED -------------------
-------------------------- JULY 30, JULY 28,
1994 1995 1996 1995 1996
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Computed ``expected'' tax expense..................................... $1,153 $2,265 $2,814 $ 882 $ 1,062
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..................... (142) (95) -- -- --
State income taxes, net of the Federal income
tax benefit..................................................... 141 271 332 104 124
Job tax credit.................................................... (29) (62) -- -- --
Other, net........................................................ 7 152 (2) -- 10
------ ------ ------ ------ -------
$1,130 $2,531 $3,144 $ 986 $ 1,196
====== ====== ====== ======= =======
</TABLE>

F-14

<PAGE> 48
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below for the
dates indicated:

<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, JULY 28,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Capital leases.......................................... $ 828 $ 857 $ 894
Other liabilities....................................... 383 302 307
Net operating loss and tax credit carryforwards......... 1,554 723 97
------- ------- ------
Total gross deferred tax assets..................... 2,765 1,882 1,298
Less - valuation allowance.......................... (1,554) (723) (97)
------- ------- ------
Net deferred tax assets............................. 1,211 1,159 1,201
------- ------- ------
Deferred tax liabilities:
Inventories, principally due to differences in the LIFO
reserve arising
from a prior business combination accounted for as a
purchase.............................................. 2,585 2,960 3,014
Property and equipment, due to differences in
depreciation and a prior business combination
accounted for as a purchase........................... 3,155 2,995 3,034
------- ------- ------
Total gross deferred tax liabilities................ 5,740 5,955 6,048
------- ------- ------
Net deferred tax liability.......................... $ 4,529 $ 4,796 $4,847
======= ======= ======
</TABLE>

At January 28, 1996 and July 28, 1996, the Company has a net operating loss
(NOL) carryforward for Federal income tax purposes of $1,754 and $-0-,
respectively, which is available to offset future Federal taxable income, if
any, through fiscal 2005. At January 28, 1996, the Company has NOL carryforwards
for state income tax purposes in various states of $3,050 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.

As a result of the reorganization which occurred in May 1991, the Company's
NOL carryforward, generated prior to the reorganization, has been subject to an
annual limitation of $2,285. Any unused portion of the annual NOL limitation can
be used without limitation in subsequent years. The valuation allowance at
January 28, 1996 relates to the NOL and tax credit carryforwards. Income tax
benefits from the utilization of NOL carryforwards increase additional paid-in
capital because such income tax benefits are attributable to the loss periods
prior to the reorganization. During fiscal 1994, the original estimate of the
amount of available NOL carryforwards generated prior to the reorganization and
annual limitation, was revised. As a result, the Company was able to utilize
more NOL carryforwards for fiscal 1993 which generated an additional tax benefit
of $790. This amount has been recorded in the accompanying fiscal 1994
consolidated financial statements as an increase in additional paid-in capital.

(8) STORE CLOSINGS

The Company closed four of its stores in fiscal 1994, two of its stores in
fiscal 1995 and three of its stores in fiscal 1996. Costs associated with the
closing of stores, consisting primarily of future lease payments and charges to
reduce assets to net realizable value are charged to expense upon the decision
to close a store. Included in fiscal 1994 store closing expense is a provision
for future lease payments of $505.

F-15

<PAGE> 49
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(9) 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
beginning one year subsequent to the grant date. Information regarding options
which were outstanding at the dates indicated is presented below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE
--------- -----
<S> <C> <C>
Options outstanding, January 31, 1993......................... --
Issued........................................................ 31,250 $7.20
Canceled...................................................... --
-------
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 $7.20 - $9.20
Issued........................................................ 44,525 $11.375
Canceled...................................................... (3,200) $9.20 - $11.375
-------
Options outstanding, January 28, 1996......................... 158,325 $7.20 - $11.375
Issued (unaudited)............................................ 37,150 $12.875
Canceled (unaudited).......................................... (2,650) $9.20 - $11.375
-------
Options outstanding at July 28, 1996.......................... 192,825 $7.20 - $12.875
=======
</TABLE>

Options exercisable at the end of fiscal 1994, 1995, 1996 and the twenty-six
week period ended July 28, 1996 amounted to -0-; 7,813; 36,375 and 64,063
(unaudited), respectively.

(10) 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.

On June 9, 1994, in connection with the Company's 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.

F-16

<PAGE> 50
DUCKWALL-ALCO STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Financial results by quarter are as follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995:
Net sales..................................................................... $ 53,419 $ 58,702 $ 56,478 $ 73,545
Gross margin <Fa>............................................................. 17,048 18,892 18,465 24,559
Net earnings.................................................................. 416 617 220 2,877
Accretion in carrying value of of redeemable common stock purchase warrant.... 96 96 96 --
Net earnings applicable to common stock....................................... 320 521 124 2,877
Net earnings per share <Fb>................................................... .16 .26 .06 .74
1996:
Net sales..................................................................... $ 54,940 $ 62,592 $ 60,795 $ 78,127
Gross margin <Fa>............................................................. 18,182 20,211 19,680 25,085
Net earnings.................................................................. 604 1,005 592 2,929
Net earnings per share........................................................ .15 .25 .15 .73
1997:
Net sales..................................................................... $ 59,348 $ 68,426
Gross margin.................................................................. 19,642 22,320
Net earnings.................................................................. 703 1,224
Net earnings per share........................................................ .18 .30

<FN>

<Fa> The pretax LIFO inventory provision for the fiscal year ended January 29, 1995 was estimated to be
expense of $225, $75 and $150 in each of the first three quarters, respectively. The annual provision
was a $614 credit resulting in a credit of $1,064 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.

<Fb> Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of
the quarterly earnings per share in fiscal 1995 does not equal the total computed for the year due to
the public offering of common stock which occurred during the fourth quarter of fiscal 1995.
</TABLE>

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has determined the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. For long-term debt, the fair value is
estimated by discounting the future cash flows at rates currently available for
similar types of debt instruments. Such fair value approximated the carrying
value of long-term debt at January 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.

F-17

<PAGE> 51
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF THIS
PROSPECTUS OR ANY SALE MADE PURSUANT TO THIS PROSPECTUS CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.

--------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................... 3
Risk Factors............................................... 6
The Company................................................ 8
Use of Proceeds............................................ 8
Dividend Policy............................................ 8
Capitalization............................................. 9
Price Range of Common Stock................................ 9
Selected Consolidated Financial Data....................... 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 11
Business................................................... 16
Management................................................. 23
Certain Transactions....................................... 28
Principal and Selling Stockholders......................... 29
Description of Capital Stock............................... 31
Shares Eligible for Future Sale............................ 31
Underwriting............................................... 32
Legal Matters.............................................. 33
Experts.................................................... 33
Available Information...................................... 33
Index to Consolidated Financial Statements................. F-1
</TABLE>

1,260,000 SHARES

DUCKWALL-ALCO STORES, INC.

COMMON STOCK
------------------------

P R O S P E C T U S
------------------------

PIPER JAFFRAY INC.

THE ROBINSON-HUMPHREY COMPANY, INC.

STIFEL, NICOLAUS & COMPANY

INCORPORATED

October 15, 1996