The Company intends to utilize the 18,000 square foot store profile for new ALCO store openings.  Currently, the Company owns 16 ALCO and 2 Duckwall locations, and leases 158 ALCO and 88 Duckwall store locations.  The Company's present intention is to lease all new Duckwall stores.  The Company may own some of the ALCO locations, but will, generally try to lease these store locations.

Before entering a new market with an ALCO or Duckwall store, the Company analyzes and screens available competitive, market, and demographic data to evaluate the suitability and attractiveness of the potential market.  The process involves an objective review of selection criteria including, among other factors, distance and drive time to discount retail competitors, demographics, retail sales levels, existence and stability of major employers, location of county government and distance from the Company's distribution center.  The screening process also involves a visit by officers of the Company to more subjectively evaluate the potential new site.  There are currently over 150 communities known by the Company to have met the Company's ALCO and Duckwall initial market selection process.  The Company is in the site selection and/or procurement process in approximately 19 of those markets, each of which has been approved by the Company for a new store location.

The estimated investment to open a new Class 18 Store is approximately $1.325 million for the land, building, equipment, and inventory.

Store Environment and Merchandising

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

Purchasing

Procurement and merchandising of products is directed by the Company's Senior Vice President - Merchandise, who reports to the Company's President.  The Senior Vice President - Merchandise is supported by a staff of three Vice President-  Divisional Merchandise Managers who are each responsible for specific product categories.  The Company employs 22 merchandise buyers and two assistant buyers  who each report to a Vice President- Divisional Merchandise Manager.  Buyers are assisted by a management information system that provides them with current price and volume information by SKU, thus allowing them to react quickly with buying and pricing adjustments dictated by customer buying patterns.

The Company purchases its merchandise from approximately 2,200 suppliers.  The Company generally does not utilize long-term supply contracts.  No single supplier accounted for more than 5% of the Company's total purchases in fiscal 2001 and competing brand name and private label products are available from other suppliers at competitive prices.  The Company believes that its relationships with its suppliers are good and that the loss of any one or more of its suppliers would not have a material adverse effect on the Company. 

Pricing

Merchandise pricing is done at the corporate level and is essentially the same for all of the ALCO stores, regardless of the level of local competition.  This pricing strategy, with its promotional activities, is designed to bring consistent value to the customer.  In fiscal 2002, promotions on various items will be offered approximately 36 times through advertising circulars.   Even though the same general pricing and advertising activities are carried out for all ALCO stores, the impact of such activities is significantly different depending upon the level of competition in the market.

Distribution and Transportation

The Company operates a 352,000 square foot distribution center in Abilene, Kansas, from which it services each of the 174 ALCO discount stores and 90 Duckwall variety stores.  This distribution center is responsible for distributing approximately 80% of the Company's merchandise, with the balance being delivered directly to the Company's stores by its vendors.  This distribution center ships to each of the Company's stores once a week, primarily through irregular route common carriers. The Company also utilizes its wholly owned subsidiary, SPD Truck Line, Inc. (the "Subsidiary") for delivery to the stores.  The distribution center is fully integrated into the Company's management information system, allowing the Company to utilize such cost cutting efficiencies as perpetual inventories, safety programs, and employee productivity software.

The Subsidiary acts as a contract carrier for the Company in transporting goods to and from its stores.  The Subsidiary leases and uses five tractors and 24 trailers for such deliveries.

Management Information Systems

Commencing in fiscal 1989, the Company committed significant resources to the purchase and application of available computer hardware and software to its discount retailing operations with the intent to lower costs, improve customer service and enhance general business planning.

In general, the Company's merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment.  All of the Company's ALCO discount stores have point-of-sale (POS) computer terminals that record certain sales data in a format that can be transmitted nightly to the Company's data processing facility where it is used to produce daily and weekly management reports.  In fiscal 1999, the Company implemented a new system for merchandise administration and distribution.  In fiscal 2000, the Company completed the roll-out of new POS store software that has extended the life and capabilities of its POS hardware.  In conjunction with this roll-out of POS software, the stores  received radio frequency hand held devices to allow for additional operating efficiencies.  In fiscal 2001, the Company continued to devote resources to development of long-term projects that will improve operational efficiencies and performance.

Approximately 800 of the Company's merchandise suppliers currently participate in the Company's electronic data interchanges ("EDI") system, which makes it possible for the Company to place purchase orders electronically.  When fully implemented, EDI will permit these and additional vendors to transmit invoices and advance shipment notices to the Company and receive sales history and purchase orders from the Company.

Store Locations

As of April 27, 2001, the Company operated 174 ALCO stores in 20 states located in smaller communities in the central United States.  Of the ALCO stores, 16 are owned and 158 are operated under real estate leases.  The ALCO stores average approximately 20,900 square feet of selling space, with an additional 5,000 square feet utilized for merchandise processing, temporary storage and administration.  The Company also operates 90 Duckwall stores in 11 states, two of which are owned, and 88 of which are leased.  The geographic distribution of the Company's stores is as follows:

Competition

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

In the discount retail business in general, price, merchandise selection, merchandise quality, advertising and customer service are all important aspects of competing.  The Company encounters direct competition with national full-line discount stores in 29 of its ALCO markets, and another 12 ALCO stores are in direct competition with regional full-line discount stores.   The competing regional and national full-line discount retailers are generally larger than the Company and the stores of such competitors in the Company's markets are substantially larger, have a somewhat wider selection of merchandise and are very  price competitive in some lines of merchandise.  Where there are no discount retail stores directly competing with the Company's ALCO stores, the Company's customers nevertheless shop at retail discount stores and other retailers located in regional trade centers, and to that extent the Company competes with such discount stores and retailers.  The Company also competes for retail sales with mail order companies, specialty retailers, mass merchandisers, dollar stores, manufacturers outlets, and the Internet.  In the 121 Class 18 markets in which the Company operates a store, there is no direct competition from a national or regional full-line discount retailer.

Executive Officers of the Company

The following table sets forth the names, ages, positions and certain other information regarding the executive officers  of the Company as of April 27, 2001.

Position

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

Glen L. Shank has served as President of the Company since June 1988 and as Chairman of the Board since May 1991.  Between 1982 and 1988, Mr. Shank served as Vice President of Merchandising of the Company.  Prior to 1982, Mr. Shank served as a Buyer and as a Merchandise Manager for the Company.  Mr. Shank has approximately 34 years of experience in the retail industry.

James E. Schoenbeck has served as Vice President of Store Operations and Advertising since 1988.  From 1979 to 1988, Mr. Schoenbeck served as the Vice President of Administration.  Mr. Schoenbeck has approximately 27 years of experience in the retail industry.

James R. Fennema has served as Vice President-Merchandise of the Company since March 1993.  For the four years prior to that he served as Vice President and a divisional merchandise manager with Caldor, Inc., a chain of regional discount stores in New England and the mid-Atlantic states of the United States.  For more than the four years prior to that he served as a divisional merchandise manager of Fishers Big Wheel, a regional chain discount retailer.  Mr. Fennema has approximately 28 years of experience in the retail industry.

Richard A. Mansfield has served as Vice President-Finance and Treasurer of the Company since May 1997.  For the two years prior to that he served as Chief Financial Officer of Country General Stores, Inc., a regional chain of specialty farm and ranch stores located in the Midwest.  For the three years prior to that he served as Chief Financial Officer of American Laminates, Inc. and Relco, Inc.  Mr. Mansfield has approximately 20 years of experience in the retail industry.

Charles E. Bogan has been the Secretary of the Company since 1972.  He has served as Vice President and General Counsel since 1984, and was Secretary and a member of the Board of Directors during the period from 1972 to 1985.  Prior to becoming the Company's General Counsel, he served as a partner in private practice with the law firm of Bogan & Johnson, beginning in 1970.

Employees

As of April 27, 2001, the Company employs approximately 5,150 people, of whom approximately 500 were employed in the general office and distribution center in Abilene, 4,000 in the ALCO stores and 650 in the Duckwall stores.  Approximately 3,000 additional employees are hired on a seasonal basis, most of whom are sales personnel.   There is no collective bargaining agent for any of the Company's employees.  The Company considers its relations with its employees to be excellent.

ITEM 2.          PROPERTIES.

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

Sixteen of the ALCO stores and two of the Duckwall stores operate in buildings owned by the Company.  The remainder of the stores operate in leased properties.  Such ALCO leases expire as follows: approximately 429,049 square feet (9.4%) expire between April 27, 2001 and February 3, 2002;  approximately 409,389 square feet (9.0%) expire between February 4, 2002 and February 2, 2003; and approximately 641,522 square feet (14.0%) expire between February 3, 2003 and February 1, 2004.  The remainder expire through 2021.  All Duckwall store leases have terms remaining of four years or less.

ITEM 3.          LEGAL PROCEEDINGS.

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

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

No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended January 28, 2001.

PART II

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

The Common Stock of the Company is quoted on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol "DUCK."  The following table sets forth the range of high and low bid information for the Company's Common Stock for each quarter of fiscal 2001 and 2000.

As of April 6, 2001, there were approximately 1,308 holders of record of the Common Stock of the Company. The Company has not paid cash dividends on its Common Stock during the last five fiscal years, and is currently prohibited from paying such dividends by the terms of the Third Amended and Restated Loan Agreement dated as of December 31, 1998, among the Company, BA Business Credit, Inc., and Transamerica Business Credit Corporation.

ITEM 6.         SELECTED FINANCIAL DATA.

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

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

(3)   The Company has adopted SFAS No. 128, Earnings Per Share, which requires a dual presentation of basic earnings per share (based on the weighted average number of common shares outstanding) and diluted earnings per share which reflects the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised.

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

The Company's fiscal year ends on the Sunday closest to January 31.  Fiscal 2001, 2000 and 1999 each consisted of 52 weeks.

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

Results of Operations

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

Fiscal 2001 Compared to Fiscal 2000

Net sales for fiscal 2001 increased $10.1 million or 2.7% to $390.6 million compared to $380.5 million for fiscal 2000.  During fiscal 2001, the Company opened 5 ALCO stores, all of which were in new non-competitive markets.  Seven stores were closed, resulting in a year end total of 267 stores.  Substantially all of the increase in net sales was due to new stores opened over the last two fiscal years. Net sales for all stores open the full year in both fiscal 2001 and 2000 (comparable stores), increased by $1.5 million or .4% in fiscal 2001 compared to fiscal 2000.  Sales in the 18,000 square foot ALCO stores, the main focus of the Company's expansion efforts, increased $2.4 million, or 1.5%.  Sales softened in the second half of the year as consumer spending in the Company's small markets was impacted by higher interest rates, high transportation and home heating costs, and a weak farm economy.

Gross margin for fiscal 2001 increased $0.7 million, or 0.6%, to $128.5 million compared to $127.8 million in fiscal 2000.  As a percentage of net sales, gross margin decreased to 32.9% in fiscal 2001 compared to 33.6% in fiscal 2000. The decline in the gross margin percentage was attributable to higher transportation costs, markdowns, and the mix of sales.

Selling, general and administrative expenses increased $3.3 million or 3.1% to $110.0 million in fiscal 2001 compared to $106.7 million in fiscal 2000, primarily due to higher advertising and utilities costs.  Also included are expenses associated with the development and implementation of key initiatives that are designed to improve sales and profits in fiscal 2002 and future years.  As a percentage of net sales, selling, general and administrative expenses was 28.2% in fiscal 2001 and 28.1% in fiscal 2000.  Selling, general and administrative expense was unfavorably impacted by the sale-leaseback transactions for $6.1 million and $6.2 million that were completed at the end of fiscal years 2000 and 1999, respectively.  The sale-leaseback impacts selling, general and administrative expense through higher store rent expense, with a corresponding reduction in depreciation and interest expense.

The provision for asset impairment and store closure increased $1.0 million, or 224%, to $1.5 million in fiscal 2001 compared to $0.5 million in fiscal 2000.  Those amounts are comprised of $1.2 million for asset impairment and $320,000 for store closing in fiscal 2001, and $294,000 for asset impairment and $169,000 for store closing in fiscal 2000.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.  For purposes of determining impairment, assets are grouped at the store level.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  A provision for store closure expense is recorded in the period the decision to close a store is made and a definitive plan of closure for such store is put in place that will be completed in the near term.  Such store closure expenses consist primarily of lease costs and property tax amounts that relate to the period subsequent to the date of closure.  Store closure expense represents costs to close 4 ALCO stores and 4 Duckwall stores in fiscal 2001, and 3 ALCO and 5 Duckwall stores in fiscal 2000.  Included in store closure expense are expenses accrued for stores expected to be closed as well as others closed during the current year.  Because there is a smaller investment in fixtures and leasehold costs, the cost to close a Duckwall store is smaller than the cost to close an ALCO store.  At the end of fiscal 2001 a provision for impairment had been recorded for 6 ALCO and 5 Duckwall stores for which stores had not been closed nor had a decision been made to close such stores.  Depreciation expense that the Company will not experience as a result of these impairments will be approximately $210,000 for fiscal 2002.

Income from operations decreased $3.5 million, or 24.4%, to $10.8 million in fiscal 2001 compared to $14.2 million in fiscal 2000.  Income from operations as a percentage of net sales decreased to 2.7% in fiscal 2001 from 3.7% in fiscal 2000.

Interest expense decreased $418,000, or 11.4%, in fiscal 2001 compared to fiscal 2000. The reduction in interest expense is due primarily to the reduction in borrowing due to the sale-leaseback transactions previously discussed.

Income taxes were $2.8 million in fiscal 2001 compared to $4.0 million in fiscal 2000.  The Company's effective tax rate was 37.8% in fiscal 2001 and 38.0% in fiscal 2000.

Earnings before the cumulative effect of accounting change for fiscal 2001 decreased by $1.9 million, or 28.7%, to $4.7 million compared to $6.6 million in fiscal 2000.

Fiscal 2000 Compared to Fiscal 1999

Net sales for fiscal 2000 increased $17.0 million, or 4.7%, to $380.5 million compared to $363.5 million for fiscal 1999.  During fiscal 2000, the Company opened 21 stores, all of which were in new non-competitive markets.  Nine stores were closed, resulting in a year end total of 269 stores.  Substantially all of the increase in net sales was due to new stores opened over the last two fiscal years. Net sales for all stores open the full year in both fiscal 2000 and 1999 (comparable stores), decreased by $.4 million, or .1%, in fiscal 2000 compared to fiscal 1999.  Sales in the 18,000 square foot ALCO stores, the main focus of the Company's expansion efforts, increased $1.3 million, or 1.0%.  Sales were impacted by the implementation of the Company's New Low Prices Everyday (NLPE) pricing strategy, which was

launched in February 1999 in the Company's ALCO discount stores.  This strategy eliminated eight advertising circulars and other promotional activity while instituting a consistent, competitively advantageous, pricing strategy designed to generate increased sales over the long term.

Gross margin for fiscal 2000 increased $3.7 million, or 3.0%, to $127.8 million compared to $124.1 million in fiscal 1999.  As a percentage of net sales, gross margin decreased to 33.6% in fiscal 2000 compared to 34.1% in fiscal 1999.  Although promotional markdowns decreased as a percentage of sales due to the implementation of NLPE, the gross margin percentage was negatively impacted in fiscal 2000 by reduced LIFO income in the amount of $2.4 million.  Excluding the LIFO impact, gross margin as a percent of sales improved to 33.6% in fiscal 2000 compared to 33.5% in fiscal 1999.

Selling, general and administrative expenses increased $4.5 million, or 4.4%, to $106.7 million in fiscal 2000 compared to $102.2 million in fiscal 1999, primarily due to the increase in total stores.  As a percentage of net sales, selling, general and administrative expenses was 28.1% in fiscal 2000 and 28.2% in fiscal 1999.  Although advertising expenses declined due to the implementation of NLPE, selling, general and administrative expense was unfavorably impacted by the sale-leaseback that was completed at the end of fiscal 1999.  The sale-leaseback impacts selling, general and administrative expense through higher store rent expense, with a corresponding reduction in depreciation and interest expense.

Income from operations decreased $1.5 million, or 9.4%, to $14.2 million in fiscal 2000 compared to $15.7 million in fiscal 1999. Income from operations as a percentage of net sales decreased to 3.7% in fiscal 2000 from 4.3% in fiscal 1999.  Excluding the impact of LIFO, income from operations increased $962,000, or 7.2%, in fiscal 2000 compared to fiscal 1999. 

Interest expense decreased $562,000, or 13.2%, in fiscal 2000 compared to fiscal 1999. The reduction in interest expense is due primarily to the reduction in borrowing due to the sale-leaseback transaction for $6.2 million that was completed at the end of fiscal 1999.

Income taxes were $4.0 million in fiscal 2000 compared to $4.3 million in fiscal 1999.  The Company's effective tax rate was 38.0% in fiscal 2000, and 37.3% in fiscal 1999.

Earnings before the cumulative effect of accounting change for fiscal 2000 decreased by $657,000, or 9.1%, to $6.6 million compared to $7.2 million in fiscal 1999.   Excluding the impact of LIFO, net income increased by $878,000, or 15.5%, in fiscal 2000 compared to fiscal 1999.

Seasonality and Quarterly Results

The following table sets forth the Company's net sales, gross margin, income from operations, and net earnings during each quarter of fiscal 1999, 2000, and 2001.

(1)   Represents earnings before the cumulative effect of accounting change.

The Company's business is subject to seasonal fluctuations.  The Company's highest sales levels occur in the fourth quarter of its fiscal year which includes the holiday selling season.  The Company's results of operations in any one quarter are not necessarily indicative of the results of operations that can be expected for any other quarter or for the full fiscal year.  The Company's results of

operations may also fluctuate from quarter to quarter as a result of the amount and timing of sales contributed by new stores and the integration of the new stores into the operations of the Company, as well as other factors.  The addition of a large number of new stores can, therefore, significantly affect the quarterly results of operations.  Also, refer to Impact of Change in Accounting Principle and Note 10 to the Consolidated Financial Statements regarding the impact of the accounting change on quarterly results.

Inflation

Management does not believe that its 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.

Liquidity and Capital Resources

At the end of fiscal 2001, working capital (defined as current assets less current liabilities) was $94.0 million compared to $95.9 million at the end of fiscal 2000 and $90.1 million at the end of fiscal 1999.

The Company's primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility, vendor trade credit financing and lease financing.  In fiscal years 2001, 2000 and 1999, the Company completed a sale-leaseback of a number of its owned stores.  The proceeds from these transactions amounted to $2.0 million, $6.1 million and $6.2 million in fiscal years 2001, 2000 and 1999, respectively. 

Cash provided by operating activities aggregated $7.3 million, $10.5 million, and $6.6 million, in fiscal 2001, 2000 and 1999, respectively.  The decrease in cash provided in fiscal 2001 relative to fiscal 2000 resulted primarily from earnings as well as a decrease in accounts payable.  The increase in cash provided in fiscal 2000 relative to fiscal 1999 resulted primarily from a larger increase in accounts payable and increased earnings before considering the non-cash impact of LIFO. 

The Company uses its revolving loan credit facility and vendor trade credit financing to fund the build up of inventories periodically during the year for its peak selling periods and to meet other short-term cash requirements.  The revolving loan credit facility which provides up to $70 million of financing in the form of notes payable and letters of credit.  The loan agreement   expires in April 2002 and automatically renews for successive one-year terms thereafter unless terminated by the lenders or the Company.   The Company had borrowings available at January 28, 2001 under the revolving loan credit facility amounting to $41.6 million.  Short-term trade credit represents a significant source of financing for inventory to the Company.  Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases.

In fiscal 2001, the Company made net cash payments on its revolving credit facility of $4.8 million, made cash payments of $1.8 million to reduce its long-term debt and capital lease obligations, and repurchased $3.0 million of Company stock.  In fiscal 2000, the Company made net cash payments on its revolving credit facility of $178,000, made cash payments of $3.7 million to reduce its long-term debt and capital lease obligations, and repurchased $2.8 million of Company stock. In fiscal 1999, the Company made net cash borrowings of $5.9 million.  The Company executed operating leases for 62 additional stores during the three year period ending in fiscal 2001.  The Company's long-range plan assumes growth in the number of stores in smaller markets where there is less competition, and, in accordance with this plan, 5 new stores were opened in fiscal 2001 and at least 4 new stores are scheduled to be opened in fiscal 2002.  The Company believes that with the $70 million line of credit, sufficient capital is available to fund the Company's planned expansion.

Cash used for acquisition of property and equipment in fiscal 2001, 2000 and 1999 totaled $5.9 million, $6.4 million, and $10.3 million, respectively.  A sale-leaseback of store buildings was completed in the amount of $2.0 million, $6.1 million, and $6.2 million in fiscal 2001, 2000, and 1999, respectively.  This resulted in net cash used for acquisition of property and equipment in fiscal 2001, 2000, and 1999 of $3.9 million, $0.3 million, and $4.0 million, respectively.  Anticipated cash payments for acquisition of property and equipment in fiscal 2002, principally for store buildings and fixtures, are $8.2 million.

During fiscal 1999, the Company's Board of Directors approved a plan to repurchase up to 411,000 shares of the Company's Common Stock (the "Stock Repurchase Program").  During fiscal 2000, the Company's Board of Directors approved the repurchase of an additional 1,000,000 shares.  Purchases pursuant to the Stock Repurchase Program are to be made from time to time in the open market or directly from stockholders at prevailing market prices.  The Stock Repurchase Program is anticipated to be funded with internally generated cash and borrowing under the Credit Facility.  As of January 28, 2001, the Company had purchased and retired 740,300 shares of Common Stock for $6.5 million.  During the period from January 29, 2001 to April 6, 2001, the Company purchased and retired an additional 270,000 shares of its Common Stock for an aggregate purchase price of $1.7 million.  Since the first buyback was announced in fiscal 1999, the Company has repurchased a total of 1,010,300 shares, which represents  20% of its outstanding shares.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS

In order to take advantage of the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, the Company is hereby identifying important risks and uncertainties that could affect the Company's actual results of operations, financial condition or business and could

cause the Company's actual results of operations, financial condition or business to differ materially from its historical results of operations, financial condition or business, or the results of operations, financial condition or business contemplated by forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company.  Factors that could cause or contribute to such differences include, but are not limited to, those factors described below.

Expansion Plans

The continued growth of the Company is dependent, in large part, upon the Company's ability to open and operate new stores on a timely and profitable basis. The Company plans to open approximately 4 ALCO stores in the current fiscal year and at least 4 ALCO stores in both fiscal 2003 and 2004.  While the Company believes that adequate sites are currently available,
the rate of new store openings is subject to various contingencies, many of which are beyond the Company's control.  These contingencies include the availability of acceptable communities for store locations, the Company's ability to secure suitable store sites on a timely basis and on satisfactory terms, the Company's ability to hire, train and retain qualified personnel, the availability  of adequate capital resources and the successful integration of new stores into existing operations.  There can be no assurance that the Company will be able to continue to successfully identify and obtain new store sites or that once obtained, the new stores will achieve satisfactory sales or profitability.

Competition

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

Government Regulation

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

In 1996, Congress enacted The Small Business Job Protection Act of 1996 (the "Act"), raising the hourly minimum wage from $4.25 to $4.75 effective as of October 1, 1996 and to $5.15 effective as of September 1, 1997.  The majority of the Company's store employees were paid hourly wages below these increased minimum wage rates.  As a result, the Act increased the Company's payroll expense.  Additional increases in the minimum wage could have a material impact on the results of the Company's operations if it were not able to pass those increased costs on to customers or if sales were not increasing at a rate large enough to offset the impact.

Control by Significant Stockholder

Kansas Public Employees Retirement System ("KPERS") is a principal stockholder of the Company, beneficially owning approximately 16% of the outstanding shares of Common Stock of the Company as of March 2, 2001.

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 fourteen other officers.  The loss of the services of one or more of these officers could have a material adverse effect on the Company.

No Recent Dividend Payments; Restrictions on Payment of Dividends

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

Impact of Change in Accounting Principle

Effective October 30, 2000, the Company, in response to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed its method of accounting for layaway sales, retroactive to the beginning of the year.  Previously, the Company recognized revenue on the entire amount of layaway sales at the time merchandise was placed on layaway.  Under the new method, revenue on layaway sales are recognized upon delivery of the merchandise to the customer.  The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 2001 is to increase (decrease) such amounts by $(38,000), $(211,000), and $(.05), respectively.  The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of January 31, 2000 has been reported in the accompanying financial statements.  Financial statements for fiscal 2000 and prior periods have not been restated.  The Company believes the pro forma effect on net earnings and earnings per share for fiscal 2000 and 1999, as if the new accounting method had been applied consistently during such periods, is not material.

Effective November 1, 1998, the Company adopted AICPA Statement of Position 98-5, Reporting on the Costs of Start up Activities (SOP 98-5), retroactive to the beginning of the year.  Previously, the Company initially capitalized and then amortized preopening costs over the initial 12-months of a store's operation.  Under the new method, the Company expenses such store preopening costs as incurred.  The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 1999 is to increase (decrease) such amounts $529,000, ($427,000), and ($0.08), respectively.  The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of February 1, 1998 has been reported in the accompanying audited financial statements.

ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Under this loan agreement, the Company converted $30,000,000 from the revolving rate loan to a 7.23% fixed rate loan on April 15, 1998 (balance of $25,000,000 at January 28, 2001) which expired April 15, 2001 after which any borrowings required by the Company will be obtained pursuant to the Revolving Rate Loan or LIBOR Rate loan provisions of the revolving loan credit facility.  The Company entered into an interest rate swap in December 2000 with a notional principal amount of $10,000,000 whereby the Company will pay a fixed rate of interest and receive interest based on LIBOR for the period April 15, 2001 to April 15, 2002 to mitigate its interest rate risk under the revolving credit facility.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

(1)        Summary of Significant Accounting Policies

(a)        Nature of Business

Duckwall-ALCO Stores, Inc. and subsidiaries (the Company) is engaged in the business of retailing general merchandise throughout the midwestern and south central regions of the United States through discount department and variety store outlets. Merchandise is purchased for resale from many vendors, and transactions with individual vendors and customers do not represent a significant portion of total purchases and sales.

(b)        Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany account balances have been eliminated in consolidation.

(c)        Basis of Presentation

The Company's fiscal year ends on the Sunday nearest to January 31. Fiscal 2001, 2000 and 1999 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 capital leases is computed on a straight-line basis over the terms of the lease agreements. Leasehold improvements are amortized on a straight-line basis over the lesser of the remaining lease term, or ten years. Estimated useful lives are as follows:

Buildings

25 years

Building improvements

10 years

Furniture, fixtures and equipment

3 - 8 years

Transportation equipment

3 - 5 years

Leasehold improvements

3 - 10 years

Major improvements are capitalized while maintenance and repairs, which do not extend the useful life of the asset, are charged to expense as incurred.

(f)         Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(g)        Net Sales

Sales are recorded in the period of sale. Sales returns, which are not material, are recorded in the period of return as a reduction of sales.

(h)        Change in Accounting Principle

Effective October 30, 2000, the Company, in response to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed its method of accounting for layaway sales, retroactive to the beginning of the year. Previously, the Company recognized revenue on the entire amount of layaway sales at the time merchandise was placed on layaway. Under the new method, revenue on layaway sales are recognized upon delivery of the merchandise to the customer. The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 2001 is to increase (decrease) such amounts by $(38), $(211), and $(.05), respectively. The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of January 31, 2000 has been reported in the accompanying financial statements. Financial statements for fiscal 2000 and prior periods have not been restated. The Company believes the pro forma effect on net earnings and earnings per share for fiscal 2000 and 1999, as if the new accounting method had been applied consistently during such periods, is not material.
Effective November 1, 1998, the Company adopted AICPA Statement of Position 98-5, Reporting on the Costs of Start up Activities (SOP 98-5), retroactive to the beginning of the year. Previously, the Company initially capitalized and then amortized preopening costs over the initial 12-months of a store's operation. Under the new method, the Company expenses such store preopening costs as incurred. The effect of adopting the accounting change on earnings before cumulative effect of accounting change, net earnings, and net earnings per share for fiscal 1999 is to increase (decrease) such amounts by $529, ($427), and ($.08), respectively. The change is considered a cumulative effect-type accounting change and, accordingly, the cumulative effect as of February 1, 1998 has been reported in the accompanying financial statements.

(k)        Use of Estimates

Management of the Company has made certain estimates and assumptions in the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.

(l)         Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. For purposes of determining impairment, the Company groups assets at the store level. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Provisions for asset impairment of $1,182, $294, and $55 for fiscal 2001, 2000, and 1999, respectively, are included in the consolidated statements of operations.

2001

2000

FIFO cost

$

124,340

122,458

Less LIFO reserve

(595)

(595)

LIFO cost

$

123,745

121,863

2001

2000

9.875% mortgage note payable due in monthly installments,

including interest, through September 2001

$

83

203

8.41% note payable due in monthly installments, including

interest, through March 2001, secured by airplane

41

272

6.4% note payable due in monthly installments, including

interest, through January 2005, secured by equipment

1,941

2,353

8.77% note payable due in monthly installments,

including interest, through September 2000

-

350

8.27% note payable due in monthly installments, including

interest, through December 2000

-

74

2,065

3,252

Less current maturities

564

1,187

Long-term debt, less current maturities

$

1,501

2,065