DUCKWALL ALCO STORES INC, S-1, 1996-09-16

DUCKWALL ALCO STORES INC
S-1, 1996-09-16
VARIETY STORES

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<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1996

REGISTRATION NO. 33-
================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

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

DUCKWALL-ALCO STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

KANSAS 5399 48-0201080
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)

401 COTTAGE STREET
ABILENE, KANSAS 67410-0219
(913) 263-3350
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

CHARLES E. BOGAN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
401 COTTAGE STREET
ABILENE, KANSAS 67410-0219
(913) 263-3350
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

COPIES TO:

RICHARD N. NIXON, ESQ. THOMAS W. VAN DYKE, ESQ.
STINSON, MAG & FIZZELL, P.C. BRYAN CAVE LLP
1201 WALNUT STREET, SUITE 2800 7500 COLLEGE BOULEVARD, SUITE 1100
KANSAS CITY, MISSOURI 64106-6251 OVERLAND PARK, KANSAS 66210-4035
(816) 842-8600 (913) 338-7700

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

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================================================

PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED<F1> PER SHARE<F2> OFFERING PRICE<F2> REGISTRATION FEE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stock ($.0001 par value per share).... 1,610,000 $13.25 $21,332,500 $7,357
=========================================================================================================================
<FN>
<F1> Includes 210,000 shares of Common Stock issuable upon exercise of an
over-allotment option granted to the Underwriters.
<F2> Pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and
solely for the purpose of calculating the amount of the registration fee,
the proposed maximum offering price per share and proposed maximum
aggregate offering price are based on the average of the high and low
prices of the Common Stock on September 12, 1996 in the over-the-counter
market as quoted on the Nasdaq National Market.
</TABLE>

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

================================================================================

<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996

PROSPECTUS
dated , 1996

1,400,000 SHARES

DUCKWALL-ALCO STORES, INC.

COMMON STOCK

Of the 1,400,000 shares of Common Stock of Duckwall-ALCO Stores, Inc. (the
``Company'') offered hereby, 1,000,000 shares are being sold by the Company and
400,000 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 September 12, 1996, the last reported sale price of the
Common Stock on the Nasdaq National Market was $13.25 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.......................... $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Total <F3>......................... $ $ $ $
=================================================================================================================================
<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 210,000 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 $ , $ and $ , 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
, 1996.

PIPER JAFFRAY INC.

THE ROBINSON-HUMPHREY COMPANY, INC.

STIFEL, NICOLAUS & COMPANY

INCORPORATED

<PAGE> 3
[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> 4
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 3, 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 3, 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> 5
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.............................. 1,000,000 shares

By the Selling Stockholders................. 400,000 shares

Total................................... 1,400,000 shares

Common Stock outstanding after the offering..... 4,999,885 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 191,525 Shares of Common Stock for which options have been
granted under the Company's Incentive Stock Option Plan and includes 375
Shares of Common Stock issued in August 1996 pursuant to options exercised
by a former employee of the Company.
</TABLE>

<PAGE> 6
<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 23,572
Stockholders' equity........................................................ 55,614 67,761

<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 1,000,000 shares of Common Stock
offered by the Company hereby, based on an assumed offering price of
$13.25 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> 7
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 20.0% of
the outstanding shares of Common Stock (or 19.2% 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> 8
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> 9
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 3, 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 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $12,146,875
(based on an assumed public offering price of $13.25 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 400,000
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> 10
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 1,000,000 shares of Common Stock offered by the Company hereby at an
assumed public offering price of $13.25 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 $ 9,206
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 22,183
------- -------
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 20,000,000 shares authorized; 3,999,510 shares
issued and outstanding, actual; 4,999,510 issued and outstanding, as adjusted
<F1>............................................................................ 1 1
Additional paid-in capital....................................................... 41,316 53,463
Retained earnings since June 2, 1991............................................. 14,297 14,297
------- -------
Total stockholders' equity................................................... 55,614 67,761
------- -------
Total capitalization..................................................... $89,944 $89,944
======= =======

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

<F1> Excludes 191,525 shares of Common Stock for which options have been
granted under the Company's Incentive Stock Option Plan and 375 shares of
Common Stock issued in August 1996 pursuant to options exercised by a
former employee 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 September 12, 1996)................................... 14 1/2 12 1/4
</TABLE>

On September 12, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $13.25 per share. As of September 3, 1996, there
were approximately 1,400 holders of record of the Common Stock.

<PAGE> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
BUSINESS

GENERAL

The Company, which was established in 1901, is a regional retailer
operating, as of September 3, 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 3, 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> 18
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> 19
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 3, 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> 20
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> 21
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 3, 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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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 September 3, 1996, an aggregate of 191,525 shares were
subject to options and options for 375 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> 29
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> 30
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., Wanger Asset Management, L.P., and Acorn Investment Trust, Series
Designated Acorn Fund) 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 2.49
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 29.29 171,337 1,000,000 20.00
Boatmen's Trust Company, as Trustee for
Duckwall-ALCO Profit Sharing Plan & Trust <F2>........... 287,350 7.18 228,663 58,687 1.17
Wellington Management Company <F11>........................ 332,400 8.31 0 332,400 6.65
Heartland Advisors, Inc. <F12>............................. 290,000 7.25 0 290,000 5.80
Wanger Asset Management, L.P. <F13>........................ 230,000 5.75 0 230,000 4.60
Acorn Investment Trust, Series Designated Acorn Fund <F14>. 220,000 5.50 0 220,000 4.40
All directors and officers as a group (9 in group)......... 171,526 4.11 0 171,526 3.32

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

<F*> Less than one percent.

<PAGE> 31

<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 address of Wanger Asset Management, L.P. is 227 West Monroe Street,
Suite 3000, Chicago, Illinois 60606.

<F14> The address of Acorn Investment Trust, Series Designated Acorn Fund is
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606.
</TABLE>

<PAGE> 32
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 3,999,885 shares of Common stock outstanding, which as of
September 3, 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 4,999,885 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 1,400,000 shares offered hereby and 2,405,759 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> 33
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..................................................................
The Robinson-Humphrey Company, Inc.................................................
Stifel, Nicolaus & Company, Incorporated...........................................
---------
Total.......................................................................... 1,400,000
=========
</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 $ per
share. Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ 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 210,000 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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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>

1,400,000 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

, 1996

<PAGE> 53
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses with the sale and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All amounts shown are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq listing fee.

<TABLE>
<S> <C>
SEC registration fee.................................................. $ 7,357
NASD filing fee....................................................... 2,714
Nasdaq listing fee.................................................... 17,500
Printing and engraving................................................ <F*>
Legal fees and expenses............................................... <F*>
Accounting fees and expenses.......................................... <F*>
Blue Sky fees and expenses (including fees of counsel)................ <F*>
Transfer agent and registrar fees and expenses........................ <F*>
Miscellaneous......................................................... <F*>
---------
Total............................................................. $ 275,000
=========

<FN>

<F*>To be completed by amendment
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 17-6305 of the Kansas general corporation code provides for
indemnification by a corporation of its offices and directors and certain other
persons as follows:

(a) A corporation shall have power to indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of
the corporation, by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding, including attorney fees, if such
person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation; and with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such person's conduct was
unlawful.

(b) A corporation shall have power to indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses actually and reasonably incurred by such person
in connection with the defense or settlement of such action or suit,
including attorney fees, if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.

II-1

<PAGE> 54
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b), or in
defense of any claim, issue or matter therein, such director, officer,
employee or agent shall be indemnified against expenses actually and
reasonably incurred by such person in connection therewith, including
attorney fees.

(d) Any indemnification under subsections (a) and (b), unless ordered by
a court, shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because such director,
officer, employee or agent has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by
the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.

(e) Expenses incurred by director or officer in defending any civil or
criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it is ultimately determined that the officer or
director is not entitled to be indemnified by the corporation as authorized
in this section. Such expenses incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deem appropriate.

(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expense may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in a person's official capacity and as to action in another capacity while
holding such office.

(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under
this section.

(h) For purposes of this section, references to ``the corporation''
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect
to the resulting or surviving corporation as such person would have with
respect to such constituent corporation if its separate existence had
continued.

(i) For purposes of this section, references to ``other enterprises''
shall include employee benefit plans; references to ``fines'' shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to ``serving at the request of the corporation'' shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner ``not opposed to the best interests of the
corporation'' as referred to in this section.

(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.

II-2

<PAGE> 55
Section 17-6002(b)(8) of the Kansas general corporation code provides that a
corporation's certificate of incorporation may contain:

(8) A provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders, policyholders or members
for monetary damages for breach of fiduciary duty as a director, provided
that such provision shall not eliminate or limits the liability of a
director (A) for any breach of the director's duty of loyalty to the
corporation or its stockholders, policyholders or members, (B) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (C) under the provisions of K.S.A. 17-6424
[relating to unlawful dividend payments or stock redemptions or repurchases]
and amendments thereto or (D) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or
limit the liability of a director for any act or omission occurring prior to
the date when such provision becomes effective. All references in this
subsection to a director shall also be deemed to refer to a member of the
governing body of a corporation which is not authorized to issue capital
stock.

Article NINTH of the Company's Amended and Restated Articles of
Incorporation provides:

The corporation may agree to the terms and conditions upon which any
director, officer, employee or agent accepts his office or position and in
its bylaws, by contract or in any other manner may agree to indemnify and
protect any director, officer, employee or agent of the corporation, or any
person who serves at the request of the corporation as a director, officer
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, to the fullest extent permitted by the laws of the
State of Kansas; provided, however, that the only limitation upon the power
granted to the corporation by this paragraph shall be a prohibition against
indemnification of any person from or on account of such person's conduct
which was finally adjudged to have been knowingly fraudulent, deliberately
dishonest or willful misconduct.

Without limiting the generality of the foregoing provisions of this
paragraph EIGHTH [sic], to the fullest extent permitted or authorized by the
laws of the State of Kansas, including, without limitation, the provisions
of subsection (b)(8) of K.S.A. 17-6002 as now in effect and as it may from
time to time hereafter be amended, no director of the corporation shall be
personally liable to the corporation or to its stockholders for monetary
damages for breach of fiduciary duty as a director.

Bylaw 24 of the Company's Bylaws provides:

Each person who is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director or officer of
another corporation (including the heirs, executors, administrators and
estate of such person) shall be indemnified by the corporation as of right
to the full extent permitted or authorized by the laws of the State of
Kansas, as now in effect and as hereafter amended, against any expenses,
judgments, fines and amounts paid in settlement (including attorneys' fees)
actually and reasonably incurred by such person in his capacity as or
arising out of his status as a director or officer of the corporation or, if
serving at the request of the corporation, as a director or officer of
another corporation. The indemnification provided by this bylaw provision
shall not be exclusive of any other rights to which those indemnified may be
entitled under the articles of incorporation, under any other bylaw or under
any agreement, vote of stockholders or disinterested directors or otherwise,
and shall not limit in any way any right which the corporation may have to
make different or further indemnifications with respect to the same or
different persons or classes of persons.

No person shall be liable to the corporation for any loss, damage,
liability or expense suffered by it on account of any action taken or
omitted to be taken by him as a director or officer of the corporation or of
any other corporation which he serves as a director or officer at the
request of the corporation, if such person (i) exercised the same degree of
care and skill as a prudent man would have exercised under the circumstances
in the conduct of his own affairs, or (ii) took or omitted to take such
action in reliance upon advice of counsel for the corporation, or for such
other corporation, or upon statement made or information furnished by
directors, officers, employees or agents of the corporation, or of such
other corporation, which he had no reasonable grounds to disbelieve.

Section 7 of the Underwriting Agreement (the proposed form of which is set
forth in Exhibit 1.1) provides for indemnification of the Registrant and its
directors and officers in certain circumstances.

II-3

<PAGE> 56
For information regarding the Registrant's undertaking to submit to
adjudication the issue of indemnification for violation of securities laws, see
``Undertakings,'' Item 17 hereof.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Not applicable.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1 Form of Underwriting Agreement<F*>

3.1 Amended and Restated Articles of Incorporation (filed as Exhibit 3(a) to Registrant's Registration Statement
on Form 10 and hereby incorporated herein by reference)

3.2 Bylaws (filed as Exhibit 3(b) to Registrant's Registration Statement on Form 10 and hereby incorporated
herein by reference)

4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-1
(File No. 33-78664) and hereby incorporated herein by reference)

4.2 Form of Stockholder Lock-Up Agreement<F*>

4.3 Second Amended and Restated Loan Agreement, dated as of October 18, 1995, by and among the Registrant,
BankAmerica Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(0) to
registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and hereby incorporated
herein by reference)

5 Opinion of Stinson, Mag & Fizzell, P.C., counsel to the Company as to the validity of the Common Stock<F*>

10.1 Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(d) to
Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference)

10.2 Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(e) to
Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference)

10.3 Lease dated July 1, 1979 between the Registrant and the City of Abilene (filed as Exhibit 10(f) to
Registrant's Registration Statement on Form 10 and hereby incorporated herein by reference)

10.4 Employment Agreement, dated March 18, 1993 between the Registrant and Glen L. Shank (filed as Exhibit 10(p)
to registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 and hereby incorporated
herein by reference)

10.5 Second Amended and Restated Loan Agreement, dated as of October 18, 1995, by and among the Registrant,
BankAmerica Business Credit, Inc. and Transamerica Business Credit Corporation (filed as Exhibit 10(0) to
registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and hereby incorporated
herein by reference)

10.6 Amended and Restated Security Agreement, dated as of October 18, 1995, by and between the Registrant and
BankAmerica Business Credit, Inc.

11 Computation of Registrant's Earnings Per Share

21 Subsidiaries of the Registrant

23.1 Consent of KPMG Peat Marwick LLP

23.2 Consent of Stinson, Mag & Fizzell, P.C. is included in Exhibit 5<F*>

24 Powers of Attorney (appears on the signature page of this Registration Statement)

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

<F*>To be Filed by Amendment
</TABLE>

(B) FINANCIAL STATEMENT SCHEDULES

Not applicable.

II-4

<PAGE> 57
ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefor, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5

<PAGE> 58
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Abilene, State of Kansas,
on the 16th day of September, 1996.

DUCKWALL-ALCO STORES, INC.

By: /s/ GLEN L. SHANK
----------------------------------
Glen L. Shank, President and
Chairman of the Board

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Glen L. Shank his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and all documents relating thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing necessary or advisable to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on September 16, 1996 by the following
persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----

<C> <S>
/s/ GLEN L. SHANK President, Chairman of the Board and Director
-------------------------------------------------- (Principal Executive Officer)
Glen L. Shank

/s/ BRYAN M. DECORDOVA Vice President--Finance and Treasurer
-------------------------------------------------- (Principal Financial and Accounting Officer)
Bryan M. DeCordova

/s/ DENNIS A. MULLIN Director
--------------------------------------------------
Dennis A. Mullin

/s/ ROBERT L. BARCUM Director
--------------------------------------------------
Robert L. Barcum

/s/ WILLIAM J. MORGAN Director
--------------------------------------------------
William J. Morgan

/s/ ROBERT C. AMENTA Director
--------------------------------------------------
Robert C. Amenta
</TABLE>

II-6

<PAGE> 1

EXECUTION COPY

AMENDED AND RESTATED SECURITY AGREEMENT
---------------------------------------

AMENDED AND RESTATED SECURITY AGREEMENT, dated as of
October 18, 1995, made by DUCKWALL-ALCO STORES, INC., a Kansas
corporation (the "Grantor"), in favor of BANKAMERICA BUSINESS
-------
CREDIT, INC. (formerly known as BA Business Credit, Inc., a
Delaware corporation, as collateral agent (in such capacity, the
"Collateral Agent") on behalf of the Secured Parties (as
----------------
defined below).

W I T N E S S E T H :
-------------------

WHEREAS, in May, 1991, the Grantor and General Electric
Capital Corporation ("GECC") entered into a certain loan
----
transaction (the "GECC Loan"), pursuant to which GECC made
---------
available to the Grantor a $42,000,000 credit facility for
revolving loans and letters of credit; and

WHEREAS, in connection with the GECC Loan, the Grantor
and GECC entered into that certain Loan Agreement (as amended prior
to February 11, 1993, the "Original Loan Agreement") dated May 29,
1991; and -----------------------

WHEREAS, as a condition to GECC's obligations to make the
GECC Loan to the Grantor, the Grantor, SPD Truck Lines, Inc.
("SPD") and GECC entered into that certain Security Agreement
---
(the "Original Security Agreement") dated May 29, 1991, which
---------------------------
Original Security Agreement granted to GECC a lien on and security
interest in substantially all of the assets of the Grantor and SPD;
and

WHEREAS, effective as of February 11, 1993, GECC assigned
all of its right, title and interest in the Original Loan Agreement
and the Original Security Agreement and each and every other
document and instrument executed in connection therewith
(collectively, the "Original Loan Documents") to BA Business
-----------------------
Credit, Inc. (now known as BankAmerica Business Credit, Inc.),
individually and as agent, and Transamerica Business Credit
Corporation;

WHEREAS, in connection with such assignment, (a) the
Original Loan Agreement was amended and restated in its entirety
pursuant to that certain Amended and Restated Loan Agreement dated
as of February 11, 1993 (as heretofore amended, supplemented or
otherwise modified, the "Existing Loan Agreement") among (i)
-----------------------
the Grantor, (ii) BA Business Credit, Inc. (now known as
BankAmerica Business Credit, Inc.) and Transamerica Business Credit
Corporation (collectively, the "Lenders"), and (iii) BA
-------
Business Credit, Inc. (now known as BankAmerica Business Credit,
Inc.), as agent for the Lenders (in such capacity, the "Agent")
-----
and (b) the Grantor, SPD and BA Business Credit, Inc. (now known as
BankAmerica Business Credit, Inc.), in its capacity as collateral
agent for the Lenders and the holders of the 10% Subordinated Notes
of the Grantor due 1998 (the "Subordinated Notes"), entered
------------------
into a First Amendment to Security Agreement, dated as

<PAGE> 2
of February 11, 1993 (the Original Security Agreement, as so amended,
being hereinafter referred to as the "Existing Security Agreement");
and ---------------------------

WHEREAS, the Grantor, the Lenders and the Agent have
agreed to amend and restate the Existing Loan Agreement in its
entirety pursuant to a Second Amended and Restated Loan Agreement,
dated as of October 18, 1995 (as further amended, supplemented or
otherwise modified from time to time, the "Loan Agreement"),
--------------
pursuant to which the Lenders have agreed to make revolving loans
from time to time to the Grantor and to cause to be issued letters
of credit from time to time for the account of the Grantor; and

WHEREAS, pursuant to the Loan Agreement, the Lenders and
the Agent have agreed to release their liens on certain of the
collateral security granted pursuant to the Existing Security
Agreement (including, without limitation, liens on all collateral
security granted by SPD) and certain of the other Loan Documents
(as defined in the Existing Loan Agreement); and

WHEREAS, the Subordinated Notes have been paid in full;
and

WHEREAS, to reflect the amendment and restatement of the
Existing Loan Agreement, the release of liens and the payment in
full of the Subordinated Notes, the Grantor and the Collateral
Agent desire to amend and restate the Existing Security Agreement
in its entirety as set forth herein;

NOW, THEREFORE, in consideration of the premises and of
the mutual covenants herein contained and for other good and
valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:

1. Defined Terms. Unless otherwise defined herein,
-------------
terms defined in the Loan Agreement are used herein as therein
defined, and the following terms shall have the following meanings
(such meanings being equally applicable to both the singular and
plural forms of the terms defined):

"Account Debtor" shall mean any "account debtor," as
--------------
such term is defined in section 9-105(l)(a) of the UCC.

"Accounts" shall mean any "account," as such term is
--------
defined in section 9-106 of the UCC, now owned or hereafter
acquired by the Grantor and, in any event, shall include,
without limitation, all accounts receivable, book debts and
other forms of obligations (other than forms of obligations
evidenced by Chattel Paper, Documents or Instruments) now
owned or hereafter received or acquired by or belonging or
owing to the Grantor (including, without limitation, under any
trade names, styles or divisions thereof) whether arising out
of goods sold or services rendered by the Grantor or from any
other transaction, whether or not the same involves the sale
of goods or services by the Grantor (including, without
limitation, any such obligation which might be characterized
as an account or contract right under the UCC)

2
<PAGE> 3
and all of the Grantor's rights in, to and under all purchase
orders or receipts now owned or hereafter acquired by it for
goods or services, and all of the Grantor's rights to any goods
represented by any of the foregoing (including, without
limitation, unpaid seller's rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned,
reclaimed or repossessed goods), and all moneys due or to
become due to the Grantor under all contracts for the sale of
goods or the performance of services or both by the Grantor
(whether or not yet earned by performance on the part of the
Grantor or in connection with any other transaction), now in
existence or hereafter occurring, including, without
limitation, the right to receive the proceeds of said purchase
orders and contracts, and all collateral security and
guarantees of any kind given by any Person with respect to any
of the foregoing.

"Chattel Paper" shall mean any "chattel paper," as
-------------
such term is defined in section 9-105(l)(b) of the UCC, now
owned or hereafter acquired by the Grantor.

"Collateral" shall have the meaning assigned to such
----------
term in Section 2 of this Security Agreement.

"Contracts" shall mean all contracts, undertakings,
---------
or other agreements (other than rights evidenced by Chattel
Paper, Documents or Instruments) in or under which the Grantor
may now or hereafter have any right, title or interest,
including, without limitation, with respect to an Account, any
agreement relating to the terms of payment or the terms of
performance thereof.

"Default" means a Default as defined in the Loan
-------
Agreement.

"Documents" shall mean any "documents," as such term
---------
is defined in section 9-105(l)(f) of the UCC, now owned or
hereafter acquired by the Grantor.

"Event of Default" means an Event of Default as
----------------
defined in the Loan Agreement.

"General Intangibles" shall mean any "general
-------------------
intangibles," as such term is defined in section 9-106 of the
UCC, now owned or hereafter acquired by the Grantor and, in
any event, shall include, without limitation, all right, title
and interest which the Grantor may now or hereafter have in or
under any Contract, all customer lists, Trademarks, rights in
intellectual property, Licenses, permits, trade secrets,
proprietary or confidential information, inventions (whether
patented or patentable or not) and technical information,
procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models,
drawings, materials and records now owned or hereafter
acquired by the Grantor, goodwill and rights of
indemnification.

"hereby," "herein," "hereof," "hereunder" and words
---------------------------------------
of similar import refer to this Security Agreement as a whole
(including, without limitation, any schedules hereto) and not
merely to the specific section, paragraph or clause in which
the respective word appears.

3
<PAGE> 4
"Instruments" shall mean any "instrument," as such
-----------
term is defined in section 9-105(l)(i) of the UCC, now owned
or hereafter acquired by the Grantor, other than instruments
that constitute, or are a part of a group of writings that
constitute Chattel Paper.

"Intellectual Property Collateral" shall mean all of
--------------------------------
the copyrights, Licenses, patents, Trademarks and Trade
Secrets as to which the Collateral Agent has been granted a
security interest hereunder.

"Inventory" shall mean any "inventory," as such term
---------
is defined in section 9-109 (4) of the UCC, now owned or
hereafter acquired by the Grantor and, in any event, shall
include, without limitation, all inventory, merchandise, goods
and other personal property now owned or hereafter acquired by
the Grantor which are held for sale or lease or are furnished
or are to be furnished under a contract of service or which
constitute raw materials, work in process or materials used or
consumed or to be used or consumed in the Grantor's business,
or the processing, packaging, delivery or shipping of the
same, and all finished goods.

"License" shall mean any Trademark License or other
-------
license as to which the Collateral Agent has been granted a
security interest hereunder.

"Proceeds" shall mean "proceeds," as such term is
--------
defined in section 9-306(1) of the UCC and, in any event,
shall include, without limitation, (i) any and all proceeds of
any insurance, indemnity, warranty or guaranty payable to the
Grantor from time to time with respect to any of the
Collateral, (ii) any and all payments (in any form whatsoever)
made or due and payable to the Grantor from time to time in
connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by
any governmental body, authority, bureau or agency (or any
person acting under color of governmental authority), (iii)
any claim of the Grantor against third parties for past,
present or future infringement or dilution of any Trademark or
Trademark License or for injury to the goodwill associated
with any Trademark, Trademark registration or Trademark
licensed under any Trademark License, and (iv) any and all
other amounts from time to time paid or payable under or in
connection with any of the Collateral.

"Secured Obligations" shall mean, without limitation,
-------------------
(i) the Obligations, including the Revolving Loans and Letters
of Credit, (ii) all fees owing by the Grantor under the Loan
Agreement, and (iii) all other indebtedness, liabilities and
obligations of the Grantor to any Secured Party, whether now
existing or hereafter incurred and whether created under,
arising out of or in connection with the Loan Agreement, this
Security Agreement or any of the other Loan Documents.

"Secured Parties" shall mean, collectively, the
---------------
Collateral Agent, the Agent, the Lenders and the Participating
Lenders.

4
<PAGE> 5
"Security Agreement" shall mean this Amended and
------------------
Restated Security Agreement, as the same may from time to time
be further amended, supplemented or otherwise modified, and
shall refer to this Amended and Restated Security Agreement as
in effect of the date such reference becomes operative.

"Trade Secrets" shall mean trade secrets, along with
-------------
any and all (i) income, royalties, damages and payments now
and hereafter due and/or payable to the Grantor with respect
thereto, including, without limitation, damages and payments
for past or future infringements or misappropriations thereof
, (ii) rights to sue for past, present and future
infringements or misappropriations thereof, and (iii) all
other rights corresponding thereto throughout the world.

"Trademark License" shall mean all of the following
-----------------
now owned or hereafter acquired by the Grantor: any written
agreement granting any right to use any Trademark or Trademark
registration.

"Trademarks" shall mean all of the following now
----------
owned or hereafter acquired by the Grantor: (i) all trademarks
(including service marks and trade names, whether registered
or at common law) , registrations and applications therefor,
and the entire product lines and goodwill of the Grantor's
business connected therewith and symbolized thereby, (ii) all
renewals thereof, (iii) all income, royalties, damages and
payments now and hereafter due or payable or both with respect
thereto, including, without limitation, damages and payments
for past or future infringements or misappropriation thereof,
(iv) all rights to sue for past, present and future
infringements or misappropriations thereof, and (v) all other
rights corresponding thereto throughout the world.

"UCC" shall mean the Uniform Commercial Code as the
---
same may, from time to time, be in effect in the State of New
York; provided, however, in the event that, by reason
-------- -------
of mandatory provisions of law, any or all of the attachment,
perfection or priority of the Collateral Agent's or Lenders'
security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the
State of New York, the term "UCC" shall mean the Uniform
Commercial Code as in effect in such other jurisdiction for
purposes of the provisions hereof relating to such attachment,
perfection or priority and for purposes of definitions related
to such provisions.

2. Grant of Security Interest. (a) The Grantor
--------------------------
hereby confirms that pursuant to the Existing Security Agreement,
as collateral security for the prompt and complete payment and
performance when due (whether at stated maturity, by acceleration
or otherwise) of all the Secured Obligations and to induce the
Lenders to enter into the Existing Loan Agreement and to make the
Loans in accordance with the terms thereof, the Grantor assigned,
conveyed, mortgaged, pledged, hypothecated and transferred to the
Collateral Agent, for its benefit and the ratable benefit of the
other Secured Parties, and granted to the Collateral Agent, for its
benefit and the ratable benefit of

5
<PAGE> 6
the other Secured Parties, a security interest in all of the
Grantor's right, title and interest in, to and under the following
(all of which is hereinafter collectively called the
"Collateral"):
----------

(i) all Accounts of the Grantor;

(ii) all Chattel Paper of the Grantor;

(iii) all Contracts of the Grantor;

(iv) all Documents of the Grantor;

(v) all General Intangibles of the Grantor;

(vi) all Instruments of the Grantor;

(vii) all Inventory of the Grantor;

(viii) all Trade Secrets of the Grantor;

(ix) all Trademark Licenses of the Grantor;

(x) all other intangible personal property
of the Grantor, whether now owned or hereafter acquired
by the Grantor and wherever located; and

(xi) to the extent not otherwise included, all
Proceeds of each of the foregoing and all accessions to,
substitutions and replacements for, and rents, profits
and products of each of the foregoing.

The Grantor hereby restates, reaffirms and continues the Liens
on the Collateral.

(b) The Grantor hereby confirms that in addition, as
collateral security for the prompt and complete payment when due of
the Secured Obligations and in order to induce the Lenders as
aforesaid, pursuant to the Existing Security Agreement, each Lender
and Participating Lender was granted a lien and security interest
in all property of the Grantor held by such Lender or Participating
Lender, including, without limitation, all property of every
description, now or hereafter in the possession or custody of or in
transit to such Lender or Participating Lender for any purpose,
including safekeeping, collection or pledge, for the account of the
Grantor, or as to which the Grantor may have any right or power.

3. Rights of Collateral Agent and Other Secured Parties;
-----------------------------------------------------
Limitations on Collateral Agent's and Other Secured Parties' Obligations.
- ------------------------------------------------------------------------
(a) It is expressly agreed by the Grantor that, anything herein to the
contrary notwithstanding, the Grantor shall remain liable under each
of its Contracts and each of its Licenses to observe and perform all
the conditions and obligations to be

6
<PAGE> 7
observed and performed by it thereunder and the Grantor shall
perform all of its duties and obligations thereunder, all in
accordance with and pursuant to the terms and provisions of each
such Contract or License. The Collateral Agent and the other
Secured Parties shall not have any obligation or liability under
any Contract or License by reason of or arising out of this
Security Agreement or the granting to the Collateral Agent or any
other Secured Party of a security interest therein or the receipt
by the Collateral Agent or any other Secured Party of any payment
relating to any Contract or License pursuant hereto, nor shall the
Collateral Agent or any other Secured Party be required or
obligated in any manner to perform or fulfill any of the
obligations of the Grantor under or pursuant to any Contract or
License, or to make any payment, or to make any inquiry as to the
nature or the sufficiency of any payment received by it or the
sufficiency of any performance by any party under any Contract or
License, or to present or file any claim, or to take any action to
collect or enforce any performance or the payment of any amounts
which may have been assigned to it or to which it may be entitled
at any time or times.

(b) The Collateral Agent authorizes the Grantor to
collect its Accounts provided that such collection is performed in
a prudent and businesslike manner, and the Collateral Agent may,
upon the occurrence and during the continuation of any Default or
Event of Default and without notice, limit or terminate said
authority at any time. If required by the Collateral Agent at any
time during the continuation of any Default or Event of Default,
any Proceeds, when first collected by the Grantor, received in
payment of any such Account or in payment for any of its Inventory
or on account of any of its Contracts, shall be promptly deposited
by the Grantor in precisely the form received (with all necessary
endorsements) in a special bank account maintained by the
Collateral Agent subject to withdrawal by the Collateral Agent
only, as hereinafter provided, and until so turned over shall be
deemed to be held in trust by the Grantor for and as the Collateral
Agent's property and shall not be commingled with the Grantor's
other funds or properties. Such Proceeds, when deposited, shall
continue to be collateral security for all of the Secured
Obligations and shall not constitute payment thereof until applied
as hereinafter provided. The Collateral Agent shall upon the
request of the Majority Lenders apply all or a part of the funds on
deposit in said special account to the principal of or interest on
or both in respect of any of the Secured Obligations in accordance
with the provisions of Section 8(d) hereof and any part of such
funds which the Majority Lenders elect not so to apply and deems
not required as collateral security for the Secured Obligations
shall be paid over from time to time by the Collateral Agent to the
Grantor. If a Default or an Event of Default has occurred and is
continuing, at the request of the Collateral Agent the Grantor
shall deliver to the Collateral Agent all original and other
documents evidencing, and relating to, the sale and delivery of
such Inventory or the performance of labor or service which created
such Accounts, including, without limitation, all original orders,
invoices and shipping receipts; and, prior to the occurrence of a
Default or an Event of Default the Grantor shall deliver
photocopies thereof to the Collateral Agent at its request.

(c) The Collateral Agent may at any time, upon the
occurrence and during the continuation of any Default or Event of
Default (whether or not waived), after first notifying the Grantor
of its intention to do so, notify Account Debtors of the Grantor,
parties to the Contracts of the Grantor, obligors of Instruments of
the Grantor and obligors in respect of Chattel Paper of the

7
<PAGE> 8
Grantor that the Accounts and the right, title and interest of the
Grantor in and under such Contracts, such Instrument and such
Chattel Paper have been assigned to the Collateral Agent and that
payments shall be made directly to the Collateral Agent. Upon the
request of the Collateral Agent, the Grantor will so notify such
Account Debtors, parties to such Contracts, obligors of such
Instruments and obligors in respect of such Chattel Paper. Upon the
occurrence and during the continuation of a Default or an Event of
Default (whether or not waived), the Collateral Agent may in its own
name or in the name of others communicate with such Account Debtors,
parties to such Contracts, obligors of such Instruments and
obligors in respect of such Chattel Paper to verify with such
Persons to the Collateral Agent's satisfaction the existence,
amount and terms of any such Accounts, Contracts, Instruments or
Chattel Paper.

(d) Upon reasonable prior notice to the Grantor (unless
a Default or an Event of Default has occurred and is continuing, in
which case no notice is necessary), the Collateral Agent shall have
the right to make test verifications of the Accounts and physical
verifications of the Inventory in any manner and through any medium
that it considers advisable, and the Grantor agrees to furnish all
such assistance and information as the Collateral Agent may require
in connection therewith. The Grantor at its expense will cause
certified independent public accountants satisfactory to the
Collateral Agent to prepare and deliver to the Collateral Agent at
any time and from time to time promptly upon the Collateral Agent's
request, the following reports: (i) a reconciliation of all its
Accounts, (ii) an aging of all its Accounts, (iii) trial balances,
and (iv) a test verification of such Accounts as the Collateral
Agent may request. The Grantor at its expense will cause certified
independent public accountants satisfactory to the Collateral Agent
to prepare and deliver to the Collateral Agent the results of the
annual physical verification of its Inventory made or observed by
such accountants.

4. Representations and Warranties. The Grantor
------------------------------
hereby represents and warrants that:

(a) Except for the security interest granted to the
Collateral Agent for the ratable benefit of itself and the
other Secured Parties and other Permitted Liens, the Grantor
is the sole owner of each item of the Collateral in which it
purports to grant a security interest hereunder, having good
and marketable title thereto, free and clear of any and all
Liens. No material amounts payable under or in connection
with any of its Accounts or Contracts are evidenced by
Instruments which have not been delivered to the Collateral
Agent.

(b) No effective security agreement, financing
statement, equivalent security or lien instrument or
continuation statement covering all or any part of the
Collateral is on file or of record in any public office,
except such as may have been filed by the Grantor in favor of
the Collateral Agent pursuant to this Security Agreement or
such as relate to other Permitted Liens.

(c) Appropriate financing statements having been filed
in the jurisdictions listed on Schedule I hereto, this
Security Agreement is effective to create a valid and
continuing first

8
<PAGE> 9
priority lien on and first priority perfected security interest
in the Collateral with respect to which a security interest may
be perfected by filing pursuant to the UCC, or by filing in the
United States Patent and Trademark Office, in favor of the
Collateral Agent for its benefit and the ratable benefit of the
other Secured Parties, prior to all other Liens, except
Permitted Liens, and is enforceable as such as against
creditors of and purchasers from the Grantor (other than
purchasers of Inventory in the ordinary course of business).
All action necessary or desirable to protect and perfect such
security interest in each item of the Collateral has been duly
taken.

(d) The Grantor's principal place of business and the
place where its records concerning the Collateral are kept and
the location of its Inventory are set forth on Schedule II
hereto, and the Grantor will not change such principal place
of business or remove such records or change the location of
its Inventory unless it has taken such action as is necessary
to cause the security interest of the Collateral Agent in the
Collateral to continue to be perfected. The Grantor will not
change its principal place of business or the place where its
records concerning the Collateral are kept or change the
location of its Inventory without giving thirty (30) days'
prior written notice thereof to the Collateral Agent.

(e) The amount represented by the Grantor to the
Collateral Agent from time to time as owing by each Account
Debtor or by all Account Debtors in respect of the Accounts of
the Grantor will at such time be the correct amount actually
and unconditionally owing by such Account Debtors thereunder.

5. Covenants. The Grantor covenants and agrees
---------
with the Collateral Agent for the benefit of itself and the other
Secured Parties that from and after the date of this Security
Agreement until the commitments of the Lenders to extend credit
under the Loan Agreement have been terminated and the Secured
Obligations have been fully satisfied:

(a) Further Documentation; Pledge of Instruments. At
--------------------------------------------
any time and from time to time, upon the written request of
the Collateral Agent, and at the sole expense of the Grantor,
the Grantor will promptly and duly execute and deliver any and
all such further instruments and documents and take such
further action as the Collateral Agent may reasonably deem
desirable to obtain the full benefits of this Security
Agreement and of the rights and powers herein granted,
including, without limitation, using their best efforts to
secure all consents and approvals necessary or appropriate for
the assignment to the Collateral Agent of any License or
Contract held by the Grantor or in which the Grantor has any
rights not heretofore assigned, the filing of any financing or
continuation statements under the UCC with respect to the
liens and security interests granted hereby, transferring
Collateral to the Collateral Agent's possession (if a security
interest in such Collateral can be perfected by possession),
and using its best efforts to obtain waivers of liens from
landlords and mortgagees. The Grantor also hereby authorizes
the Collateral Agent to file any such financing or
continuation statement without the signature of the Grantor to
the extent permitted by applicable law. If any amount payable
under or in connection with any of the

9
<PAGE> 10
Collateral shall be or become evidenced by any Instrument, such
Instrument shall be immediately pledged to the Collateral Agent
hereunder, and shall be duly endorsed in a manner satisfactory
to the Collateral Agent and delivered to the Collateral Agent.

(b) Maintenance of Records. The Grantor will keep
----------------------
and maintain at its own cost and expense satisfactory and
complete records of the Collateral, including, without
limitation, a record of all payments received and all credits
granted with respect to the Collateral and all other dealings
with the Collateral. The Grantor will mark its books and
records pertaining to the Collateral to evidence this Security
Agreement and the security interests granted hereby. All
Chattel Paper will be marked with the following legend: "This
writing and the obligations evidenced or secured hereby are
subject to the security interest of BankAmerica Business
Credit, Inc., as Collateral Agent". For the Collateral
Agent's further security, the Grantor agrees that the
Collateral Agent shall have a special property interest in all
of the Grantor's books and records pertaining to the
Collateral and, upon the occurrence and during the
continuation of any Default or Event of Default, the Grantor
shall deliver and turn over any such books and records to the
Collateral Agent or to its representatives at any time on
demand of the Collateral Agent. Prior to the occurrence of a
Default or an Event of Default and upon reasonable notice from
the Collateral Agent, the Grantor shall permit any
representative of the Collateral Agent to inspect such books
and records and will provide photocopies thereof to the
Collateral Agent.

(c) Indemnification. In any suit, proceeding or
---------------
action brought by the Collateral Agent or any other Secured
Party relating to any Account, Chattel Paper, Contract,
General Intangible or Instrument for any sum owing thereunder,
or to enforce any provision of any Account, Chattel Paper,
Contract, General Intangible or Instrument, the Grantor will
save, indemnify and keep the Collateral Agent and such Secured
Party harmless from and against all expense, loss or damage
suffered by reason of any defense, setoff, counterclaim,
recoupment or reduction of liability whatsoever of the obligor
thereunder, arising out of a breach by the Grantor of any
obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor
of, such obligor or its successors from the Grantor, and all
such obligations of the Grantor shall be and remain
enforceable against and only against the Grantor and shall not
be enforceable against the Collateral Agent or any other
Secured Party.

(d) Compliance with Laws, etc. The Grantor will
-------------------------
comply, in all material respects, with all acts, rules,
regulations, orders, decrees and directions of any
governmental authority, applicable to the Collateral or any
part thereof or to the operation of the Grantor's business;
provided, however, that the Grantor may contest any
-------- -------
act, regulation, order, decree or direction in any reasonable
manner which shall not in the sole opinion of the Collateral
Agent adversely affect the Collateral Agent's rights hereunder
or adversely affect the first priority of its security
interest in the Collateral.

10
<PAGE> 11
(e) Payment of Obligations. The Grantor will pay
----------------------
promptly when due all taxes, assessments and governmental
charges or levies imposed upon the Collateral or in respect of
its income or profits therefrom and all claims of any kind
(including, without limitation, claims for labor, materials
and supplies), except that no such charge need be paid if (i)
such nonpayment does not involve any danger of the sale,
forfeiture or loss of any of the Collateral or any interest
therein, and (ii) such charge is adequately reserved against
in accordance with and to the extent required by GAAP.

(f) Compliance with Terms of Accounts, etc. In all
--------------------------------------
material respects, the Grantor will perform and comply with
all obligations in respect of Accounts, Chattel Paper,
Contracts and Licenses and all other agreements to which it is
a party or by which it is bound..

(g) Limitation on Liens on Collateral. The Grantor
---------------------------------
will not create, permit or suffer to exist, and will defend
the Collateral against and take such other action as is
necessary to remove, any Lien on the Collateral except
Permitted Liens, and will defend the right, title and interest
of the Collateral Agent and the other Secured Parties in and
to any of the Grantor's rights under the Chattel Paper,
Contracts, Documents, General Intangibles and Instruments and
to the Inventory and in and to the Proceeds thereof against
the claims and demands of all Persons whomsoever.

(h) Limitations on Modifications of Accounts. Upon
----------------------------------------
the occurrence and during the continuation of any Default or
Event of Default, the Grantor will not, without the Collateral
Agent's prior written consent, grant any extension of the time
of payment of any of the Accounts, Chattel Paper or
Instruments, compromise, compound or settle the same for less
than the full amount thereof, release, wholly or partly, any
Person liable for the payment thereof, or allow any credit or
discount whatsoever thereon other than trade discounts granted
in the ordinary course of business of the Grantor.

(i) Insurance. The Grantor shall insure the
---------
Collateral against loss or damage by fire with extended
coverage, loss in transit, and such other hazards as the
Collateral Agent and the Lenders shall specify, in amounts,
under policies and by insurers acceptable to the Collateral
Agent and the Lenders. The Grantor shall cause the Collateral
Agent and the Lenders to be named in each such policy as
secured party and loss payee or additional insured, in a
manner acceptable to the Lenders. Each policy of insurance
shall contain a clause or endorsement requiring the insurer to
give not less than thirty (30) days prior written notice to
the Collateral Agent in the event of cancellation of the
policy for any reason whatsoever and a clause or endorsement
stating that the interest of the Collateral Agent and the
Lenders shall not be impaired or invalidated by any act or
neglect of the Grantor or the owner of any premises where
Collateral is located nor by the use of such premises for
purposes more hazardous than are permitted by such policy.
All premiums for such insurance shall be paid by the Grantor
when due, and certificates of insurance and the original
policies shall be delivered to the Collateral Agent. If any
the Grantor fails to procure such insurance or to pay the
premiums therefor when due, the Collateral Agent may (but
shall not be required

11
<PAGE> 12
to) do so and charge the costs thereof to the Grantor's loan
account. Each the Grantor shall promptly notify the Collateral
Agent of any loss, damage, or destruction to the Collateral or
arising from its use, whether or not covered by insurance. The
Collateral Agent is hereby authorized to collect all such
insurance proceeds directly. After deducting from such proceeds
the expenses, if any, incurred by the Collateral Agent or
either Lender in the collection or handling thereof, the
Collateral Agent may apply such proceeds to the reduction of
the Obligations, in such order as the Collateral Agent
determines, or at the Collateral Agent's option may permit or
require the Grantor to use such money, or any part thereof, to
replace, repair or restore the Collateral in a diligent and
expeditious manner with materials and workmanship of
substantially the same quality as existed before the loss,
damage or destruction.

(j) Limitations on Disposition. The Grantor will
--------------------------
not sell, lease, transfer or otherwise dispose of any of the
Collateral, or attempt or contract to do so except as
permitted by the Loan Agreement and except for sales of
Inventory in the ordinary course of business.

(k) Further Identification of Collateral. The
------------------------------------
Grantor will if so requested by the Collateral Agent furnish
to the Collateral Agent, as often as the Collateral Agent
reasonably requests, statements and schedules further
identifying and describing the Collateral and such other
reports in connection with the Collateral as the Collateral
Agent may reasonably request, all in reasonable detail.

(l) Notices. The Grantor will advise the Collateral
-------
Agent promptly, in reasonable detail, (i) of any material
lien, security interest, encumbrance or claim made or asserted
against any of the Collateral, (ii) of any material change in
the composition of the Collateral, and (iii) of the occurrence
of any other event which would have a material adverse effect
on the aggregate value of the Collateral or on the security
interests created hereunder.

(m) Access and Examination. The Collateral Agent
----------------------
and the Lenders may at all reasonable times have access to,
examine, audit, make extracts from and inspect the Grantor's
records, files, and books of account and the Collateral and
may discuss each the Grantor's affairs with the Grantor's
officers and management and with its independent public
accountants. The Grantor will deliver to the Collateral Agent
any instrument necessary for the Agent or the Lenders to
obtain records from any service bureau maintaining records for
the Grantor. The Collateral Agent and the Lenders may, at any
time when an Event of Default exists and at the Grantor's
expense, make copies of all of the Grantor's books and
records, or require the Grantor to deliver such copies to the
Collateral Agent and each Lender. The Collateral Agent and
the Lenders may, without expense to the Collateral Agent or
any Lender, use such of the Grantor's personnel, supplies, and
premises as may be reasonably necessary for maintaining or
enforcing the Security Interest. The Collateral Agent and the
Lenders shall have the right, at any time, in their own name
or in the name of a nominee of the Lenders, to verify the
validity, amount or any other matter relating to the Accounts,
by mail, telephone or otherwise.

12
<PAGE> 13
(n) Continuous Perfection. The Grantor will not
---------------------
change its name, identity or corporate structure in any manner
which might make any financing or continuation statement filed
in connection herewith seriously misleading within the meaning
of section 9-402(7) of the UCC (or any other then applicable
provision of the UCC) unless the Grantor shall have given the
Collateral Agent at least thirty (30) days' prior written
notice thereof and shall have taken all action (or made
arrangements to take such action substantially simultaneously
with such change if it is impossible to take such action in
advance) necessary or reasonably requested by the Collateral
Agent to amend such financing statement or continuation
statement so that it is not seriously misleading.

(o) Covenants Regarding Intellectual Property Collateral.
----------------------------------------------------

(i) The Grantor shall notify the Collateral
Agent immediately if it knows or has reason to know that
any application or registration relating to any Trademark
which is material to the conduct of the Grantor's
business may become abandoned or dedicated, or of any
adverse determination or development (including, without
limitation, the institution of, or any such determination
or development in, any proceeding in the United States
Patent and Trademark Office or any court) regarding the
Grantor's ownership of any Trademark which is material to
the conduct of the Grantor's business, its right to
register the same, or to keep and maintain the same.

(ii) In no event shall the Grantor, either
itself or through any agent, employee, licensee or
designee, file an application for the registration of any
Trademark with the United States Patent and Trademark
Office or any similar office or agency in any other
country or any political subdivision thereof, unless it
promptly informs the Collateral Agent, and, upon request
of the Collateral Agent, executes and delivers any and
all agreements, instruments, documents, and papers as
Lender may request to evidence the Collateral Agent's
security interest in such Trademark and the General
Intangibles, including, without limitation, the goodwill
of the Grantor, relating thereto or represented thereby.

(iii) The Grantor will take all necessary and
appropriate actions, including, without limitation, in
any proceeding before the United States Patent and
Trademark Office, to maintain and pursue each application
(and to obtain the relevant registration) and to maintain
each registration of the Trademarks which are material to
the conduct of the Grantor's business, including, without
limitation, filing of applications for renewal,
affidavits of use, affidavits of incontestability and
opposition cancellation proceedings.

(iv) In the event that any of the Intellectual
Property Collateral is infringed, misappropriated or
diluted by a third party, the Grantor shall notify the
Collateral Agent promptly after it learns thereof and
shall, unless the Grantor shall reasonably

13
<PAGE> 14
determine that such Intellectual Property Collateral is
not material to the conduct of the Grantor's business,
promptly sue for infringement, misappropriation or
dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and take such
other actions as the Grantor shall reasonably deem
appropriate under the circumstances to protect such
Intellectual Property Collateral.

6. Collateral Agent's Appointment as Attorney-in-Fact.
--------------------------------------------------
(a) The Grantor hereby irrevocably constitutes and appoints the
Collateral Agent and any officer or agent thereof, with full power
of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of the Grantor
and in the name of the Grantor or in its own name, from time to time
in the Collateral Agent's discretion, for the purpose of carrying out
the terms of this Security Agreement, to take any and all appropriate
action and to execute and deliver any and all documents and
instruments which may be necessary or desirable to accomplish the
purposes of this Security Agreement and, without limiting the
generality of the foregoing, hereby gives the Collateral Agent the
power and right, on behalf of the Grantor, without notice to or assent
by the Grantor to do the following:

(i) to ask, demand, collect, receive and give
acquittances and receipts for any and all moneys due and
to become due under any Collateral and, in the name of
the Grantor or its own name or otherwise, to take
possession of and endorse and collect any checks, drafts,
notes, acceptances or other Instruments for the payment
of moneys due under any Collateral and to file any claim
or to take any other action or proceeding in any court of
law or equity or otherwise deemed appropriate by the
Collateral Agent for the purpose of collecting any and
all such moneys due under any Collateral whenever payable
and to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise
deemed appropriate by the Collateral Agent for the
purpose of collecting any and all such moneys due under
any Collateral whenever payable;

(ii) to pay or discharge taxes, liens, security
interests or other encumbrances levied or placed on or
threatened against the Collateral, to effect any repairs
or any insurance called for by the terms of this Security
Agreement and to pay all or any part of the premiums
therefor and the costs thereof; and

(iii) (A) to direct any party liable for any
payment under any of the Collateral to make payment of
any and all moneys due, and to become due thereunder,
directly to the Collateral Agent or as the Collateral
Agent shall direct; (B) to receive payment of and receipt
for any and all moneys, claims and other amounts due, and
to become due at any time, in respect of or arising out
of any Collateral; (C) to sign and indorse any invoices,
freight or express bills, bills of lading, storage or
warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with accounts and
other Documents constituting or relating to the
Collateral; (D) to commence and prosecute any suits,
actions or proceedings at

14
<PAGE> 15
law or in equity in any court of competent jurisdiction to
collect the Collateral or any part thereof and to enforce
any other right in respect of any Collateral; (E) to
defend any suit, action or proceeding brought against the
Grantor with respect to any Collateral; (F) to settle,
compromise or adjust any suit, action or proceeding
described above and, in connection therewith, to give such
discharges or releases as the Collateral Agent may deem
appropriate; (G) to license or, to the extent permitted by
an applicable license, sublicense, whether general,
special or otherwise, and whether on an exclusive or
non-exclusive basis, any Trademark, throughout the world
for such term or terms, on such conditions, and in such
manner, as the Collateral Agent shall in its sole
discretion determine; and (H) generally to sell, transfer,
pledge, make any agreement with respect to or otherwise
deal with any of the Collateral as fully and completely as
though the Collateral Agent were the absolute owner
thereof for all purposes, and to do, at the Collateral
Agent's option and the Grantor's expense, at any time, or
from time to time, all acts and things which the
Collateral Agent reasonably deems necessary to protect,
preserve or realize upon the Collateral and the Collateral
Agent's Lien with respect to the Collateral for the
benefit of itself and the other Secured Parties, in order
to effect the intent of this Security Agreement, all as
fully and effectively as the Grantor might do.

(b) The Collateral Agent agrees that, except upon the
occurrence and during the continuation of a Default or an Event of
Default, it will forebear from exercising the power of attorney or
any rights granted to the Collateral Agent pursuant to this Section
6. The Grantor hereby ratifies, to the extent permitted by law, all
that said attorneys shall lawfully do or cause to be done by virtue
hereof. The power of attorney granted pursuant to this Section 6
is a power coupled with an interest and shall be irrevocable until
the Secured Obligations are indefeasibly paid in full.

(c) The powers conferred on the Collateral Agent
hereunder are solely to protect the interest of the Collateral
Agent, on behalf of the Secured Parties, in the Collateral, and
shall not impose any duty upon it to exercise any such powers. The
Collateral Agent shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and
neither it nor any of its officers, directors, employees or agents
shall be responsible to the Grantor for any act or failure to act,
except for its own gross negligence or willful misconduct.

(d) The Grantor also authorizes the Collateral Agent, at
any time and from time to time upon the occurrence and during the
continuation of any Default or Event of Default, (i) to communicate
in its own name with any party to any Contract with regard to the
assignment of the right, title and interest of the Grantor in and
under the Contracts hereunder and other matters relating thereto
and (ii) to execute, in connection with the sale provided for in
Section 8 hereof, any endorsements, assignments or other
instruments of conveyance or transfer with respect to the
Collateral.

15
<PAGE> 16

7. Performance by the Collateral Agent of Grantor's
------------------------------------------------
Obligations. If the Grantor fails to perform or comply with any
- -----------
of its agreements contained herein and the Collateral Agent, as
provided for by the terms of this Security Agreement, shall itself
perform or comply, or otherwise cause performance or compliance,
with such agreement, the reasonable expenses of the Collateral
Agent incurred in connection with such performance or compliance,
together with interest thereon at the rate then in effect in
respect of Reference Rate Loans shall be payable by the Grantor to
the Collateral Agent on demand and shall constitute Secured
Obligations secured hereby.

8. Remedies, Rights Upon Default. (a) If any
-----------------------------
Default or Event of Default shall occur and be continuing, the
Collateral Agent shall, at the request of the Majority Lenders, or
may, with the consent of the Majority Lenders, exercise in addition
to all other rights and remedies granted to it in this Security
Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and
remedies of a secured party under the UCC. Without limiting the
generality of the foregoing, the Grantor expressly agrees that in
any such event the Collateral Agent, without demand of performance
or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale)
to or upon the Grantor or any other Person (all and each of which
demands, advertisements and/or notices are hereby expressly waived
to the maximum extent permitted by the UCC and other applicable
law), may forthwith collect, receive, appropriate and realize upon
the Collateral, or any part thereof, for the benefit of itself and
the other Secured Parties, and/or may forthwith sell, lease,
assign, give an option or options to purchase, or sell or otherwise
dispose of and deliver said Collateral (or contract to do so), or
any part thereof, for the benefit of itself and the other Secured
Parties, in one or more parcels at public or private sale or sales,
at any exchange or broker's board or at any of the Collateral
Agent's offices or elsewhere at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of
any credit risk. The Collateral Agent or any Lender shall have the
right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase
the whole or any part of said Collateral (or any part thereof) so
sold, free of any right or equity of redemption, which equity of
redemption the Grantor hereby releases. The Grantor further
agrees, at the Collateral Agent's request, to assemble the
Collateral (or any part thereof) and make it available to the
Collateral Agent at places which the Collateral Agent shall
reasonably select, whether at the Grantor's premises or elsewhere.
The Collateral Agent shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale,
as provided in Section 8(d) hereof, the Grantor remaining liable
for any deficiency remaining unpaid after such application, and
only after so paying over such net proceeds and after the payment
by the Collateral Agent of any other amount required by any
provision of law, including section 9-504(l)(C) of the UCC, need
the Collateral Agent account for the surplus, if any, to the
Grantor. To the maximum extent permitted by applicable law, the
Grantor waives all claims, damages, and demands against the
Collateral Agent and the other Secured Parties arising out of the
repossession, retention or sale of the Collateral (or any part
thereof) except such as arise out of the gross negligence or wilful
misconduct of the Collateral Agent or any other Secured Party. The
Grantor agrees that the Collateral Agent need not give more than
ten (10) days' notice (which notification shall be deemed given
when mailed or delivered on an overnight basis, postage prepaid,
addressed to the Grantor at its address referred to in Section 12
hereof) of the time and place of any public sale or of the time
after which a private sale

16
<PAGE> 17
may take place and that such notice is reasonable notification of
such matters. The Grantor shall remain liable for any deficiency if
the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which the Collateral Agent and
the other Secured Parties are entitled in accordance with the terms
hereof, the Grantor also being liable for the reasonable fees of any
attorneys employed by the Collateral Agent or any other Secured
Party (including the allocated cost of staff counsel) to collect
such deficiency.

(b) The Grantor also agrees to pay all costs of each of
the Collateral Agent and each other Secured Party, including,
without limitation, reasonable attorneys' fees (including the
allocated cost of staff counsel), incurred in connection with the
enforcement of any of its rights and remedies hereunder.

(c) The Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by
applicable law) of any kind in connection with this Security
Agreement or any Collateral.

(d) The Proceeds of any sale, disposition or other
realization upon all or any part of the Collateral shall be
distributed by the Collateral Agent in the following order of
priorities:

first, to the Collateral Agent in an amount sufficient
-----
to pay in full the expenses of the Collateral Agent in connection
with such sale, disposition or other realization, including all
expenses, liabilities and advances incurred or made by the
Collateral Agent in connection therewith, including, without
limitation, reasonable attorneys' fees (including the allocated
cost of staff counsel);

second, to the Lenders and the Participating Lenders in
------
an amount equal to the then unpaid principal of and accrued
interest and prepayment premiums, if any, on the Secured
Obligations, and if such Proceeds shall be insufficient to pay
in full such amount, then to the Lenders and the Participating
Lenders ratably in accordance with the then unpaid amounts
thereof owing to each such Lender or Participating Lender;

third, to the Lenders and the Participating Lenders in
-----
an amount equal to any other Secured Obligations which are
then unpaid, and if such Proceeds shall be insufficient to pay
in full such amount, then to the Lenders and the Participating
Lenders ratably in accordance with the then unpaid amounts
thereof owing to each such Lender or Participating Lender; and

finally, to pay to the Grantor, or its representatives or
-------
as a court of competent jurisdiction may direct, any surplus then
remaining from such Proceeds.

9. Grant of License to Use Intellectual Property
---------------------------------------------
Collateral. For the purpose of enabling the Collateral Agent to
- ----------
exercise rights and remedies under Section 8 hereof at such time as
the Collateral Agent, without regard to this Section 9, shall be
lawfully entitled to exercise such rights and remedies, the Grantor
hereby grants to the Collateral Agent an irrevocable, non-exclusive
license

17
<PAGE> 18
(exercisable without payment of royalty or other compensation to the
Grantor) to use, license or sublicense any Trade Secret or
Trademark, now owned or hereafter acquired by the Grantor, and
wherever the same may be located, and including, without limitation,
in such license reasonable access to all media in which any of the
licensed items may be recorded or stored and to all computer and
automatic machinery software and programs used for the compilation
or printout thereof.

10. Limitation on the Collateral Agent's Duty in
--------------------------------------------
Respect of Collateral. The Collateral Agent shall not have any
- ---------------------
duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of it or any income
thereon or as to the preservation of rights against prior parties
or any other rights pertaining thereto, except that the Collateral
Agent shall use reasonable care with respect to the Collateral in
its possession or under its control. Upon request of the Grantor,
the Collateral Agent shall account for any moneys received by it in
respect of any foreclosure on or disposition of the Collateral.

11. Reinstatement. This Agreement shall remain in
-------------
full force and effect and continue to be effective should any
petition be filed by or against the Grantor for liquidation or
reorganization, should the Grantor become insolvent or make an
assignment for the benefit of creditors or should a receiver or
trustee be appointed for all or any significant part of the
Grantor's assets, and shall continue to be effective or be
reinstated, as the case may be, if at any time payment and
performance of the Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must
otherwise be restored or returned by any obligee of the Secured
Obligations, whether as a "voidable preference", "fraudulent
conveyance", or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or
any part thereof, is rescinded, reduced, restored or returned, the
Secured Obligations shall be reinstated and deemed reduced only by
such amount paid and not so rescinded, reduced, restored or
returned.

12. Notices. Except as otherwise provided herein,
-------
whenever it is provided herein that any notice, demand, request,
consent, approval, declaration or other communication shall or may
be given to or served upon any of the parties by any other party,
or whenever any of the parties desires to give or serve upon any
other communication with respect to this Security Agreement, each
such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or sent by registered
or certified mail, return receipt requested, postage prepaid, or by
telecopy and confirmed by telecopy answerback addressed as follows:

(a) If to the Collateral Agent, at

BankAmerica Business Credit, Inc.
40 East 52nd Street, 2nd Floor
New York, New York 10022
Attn: Portfolio Manager
Telecopy Number: (212) 836-5169

18
<PAGE> 19
with copies to

Bank of America National Trust
and Savings Association
335 Madison Avenue - 4th Floor
New York, New York 10017
Attn: Legal Department
Telecopy Number: (212) 503-7350

If to Transamerica, at:

Transamerica Business Credit Corporation
Two Ravinia Drive, Suite 700
Atlanta, Georgia 30346
Attn: Mr. T. W. Harris
Telecopy Number: (770) 390-7017

with copies to:

King & Spaulding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Attn: Gerald T. Woods, Esq.
Telecopy Number: (404) 572-5100

(b) If to the Grantor, at:

Duckwall-ALCO Stores, Inc.
401 Cottage Avenue
Abilene, Kansas 67410-2832
Attn: Mr. Bryan DeCordova
Telecopy Number: (913) 263-1905

With a copy to

Stinson, Mag & Fizzell, P.C.
1201 Walnut Street
P.O. Box 419251
Kansas city, Missouri 64141-6251
Attention: Richard N. Nixon, Esq.
Telecopy Number: (816) 691-3495

19
<PAGE> 20
or at such other address as may be substituted by notice given as
herein provided. The giving of any notice required hereunder may
be waived in writing by the party entitled to receive such notice.
Every notice, demand, request, consent, approval, declaration or
other communication hereunder shall be deemed to have been duly
given or served on the date on which personally delivered, with
receipt acknowledged, telecopied and confirmed by telecopy
answerback or when deposited in the United States mails, postage
prepaid, if sent by registered or certified mail. Failure or delay
in delivering copies of any notice, demand, request, consent,
approval, declaration or other communication to the persons
designated above to receive copies shall in no way adversely affect
the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.

13. Successor Collateral Agent. The Collateral
--------------------------
Agent may resign at any time as Collateral Agent under this
Security Agreement by giving written notice thereof to the Secured
Parties and the Grantor and shall resign by giving such notice in
the event the Collateral Agent ceases to be a Lender. Upon any
such resignation, the remaining Majority Lenders shall have the
right to appoint a successor Collateral Agent hereunder. In the
event no successor Collateral Agent shall have been so appointed by
the Majority Lenders, and shall have accepted such appointment,
within 30 days from and after the date the Collateral Agent
resigns, then the retiring Collateral Agent may, on behalf of the
Secured Parties, appoint a successor Collateral Agent, which shall
be a commercial bank organized under the laws of the United States
of America or of any State thereof and having a combined capital
and surplus of at least $100,000,000. Upon the acceptance by a
successor Collateral Agent of its appointment as agent under this
Security Agreement, such successor Collateral Agent shall thereupon
succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Collateral Agent, and the
retiring Collateral Agent shall be discharged from its duties and
obligations under this Security Agreement.

14. Severability. Any provision of this Security
------------
Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

15. No Waiver; Cumulative Remedies. Neither the
------------------------------
Collateral Agent nor any of the other Secured Parties shall by any
act, delay, omission or otherwise be deemed to have waived any of
its rights or remedies hereunder, and no waiver shall be valid
unless in writing, signed by the Collateral Agent, and then only to
the extent therein set forth. A waiver by the Collateral Agent of
any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Collateral
Agent would otherwise have had on any future occasion. No failure
to exercise nor any delay in exercising on the part of the
Collateral Agent, any right, power or privilege hereunder, shall
operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any
other or future exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies hereunder
provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights and remedies
provided by law. None of the terms or provisions of this Security
Agreement may be waived, altered, modified or

20
<PAGE> 21
amended except by an instrument in writing, duly executed by the
Collateral Agent and, where applicable, by the Grantor.

16. Successors and Assigns; GOVERNING LAW. (a) This
-------------------------------------
Security Agreement and all obligations of the Grantor hereunder
shall be binding upon the successors and assigns of the Grantor,
and shall, together with the rights and remedies of the Collateral
Agent hereunder, inure to the benefit of the Collateral Agent, the
other Secured Parties and their respective successors and assigns.
No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument
evidencing the Obligations or any portion thereof or interest
therein shall in any manner affect the security interest granted to
the Collateral Agent for the benefit of itself and the other
Secured Parties hereunder.

(b) THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF NEW YORK.

17. Use and Protection of Intellectual Property
-------------------------------------------
Collateral. Notwithstanding anything to the contrary contained
- ----------
herein, unless a Default or Event of Default has occurred and is
continuing, the Collateral Agent shall from time to time execute
and deliver, upon the written request of the Grantor, any and all
instruments, certificates or other documents, in the form so
requested, necessary or appropriate in the judgment of the Grantor
to permit the Grantor to continue to exploit, license, use, enjoy
and protect the Intellectual Property.

18. Further Indemnification. The Grantor agrees to
-----------------------
pay, and to save the Collateral Agent and each other Secured Party
harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all excise, sales or
other similar taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with
any of the transactions contemplated by this Security Agreement.

19. WAIVER OF JURY TRIAL. EACH OF THE COLLATERAL
--------------------
AGENT AND THE GRANTOR WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES
HEREUNDER, UNDER THE LOAN AGREEMENT OR UNDER THE OTHER LOAN
DOCUMENTS OR RELATING TO ANY OF THE FOREGOING.

21
<PAGE> 22
IN WITNESS WHEREOF, each of the parties hereto has caused
this Security Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.

DUCKWALL-ALCO STORES, INC.

By:
---------------------------
Name:
Title:

Accepted and acknowledged by:

BANKAMERICA BUSINESS CREDIT, INC.,
As Collateral Agent

By:
---------------------------
Name:
Title:

22
<PAGE> 23
Schedule I
----------
to
--
Amended and Restated Security Agreement
---------------------------------------

FINANCING STATEMENT JURISDICTIONS

Arkansas
- --------

Secretary of State
Arkansas County
Boone County
Faulkner County
Garland County
Pope County
Pulaski County
Sharp County

Arizona
- -------

Secretary of State
Apache County
Navajo County

Colorado
- --------

Secretary of State
Adams County
Baca County
Bent County
Denver County
El Paso County
Fremont County
Kit Carson County
Las Animas County
Morgan County
Otero County
Yuma County

Illinois
- --------

Secretary of State
Ford County
Jasper County
Morgan County

Iowa
- ----

Secretary of State
Benton County
Buena Vista County
Carroll County
Crawford County
Cass County
Cherokee County
Dallas County
Emmet County
Fayette County
Hancock County
Marion County
Montgomery County
Plymouth County

Kansas
- ------

Secretary of State
Barber County
Barton County
Brewster County
Brown County
Chase County
Chaves County
Chautauqua County
Cloud County
Coffey County
Decatur County
Dickinson County

<PAGE> 24
Kansas (continued)
- ------

Ellis County
Ellsworth County
Finney County
Ford County
Geary County
Grant County
Greenwood County
Harper County
Harvey County
Kingman County
Kiowa County
Lincoln County
Linn County
Marion County
Meade County
Mitchell County
Morris County
Morton County
Nemaha County
Ness County
Osage County
Osborne County
Ottawa County
Pawnee County
Riley County
Rush County
Phillips County
Pottawatomie County
Pratt County
Reno County
Republic County
Rice County
Rooks County
Saline County
Scott County
Sedgwick County
Sherman County
Stafford County
Stanton County
Stevens County
Sumner County
Trego County
Washington County

New Mexico
- ----------

Secretary of State
Chaves County

Minnesota
- ---------

Secretary of State
Lyon County
Mower County

Mississippi
- -----------

Secretary of State
Alcorn County
Panola County
Bolivar County

Nebraska
- --------

Secretary of State
Boone County
Box Butte County
Buffalo County
Cash County
Cherry County
Cherokee County
Cheyenne County
Cuming County
Dawson County
Deuel County
Dodge County
Gage County
Fillmore County
Holt County
Keith County
Lincoln County
Madison County
Otoe County
Red Willow County
Scotts Bluff County
Sheridan County
Valley County

2
<PAGE> 25

New Mexico
- ----------

Secretary of State
Chaves County
Cibola County
Lea County
Quay County
Roosevelt County
Valencia County

North Dakota
- ------------

Cavalier County
Dickey County
Foster County
Rolette County
Ransom County
Traill County

Oklahoma
- --------

Secretary of State
Alfalfa County
Bailey County
Beaver County
Blaine County
Ellis County
Latimer County
Major County
Osage City County
Texas County
Washita County

South Dakota
- ------------

Secretary of State
Brule County
Charles Mix County
Day County
Grant County
Lawrence County
Lincoln County
Roberts County
Spink County
Yankton County

Texas
- -----

Secretary of State
Andrews County
Bailey County
Brewster County
Bosque County
Castro County
Coleman County
Dallas County
Dallam County
Gray County
Hansford County
Lamb County
Lubbock County
Milam County
Ochiltree County
Swisher County
Ward County
Wilbarger County
Winkler County
Wood County
Wyoming
- -------

Secretary of State
Albany County
Campbell County
Carbon County
Fremont County
Lincoln County

3
<PAGE> 26

Utah
- ----

Secretary of State
Duchesne County

4
<PAGE> 27
Schedule II
to
Amended and Restated Security Agreement

Principal Place of Business
&
Location of Records Concerning Collateral:

Duckwall-Alco Stores, Inc.
General Offices
401 Cottage Avenue
Abilene, KS 67410

-1-
<PAGE> 28

Schedule II
-----------
to
--
Amended and Restated Security Agreement
---------------------------------------

INVENTORY LOCATIONS

DUCKWALL-ALCO STORES, INC., GENERAL OFFICES, 401 COTTAGE AVE.,
ABILENE, KS 67410

DUCKWALL STORES (45)
- --------------------
10. 1826 M. Street
Belleville, KS 66935
20. 113 W.Lincoln Avenue
Lincoln, KS 67455
28. 102 W. Main Street
(Box 314)
Council Grove, KS 66846
34. 427 Lincoln
Wamego, KS 66547
37. 321 East Main Street
Marlon, KS 66861
41. 206 Clayton Street
Brush, CO 80723
43. 313 Main Street
(Box 356)
Scott City, KS 67871
47. 132 W. 8th Street
Horton, KS 66439
48. 917 Main Street
Springfield, CO 81073
52. 113 S. Main Street
Ulysses, KS 67880
53. 529 S. Main Street
Hugoton, KS 67951
55. 129 S. Douglas
Beaver, OK 73932
56. 201 N. Main Street
WaKeeney, KS 67672
57. 125 South Penn
Oberlin, KS 67749
58. 110 S. Main
Plainville, KS 67663
59. 112 E. Main
Sedan, KS 67361
60. 157 S. Main Street
Holsington, KS 67544
61. 602 S. Main (Box 420)
Johnson, KS 67855
62. 710 Main St. (Box 773)
LaCrosse, KS 67548-0773
63. 532 Market
Osage City, KS 66523
65. 226 E. Ross Ave.
(Box 237)
Clearwater, KS 67026
66. 125 W. Main
Osborne, KS 67473
67. 966 G Street
Genova, NE 68361
68. 203 E. Sycamore
Ness City, KS 67560
69. 339 S. Main, Box 579
Shattuck, OK 73858
70. 600 Main
Walsenburg, CO 81089
71. 286 Vincent Ave.
(Box 664)
Chappell, NE 69129
72. 307-1/2 Sixth Street
Las Animas, CO 81054
74. 323 Main Street
Manning, LA 51465
76. 220-1/2 Broadway
(Box 525)
Cottonwood Falls, KS 66845
77. 102 E. Third
St. John, KS 67576
78. 417 Morton St.
(Box 417)
Elkhart, KS 67950
79. 310 C Street
Washington, KS 66968
80. 142 S. Main Street
Greensburg, KS 67054
83. 314 West 2nd Street
Minneapolis, KS 67467
84. 203 S. Broadway
Hooker, OK 73945
85. 306 North Main
Rocky Ford, CO 81067
88. 309 E. 4th
Villisca, IA 50864
89. 603 W. Carthage (Box B)
Meade, KS 67864
91. 121 S. Broadway
Sterling, KS 67579
92. 131 S. Main
Caldwell, KS 67022
93. 101 N. Main (Box 354)
Stafford, KS 67578
<F*>701. 906 Main Street (Box 447)
Pleasanton, KS 66075
<F*>702. 116 S. Chestnut Street
Kimball, NE 69145
<F*>703. 104 N. Central
Coldwater, KS 67029

ALCO DISCOUNT STORES (118)
- --------------------------
1. 1903 N. Buckeye Street
Abilene, KS 67410
2. 1820 S. 9th Street
Salina, KS 67401
5. 1401 E. 6th Street
(Box 635)
Concordia, KS 66901
11. 310 W. Frontview
Dodge City, KS 67801
12. 1401 E. Kansas Avenue
Garden City, KS 67846
15. 1207 West Platte Street
Fort Morgan, CO 80701
17. 2702 N. Vine Street
Hays, KS 67601
18. 620 N. Broadway Street
Larned, KS 67550
19. 115 S. Jackson Street
Pratt, KS 6712-
21. 1121 Main Street
Goodland, KS 67735
45. 3007 Anderson Avenue
Manhattan, KS 66503
73. 6000 E. 64th Avenue
Commerce City, CO 80022
81. 900 W. Hobbs Street
Roswell, NM 88201
90. 1207 N. Hobart Street
Pampa, TX 79065
97. 2300 Anderson Avenue
Newton, KS 67114
99. 414 E. 30th Street
Hutchinson, KS 67502
103. 920 West 6th Street
Junction City, KS 66441
105. 1711 Fremont Drive
Canon City, CO 81212
108. 2115 N. 6th Street
Beatrice, NE 68310
112. 1600 E. 7th Street
Atlantic, IA 50022
113. N. 2nd St. & E. Bow Drive
Cherokee, IA 51012
114. 700 W. "D" Street
McCook, NE 69001
118. 700 E. 23rd Street
Fremont, NE 68025
119. 401 First Street
Perry, IA 50220
123. 103 E. Norfolk Avenue
Norfolk, NE 68701
124. 2402 Central Ave.
(Box 472)
Estherville, IA 51334
126. 1325 W. 3rd Street
(Box 39)
Alliance, NE 69301
129. 401 N. Main Street
S. Hutchinson, KS 67505
130. 628 Illinois Street
Sidney, NE 69162
131. 201 E. 6th Street
North Platte, NE 69101
147. 1502 S. Lincoln Street
P.O. Box 266
Knoxville, IA 50138-0266
149. 509 Blair Street
Dalhart, TX 79022
150. 1301 S. Main Street
Perryton, TX 79070
152. 300 W. 1st Street
Portales, NM 88130
153. 1101 N. 1st Street
Grants, NM 87020

<PAGE> 29
154. 630 E. Reinken Avenue
Belen, NM 87002
155. R.R.1, Box 117A
1556 S. 11th
Nebraska City, NE 68410
157. 275 Grand View
Lander, WY 82520
161. 1907 S. Stockton
Monahans, TX 79756
163. 502 Higley Blvd.
Rawlins, WY 82301
165. 1203 N. Main Street
Andrews, TX 79714
166. 820 E. 1st Street
Ogallala, NE 69153
175. 504 S. Promenade
Havana, IL 62644
185. 334 E. Highway 302
Kermit, TX 79745
189. 1017 Spring Valley Ave.
Diamondville, WY 83116
190. 302 S.E. Hwy. 20
O'Neill, NE 68763
191. 700 E. Highway 20
Valentine, NE 69201
195. 901 W. Tucumcari Blvd.
Tucumcari, NM 88401
202. 333 S. Lincoln
Burlington, CO 80807
203. 300 S. Iliff
Medicine Lodge, KS 67104
204. 407 E. Hwy. #20, P.O.
Box 406
Gordon, NE 69343
205. 1300 S. Lincoln Street
West Point, NE
68788-4586
206. 5-2 E. 8th Avenue
Yuma, CO 80759
207. 810 East "D" Street
Kingman, KS 67068
208. 1400 Morningside Ave.
Milbank, SD 57252
209. E. Hwy. #12
Webster, SD 57274
210. 1130 5th St., East
Canton, SD 57013
211. E. Hwy. #10
Sisseton, SD 57262
212. 614 W. 3rd Street
Redfield, SD 57469
213. 1121 W. Main
Lyons, KS 67554
214. 110 Meridian Avenue
Cozad, NE 69130
215. 2970 10th Street
Gering, NE 69341
216. 816 E. State Road
Fairview, OK 73737
217. 1415 N. Glenn English
Cordell, OK 73632
218. 910 W. Avenue D
Lovington, NM 88260
220. R.R. #4
Fredonia, KS 66736
221. RFD #1, Hwy. 14 & Tenth
Beloit, KS 67420
222. 200 Clarence Nash Blvd.
Watonga, OK 73772
223. 245 West Second
Wray, CO 80758
224. 521 Hwy. 207 South
Spearman, TX 79081
225. 210 Southgate
Cherokee, OK 73728
226. 4109 Hillcrest Plaza
Vernon, TX 76384
227. Hwy 200 East
P.O. Box 157
Carrington, ND 58421
228. 602 Main Ave. West
P.O. Box 579
Rolla, ND 58367-0579
229. 705 Marshall Howard Dr.
Littlefield, TX 79339
230. 1524 9th Ave. (Box 328)
Langdon, ND 58249
231. R.R. #1, P.O. Box 489
Chamberlain, SD 57325
232. 200 S. Main
Winnsboro, TX 75494
233. 405 N. Arkansas Avenue
Russellville, AR 72801
234. 803 N. Broadway
Dimmitt, TX 79027-0847
235. 911 South K Avenue
Vinton, IA 52349
236. 704 S. 7th
Oakes, ND 58474
237. Hwy. 32 South
P.O. Box 948
Lisbon, ND 58054-9998
238. Hwy. 11 East
P.O. Box 303
Ord, NE 68862
239. 501 W. Hwy. 54
P.O. Box 190
Eureka, KS 67045
240. 804 East First Street
Cameron, TX 76520
241. 2500 E. Highway 90
Alpine, TX 79830
242. 1457 W. Main
(Box 1378)
Pawhuska, OK 74056
243. 1401 W. American Blvd.
Muleshoe, TX 79347
244. 1500 S. 75 Hwy. (Box 57)
Sabetha, KS 66534
245. 915 W. Highway 46
Wagner, SD 57380
246. Johnstowne Mall
Route 16 West
P.O. Box 618
Shelbyville, IL 62565
247. 615 N. Ash (Box 191)
Hillsboro, KS 67063
248. 900 N.W. 6th
Tulla, TX 79088
249. 629 Highway 2 North
Wilburton, OK 74578
250. R.R. #3, Box 24A
P.O. Box 246
Phillipsburg, KS 67661
251. 207 S. Mountain Ave.
Springerville, AZ 85938
252. 745 E. 15th Street
(Box 152)
Ellsworth, KS 67439
253. 1207 N. Avenue G
(Box 521)
Clifton, TX 76634
254. 307 Highway 150 North
West Union, IA
52175-1048
255. 935 3rd St., S.E., Box 217
Mayville, ND 58257
256. 30 W. Highway 40, 330-6
Roosevelt, UT 84066
257. 2303 Commercial Ave.
(Box 915)
Coleman, TX 76834
258. 1515 Navajo Blvd.
Holbrook, AZ 86025
259. 150 E. Highway 18 Box 99
Garner, IA 50438
260. 619 East First Box 504
Gibson City, IL 60936
261. 1106 S. Van Buren St.
Box 231
Newton, IL 62448
262. Twin City Shopping Mall
145 Glendale Drive
Lead, SD 57754
<F*>263. U.S. Hwy 84 & Division
Slaton, Tx 79364
<F*>264. E. 400 South Hwy. 14
Albion, NE 68620
<F*>265. 308 S.W.2nd
Canadian, TX 79014
<F*>266. 725 N. Broadway Ave.
(Box 146)
Spring Valley, MN 55975-
0146
<F*>268. 710 Hwy 14 North
Anthony, KS 67003
409. Hwy. 62-65 North
Harrison, AR 72601
411. 1540 Malvern Avenue
Suite G-H
Hot Springs, AR 71901
430. 420 Hwy. #1 South
DeWitt, AR 72042
433. 103 E. Oak Street
Conway, AR 72032
607. Highland Shopping Center
Rt. 2, Box 249A
Hardy, AR 72542

STERLING DEPT. STORE (1)
- ------------------------

300. 221 W. Capitol
Little Rock, AR 72201

[FN]
<F*>Store under construction

Duckwall-Alco Warehouse
900 North Van Buren
Abilene, KS 67410

#0904
(Revised 1/25/96)

<PAGE> 1

<TABLE>
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
Twenty-Six Week
Fiscal Years Ended Periods Ended
---------------------------- --------------------
July 30, July 28,
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average common stock
outstanding 2,000,000 2,731,370 3,999,510 3,999,510 3,999,510
Dilutive effect of stock options
outstanding 6,250 6,250 14,841 8,399 34,012
--------- --------- --------- --------- ---------

Weighted average common stock and
equivalents outstanding 2,006,250 2,737,620 4,014,351 4,007,909 4,033,522
========= ========= ========= =========

Common stock purchase warrant
outstanding 350,000
---------

Pro forma weighted average common
stock and equivalents outstanding 2,356,250
=========

Net earnings $ 2,260 4,130 5,130 1,609 1,927
========= ========= ========= =========
Accretion in carrying value of common
stock purchase warrant 645
---------

Net earnings applicable to common stock $ 1,615
=========

Earnings per common and common
equivalent share $ .80 1.51 1.28 .40 .48
========= ========= ========= ========= =========

Pro forma earnings per common and
common equivalent share $ .96
=========

</TABLE>

<PAGE> 1

SUBSIDIARIES OF THE REGISTRANT

The registrant has one wholly-owned subsidiary, SPD Truck Line, Inc.,
a Kansas corporation.

<PAGE> 1

ACCOUNTANTS' CONSENT

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

We consent to the use of our report included herein and to the
reference to our firm under the heading "Experts" in the
prospectus.

KPMG Peat Marwick LLP

Wichita, Kansas
September 16, 1996