DUANE READE INC, 424B1, 1998-02-10

DUANE READE INC
424B1, 1998-02-10
DRUG STORES AND PROPRIETARY STORES

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<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration File No.: 333-41239

PROSPECTUS
February 9, 1998

7,277,718 SHARES

[DUANE READE LOGO]

COMMON STOCK

Of the 7,277,718 shares of common stock, $0.01 par value per share (the
"Common Stock"), of Duane Reade Inc. ("Duane Reade" or the "Company") offered
hereby (the "Offering"), 6,700,000 shares are being offered by the Company,
and 577,718 shares are being offered by certain selling stockholders (the
"Selling Stockholders"). The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders. The Offering is
part of the Refinancing Plan (as defined herein) of the Company. See
"Prospectus Summary--Refinancing Plan" and "Use of Proceeds."

Prior to this Offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the factors considered
in determining the initial public offering price.

The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of official issuance, under the symbol "DRD."

SEE "RISK FACTORS," BEGINNING ON PAGE 9, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.

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

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

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO THE DISCOUNTS AND TO THE TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- ----------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Per Share .. $16.50 $1.155 $15.345 $15.345
Total(3).... $120,082,347 $8,405,764 $102,811,500 $8,865,083
</TABLE>

- -----------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $965,000.
(3) Certain stockholders that are affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), one of the Underwriters, have
granted to the Underwriters an option, exercisable within 30 days of
the date hereof, to purchase an aggregate of up to 1,091,658 additional
shares of Common Stock, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the
Public, Underwriting Discounts and Commissions, Proceeds to the Company
and Proceeds to Selling Stockholders will be $138,094,704, $9,666,629,
$102,811,500 and $25,616,575, respectively. See "Principal and Selling
Stockholders" and "Underwriting." The Company will not receive any
proceeds from the sale of shares of Common Stock by such affiliates of
DLJ or by any other Selling Stockholder.

The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if delivered to and accepted by them,
subject to certain prior conditions. The Underwriters reserve the right to
reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made in New York, New York on or about
February 13, 1998.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

GOLDMAN, SACHS & CO.

SALOMON SMITH BARNEY
<PAGE>
[PICTURES]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS, AND THE
IMPOSITION OF PENALTY BIDS. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE
COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

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<PAGE>

[DUANE READE INC. LOGO]

[PHOTO]

With 58 drugstores in Manhattan, four in Brooklyn, two in the Bronx, two
in Queens, and one in Newark, duane reade enjoys the largest share of drugstore
sale in the New York metropolitan market.

FLAGS APPROXIMATE STORE LOCATIONS.

<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included elsewhere in
this Prospectus. Unless otherwise stated, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
The share data set forth in this Prospectus reflects a reclassification of
the Company's capital stock pursuant to which each holder of shares of class
B common stock, $.01 par value per share ("Class B Common Stock"), is
entitled to receive one share of Common Stock for approximately 8.326 shares
of Common Stock (the "Reclassification"). Unless otherwise stated in this
Prospectus, references to the "Company" or "Duane Reade" shall mean Duane
Reade Inc. (formerly known as Duane Reade Holding Corp.), its consolidated
subsidiaries and their respective predecessors. The fiscal year of the
Company ends on the last Saturday in December. Fiscal years 1992 through 1996
each consisted of 52 weeks. All data regarding the number of the Company's
stores is as of November 25, 1997, unless otherwise specified.

THE COMPANY

Duane Reade is the largest drugstore chain in New York City, based on
sales volume, with 58 of its 67 stores located in Manhattan's high-traffic
business and residential districts. The Company operates almost twice as many
stores in Manhattan as its next largest competitor. Since opening its first
store in 1960, the Company has successfully executed a marketing and
operating strategy tailored to the unique characteristics of New York City,
the largest and most densely populated market in the United States. According
to Drug Store News, Duane Reade is the leading drugstore chain in the United
States in terms of sales per square foot, at $956 per square foot in 1996,
which was more than two times the national average for drugstore chains. For
the fiscal year ended December 28, 1996, the Company had sales of $381.5
million and EBITDA (as defined herein) of $35.3 million, increases of 13.2%
and 28.6%, respectively, over the 1995 fiscal year. For the 39 weeks ended
September 27, 1997, the Company had sales of $313.8 million and EBITDA of
$29.7 million, increases of 11.6% and 24.9%, respectively, over the
comparable 1996 period. For the fiscal year ended December 28, 1996 and the
39 week period ended September 27, 1997, the Company had net losses of $17.9
million and $14.2 million, respectively, and, on a pro forma basis, after
giving effect to the Offering and the Refinancing Plan, the Company would
have had net losses of $5.3 million and $3.8 million, respectively, for such
periods.

The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. Independent surveys
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.

The Company has developed an operating strategy designed to capitalize on
the unique characteristics of the New York City market, which include
high-traffic volume, complex distribution logistics and high costs of
occupancy, media advertising and personnel. The key elements of the Company's
operating strategy are its (i) everyday low price format and broad product
offering, (ii) low cost operating structure supported by its high volume
stores and low advertising and distribution costs and (iii) ability to design
and operate its stores in a wide variety of sizes and layouts.

The Company believes that its everyday low price format and broad product
offerings provide value and convenience for its customers and build customer
loyalty. The Company's everyday low price format results in prices that the
Company believes are lower, on average, than the prices offered by its
competitors.

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warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.

The Company has demonstrated its ability to successfully operate stores
using a wide variety of store configurations and sizes, which the Company
believes is necessary to succeed in the New York City market. For example,
the size of the Company's stores ranges from 2,600 to 12,300 square feet, and
it operates 29 bi-level stores. The Company believes that its flexibility in
configuring stores provides it with a competitive advantage in securing
locations for its new stores, as many of its competitors target more
standarized spaces for their stores, which are more difficult to find in New
York City. In addition, the Company's management team has extensive
experience and knowledge of the New York City real estate market, allowing it
to aggressively pursue attractive real estate opportunities.

The Company was founded in 1960. In 1992, Bain Capital acquired the
Company from its founders and, in June 1997, investment funds affiliated with
DLJ Merchant Banking Partners II, L.P. ("DLJMBPII") acquired approximately
91.5% of the outstanding capital stock of the Company from Bain Capital and
certain other selling securityholders (the "Recapitalization"). Since the
1992 acquisition, the Company has incurred net losses in each fiscal year.

In 1994 and 1995, the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several measures to improve operations, including
improving inventory controls and decreasing out-of-stock occurrences,
creating a loss prevention function to control inventory shrink and
continuing to invest in management information systems ("MIS"). In 1997, the
Company resumed its store expansion program, opening seven stores. During Mr.
Cuti's tenure at the Company, EBITDA has increased by 53.2% from $26.9
million for the 52 weeks ended March 29, 1996 to $41.2 million for the 52
weeks ended September 27, 1997.

The Company was incorporated in Delaware in 1992. The Company's principal
executive offices are located at 440 Ninth Avenue, New York, New York 10001,
and its phone number is (212) 273-5700.

GROWTH STRATEGY

The Company believes that, as a result of its successful operating history
and market position in New York City, it is well positioned to capitalize on
the growth opportunities in its market. The Company's strategy for continued
growth is to (i) open additional stores in Manhattan and the surrounding
boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii)
make opportunistic acquisitions of independent drugstores and pharmacy files
and (iv) continue to implement merchandising initiatives in non-pharmacy
areas.

OPEN ADDITIONAL STORES. The Company believes that the New York City
drugstore market remains underpenetrated by drugstore chains, with only 50%
of the estimated $2.65 billion in annual drugstore-related sales controlled
by chains, compared to approximately 74% controlled by chains nationally.
This provides significant opportunities for the Company to open additional
stores in Manhattan as well as in the densely populated areas of the
surrounding boroughs. Some of the Company's most successful stores have been
opened in areas new to the Company, such as the residential areas of the
Upper East and West sides of Manhattan, Brooklyn, the Bronx and Queens. The
Company believes that its long-standing presence in, and knowledge of, the
New York City real estate market, combined with the use of a proprietary site
selection model that considers numerous demographic and traffic flow
variables, have allowed it to identify attractive store locations. Since
1993, all of the Company's new stores have become profitable on an operating
basis (i.e., prior to allocation of corporate expenses, goodwill
amortization, interest expense and income taxes) within the first full year
of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City.

CONTINUE TO CAPITALIZE ON FAVORABLE PHARMACY TRENDS. Sales of prescription
and over-the-counter ("OTC") drugs have been growing rapidly throughout the
drugstore industry. The Company expects

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demographic trends, such as the aging of the U.S. population, and industry
changes, such as growth of managed care organizations, insurance companies,
employers and other third-party payors (collectively, "Third Party Plans"),
to continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans generally result in lower gross profit
margins due to competitive pricing, the Company believes that such lower
margins are offset by the increased volume of pharmacy sales and the
opportunity to leverage fixed expenses. The Company believes that its
initiatives, which are designed to capitalize on industry trends, have
resulted in the Company's pharmacy sales growing at an annual rate of
approximately 30% since 1994. Although these initiatives have helped increase
the average number of prescriptions filled by Duane Reade per store per week
from 640 in 1994 to 865 during 1997, the Company's average remains well below
the national industry chain store average of approximately 1,200, providing
significant opportunity for continued pharmacy growth. The Company believes
that continued pharmacy growth will increase overall customer traffic,
thereby also benefitting its non-pharmacy sales.

MAKE OPPORTUNISTIC ACQUISITIONS OF INDEPENDENT DRUGSTORES AND PHARMACY
FILES. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which generate incremental revenue and higher margins. When
appropriate, the Company retains the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. In 1997, the Company acquired one independent
drugstore and seven such pharmacy files and intends to aggressively pursue
additional purchases.

CONTINUE TO IMPLEMENT MERCHANDISING INITIATIVES IN NON-PHARMACY
AREAS. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed installation of Point of
Sale ("POS") scanners in all of its stores and, by the end of the first
quarter of 1998, will have completed its "planogramming" (space management
system) initiative in all of its stores. These systems and initiatives will
allow the Company to better analyze sales trends and merchandise its stores
more effectively, which the Company believes will ultimately increase its
sales and profitability.

The success of the Company's growth strategy is dependent on a number of
factors, many of which are beyond the Company's control. The Company's
ability to continue to successfully execute its new store opening program is
subject to a number of factors including the availability and cost of
attractive new store locations, continued favorable retail and pharmacy
trends, competition, the general economic environment and the ability of
management to successfully oversee the Company's expanded operations. Due to
the above factors, there can be no assurance that the Company will be
successful in implementing the above growth strategy.

RECENT DEVELOPMENTS

The Company's 1997 fiscal year ended on December 27, 1997. While the final
results for the year ended December 27, 1997 are not yet available, the
Company currently estimates that net sales for the full 1997 fiscal year were
approximately $429.8 million, including approximately $107.8 million from
pharmacy sales.

5
<PAGE>
The information above is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended
December 27, 1997.

REFINANCING PLAN

The Offering is part of a plan to refinance all of the Company's existing
indebtedness (the "Refinancing Plan") in order to enhance the Company's
financial flexibility to pursue growth opportunities and implement capital
improvements. The successful consummation of the Refinancing Plan will reduce
the Company's overall indebtedness, simplify the Company's capital structure
and provide access to additional borrowings. The principal components of the
Refinancing Plan are: (i) the sale by the Company of 6,700,000 shares of
Common Stock in the Offering for estimated net proceeds of $101.8 million;
(ii) the execution of a new secured credit agreement (the "New Credit
Agreement"), which will provide for borrowings of up to approximately $160.0
million; (iii) the issuance (the "Notes Offering") of $80.0 million aggregate
principal amount of the Company's 9 1/4% Senior Subordinated Notes due 2008
(the "New Senior Subordinated Notes") for estimated net proceeds of $77.1
million; (iv) the repayment of all outstanding borrowings under the Company's
existing credit agreement (the "Existing Credit Agreement"), the outstanding
principal amount of which was $89.8 million as of December 27, 1997; (v) the
redemption of the Company's outstanding 15% Senior Subordinated Zero Coupon
Notes due 2004 (the "Zero Coupon Notes") for $99.8 million (including a
redemption premium of $7.0 million); (vi) the redemption of the Company's
outstanding 12% Senior Notes due 2002 (the "Senior Notes") for $93.9 million
(including a redemption premium of $4.0 million); and (vii) the merger of
Daboco, Inc., a direct wholly-owned subsidiary of the Company, with and into
the Company (the "Merger"). The Company believes that the Refinancing Plan
will result in a reduction in overall interest expense because total interest
expense associated with the New Credit Agreement and the Notes Offering will
be less than the total interest expense currently associated with the Senior
Notes and the Zero Coupon Notes. See "Selected Consolidated Historical
Financial and Operating Data." The Company expects that interest rates under
the New Credit Agreement will be approximately the same as interest rates
under the Existing Credit Agreement. See "Description of Certain
Indebtedness--New Credit Agreement." The Company expects that total fees and
expenses associated with the Refinancing Plan will be approximately $14.4
million. See "Use of Proceeds." The consummation of the Offering will be
conditional upon the other components of the Refinancing Plan.

THE OFFERING

Common Stock offered hereby ... 7,277,718 shares (1)

Common Stock to be outstanding
after the Offering ............ 16,957,832 shares (1)

Use of Proceeds ............... The net proceeds received by the Company
from the Offering, together with borrowings
under the New Credit Agreement and the net
proceeds from the Notes Offering, will be
used to complete the Refinancing Plan. See
"Prospectus Summary--Refinancing Plan" and
"Use of Proceeds."

New York Stock Exchange symbol
............................... "DRD"
- ------------
(1) Excludes (i) outstanding options to purchase an aggregate of 1,651,959
shares of Common Stock and (ii) 315,409 additional shares reserved for
issuance under the Company's stock option plans.

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SUMMARY HISTORICAL
FINANCIAL AND OPERATING DATA
(In thousands, except percentages and store data)

The following table sets forth summary consolidated historical financial
data for the fiscal years ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the 39 week periods ended September 28, 1996 and
September 27, 1997. This data should be read in conjunction with the
consolidated historical financial statements of the Company, together with
the notes thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------------------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $281,103 $336,922 $381,466 $281,093 $313,796
Gross profit .............................. 71,425 77,095 92,961 65,296 77,383
Nonrecurring charges (1) .................. -- -- -- -- 10,887
Operating income .......................... 11,042 12,166 14,542 11,849 11,268
Net interest expense ...................... 27,480 30,224 32,396 24,334 25,433
Net loss .................................. (16,438) (18,058) (17,854) (12,485) (14,165)

OPERATING AND OTHER DATA:
EBITDA (2)................................. $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of net sales ...... 11.1% 8.2% 9.3% 8.5% 9.5%
Number of stores at end of period ........ 51 59 60 60 65
Same store sales growth (3) ............... 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales growth (3) ..... 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at end of
period ................................... 6,596 6,712 6,733 6,733 6,832
Sales per square foot (4) ................. $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales ....... 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of pharmacy
sales .................................... 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures....................... $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- -----------------------------
(ACTUAL) (AS ADJUSTED)(5)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .......................... $ 9,917 $ 29,849 $ 56,187
Total assets ............................. 222,476 239,520 266,910
Total debt and capital lease obligations 245,657 262,649 212,187
Stockholders' equity (deficiency) ....... (59,396) (73,561) 4,316
</TABLE>

(footnotes on next page)

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(footnotes to Summary Historical Financial and Operating Data appearing on
the preceding page)
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the repurchase
offers referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million,
including investment banking fees of $7.7 million (including $3.5
million to an affiliate of DLJMBPII and $0.6 million to certain
affiliates of Bain Capital), legal and accounting fees of $1.6 million,
stand-by commitment fees relating to certain change of control offers
of $1.2 million to an affiliate of DLJMBPII, and other costs of $0.4
million, which the Company has treated as a non-recurring expense
because such expenses are related to financing activities in connection
with the Recapitalization and related events, which the Company does
not expect to repeat.
(2) As used herein, "EBITDA" means net income (loss) plus nonrecurring
costs, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
generally accepted accounting principles ("GAAP").
A reconciliation of net loss to EBITDA for each period included above
is set forth below (dollars in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------------ --------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net loss ............. $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 27,480 30,224 32,396 24,334 25,433
Amortization ......... 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- 10,887
Other non-cash item . 724 1,769 1,526 1,156 1,182
----------- ----------- ----------- --------------- ---------------
EBITDA ............... $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== =========== =========== =============== ===============
</TABLE>

(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(5) Adjusted to give effect to (i) the Refinancing Plan, including the
consummation of the Offering and the Notes Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds," as
if all such transactions had occurred at September 27, 1997, (ii) a
provision of $75,000 for compensation expense related to previously
issued stock options and (iii) an extraordinary loss of $23.6 million
for the 39 weeks ended September 27, 1997 arising from the redemption
of the Senior Notes and the Zero Coupon Notes and the write-off of the
related unamortized deferred financing fees, as if all such
transactions had occurred at September 27, 1997. See "Use of Proceeds"
and "Capitalization."

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RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.

RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS

After the Offering, the Company will have a substantial amount of
outstanding indebtedness. As of September 27, 1997, on a pro forma basis
giving effect to the Refinancing Plan, including the Offering and the Notes
Offering and the application of the net proceeds therefrom, the consolidated
indebtedness of the Company would have been approximately $212.2 million
(excluding trade payables, accrued expenses and other non-current
liabilities). In addition, the Company's earnings have historically been
insufficient to cover fixed charges and were insufficient by $17.9 million
and $14.2 million for the fiscal year ended December 28, 1996 and the 39 week
period ended September 27, 1997, respectively. Subject to certain limitations
contained in its outstanding debt instruments, the Company or its
subsidiaries may incur additional indebtedness to finance working capital,
capital expenditures or acquisitions or for general corporate purposes. The
Company's level of indebtedness could have important consequences to the
holders of Common Stock, including the following: (i) the Company's ability
to obtain additional capital for acquisitions, capital expenditures, working
capital or general corporate or other purposes may be limited and (ii) the
Company's level of indebtedness may reduce the Company's flexibility to
respond to changing business and economic conditions. Substantially all of
the Company's indebtedness under the New Credit Agreement is expected to be
subject to variable interest rates that fluctuate in accordance with changes
in the market rate to be specified in the New Credit Agreement. Fluctuations
in such interest rates may occur at any time in response to changing economic
conditions and other factors beyond the Company's control, and there can be
no assurance with respect to how long such rates will remain at their current
levels. Although the Company expects to enter into hedging agreements to
limit its exposure to interest rate fluctuations, a significant rise in
interest rates could have a material adverse effect on the Company. To date,
the Company has not entered into any such hedging arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

The Company's ability to service its indebtedness will be dependent on its
future performance, which will be affected by prevailing economic, financial,
business, competitive, legislative, regulatory and other conditions, certain
of which are beyond the Company's control. The Company believes that, based
upon current levels of operations and anticipated growth, it should be able
to meet its debt service obligations when due for the foreseeable future. If,
however, the Company becomes unable to service its indebtedness, it will be
forced to pursue one or more alternative strategies such as selling assets,
restructuring or refinancing its indebtedness or seeking additional equity
capital (which may substantially dilute the ownership interest of holders of
Common Stock), which actions are restricted, to some extent, under the terms
of the New Credit Agreement and the New Senior Subordinated Notes. There can
be no assurance that any of these strategies could be effected on
satisfactory terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

The New Senior Subordinated Note Indenture will contain certain covenants
which, among other things, will restrict the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, make certain restricted payments,
create certain liens, sell assets, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell or issue
capital stock of the Company's subsidiaries. In addition, the New Credit
Agreement contains other and more restrictive covenants, including those
requiring the Company to maintain specified financial ratios and satisfy
certain tests relating to its financial condition, and prohibits the Company
from repaying its other indebtedness (including the New Senior Subordinated
Notes) prior to the maturity of the New Credit Agreement. The Company's
ability to comply with the covenants in the New Credit Agreement and/or the
New Senior Subordinated Note Indenture may be affected by events beyond its
control, including prevailing economic, financial, business, competitive,
legislative, regulatory

9
<PAGE>
and other conditions. The breach of any such covenants or restrictions could
result in a default under the New Credit Agreement and/or the New Senior
Subordinated Note Indenture. Upon the occurrence of an event of default under
the New Credit Agreement, the lenders thereunder could elect to declare all
amounts borrowed thereunder to be immediately due and payable, together with
accrued and unpaid interest, and terminate the commitments of the lenders to
make further extensions of credit under the New Credit Agreement. If the
Company were unable to repay its indebtedness to its lenders under the New
Credit Agreement, such lenders could proceed against any or all of the
collateral securing the indebtedness under the New Credit Agreement, which
collateral is expected to consist of substantially all of the assets of the
Company and the capital stock and substantially all of the assets of its
subsidiaries. See "Description of Certain Indebtedness--New Credit Agreement"
and "Description of Certain Indebtedness--New Senior Subordinated Notes."

COMPETITION

The markets in which the Company operates are highly competitive. In the
New York City area, the Company competes against national, regional and local
drugstore chains, discount drugstores, supermarkets, combination food and
drugstores, discount general merchandise stores, mass merchandisers,
independent drugstores and local merchants. Major chain competitors in the
New York City market include Rite-Aid, Genovese and CVS. Many of the
Company's competitors are larger and have greater financial resources than
the Company. In addition to competition from the foregoing, the Company's
pharmacy departments also compete with hospitals, health maintenance
organizations ("HMOs") and mail order prescription drug providers. The
Company's drugstores compete, among other things, on the basis of convenience
of location and store layout, product mix, selection, customer service and
price. There can be no assurance that such competition will not adversely
affect the Company's results of operations or financial condition. See
"Business--Competition."

NET LOSSES; INTANGIBLE ASSETS

The Company has experienced net losses of $24.4 million, $16.4 million,
$18.1 million, $17.9 million and $14.2 million for the prior four fiscal
years and the 39 weeks ended September 27, 1997, respectively. The net
proceeds from the Offering, the Notes Offering and the New Credit Agreement
will be used to reduce overall indebtedness of the Company and associated
interest expense. See "Prospectus Summary--Refinancing Plan" and "Use of
Proceeds." The Company's results of operations will continue to be affected
by events and conditions both within and beyond its control, including the
successful implementation of the Company's growth strategy, continued
performance of existing stores, competition and economic, financial, business
and other conditions. Therefore, there can be no assurance that the Company
will not continue to incur net losses in the future. As of September 27,
1997, the Company's consolidated stockholders' deficiency was $73.6 million.
On a pro forma basis giving effect to the Refinancing Plan, including the
Offering, the Notes Offering and the application of the net proceeds
therefrom, the Company would have had stockholders' equity of approximately
$4.3 million as of September 27, 1997. The Company also expects to realize an
extraordinary loss of approximately $23.6 million in the first quarter of
1998 as a result of the early retirement of the Senior Notes, the Zero Coupon
Notes and the Existing Credit Agreement.

Of the Company's total assets at December 28, 1996, approximately $142.4
million (or 64.0% of total assets) represented goodwill, net of amortization,
and other intangible assets arising principally from the acquisition of the
Company's predecessor by Bain Capital in 1992. It is possible that no cash
would be recoverable from the voluntary or involuntary sale of the intangible
assets of the Company, including its goodwill.

ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION

Substantially all of the Company's stores are located in the New York City
area. As a result, the Company is sensitive to economic and competitive
conditions, the regulatory environment and the availability of labor in that
area. The success of the Company's future operations will be substantially
affected by its ability to compete effectively in the New York City area, and
no prediction can be made as to economic conditions in this region.

10
<PAGE>
UNCERTAINTY OF LEASE RENEWALS

All of the Company's stores are leased, with the leases expiring at
various dates from May 1998 to December 2022 (assuming renewal options are
exercised). Leases for eight stores that generated approximately 12.8% of the
Company's net sales for the 39 week period ended September 27, 1997 are
scheduled to expire before the end of 2000. Although the Company has
historically been successful in renewing most of its store leases when they
have expired, there can be no assurance that the Company will continue to be
able to do so on acceptable terms or at all. If the Company is unable to
renew the leases for the Company's store locations as they expire, or find
other favorable locations at acceptable lease rates, there can be no
assurance that such failures will not have a material adverse effect on the
Company's financial condition and results of operations. See
"Business--Properties; Leases."

RISKS ASSOCIATED WITH FUTURE GROWTH

The Company is experiencing a period of rapid expansion, which the Company
believes will continue for the foreseeable future. The operating complexity
of the Company's business, as well as the responsibilities of management
personnel, have increased as a result of this expansion. The Company's
ability to manage such growth effectively will require it to continue to
expand and improve its operating and financial systems and to expand, train
and manage its employee base. In addition, as the Company opens new stores,
there can be no assurance that a sufficient number of qualified personnel
will be available to manage such expanded operations or that such operations
will be successfully integrated into the Company. The Company's inability to
manage its expansion effectively, including the hiring of additional
personnel, could have a material adverse effect on its business and results
of operations. The Company's expansion prospects are also dependent on a
number of other factors, including, among other things, economic conditions,
competition, consumer preferences, financing and working capital needs, the
ability of the Company to negotiate store leases on favorable terms and the
availability of additional warehouse space and new store locations. In
addition, as the Company continues with its plans to open additional stores
in the New York City area, sales at existing stores may decrease as customers
shop at the Company's newer stores. There can be no assurance that the
Company will be able to effectively realize its plans for future expansion.
See "Business."

RISKS ASSOCIATED WITH REGULATORY AND OTHER CHANGES IN THE HEALTH CARE
INDUSTRY

Pharmacy sales accounted for approximately 22% of the Company's total
sales for 1996 and 25% of the Company's total sales for the 39 week period
ended September 27, 1997. Pharmacy sales to Third Party Plans accounted for
approximately 64% of the Company's total pharmacy sales for 1996 and
approximately 73% of the Company's total pharmacy sales for the 39 week
period ended September 27, 1997. The efforts of Third Party Plans to contain
costs have placed downward pressures on gross profit margins from sales of
prescription drugs. However, management believes that the penetration of
Third Party Plans in the New York City market will continue, and the
resulting increase in volume should help to mitigate the decrease in gross
profit margins. See "Business--The Drugstore Industry."

The Company's revenues from prescription drug sales may also be affected
by health care reform initiatives of federal and state governments, including
proposals designed to significantly reduce spending on Medicare, Medicaid and
other government programs, changes in programs providing for reimbursement
for the cost of prescription drugs by Third Party Plans and regulatory
changes relating to the approval process for prescription drugs. Such
initiatives could lead to the enactment of federal and state regulations that
may adversely impact the Company's prescription drug sales and, accordingly,
its results of operations.

REGULATORY MATTERS

The Company's business is subject to various federal and state
regulations. For example, pursuant to the Omnibus Budget Reconciliation Act
of 1990 ("OBRA") and comparable state regulations, the Company's pharmacists
are required to offer counseling, without additional charge, to their
customers about medication, dosage, delivery systems, common side effects and
other information deemed

11
<PAGE>
significant by the pharmacists and may have a duty to warn customers
regarding any potential adverse effects of a prescription drug if the warning
could reduce or negate such effects. The Company is also subject to federal,
state and local licensing and registration regulations with respect to, among
other things, its pharmacy operations. The Company believes that it has
satisfied all of its licensing and registration requirements and continues to
actively monitor its compliance with such requirements. However, violations
of any such regulations could result in various penalties, including
suspension or revocation of the Company's licenses or registrations or
monetary fines, which could adversely effect the Company's operations.
Additionally, the Company is subject to federal Drug Enforcement Agency
("DEA") regulations relative to its pharmacy operations, including
purchasing, storing and dispensing of controlled substances.

The Company is also subject to laws governing its relationship with
employees, including minimum wage requirements, overtime and working
conditions. Increases in the federal minimum wage rate, employee benefit
costs or other costs associated with employees could adversely affect the
Company's results of operations.

DEPENDENCE ON KEY PERSONNEL

The success of the Company depends to a large extent on its executive
management team. Although the Company has entered into employment agreements
with each of the Company's executive officers, it is possible that members of
executive management may leave the Company, and such departures could have a
negative impact on the business of the Company. The Company does not maintain
key-man life insurance on any of its executive officers. See "Management."

CONTINUED INFLUENCE OF PRINCIPAL STOCKHOLDERS

Upon consummation of the Offering, investment funds affiliated with
DLJMPBII, an affiliate of DLJ, which is one of the Underwriters, and certain
of its affiliates will beneficially own an aggregate of approximately 52.4%
of the Company's fully diluted outstanding Common Stock (46.3% if the
Underwriters' overallotment option is exercised in full). In addition, two of
the Company's four directors are Managing Directors of DLJ Merchant Banking
II, Inc. ("DLJMB"), a general partner of DLJMBPII, and one director is a
Managing Director of DLJ. In connection with the consummation of the
Offering, the Company expects to add two independent directors to the Board
of Directors. See "Management" and "Principal and Selling Stockholders."
Under Delaware law and the Company's Amended and Restated Certificate of
Incorporation, owners of a majority of the Company's outstanding Common Stock
are able to elect all of the Company's directors and approve significant
corporate transactions without the approval or consent of the other
shareholders. As a result, DLJMBPII will continue to have the ability (either
alone or together with a small percentage of other shareholders) to elect all
of the Company's directors and to control the vote on all matters submitted
to a vote of the holders of the Common Stock, including any going private
transaction, merger, consolidation or sale of all or substantially all of the
Company's assets. The Company's Amended and Restated Certificate of
Incorporation provides that any action that can be taken by a meeting of the
shareholders may be taken by written consent in lieu of a meeting. See
"Description of Capital Stock."

CERTAIN ANTI-TAKEOVER EFFECTS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws may inhibit changes in control
of the Company not approved by the Company's Board of Directors. These
provisions, which, among other things, (i) authorize the Board of Directors
to issue preferred stock ranking senior to the Common Stock without any
action on the part of the shareholders and (ii) establish certain advance
notice procedures for shareholder proposals (including nominations of
directors) to be considered at shareholders' meetings may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interests. These provisions also may adversely affect prevailing market
prices for the Common Stock. In addition, Section 203 of the Delaware General
Corporation Law restricts certain persons from engaging in business
combinations with the Company. See "Description of Capital Stock."

12
<PAGE>
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK

Since 1993, the Company has not declared or paid any cash or other
dividends on the Common Stock and does not expect to pay dividends for the
foreseeable future. The New Senior Subordinated Note Indenture contains a
covenant that restricts the ability of the Company to pay cash dividends, and
the New Credit Agreement will prohibit the payment of cash dividends. If
these restrictions are subsequently removed, any future cash dividends will
depend upon the Company's results of operations, financial conditions, cash
requirements, the availability of a surplus and other factors. See "Dividend
Policy."

COLLECTIVE BARGAINING AGREEMENTS

As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. The
Company's three-year contracts with these two unions expire on August 31,
1999 and August 31, 1998, respectively. The Company has not experienced any
material business interruption as a result of labor disputes within the past
15 years, and the Company considers its employee relations to be good.
However, there can be no assurance that, upon the expiration of any of the
Company's collective bargaining agreements, the Company will be able to
negotiate new collective bargaining agreements on terms favorable to the
Company or that the Company's business operations will not be interrupted as
a result of labor disputes or difficulties or delays in the process of
renegotiating its collective bargaining agreements. In such events, the
Company's results of operations could be materially adversely affected. See
"Business--Employees."

IMMEDIATE AND SUBSTANTIAL DILUTION

Based upon the initial public offering price, purchasers of Common Stock
in the Offering will experience immediate and substantial dilution of $24.31
per share in the net tangible book deficiency per share of Common Stock. See
"Dilution."

ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing, subject to
notice of issuance, on the New York Stock Exchange, there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained or that purchasers of Common Stock in the Offering will be able to
resell their shares at prices at or above the initial offering price. The
initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company and the representatives of the
Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting." After the Offering, the market
price for shares of the Common Stock may be volatile and may fluctuate based
upon a number of factors, including many that are beyond the control of the
Company, such as the Company's results of operations and business
performance, general industry trends, news announcements by competitors of
the Company, changes in the regulatory environment or in general, political,
market and economic conditions.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 16,957,832 shares
of Common Stock outstanding. The shares of Common Stock sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless held by an
"affiliate" of the Company, as that term is defined under Rule 144 under the
Securities Act ("Rule 144"), which shares will be subject to the resale
limitations of Rule 144. In addition, certain existing stockholders,
including holders of restricted Common Stock, have registration rights with
respect to Common Stock held by them. In connection with the Offering,
certain existing stockholders have agreed not to dispose of any shares for a
period of 180 days from the date of this Prospectus, and the Company

13
<PAGE>
has agreed not to dispose of any shares (other than shares sold by the
Company in the Offering or issuances by the Company of certain employee stock
options and shares covered thereby) for a period of 180 days from the date of
this Prospectus, without the prior written consent of representatives of the
Underwriters. Upon expiration of such 180-day period, up to 52,454 shares of
Common Stock will be eligible for sale pursuant to Rule 144, without regard
to volume limitations. No prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares of
Common Stock for sale will have on the market price of the Common Stock from
time to time. The sale of a substantial number of shares held by the existing
stockholders, whether pursuant to a subsequent public offering or otherwise,
or the perception that such sales could occur, could adversely affect the
market price of the Common Stock and could materially impair the Company's
future ability to raise capital through an offering of equity securities. See
"Certain Relationships and Related Transactions--Stockholders and
Registration Rights Agreement," "Shares Eligible for Future Sale" and
"Underwriting."

14
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the Offering (after deducting the
underwriting discounts and estimated other general offering expenses) are
estimated to be approximately $101.8 million. The Company intends to use such
net proceeds, together with estimated net proceeds from the Notes Offering of
approximately $77.1 million and net borrowings under the New Credit Agreement
of approximately $127.6 million, to complete the Refinancing Plan, which is
expected to consist of: (i) the redemption of all of the Zero Coupon Notes
for $99.8 million (including a redemption premium of $7.0 million), (ii) the
redemption of all of the Senior Notes for $93.9 million (including a
redemption premium of $4.0 million), (iii) the repayment of all outstanding
term loan indebtedness under the Existing Credit Agreement, the outstanding
principal amount of which was $65.3 million as of December 27, 1997, (iv) the
repayment of all outstanding revolving indebtedness under the Existing Credit
Agreement, the outstanding principal amount of which was $24.5 million as of
December 27, 1997, and (v) the payment of fees and expenses incurred in
connection with the Refinancing Plan. The Company plans to use the proceeds
of the Offering, the Notes Offering and a portion of the proceeds from the
New Credit Agreement to fund the redemption of the Zero Coupon Notes and the
Senior Notes. Accordingly, the proceeds from the Offering and the Notes
Offering will be used to defease the Zero Coupon Notes and the Senior Notes
pending such redemptions, which the Company currently expects to occur
approximately 30 days after the closing of the Offering. The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders.

The term loan indebtedness under the Existing Credit Agreement has a
maturity date of June 2002 and currently bears interest at an annual rate of
LIBOR plus 3.0%, which, as of September 30, 1997, equaled approximately 8.8%.
The revolving loan indebtedness under the Existing Credit Agreement has a
maturity date of June 2001 and currently bears interest at an annual rate of
LIBOR plus 2.5%, which, as of September 30, 1997, equaled approximately 8.3%,
and provides for a commitment fee ranging from 0.375% to 0.5% per annum on
the unused portion of the facility, depending on the Company's ratio of
consolidated debt to EBITDA (as defined in the Existing Credit Agreement).
The Zero Coupon Notes have a maturity date of September 2004 and accrete at a
fixed rate of 15% per annum compounded semiannually, with cash interest
payments commencing in March 2000 at a fixed rate of 15% per annum. The
Senior Notes have a maturity date of September 2002 and bear interest at a
fixed rate of 12% per annum.

15
<PAGE>
DIVIDEND POLICY

Since 1993, the Company has not declared or paid any cash or other
dividends on its Common Stock and does not expect to pay dividends for the
foreseeable future. The Company anticipates that, for the foreseeable future,
earnings will be reinvested in the business and used to service indebtedness.
The declaration and payment of cash dividends by the Company are subject to
the discretion of the Board of Directors. In addition, the New Credit
Agreement will prohibit the payment of cash dividends, and the New Senior
Subordinated Notes Indenture will contain a covenant that restricts the
payment of cash dividends. See "Description of Certain Indebtedness." In
addition, any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions under its current or any future indebtedness, the
availability of a surplus and other factors deemed relevant by the Board of
Directors. See "Risk Factors--Restrictions on Payment of Dividends on Common
Stock."

16
<PAGE>
CAPITALIZATION

The following table sets forth the total capitalization of the Company as
of September 27, 1997 and the pro forma capitalization as adjusted to give
effect to the Refinancing Plan (assuming consummation of the redemption of
the Senior Notes and the Zero Coupon Notes), including the sale by the
Company of 6,700,000 shares of Common Stock offered hereby. See "Use of
Proceeds." This table should be read in conjunction with the unaudited
consolidated financial statements of the Company, including the notes
thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Credit agreement(2) ......................... $ 81,475 $ --
New Credit Agreement(3) ..................... -- 130,000
Senior Notes(4) ............................. 89,893 --
Zero Coupon Notes(5) ........................ 89,094 --
9 1/4% New Senior Subordinated Notes ........ -- 80,000
Capital lease obligations ................... 2,187 2,187
---------- --------------
Total long-term debt ...................... 262,649 212,187
---------- --------------
Stockholders' equity (deficiency):
Common stock and additional paid-in capital 24,665 126,215
Preferred stock.............................. -- --
Accumulated deficit ......................... (98,226) (121,899)
---------- --------------
Total stockholders' equity (deficiency) .. (73,561) 4,316
---------- --------------
Total capitalization .......................... $189,088 $ 216,503
========== ==============
</TABLE>

- ------------
(1) Adjusted to give effect to the Refinancing Plan, including the
consummation of the Offering and the Notes Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds," as
if all such transactions had occurred at September 27, 1997.
(2) Reflects the outstanding balance under the Company's credit agreement
in effect on September 27, 1997, which was replaced by the Existing
Credit Agreement on September 30, 1997.
(3) Does not include $30.0 million of borrowing availability under the
revolving portion of the New Credit Agreement.
(4) Pursuant to the terms of the Indenture relating to the Senior Notes,
the Company has the right to call the Senior Notes at a price equal to
104.5% of the principal amount thereof (a premium of approximately $4.0
million). Concurrently with closing of the Offering and the Notes
Offering, the Company will call the Senior Notes (the "Senior Notes
Redemption") and currently expects that the Senior Notes Redemption
will occur approximately 30 days after the closing of the Offering.
(5) Pursuant to the terms of the Indenture relating to the Zero Coupon
Notes, the Company has the right to call the Zero Coupon Notes at a
price equal to 107.5% of the accreted value thereof (a premium of
approximately $7.0 million). Concurrently with the closing of the
Offering and the Notes Offering, the Company will call the Zero Coupon
Notes (the "Zero Coupon Notes Redemption") and currently expects that
the Zero Coupon Notes Redemption will occur approximately 30 days after
the closing of the Offering.

17
<PAGE>
DILUTION

The net tangible book deficiency of the Company as of September 27, 1997
was approximately $211.1 million, or $20.58 per share of Common Stock. Net
tangible book deficiency per share represents the amount of the Company's
total tangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of
$101.8 million of estimated net proceeds to the Company from the Offering and
the application thereof as described under "Use of Proceeds," the pro forma
net tangible book deficiency of the Company at September 27, 1997 would have
been approximately $132.5 million, or $7.81 per share of Common Stock. This
represents an immediate reduction in net tangible book deficiency of $12.77
per share to the existing shareholders and an immediate net tangible book
value dilution of $24.31 per share to new investors purchasing shares in the
Offering. The following table illustrates this dilution:

<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share .......................... $ 16.50
Net tangible book deficiency per share at September 27, 1997 ..... $(20.58)
Decrease in net tangible book deficiency per share attributable
to new investors................................................. 12.77
----------
Pro forma net tangible book deficiency value per share after the
Offering ........................................................ (7.81)
---------
Dilution per share to new investors .............................. $(24.31)
=========
</TABLE>

The following table summarizes, on a pro forma basis after giving effect
to the Offering and the application of the estimated net proceeds therefrom
as of September 27, 1997, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company for such shares and
the average price per share paid by the existing stockholders and the new
investors purchasing shares of Common Stock in the Offering (dollars in
thousands, except per share amounts):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) 10,257,832 60.5% $ 24,665 18.2% $ 2.40
New investors ............. 6,700,000 39.5% 110,550 81.8% 16.50
------------ --------- ---------- ---------
Total...................... 16,957,832 100.0% $135,215 100.0%
============ ========= ========== =========
</TABLE>
- ------------
(1) Excludes 1,651,959 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of September 27, 1997 (with a
weighted average exercise price of $7.05 per share).

18
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial
statements are based on the unaudited consolidated financial statements
included elsewhere in this Prospectus, adjusted to give effect to the
Refinancing Plan.

The unaudited pro forma statements of operations data are derived from the
consolidated statements of operations for the fiscal year ended December 28,
1996 and the 39 week period ended September 27, 1997, included elsewhere in
this Prospectus, and assume that the Refinancing Plan was consummated as of
December 31, 1995. The unaudited pro forma condensed consolidated balance
sheet data are derived from the unaudited consolidated balance sheet of the
Company as of September 27, 1997, included elsewhere in this Prospectus, and
assume that the Refinancing Plan was consummated on September 27, 1997. The
unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements of the
Company, included elsewhere in this Prospectus.

The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of the results that would actually have been
obtained if the Refinancing Plan had occurred on the dates indicated or of
the results that may be obtained in the future. The unaudited pro forma
condensed consolidated financial statements are presented for comparative
purposes only. The pro forma adjustments, as described in the accompanying
data, are based on available information and certain assumptions that
management believes are reasonable.

19
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

SEPTEMBER 27, 1997

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash........................................................ $ 218 $ 28,128 (1) $ 28,346
Receivables................................................. 9,084 9,084
Inventories................................................. 65,872 65,872
Prepaid expenses ........................................... 1,371 1,371
------------ ------------- -----------
TOTAL CURRENT ASSETS ...................................... 76,545 28,128 104,673
Property and equipment, net ................................. 24,918 24,918
Goodwill, net ............................................... 121,757 121,757
Other assets, net............................................ 16,300 2,506 (1) 15,562
2,900 (1)
2,700 (2)
(8,844)(5)
------------ ------------- -----------
Total assets .............................................. $239,520 $ 27,390 $ 266,910
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable ........................................... $ 30,710 $ $ 30,710
Accrued interest ........................................... 623 (600)(1) 23
Accrued expenses ........................................... 13,193 (2,200)(1) 13,693
2,700 (2)
Current portion of senior debt ............................. 660 2,550 (1) 2,550
(660)(1)
Current portion of capital lease obligations................ 1,510 1,510
------------ ------------- -----------
TOTAL CURRENT LIABILITIES ................................. 46,696 1,790 48,486
Senior debt, less current portion ........................... 170,708 127,450 (1) 207,450
80,000 (1)
(80,815)(1)
(93,938)(1)
4,045 (4)
Zero Coupon Notes, net....................................... 89,094 (99,803)(1) --
3,746 (3)
6,963 (4)

Capital lease obligations less current portion............... 677 677
Other non-current liabilities................................ 5,906 75 (6) 5,981
------------ ------------- -----------
TOTAL LIABILITIES ......................................... 313,081 (50,487) 262,594
------------ ------------- -----------
Stockholders' deficiency:
Common stock, $0.01 par; authorized 30,000,000 shares;
issued and outstanding 10,257,832 shares and 16,957,832
shares, respectively ....................................... 103 67 (1) 170
Paid-in-capital............................................. 24,562 110,483 (1) 126,045
(9,000)(1)
Accumulated deficit ........................................ (98,226) (3,746)(3) (121,899)
(11,008)(4)
(8,844)(5)
(75)(6)
------------ ------------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) ................... (73,561) 77,877 4,316
------------ ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) .. $239,520 $ 27,390 $ 266,910
============ ============= ===========
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.

20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The net effect on cash of the transactions and the application of
proceeds thereof, as of September 27, 1997, is as follows:

<TABLE>
<CAPTION>
<S> <C>
TOTAL SOURCES:
Proceeds to the Company from the Offering............. $110,550
New Credit Agreement:
Current portion...................................... 2,550
Non-current portion.................................. 127,450
New Senior Subordinated Notes......................... 80,000
----------
Total sources....................................... $320,550
==========
TOTAL USES:
Existing Credit Agreement
Current portion...................................... $ 660
Non-current portion.................................. 80,815
Senior Notes, including redemption premium............ 93,938
Zero Coupon Notes, including redemption premium ...... 99,803
Offering fees and expenses............................ 9,000
New Credit Agreement fees and expenses................ 2,506
New Senior Subordinated Notes fees and expenses ...... 2,900
Accelerated payment of previously incurred liability 2,200
Accrued interest ..................................... 600
Cash.................................................. 28,128
----------
Total uses.......................................... $320,550
==========
</TABLE>

(2) Represents fees and expenses related to the Existing Credit Agreement.
(3) Represents adjustment of Zero Coupon Notes to accreted value in
accordance with the Zero Coupon Notes Indenture.
(4) Represents accrual of redemption premiums on the Senior Notes and the
Zero Coupon Notes.
(5) Represents a write-off of unamortized deferred financing costs related
to the Company's previously outstanding debt, including (i) $6,144
relating to the bank credit agreement of the Company that existed prior
to the Existing Credit Agreement, the Senior Notes and the Zero Coupon
Notes and (ii) $2,700 relating to the Existing Credit Agreement.
(6) Represents compensation expense in connection with stock options
granted.

21
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
Net sales .................................... $313,796 $ $313,796
Cost of sales................................. 236,413 236,413
------------ ------------- ------------
Gross profit.................................. 77,383 -- 77,383
------------ ------------- ------------
Selling, general and administrative expenses 48,218 75 (2) 48,293
Amortization ................................. 3,826 3,826
Depreciation ................................. 2,584 2,584
Store pre-opening expenses.................... 600 600
Nonrecurring charge........................... 10,887 10,887
------------ ------------- ------------
66,115 75 66,190
------------ ------------- ------------
Operating income ............................. 11,268 (75) 11,193
Interest expense, net ........................ 25,433 (10,408)(1) 15,025
------------ ------------- ------------
Loss before income taxes...................... (14,165) 10,333 (3,832)(3)
Income taxes.................................. -- -- --
------------ ------------- ------------
Net loss..................................... $(14,165) $ 10,333 $ (3,832)
============ ============= ============
Net loss per common share.................... $ (1.34) $ (0.22)
============ ============
Weighted average common shares outstanding .. 10,600 17,300
============ ============

</TABLE>

FOR THE 52 WEEKS ENDED DECEMBER 28, 1996

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
Net sales..................................... $381,466 $ $381,466
Cost of sales ................................ 288,505 288,505
------------ ------------- -----------
Gross profit ................................. 92,961 -- 92,961
------------ ------------- -----------
Selling, general and administrative expenses 59,048 59,048
Amortization.................................. 16,217 16,217
Depreciation.................................. 3,015 3,015
Store pre-opening expenses ................... 139 139
------------ ------------- -----------
78,419 -- 78,419
------------ ------------- -----------
Operating income.............................. 14,542 -- 14,542
Interest expense, net......................... 32,396 (12,527)(4) 19,869
------------ ------------- -----------
Loss before income taxes...................... (17,854) 12,527 (5,327)
Income taxes.................................. -- -- --
------------ ------------- -----------
Net loss..................................... $(17,854) $ 12,527 $ (5,327)
============ ============= ===========
Net loss per common share.................... $ (1.69) $ (0.31)
============ ===========
Weighted average common shares outstanding ... 10,575 17,275
============ ===========

</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.

22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

The Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflect the following as if all transactions had occurred on December 31,
1995:

(1) For the 39 weeks ended September 27, 1997:

<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an interest rate of 9.25%)(a) ..................................... $ 5,550
Interest expense related to the New Credit Agreement (b) .......... 8,072
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 658
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (24,688)
----------
$(10,408)
==========
</TABLE>

(2) Reflects a provision for compensation expense in connection with stock
options issued.

(3) Upon the early retirement of the Senior Notes, the Zero Coupon Notes
and the Existing Credit Agreement as a consequence of the consummation
of the Refinancing Plan, the Company expects to realize an
extraordinary loss, which on a pro forma basis for the 39 weeks ended
September 27, 1997 would be approximately $23,598, comprised of:

<TABLE>
<CAPTION>
<S> <C>
Redemption premium on Senior Notes.............................. $ 4,045
Redemption premium on Zero Coupon Notes......................... 6,963
Adjustment of Zero Coupon Notes to accreted value in accordance
with the Zero Coupon Note Indenture............................ 3,746
Write-off of unamortized deferred financing costs related to
the Company's previously outstanding debt...................... 8,844
--------
Pro forma extraordinary loss (tax effect: none)................. $23,598
========
</TABLE>

(4) For the 52 weeks ended December 28, 1996:

<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an interest rate of 9.25%)(a) ..................................... $ 7,400
Interest expense related to the New Credit Agreement (c) .......... 10,763
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 1,012
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (31,702)
----------
$(12,527)
==========
</TABLE>

- ------------
(a) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a change in interest expense of $150 for the 39
weeks ended September 27, 1997 and $200 for the 52 weeks ended
December 28, 1996.
(b) Interest expense is calculated as follows: (i) assuming an
outstanding principal balance on the New Credit Agreement of $130.0
million for the applicable period and (ii) using an interest rate of
8.3%, which is calculated in accordance with the New Credit
Agreement, which provides for the payment of interest on $50.0
million of outstanding Tranche A loans at LIBOR plus 2.5% and on
$80.0 million of outstanding Tranche B loans at LIBOR plus 2.75%.
Based on the current LIBOR rate, as of February 6, 1998 of 5.625%,
the average interest rate on such borrowings is 8.3%. A 25 basis
point (0.25%) increase or decrease in the assumed interest rate would
result in a $243 change in interest expense.
(c) Interest expense is calculated as follows: (i) assuming an
outstanding principal balance on the New Credit Agreement of $130.0
million for the applicable period and (ii) using an interest rate of
8.3%, which is calculated in accordance with the New Credit
Agreement, which provides for the payment of interest on $50.0
million of outstanding Tranche A loans at LIBOR plus 2.5% and on
$80.0 million of outstanding Tranche B loans at LIBOR plus 2.75%.
Based on the current LIBOR rate, as of February 6, 1998 of 5.625%,
the average interest rate on such borrowings is 8.3%. A 25 basis
point (0.25%) increase or decrease in the assumed interest rate would
result in a $325 change in interest expense.

23
<PAGE>
SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
(In thousands, except per share amounts, percentages and store data)

The data set forth below as of December 31, 1992 and for the period
September 26, 1992 through December 31, 1992, and as of January 1, 1994,
December 31, 1994, December 30, 1995, December 28, 1996 and for each of the
52 week periods then ended was derived from the consolidated financial
statements of the Company. As used below, the term "Predecessor" refers to
the operations of Duane Reade prior to the acquisition thereof by Bain
Capital in September 1992. The basis of accounting as of September 25, 1992
and for the period January 1, 1992 through September 25, 1992 reflects the
historical basis of accounting of the Predecessor prior to the acquisition
thereof by Bain Capital and such data was derived from the consolidated
financial statements of the Predecessor. The data presented below for the 39
weeks ended September 28, 1996 and September 27, 1997 and as of September 27,
1997 have been derived from the Company's unaudited consolidated financial
statements and, in the opinion of the Company's management, reflect and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such results. The results of operations
for the 39 weeks ended September 27, 1997 are not necessarily indicative of
the results that may be expected for a full fiscal year. This information
should be read in conjunction with the historical consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR
-------------
PERIOD
JANUARY 1

TO
SEPTEMBER 25,
1992
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $167,634
Cost of sales ......................... 124,637
-------------
Gross profit .......................... 42,997
Selling, general and administrative
expenses ............................. 22,636
Amortization .......................... 0
Depreciation .......................... 723
Store pre-opening expenses ............ --
Nonrecurring charges (1) .............. --
-------------
Operating income (loss) ............... 19,638
Net interest expense .................. 3,298
-------------
Income (loss) before income tax ...... 16,340
Provision for taxes ................... 620
-------------
Net income (loss) ..................... $ 15,720
=============
Earnings (loss) per common share .....
Weighted average common shares
outstanding...........................
OPERATING AND OTHER DATA:
EBITDA (2) ............................ $ 20,380
EBITDA as a percentage of sales ...... 12.2%
Number of stores at end of period .... 37
Same store sales growth (3) ........... --
Pharmacy same store sales
growth (3)(5).........................
Average store size (square feet) at
end of period ........................ --
Sales per square foot (6).............. --
Pharmacy sales as a % of net sales
(5)................................... --
Third-Party Plan sales as a % of
pharmacy sales (7) ...................
Capital expenditures .................. $ 114
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,943
Total assets .......................... 264,355
Total debt and capital lease
obligations (8)....................... 221,471
Stockholders' equity (deficiency) .... (35,622)
</TABLE>

(RESTUBBED TABLE CONTINUED FROM ABOVE)

<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------
PERIOD 39 WEEKS ENDED
SEPTEMBER 26
TO FISCAL YEAR ----------------------------
DECEMBER 31, ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27,
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $60,785 $241,474 $281,103 $336,922 $381,466 $281,093 $313,796
Cost of sales ......................... 45,560 181,566 209,678 259,827 288,505 215,797 236,413
------------ --------- --------- --------- --------- ------------- -------------
Gross profit .......................... 15,225 59,908 71,425 77,095 92,961 65,296 77,383
Selling, general and administrative
expenses ............................. 8,019 29,666 39,741 50,326 59,048 42,499 48,218
Amortization .......................... 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation .......................... 166 729 1,184 1,929 3,015 2,295 2,584
Store pre-opening expenses ............ -- 300 1,220 1,095 139 139 600
Nonrecurring charges (1) .............. -- -- -- -- -- -- 10,887
------------ --------- --------- --------- --------- ------------- -------------
Operating income (loss) ............... (304) 1,781 11,042 12,166 14,542 11,849 11,268
Net interest expense .................. 6,989 26,199 27,480 30,224 32,396 24,334 25,433
------------ --------- --------- --------- --------- ------------- -------------
Income (loss) before income tax ...... (7,293) (24,418) (16,438) (18,058) (17,854) (12,485) (14,165)
Provision for taxes ................... -- -- -- -- -- -- --
------------ --------- --------- --------- --------- ------------- -------------
Net income (loss) ..................... $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
============ ========= ========= ========= ========= ============= =============
Earnings (loss) per common share ..... $ (.73) $ (2.34) $ (1.55) $ (1.70) $ (1.69) $ (1.18) $ (1.34)
============ ========= ========= ========= ========= ============= =============
Weighted average common shares
outstanding........................... 10,046 10,448 10,633 10,650 10,575 10,589 10,600
============ ========= ========= ========= ========= ============= =============
OPERATING AND OTHER DATA:
EBITDA (2) ............................ $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of sales ...... 11.9% 12.4% 11.1% 8.2% 9.3% 8.5% 9.5%
Number of stores at end of period .... 37 40 51 59 60 60 65
Same store sales growth (3) ........... 2.4%(4) 3.3% 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales
growth (3)(5)......................... -- -- 14.2% 7.0% 25.5% 25.1% 25.4%

Average store size (square feet) at
end of period ........................ 6,166(4) 6,172 6,596 6,712 6,733 6,733 6,832
Sales per square foot (6).............. $ 1,001(4) $ 1,022 $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales
(5)................................... -- 16.6% 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of
pharmacy sales (7) ................... 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures .................. $ 950 $ 1,838 $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,722 $ 14,285 $ 20,152 $ 13,699 $ 9,917 $ 8,220 $ 29,849
Total assets .......................... 260,674 234,430 229,699 235,860 222,476 226,060 239,520
Total debt and capital lease
obligations (8)....................... 221,815 223,422 228,764 244,104 245,657 247,570 262,649
Stockholders' equity (deficiency) .... 16,236 (6,757) (23,170) (41,196) (59,396) (54,027) (73,561)
</TABLE>

24
<PAGE>
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the exchange offers
referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million,
including investment banking fees of $7.7 million (including $3.5
million to an affiliate of DLJMBPII and $0.6 million to certain
affiliates of Bain Capital), legal and accounting fees of $1.6 million,
stand-by commitment fees relating to certain change of control offers
of $1.2 million to an affiliate of DLJMBPII, and other costs of $0.4
million, which the Company has treated as a non-recurring expense
because such expenses related to financing activities in connection
with the Recapitalization and related events, which the Company does
not expect to repeat.
(2) As used herein, "EBITDA" means net income (loss) plus nonrecurring
charges, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
GAAP.
A reconciliation of net income (loss) to EBITDA for each period
included above is set forth below (dollars in thousands):

<TABLE>
<CAPTION>
JAN. 1 SEPT. 26 FISCAL YEAR 39 WEEKS ENDED
TO TO ------------------------------------------------- ------------------------
SEPT. 25, DEC. 31, SEPT. 28, SEPT. 27,
1992 1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) .... $15,720 $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 3,298 6,989 26,199 27,480 30,224 32,396 24,334 25,433
Amortization ......... -- 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 723 166 729 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- -- -- -- 10,887
Other non-cash items 639 -- 33 724 1,769 1,526 1,156 1,182
----------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
EBITDA ............... $20,380 $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== ========== =========== =========== =========== =========== =========== ===========
</TABLE>

(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) For the year ended December 31, 1992.
(5) Prior to 1993, the Company did not separately track pharmacy sales.
(6) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(7) Prior to fiscal year 1994, the Company's pharmacy system did not
separately track third-party sales.
(8) Excludes deferred rent obligations of approximately $4.0 million and
$5.4 million at December 28, 1996 and at September 27, 1997,
respectively.

25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in connection with the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus.

GENERAL

The Company generates revenues primarily through sales of OTC drugs and
prescription pharmaceutical products, health and beauty aids, food and
beverage items, tobacco products, cosmetics, housewares, hosiery, greeting
cards, photofinishing, photo supplies and seasonal merchandise. Health and
beauty products, including OTC drugs, represent the largest of the Company's
product categories. The Company's primary costs and expenses consist of (i)
inventory costs, (ii) labor expenses and (iii) occupancy costs.

The Company had sales per square foot of $956 and approximately $1,054 in
fiscal 1996 and fiscal 1997, respectively. The Company believes that sales
per square foot are a useful measure of comparing the Company's performance
to that of its competitors because it is a measure of a store's sales
productivity. The Company experienced a decline in sales per square foot from
1993 through 1995 as a result of the opening of additional stores in
connection with the Company's expansion plans during that period. The opening
of such additional stores resulted in a decline in sales per square foot
principally because (i) the average square footage for the new stores was
greater than that of the existing store base and (ii) new stores generally
take some time to reach a mature level of sales. The Company currently
expects that its sales per square foot may decline as it embarks on its plan
to increase new store openings during 1998 and 1999. The Company believes
that its competitors in the industry experience increases and decreases in
sales per square foot for similar reasons.

In 1997, the Company resumed its store expansion program, opening seven
stores in 1997. Generally a new Duane Reade store requires an investment of
approximately $1.1 million in capital expenditures and working capital. Since
1993, all of the Company's new stores have become profitable on an operating
basis within the first full year of operation. Over the next two years, the
Company plans to open approximately 30 to 40 stores, primarily in New York
City.

Over the past two years, Third Party Plans, including managed care
providers and insurance companies, have comprised an increasing percentage of
the Company's pharmacy business as the health care industry shifts to managed
care. While sales to customers covered by Third Party Plans result in lower
gross profit rates due to competitive pricing, the Company believes that such
lower rates are offset by increased volume of pharmacy sales and the
opportunity to leverage fixed expenses.

The Company includes stores that have been in operation for at least 13
months for purposes of calculating comparable store sales figures.

The Company's predecessor was founded in 1960. In 1992, Bain Capital
formed the Company to acquire the Company's predecessor from its founders
through a leveraged buyout, financed primarily with the proceeds from the
Zero Coupon Notes and the Senior Notes. In June 1997, investment funds
affiliated with DLJMBPII (the "DLJMB Entities"), an affiliate of DLJ, one of
the Underwriters, acquired approximately 91.5% of the outstanding capital
stock of the Company from Bain Capital and certain other selling
securityholders, for approximately $78.7 million in cash, pursuant to a
Recapitalization Agreement, dated June 18, 1997 (the "Recapitalization
Agreement"). Upon consummation of such purchase, the Company reclassified all
of its outstanding capital stock (then consisting of four classes) into one
class of common stock, $0.01 par value per share. Upon consummation of the
Offering, assuming no exercise

26
<PAGE>
of the Underwriters' overallotment option, the DLJMB Entities will hold
approximately 52.4% of the Common Stock on a fully diluted basis. See
"Principal and Selling Stockholders."

Prior to the consummation of the Offering, the Company's primary asset is
all of the outstanding common stock of Daboco, Inc., a New York corporation
("Daboco"), with Daboco and DRI I, Inc. ("DRI"), a direct wholly-owned
subsidiary of Daboco, together owning all of the outstanding partnership
interests of Duane Reade, a New York general partnership ("Duane Reade")
(Daboco owns a 99% partnership interest and DRI owns the remaining 1%
partnership interest). Substantially all of the operations of the Company are
conducted through Duane Reade. Concurrently with the consummation of the
Offering, Daboco will be merged with and into the Company (the "Merger"),
resulting in the Company directly owning 99% of the partnership interests of
Duane Reade (the "Partnership Interest") and DRI continuing to own a 1%
partnership interest. Following the consummation of the Merger, the primary
assets of the Company will be the Partnership Interest and 100% of the
outstanding common stock of DRI.

RESULTS OF OPERATIONS

The following sets forth the results of operations as a percentage of
sales for the periods indicated.

<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------------
FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
----------------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Net sales .................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .............. 74.6 77.1 75.6 76.8 75.3
-------- -------- -------- --------------- ---------------
Gross profit ............... 25.4 22.9 24.4 23.2 24.7
-------- -------- -------- --------------- ---------------
Selling, general and
administrative expenses .. 14.1 14.9 15.5 15.1 15.4
Amortization ............... 6.5 3.5 4.3 3.0 1.2
Depreciation ............... 0.4 0.6 0.8 0.8 0.8
Store pre-opening expenses 0.4 0.3 0.0 0.1 0.2
Nonrecurring charges ....... -- -- -- -- 3.5
-------- -------- -------- --------------- ---------------
Operating income ........... 4.0 3.6 3.8 4.2 3.6
Net interest expense ....... 9.8 9.0 8.5 8.6 8.1
-------- -------- -------- --------------- ---------------
Net loss ................... (5.8)% (5.4)% (4.7)% (4.4)% (4.5)%
======== ======== ======== =============== ===============
</TABLE>

39 WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO 39 WEEKS ENDED SEPTEMBER 28,
1996

Net sales in the 39 weeks ended September 27, 1997 were $313.8 million, an
increase of 11.6% over net sales of $281.1 million for the 39 weeks ended
September 28, 1996. The increase was attributable to increased comparable
store sales of 7.9% and the inclusion of one new store opened during the 39
weeks ended September 28, 1996 for the entire 1997 period and five new stores
opened in 1997.

Cost of sales as a percentage of net sales decreased to 75.3% for the 39
weeks ended September 27, 1997 from 76.8% for the 39 weeks ended September
28, 1996, resulting in an increase in gross profit margin to 24.7% for the
1997 period from 23.2% during the same period in 1996. The increase in gross
margin resulted from a number of factors including (i) increased contribution
from the sale of higher margin merchandise such as cosmetics, vitamins,
general merchandise, generic drugs and private label products, (ii) higher
promotional allowances received from vendors and (iii) occupancy costs that
increased at a lesser rate than the rate at which sales increased.

Selling, general and administrative expenses represented 15.4% and 15.1%
of net sales in the 39 weeks ended September 27, 1997 and September 28, 1996,
respectively. The percentage increase in 1997 compared to 1996 resulted
principally from higher selling and administrative expenses including (i)
higher store salaries as a percentage of net sales (principally from new
stores during the early months of

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operation) and (ii) operating costs related to the Company's management
information systems department, partially offset by elimination of agreements
requiring the annual payment of $1.0 million in management fees to Bain
Capital. Such agreements were terminated as a result of the Recapitalization.
The Company believes that as the Company's new stores mature, salaries will
increase at a lesser rate than store sales.

Amortization of goodwill and other intangibles in the 39 weeks ended
September 27, 1997 and September 28, 1996 was $3.8 million and $8.5 million,
respectively. The decrease in amortization is principally a result of the
completion in 1996 of amortization of covenants not to compete and the
related write-off of the balance of such amounts during the fourth quarter of
1996.

Depreciation was $2.6 million and $2.3 million in the 39 weeks ended
September 27, 1997 and September 28, 1996, respectively.

Store pre-opening expenses increased from $0.1 million in the 39 weeks
ended September 28, 1996 to $0.6 million in the 39 weeks ended September 27,
1997 due to the opening of five new store locations in 1997 compared to one
in 1996.

Net interest expense was $25.4 million in the 39 weeks ended September 27,
1997 compared to $24.3 million in the 39 weeks ended September 28, 1996. The
increase in interest expense was principally due to (i) higher non-cash
accretion of the Zero Coupon Notes, (ii) interest related to financing of
third party accounts receivable and (iii) increased interest on borrowings
under the revolving credit facility, partially offset by (a) reduced interest
on term loan borrowings caused by the decrease in average balance from $72.8
million for the 39 weeks ended September 28, 1996 to $66.5 million for the 39
weeks ended September 27, 1997 and a decrease in the average interest rate
from 9.1% for the 39 weeks ended September 28, 1996 to 8.8% for the 39 weeks
ended September 27, 1997 and (b) reduced interest on capital lease
obligations.

The net loss for the Company increased by $1.7 million from $12.5 million
in the 39 weeks ended September 28, 1996 to $14.2 million in the 39 weeks
ended September 27, 1997 primarily as a result of nonrecurring charges (see
Note 11 of Notes to Consolidated Financial Statements (Unaudited)) and
increases in selling, general and administrative expenses and interest
expense, partially offset by increased sales and gross profit margin and
lower amortization of intangibles. The Company's EBITDA improved by $5.9
million or 24.9% to $29.7 million in the 39 weeks ended September 27, 1997
compared to $23.8 million in the 39 weeks ended September 28, 1996. EBITDA as
a percentage of sales increased to 9.5% in the 39 weeks ended September 27,
1997 from 8.5% in the 39 weeks ended September 28, 1996.

FISCAL 1996 COMPARED TO FISCAL 1995

Net sales in 1996 were $381.5 million, an increase of 13.2% over 1995 net
sales of $336.9 million. The increase was due to increased comparable store
sales of 8.3% and the inclusion of eight stores opened during 1995 for the
entire 1996 period and of one store opened in 1996. The increase in
comparable store sales was primarily attributable to increased pharmacy
sales, which increased to 21.8% of total sales in 1996 compared to 19.0% of
total sales in 1995.

Cost of sales as a percentage of net sales decreased to 75.6% for 1996
from 77.1% for 1995, resulting in an increase in gross profit margin to 24.4%
for 1996 from 22.9% for 1995. The increase in gross margin resulted from a
number of factors including (i) lower inventory shrink losses, (ii) increased
contributions from the sale of generic drugs and private label products,
(iii) less promotional activity and (iv) lower rent-to-sales ratios in stores
opened during 1995 and 1994. The increases were partially offset by lower
gross margins resulting from sales to customers covered by Third Party Plans.

Selling, general and administrative expenses were $59.0 million or 15.5%
of net sales and $50.3 million or 14.9% of net sales in 1996 and 1995,
respectively. The percentage increase in 1996 compared to 1995 resulted
principally from higher administrative expenses, including (i) operating
costs related to the Company's management information systems department,
(ii) administrative salaries and one time executive search and severance
expenses and (iii) professional and consulting fees principally for the
warehouse and loss prevention areas. The increases were partially offset by
lower store operating

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expenses as a percentage of net sales primarily due to a higher volume of
pharmacy sales, which allows the Company to leverage other fixed store
operating expenses.

Amortization of goodwill and other intangibles in 1995 and 1996 was $11.6
million and $16.2 million, respectively. The increase in amortization was
caused by an increase in the amortization of covenants not to compete from
$8.1 million in 1995 to $11.4 million in 1996 and amortization of systems
installation and integration costs in an amount of $1.4 million in 1996. The
increase in amortization of covenants not to compete was caused by the
write-off of the balance of such intangibles in 1996 resulting from the
termination of the related agreements. Amortization of systems installation
and integration costs began in 1996.

The increase in depreciation from $1.9 million in 1995 to $3.0 million in
1996 resulted principally from (i) depreciation of data processing equipment
which began in 1996 and (ii) a full year's depreciation in 1996 of assets of
eight stores that were opened in 1995.

Store pre-opening expenses decreased from $1.1 million in 1995 to $0.1
million in 1996 due to the opening of one new store location in 1996 compared
to eight in 1995.

Net interest expense increased 7.2% to $32.4 million in 1996 from $30.2
million in 1995. The increase in interest expense was principally due to the
higher non-cash accretion of the Zero Coupon Notes offset, in part, by
reduced interest on term loan borrowings resulting from the decrease in
average outstanding balance from $75.1 million to $72.0 million and a
decrease in the average interest rate from 9.5% to 9.1%.

The net loss for the Company decreased by $0.2 million or 1.1% from $18.1
million in 1995 to $17.9 million in 1996 primarily as a result of increased
sales and gross profit margin offset, in part, by increases in selling,
general and administrative expenses and amortization of intangibles. The
Company's EBITDA increased by $7.9 million or 28.6% to $35.3 million in 1996
compared to $27.4 million in 1995. EBITDA as a percentage of sales increased
to 9.3% in 1996 from 8.2% in 1995.

FISCAL 1995 COMPARED TO FISCAL 1994

Net sales in 1995 were $336.9 million, an increase of 19.9% over 1994 net
sales of $281.1 million. The increase was primarily due to the inclusion of
11 new stores opened during 1994 for the entire 1995 period and of eight
stores opened during 1995, partially offset by a decrease in comparable store
sales of 3.5%.

Cost of sales as a percentage of net sales increased to 77.1% for 1995
from 74.6% for 1994. The increase in cost of sales resulted from a number of
factors, including: (i) increased inventory losses arising from inventory
shrink and from difficulties encountered in implementing new warehousing and
merchandising systems, (ii) delays in implementation of normal price
increases, (iii) increased promotional activity, primarily in the last
quarter of 1995, and (iv) increased occupancy expense as a percentage of
sales in 1995 as compared with 1994. These changes were partially offset by a
decline in amortization of certain acquisition costs, which amortization was
completed in the third quarter of 1994.

Selling, general and administrative expenses for 1995 increased to $50.3
million from $39.7 million for 1994, representing 14.9% and 14.1% of sales in
1995 and 1994, respectively. Such percentage increase in 1995 resulted
principally from additional costs from operating new stores and the
implementation of new MIS.

Amortization of goodwill and other intangibles decreased from $18.2
million in 1994 to $11.6 million in 1995. This decrease was primarily
attributable to a decrease in amortization of covenants not to compete from
$13.0 million in 1994 to $8.1 million in 1995. The decrease in amortization
of covenants not to compete in 1995 as compared to 1994 is a result of the
double declining balance method of amortization for such intangibles.
Amortization of customer files in connection with the acquisition of the
Company by Bain Capital in September 1992, which amounted to $1.7 million in
1994, was completed in the third quarter of 1994.

Depreciation charges in 1995 and 1994 were $1.9 million and $1.2 million,
respectively. The increase in 1995 resulted principally from (i) depreciation
in 1995 of assets of eight new store locations opened and (ii) a full year's
depreciation in 1995 of assets of 11 store locations that were opened in 1994
as compared to one-half year's depreciation of such assets in 1994.

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<PAGE>
Store pre-opening expenses of $1.1 million and $1.2 million in 1995 and
1994, respectively, relate principally to eight new store locations opened in
1995 and 11 new store locations opened in 1994.

Net interest expense increased from $27.5 million in 1994 to $30.2 million
in 1995. This increase was principally due to an increase in the non-cash
accretion of the Zero Coupon Notes of $1.2 million and higher interest on
term loan borrowings resulting from a higher average interest rate of 9.5%
for 1995 as compared to 7.8% for 1994.

The net loss for the Company increased by $1.6 million or 9.8% from $16.4
million in 1994 to $18.1 million in 1995 primarily as a result of a decrease
in gross profit and an increase in selling, general and administrative
expenses offset, in part, by a decrease in amortization expense. The
Company's EBITDA decreased by $3.8 million or 12.2% to $27.4 million in 1995
compared to $31.2 million in 1994. EBITDA as a percentage of sales declined
to 8.2% in 1995 from 11.1% in 1994.

LIQUIDITY AND CAPITAL RESOURCES

On September 30, 1997, the Company entered into the Existing Credit
Agreement, which provides for, among other things, $65.5 million of term
loans and up to $30.0 million of revolving loans. As of October 25, 1997,
outstanding balances thereunder totaled $91.5 million. The Company utilizes
cash flow from operations, together with borrowings under the revolving
portion of the Existing Credit Agreement, to fund working capital needs,
investing activities (consisting primarily of capital expenditures) and
financing activities (normal debt service requirements, interest payments and
repayment of term and revolving loans outstanding). Concurrently with the
consummation of the Refinancing Plan, the Company expects to refinance and
replace the Existing Credit Agreement with the New Credit Agreement. See
"Description of Certain Indebtedness--New Credit Agreement."

Working capital was $9.9 million and $13.7 million as of December 28, 1996
and December 30, 1995, respectively, and $29.8 million on September 27, 1997.
The Company's capital requirements primarily result from opening and stocking
new stores and from the continuing development of new MIS. The Company's
ability to open stores in 1996 was limited to a certain degree by liquidity
considerations. The Company believes that there are significant opportunities
to open additional stores, and currently plans to open 30 to 40 stores in the
next two years. The Company expects to spend approximately $16 million in
1998 on capital expenditures primarily for new and replacement stores.
Working capital is also required to support inventory for the Company's
existing stores. Historically, the Company has been able to lease its store
locations. The Company has experienced a significant increase in accounts
receivable due to increased pharmacy sales in connection with Third Party
Plans, as compared to non-Third Party Plan sales which are generally paid by
cash or credit card. However, the Company believes that it has adequately
provided for liquidity by entering into a non-recourse factoring arrangement
whereby the Company resells accounts receivable associated with Third Party
Plans.

For the fiscal year ended December 28, 1996, net cash provided by
operating activities was $12.6 million, compared to $6.7 million for the
fiscal year ended December 30, 1995. The primary reasons for this increase
relate to an increase in operating earnings before the amortization of
goodwill and other intangibles, depreciation and amortization of property and
equipment and interest expense, partially offset by a decrease in working
capital primarily due to a decrease in accounts payable. For the fiscal year
ended December 28, 1996, net cash used in investing activities was $3.8
million, compared to $12.8 million for the fiscal year ended December 30,
1995. This reduction primarily resulted from a decrease in capital
expenditures and a decrease in systems development costs. For the fiscal year
ended December 28, 1996, net cash used in financing activities was $10.7
million, compared to $4.8 million provided by financing activities for the
fiscal year ended December 30, 1995. This reduction primarily resulted from
decreased borrowings under the Company's then existing credit facility and a
decrease in capital lease financing.

For the 39 weeks ended September 27, 1997, net cash used in operating
activities was $3.2 million, compared to $6.7 million provided by operating
activities during the 39 weeks ended September 28, 1996. The primary reasons
for this decrease are (i) an increase in inventory and accounts payable
during the 1997 period, partially offset by an increase in operating
earnings. The Company's significant increase in inventory resulted from
management's decision to take advantage of a number of

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<PAGE>
forward purchasing opportunities, accumulate inventory in advance of
additional store openings and seasonal inventory buildup during the 1997
period. The Company believes that the activities did not and will not
materially adversely affect its liquidity. For the 39 weeks ended September
27, 1997, net cash used in investing activities was $3.9 million, compared to
$2.9 million for the 39 weeks ended September 28, 1996. This increase
primarily resulted from an increase in capital expenditures during the 1997
period, partially offset by a decrease in the capitalization of systems
development costs. For the 39 weeks ended September 27, 1997, net cash
provided by financing activities was $7.1 million, compared to $5.6 million
used in financing activities for the 39 weeks ended September 28, 1996. This
increase primarily resulted from increased borrowings under the revolving
portion of the Existing Credit Agreement.

Leases for eight of the Company's stores that generated approximately
12.8% of the Company's net sales for the 39 weeks ended September 27, 1997
are scheduled to expire before the end of the year 2000. The Company believes
that it will be able to renew such leases on economically favorable terms or,
alternatively, find other economically attractive locations to lease. See
"Risk Factors--Uncertainty of Lease Renewals."

As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. Pursuant to the terms of
such collectively bargaining agreements, the Company is required to pay
certain annual increases in salary and benefits to such employees. The
Company does not believe that such increases will have a material impact on
the Company's liquidity or results of operations. See "Risk
Factors--Collective Bargaining Agreements" and "Business--Employees."

The net proceeds received by the Company from the Offering, together with
the net proceeds received by the Company from the Notes Offering and
borrowings under the New Credit Agreement, will be used to complete the
Refinancing Plan. See "Use of Proceeds." The Refinancing Plan is designed to
enhance the Company's financial flexibility and enable it to pursue growth
opportunities and implement capital improvements. The Company expects that
the Refinancing Plan will reduce the Company's overall level of indebtedness,
simplify the Company's capital structure and provide it with access to
additional borrowings. See "Prospectus Summary--Refinancing Plan."

Following the implementation of the Refinancing Plan, the Company believes
that, based on current levels of operations and anticipated growth, cash flow
from operations, together with other available sources of funds, including
borrowings under the New Credit Agreement, will be adequate for at least the
next two years to make required payments of principal and interest on the
Company's indebtedness, to fund anticipated capital expenditures and working
capital requirements and to comply with the terms of its debt agreements. The
ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent upon the future performance of the Company and
its subsidiaries which, in turn, will be subject to general economic,
financial, business, competitive, legislative, regulatory and other
conditions, certain of which are beyond the Company's control. In addition,
there can be no assurance that the Company's operating results, cash flow and
capital resources will be sufficient for payment of its indebtedness in the
future. The Company expects that substantially all of its borrowings under
the New Credit Agreement will bear interest at floating rates; therefore, the
Company's financial condition will be affected by the changes in prevailing
interest rates. The Company expects to enter into interest rate protection
agreements to minimize the impact from a rise in interest rates. See "Risk
Factors--Risks Associated with Substantial Indebtedness."

TAX BENEFITS FROM NET OPERATING LOSSES

At September 27, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $71.0 million, which are due to expire in the years
2007 through 2012. These NOLs may be used to offset future taxable income
through 2012 and thereby reduce or eliminate the Company's federal income
taxes otherwise payable. The Internal Revenue Code of 1986, as amended (the
"Code"), imposes significant limitations on the utilization of NOLs in the
event of an "ownership change," as defined in section 382 of the Code (the
"Section 382 Limitation"). The Section 382 Limitation is an annual limitation
on the amount of pre-ownership change NOLs that a corporation may use to
offset its post-ownership change income. The Section 382 Limitation is
calculated by multiplying the value of a corporation's stock

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<PAGE>
immediately before an ownership change by the long-term tax-exempt rate (as
published by the Internal Revenue Service). Generally, an ownership change
occurs with respect to a corporation if the aggregate increase in the
percentage of stock ownership (by value) of that corporation by one or more
5% shareholders (including certain groups of shareholders who in the
aggregate own at least 5% of that corporation's stock) exceeds 50 percentage
points over a three-year testing period. The Recapitalization caused the
Company to experience an ownership change. As a result, the Company currently
is subject to an annual Section 382 Limitation of approximately $5.0 million
on the amount of NOLs generated prior to the Recapitalization that the
Company may utilize to offset future taxable income. In addition, the Company
believes that it will generate approximately $42.0 million of NOLs in
connection with the Refinancing Plan. Such NOLs will not be subject to the
Section 382 Limitation and may be utilized to offset future taxable income.
However, there can be no assurance that any NOLs will be able to be utilized
by the Company to offset future taxable income or that such NOLs will not
become subject to limitation due to future ownership changes. The Company
does not believe that the Offering will result in an ownership change.

YEAR 2000 COMPLIANCE

The Company has several computer software systems which will require
modification or upgrading to accomodate the year 2000 and thereafter. The
Company believes that all systems can be changed by the end of 1999 and does
not expect the cost of the changes to be material to the Company's financial
condition or results of operations.

SEASONALITY

In general, sales of drugstore items such as prescription drugs, OTC drugs
and health and beauty care products exhibit limited seasonality in the
aggregate, but do vary by product category. Quarterly results are primarily
affected by the timing of new store openings and the sale of seasonal
products. In view of the Company's recent expansion of seasonal
merchandising, the Company expects slightly greater revenue sensitivity
relating to seasonality in the future.

INFLATION

The Company believes that inflation has not had a material impact on
results of operations for the Company during the three years ended December
28, 1996 and the 39 weeks ended September 27, 1997.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires the presentation of basic and
diluted earnings per share in a company's financial statements for reporting
periods ending subsequent to December 15, 1997. Early adoption of SFAS No.
128 is not permitted. The adoption of SFAS No. 128 is not expected to have a
material impact on the Company's consolidated financial statements.

As of September 27, 1997, there were outstanding options to purchase an
aggregate of 1,126,731 shares of Common Stock, which shares are not included
in the calculation of earnings per share for the 39 weeks ended September 27,
1997 and would not be included in such calculation under the guidance
prescribed by SFAS No. 128 because of the anti-dilutive nature of these
instruments.

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BUSINESS

THE DRUGSTORE INDUSTRY

The U.S. drugstore industry generated approximately $91 billion of retail
sales in 1996 according to Drug Store News. The industry has experienced
strong and steady growth, having expanded at a 6.2% compound annual rate over
the ten years through 1996. The industry is expected to continue to grow as
the aging of the population drives long-term demand growth for prescription
drugs. The Company believes that prescription drug use generally rises with
age. In addition to these positive demographic trends, the shift to
increasing use of Third Party Plans is increasing overall prescription drug
usage. Third Party Plans tend to favor lower cost drug therapies over
alternative treatment methods such as surgery or in-hospital treatment.
Additionally, by reducing the out-of-pocket expense to the consumer and by
improving patients' compliance for prescription drug use, Third Party Plans
have helped increase unit growth in prescription drugs.

In recent years, the drugstore industry has experienced significant
consolidation, as national chains have gained market share from independent
operators. According to Drug Store News, the number of drugstores has fallen
from approximately 54,000 in 1990 to approximately 40,000 in 1996. The share
of industry sales represented by independent drugstores (i.e., operators of
less than four stores) has fallen from 35% in 1991 to 24% in 1996. Over the
last ten years, sales at chain drugstores such as Duane Reade have grown at a
compound annual rate of 8.4% compared to the industry average of 6.2%.

The increased role of Third Party Plans has contributed significantly to
industry consolidation. According to IMS America, pharmacy business
attributable to Third Party Plans as a percentage of total pharmacy sales has
risen to 67% in 1996 from 37% in 1990. Third Party Plans typically require
drugstores to enter into contracts with third party payors (such as insurance
plans, HMOs, preferred-provider organizations ("PPOs") and other managed care
providers) to provide prescription drugs at specified rates of reimbursement
for their membership. Although sales to customers covered by Third Party
Plans typically result in lower gross margins compared to cash sales,
management believes that the lower gross margins are offset by the increased
volume of pharmacy sales generated by such Third Party Plans. Drugstore
chains such as the Company, which have high penetration within their markets
and are able to handle the payment processing of such Third Party Plans, are
better able to service the customers of the Third Party Plans and are
therefore gaining market share in the sale of prescription drugs from
independent drugstores and small chains.

Third Party Plans typically seek to form alliances with drugstore chains
in order to benefit from the chains' multiple locations and to take advantage
of on-line management information systems that facilitate claims processing.
Management believes that penetration of Third Party Plans in Manhattan has
historically lagged behind the penetration of such Third Party Plans in the
rest of the United States because until 1994, neither Duane Reade nor most of
Manhattan's independent drugstores aggressively pursued alliances with Third
Party Plans. The Company believes that its extensive network of conveniently
located stores, strong local market position, pricing policies and reputation
for high quality health care products and services provide Duane Reade with a
competitive advantage in attracting business from individual customers as
well as Third Party Plans. While management believes that Third Party Plans
have grown significantly in Manhattan since 1994, it still remains relatively
less penetrated than the rest of the country. The Company believes that as
Third Party Plans continue to penetrate the Manhattan market, the number of
independent drugstores will decline due to competitive pressures.

GENERAL

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of sales per square foot, at $956 per square foot in 1996, which was more
than two times the national average for drugstore chains. For the fiscal year
ended December 28, 1996, the Company had sales of $381.5 million and EBITDA
of $35.3 million, increases of 13.2% and 28.6%, respectively, over the 1995
fiscal year. For the 39 weeks ended September 27, 1997, the Company had sales
of $313.8 million and EBITDA of $29.7 million, increases of 11.6% and 24.9%,
respectively, over the comparable 1996 period. For the fiscal year ended
December 28, 1996 and the 39 week period ended September 27, 1997, the
Company had net losses of $17.9 million and $14.2 million, respectively, and,
on a pro forma basis, after giving effect to the Offering and the Refinancing
Plan, would have had net losses of $5.3 million and $3.8 million,
respectively, for such periods.

The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. An independent survey
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.

The Company is able to keep its operating costs relatively low due to its
high per store sales volume, low warehouse and distribution costs and low
advertising expenditures. The Company's high volume stores allow it to
effectively leverage occupancy costs, payroll and other store operating
expenses. The Company's two primary distribution facilities are located
within five miles of all but one of its 67 stores and, combined with the
rapid turnover of inventory in Duane Reade's stores, result in relatively low
warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.

The Company's predecessor was founded in 1960. In 1992, Bain Capital
acquired the Company from its founders and, in June 1997, investment funds
affiliated with DLJMBPII acquired approximately 91.5% of the outstanding
capital stock of the Company from Bain Capital and certain other selling
securityholders. Since the 1992 acquisition, the Company has incurred net
losses in each fiscal year.

In 1994 and 1995 the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several

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<PAGE>
measures to improve operations, including improving inventory controls and
decreasing out-of-stock occurrences, creating a loss prevention function to
control inventory shrink and continuing to invest in MIS. In 1997, the
Company resumed its store expansion program, opening seven stores in 1997.
During Mr. Cuti's tenure at the Company, EBITDA has increased by 53.2% from
$26.9 million for the 52 weeks ended March 29, 1996 to $41.2 million for the
52 weeks ended September 27, 1997, and the Company experienced net losses of
$19.8 million and $19.5 million for the 52 weeks ended March 29, 1996 and the
52 weeks ended September 27, 1997, respectively. Net loss before
non-recurring charges for the 52 weeks ended September 27, 1997 was $8.6
million.

GROWTH STRATEGY

Open Additional Stores. The Company believes that the Manhattan drugstore
market remains underpenetrated by drugstore chains, with only 50% of the
estimated $2.65 billion in annual drugstore-related sales controlled by
regional or national chains, compared to approximately 74% controlled by
chains nationally. This provides significant opportunities for the Company to
open additional stores in Manhattan as well as in the densely populated areas
of the surrounding boroughs. Some of the Company's most successful stores
have been opened in areas new to the Company, such as the residential areas
of the Upper East and West sides of Manhattan, Brooklyn, the Bronx and
Queens. The Company believes that its long-standing presence in, and
knowledge of, the New York City real estate market, combined with the use of
a proprietary site selection model that considers numerous demographic and
traffic flow variables, have allowed it to identify attractive store
locations. Since 1993, all of the Company's new stores have become profitable
on an operating basis (i.e., prior to allocation of corporate expenses,
goodwill amortization, interest expense and income taxes) within the first
full year of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City. See "Risk
Factors--Risks Associated with Future Growth."

Continue to Capitalize on Favorable Pharmacy Trends. Sales of prescription
and OTC drugs have been growing rapidly throughout the drugstore industry.
The Company expects demographic trends, such as the aging of the U.S.
population, and industry changes, such as growth of Third Party Plans, to
continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans result in lower gross profit margins
due to competitive pricing, the Company believes that such lower margins are
offset by the increased volume of pharmacy sales and the opportunity to
leverage fixed expenses. The Company believes that its initiatives, which are
designed to capitalize on industry trends, have resulted in the Company's
pharmacy sales growing at an annual rate of approximately 30% since 1994.
Although these initiatives have helped increase the average number of
prescriptions filled by Duane Reade per store per week from 640 in 1994 to
865 during 1997, the Company's average remains well below the national
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that
continued pharmacy growth will increase overall customer traffic, thereby
also benefitting its non-pharmacy sales.

Make Opportunistic Acquisitions of Independent Drugstores and Pharmacy
Files. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which

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<PAGE>
generate incremental revenue and higher margins. When appropriate, the
Company retains the services of the pharmacist, whose personal relationship
with the customers generally maximizes the retention rate of the purchased
file. In 1997, the Company acquired one independent drugstore and seven such
pharmacy files and intends to aggressively pursue additional purchases.

Continue to Implement Merchandising Initiatives in Non-Pharmacy
Areas. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed its installation of POS
scanners in all of its stores and, by the end of the first quarter of 1998,
will have completed its planogramming initiative in all of its stores. These
systems and initiatives will allow the Company to better analyze sales trends
and merchandise its stores more effectively, which the Company believes will
ultimately increase its sales and profitability.

COMPANY OPERATIONS

Merchandising. Duane Reade's overall merchandising strategy is to provide
the broadest selection of branded and private label drugstore products
available in Manhattan and to sell them at everyday low prices. To further
enhance customer service and loyalty, the Company attempts to maintain a
consistent in-stock position in all merchandise categories. In addition to
prescription and OTC drugs, the Company offers health and beauty aids, food
and beverage items, tobacco products, cosmetics, housewares, hosiery,
greeting cards, photofinishing, photo supplies, seasonal merchandise and
other products. Health and beauty care products, including OTC drugs,
represent the largest of the Company's product categories. Duane Reade
drugstores offer a wide variety of brand name and private label products,
including oral, skin and hair care products, bath supplies, vitamins and
nutritional supplements, feminine hygiene products, family planning products
and baby care products. Popular brands of health and beauty aids are given
ample shelf space, and large sizes are offered, which the Company believes
appeals to the value consciousness of many Manhattan consumers. Convenience
items such as candy, snacks and seasonal goods are positioned near the check
out registers to provide optimum convenience and stimulate impulse purchases
for the customers while allowing the store employees to monitor those product
categories that are particularly susceptible to inventory shrink.

In addition to the wide array of name brand products offered in its
stores, the Company offers its own private label products. Private label
products provide customers with high-quality, lower priced alternatives to
name brand products while generating higher gross profit margins than name
brand products. These offerings also enhance Duane Reade's reputation as a
value-oriented store. The Company currently offers approximately 400 private
label products. In 1996, these private label products accounted for
approximately 4.6% of non-pharmacy sales. The Company believes that its
strong brand image, reputation for quality and reliability in the New York
City market, and its economies of scale in purchasing allow it to
aggressively promote private label goods.

The Company has recently made efforts to increase the sales of certain
high-margin items, such as cosmetics, greeting cards and photofinishing. In
1996, the Company completed the remodeling of the cosmetics sections in 19
stores, which resulted in an approximately 23% increase in cosmetic sales in
those stores with no increase in linear footage. In the greeting cards
category, the Company increased seasonal selection and reformatted the card
section in many of its stores, resulting in a 26% increase in greeting card
sales in 1996 compared to 1995. Other merchandising initiatives completed
during 1996 include an expanded selection of seasonal merchandise, vitamins,
nutrition products and baby accessories, particularly in stores located in
residential areas. The Company believes there are additional opportunities to
continue to refine and improve the merchandise mix in its stores.

36
<PAGE>
The Company also offers same-day photofinishing services in all of its
stores and has recently introduced one-hour photofinishing in three stores.
In 1998, the Company expects to introduce one-hour photofinishing in seven to
ten additional stores. Management believes that photofinishing services
contribute significantly to sales of other merchandise categories because of
customer traffic increases that result from the customer visiting a store
twice, in order to drop off film and pick up the processed photos.

Pharmacy. The Company believes that its pharmacy business will continue to
contribute significantly to the Company's growth. Management also believes
that a larger and stronger pharmacy business will enhance customer loyalty
and generate incremental customer traffic, which is expected to increase
sales of Duane Reade's wide variety of OTC drugs and other non-pharmacy
merchandise. Duane Reade significantly grew its prescription drug sales in
1996 as reflected by its same-store pharmacy sales increase of 25.5% during
1996 compared to 1995 and an increase of 25.4% for the 39 week period ended
September 27, 1997 compared to the same period in 1996. Sales of prescription
and OTC drugs represented approximately 35% of total sales in 1996 as
compared with 33% of total sales in 1995 and approximately 38% of total sales
for the 39 week period ended September 27, 1997. Although the average number
of prescriptions filled by Duane Reade per store per week has increased from
640 in 1994 to 865 during 1997, the Company's average remains well below the
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that the
average number of prescriptions filled per week by it lags behind the
industry average because of (i) the historically low penetration of Third
Party Plans in the New York City area and (ii) the Company's concentration of
stores in business areas, rather than residential areas. The Company believes
continued pharmacy growth will also increase overall customer traffic and
benefit its non-pharmacy sales.

The Company generally locates the pharmacy at the rear of the store in
order to maximize the pharmacy customer's exposure to other categories of
merchandise in the front of the store. Each pharmacy is staffed with a
registered pharmacist and a drug clerk at all times to ensure quick and high
quality service. Each store carries a complete line of both branded and
generic prescription drugs. In 1996, the Company began a program to upgrade
the quality of its pharmacy service. The Company believes that this
initiative has contributed to its strong growth in pharmacy sales and should
continue to benefit the Company as customer loyalty builds in response to
improved service levels.

In addition to customer service initiatives in its pharmacy business, the
Company has remodeled or redesigned 16 of its pharmacies since the beginning
of 1996. This remodeling, which has primarily involved updating the pharmacy
counter area to allow pharmacists and customers to have more direct contact
and providing a consultation and waiting area for customers, has not resulted
in any significant reduction in total retail selling space. By improving the
store layout and accessibility of the pharmacist and pharmacy area, the
stores that have been remodeled have achieved strong growth in their pharmacy
business. All stores opened since 1995 have the new pharmacy counter area
design. The Company currently operates 24 such stores. The Company has also
launched pharmacy marketing initiatives, such as home delivery and
prescription-by-fax services, which it believes have contributed to the
increased sales and customer loyalty of the pharmacy business.

The Company believes that its extensive network of conveniently located
stores, strong local market position, pricing policies and reputation for
high quality health care products and services provide it with a competitive
advantage in attracting pharmacy business from individual customers as well
as Third Party Plans. The percentage of the Company's total prescription drug
sales attributable to Third Party Plans increased to approximately 64% in
1996 from approximately 58% in 1995, and to approximately 73% for the 39 week
period ended September 27, 1997. Although gross margins on sales to Third
Party Plans are generally lower than other prescription drug sales because of
the highly competitive nature of pricing for this business and the purchasing
power of Third Party Plans, management believes that the lower gross profit
margins are offset by the higher volume of pharmacy sales to Third Party Plan
customers allowing the Company to leverage other fixed store operating
expenses. In addition, the Company believes that Third Party Plans generate
additional general merchandise sales by increasing customer traffic in the
stores. As of September 27, 1997, the Company had contracts with over 100
Third Party Plans, including every major Third Party Plan in the Company's
market areas.

37
<PAGE>
Another important component of the Company's pharmacy growth strategy is
the continued acquisition of prescription files from independent pharmacies
in market areas currently served by existing Company stores. In 1997, the
Company purchased the prescription files of eight independent pharmacies for
an aggregate total of $830,000, which generated approximately $7 million in
revenues on an annualized basis. Independent pharmacists tend to have a
higher proportion of customers that are not Third Party Plans, which provide
the Company with incremental revenue and higher margin contribution. When
appropriate, the Company will retain the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. Since 1995, the Company has experienced an
estimated 80% customer retention rate with respect to prescription files
acquired. Presently, there are approximately 1,400 independent pharmacies in
New York City, and the Company believes that these stores will provide
additional acquisition opportunities in the future.

The Company's pharmacies employ computer systems that link all of the
Company's pharmacies and enable them to provide customers with a broad range
of services. The Company's pharmacy computer network profiles customer
medical and other relevant information, supplies customers with information
concerning their drug purchases for income tax and insurance purposes and
prepares prescription labels and receipts. The computer network also
expedites transactions with Third Party Plans by electronically transmitting
prescription information directly to the Third Party Plan and providing
on-line adjudication, which confirms at the time of sale customer
eligibility, prescription coverage and pricing and co-payment requirements
and automatically bills the respective plan. On-line adjudication reduces
losses from rejected claims and eliminates a portion of the Company's
paperwork for billing and collection of receivables and costs associated
therewith.

Store Operations. The majority of the Company's stores are located in the
business and residential areas of Manhattan, the most densely populated area
in the United States. The Company's operations have been tailored to handle
high-volume customer traffic. During 1996, an average Duane Reade store
served approximately 2,500 customers per weekday, and 700 customers during
each of the peak lunch and commuting periods of the day. Some of the
Company's stores may operate up to 25 registers during peak demand periods.

Duane Reade stores range in size from 2,600 to 12,300 square feet, with an
average of 6,800 square feet. The Company's stores are designed to facilitate
customer movement and to minimize inventory shrink. The Company believes that
its wide, straight aisles and well-stocked shelves allow customers to find
merchandise easily and allow the store's employees (managers, security
guards, cashiers and stock clerks) to effectively monitor customer behavior.
The Company attempts to group merchandise logically in order to enable
customers to locate items quickly and to stimulate impulse purchases.

In 1996, the Company began planogramming its stores by using a
computerized space management system to design each store's layout and
product displays. The system seeks to maximize productivity per square foot
of selling space, maintain consistency in merchandising and reduce inventory
levels. To date, 34 stores have been designed by the system. Management
believes that the Company's remaining stores will be planogrammed by the end
of the first quarter of 1998. As a result, the Company believes that it has
yet to realize the full benefits from this system.

The Company establishes each store's hours of operations in an attempt to
best serve customer traffic patterns and purchase habits and to optimize
store labor productivity. Stores in Manhattan's business districts are
generally open five days a week. In residential and appropriate
business/shopping districts, stores are open six or seven days a week with a
heavy emphasis on convenient, early morning and late evening openings. In
1997, the Company had seven stores which were open 24 hours a day, 365 days a
year. The Company intends to continue to identify stores in which extended
operating hours would improve customer service and convenience and contribute
to the Company's profitability. Each store is supervised by one store manager
and one or more assistant store managers. Stores are supplied by deliveries
from the Company's warehouses in Queens an average of three times a week,
allowing the stores to maintain a high in-stock position, maximize store
selling space and minimize inventory required to be held on hand.

38
<PAGE>
The Company attempts to mitigate inventory shrink through (i) the
employment of full time security guards in each store, (ii) the use of a
state-of-the-art Electronic Article Surveillance ("EAS") system that detects
unremoved EAS tags on valuable or easily concealed merchandise and (iii)
merchandise delivery and stocking during non-peak hours. Additionally, all
store and warehouse employees are trained to monitor inventory shrink, and
the Company uses outside consulting services to monitor employee behavior.
Recently, the Company hired a full-time team of loss prevention professionals
and established an anonymous call-in line to allow employees to report
instances of theft. The Company also instituted ongoing audits of warehouse
picking and receiving and an anonymous reward line for the reporting of
theft. The Company believes that these programs have enabled it to control
inventory shrink and will enable it to continue to do so.

Purchasing and Distribution. The Company purchases approximately 82% of
its merchandise directly from manufacturers. The Company distributes
approximately 84% of its merchandise through the Company's warehouses and
receives direct-to-store deliveries for approximately 16% of its purchases.
Direct-to-store deliveries are made for pharmaceuticals, greeting cards,
photofinishing, convenience foods and beverages. The Company purchases from
over 1,000 vendors. The Company believes that there are ample sources of
supply for the merchandise currently sold in its stores. The Company manages
its purchasing through a combination of forward buying, national buying and
vendor discount ("deal") buying in ways in which it believes maximizes its
buying power. For example, the Company uses a computerized forecasting and
investment program that is designed to determine optimal forward buying
quantities before an announced or anticipated price increase has been
implemented. By forward buying, the Company stocks up on regularly carried
items when manufacturers temporarily reduce the cost of goods or when a price
increase has been announced or is anticipated.

The Company operates two warehouses, which are located within five miles
of all but one of its stores. The Company's primary warehouse contains
approximately 150,000 square feet devoted to inventory. The Company believes
that the close proximity of the warehouses to the stores allows the Company
to supply the stores frequently, thereby minimizing inventory and maximizing
distribution economies. The Company also owns a fleet of trucks and vans,
which it uses for all deliveries from the warehouses to the stores.

ADVERTISING AND PROMOTION

The Company regularly promotes key items at reduced retail prices during
four-week promotional periods. Store windows and in-store signs are utilized
to communicate savings and value to shoppers. Additionally, over 30 million
bags with the highly recognizable Duane Reade logo are used by its customers
each year, helping to promote the Company's name throughout New York City.
The Company also utilizes full color circulars to announce new stores and
heavily circulates them in local areas to attract customers. Typically, a new
store sells one to two times its regular volume during a grand opening
promotion, which generally lasts two to three weeks. The Company generally
does not rely heavily on the use of print or broadcast media to promote its
stores. Rather, because of its many high-traffic locations, the Company
typically relies on in-window displays as its primary method of advertising.
In 1997, the Company began using radio advertising. The radio advertising
focuses on the Company's pharmacy business, highlighting services enhanced by
the modern pharmacy computer system, pharmacist accessibility and enhanced
convenience.

39
<PAGE>
PROPERTIES; LEASES

As of November 25, 1997, the Company is operating stores in the following
locations:

<TABLE>
<CAPTION>
LOCATION TOTAL
<S> <C>
Manhattan, NY ..... 58
Brooklyn, NY ...... 4
Bronx, NY ......... 2
Queens, NY ........ 2
Newark, NJ ........ 1
---------
Total ........... 67
</TABLE>

Store leases are generally for 15 year terms. The average year of
expiration for all the Company's leases is 2006. Lease rates are generally
subject only to increases based on inflation, real estate tax increases or
maintenance cost increases. The following table sets forth the lease
expiration dates of the Company's leased stores over each of the next five
years and thereafter. Of the stores with leases expiring in the next five
years, four have renewal options. See "Risk Factors--Uncertainty of Lease
Renewals."

<TABLE>
<CAPTION>
NUMBER OF
YEAR LEASES EXPIRING
<S> <C>
1997 ........... 0
1998 ........... 3
1999 ........... 1
2000 ........... 4
2001 ........... 0
Thereafter ..... 59
</TABLE>

The Company owns a distribution facility and related land in Long Island
City, New York. The building contains approximately 150,000 square feet of
space, all of which is used for warehousing and distribution. The Company
also leases a 50,000 square foot distribution facility in Maspeth, New York,
which is only one mile from the Long Island City facility. The Company leases
space for its corporate headquarters, which is located in Manhattan.

MANAGEMENT INFORMATION SYSTEMS

The Company currently has modern pharmacy and inventory management
information systems. In 1996, the Company completed the installation of a
host-based, modern pharmacy information system. The pharmacy information
system (PDX) has reduced the time for electronic reimbursement approval for
prescriptions from Third Party Plan providers from 50 seconds to seven
seconds, and the inventory management information systems (JDA merchandising
and E3 replenishment) have allowed the Company to increase inventory turns in
the warehouses from 11 to 13 per year. In early 1997, the Company began the
process of installing POS systems in its stores. The Company believes that
these systems will allow the Company to better control pricing, inventory and
shrink, while maximizing the benefits derived from the other parts of its
systems installation program. POS will also provide sales analysis that will
enable the Company to improve labor scheduling, and will help optimize
planogram design by allowing detailed analysis of stock-keeping-unit ("SKU")
sales. The installation of the Company's POS systems was completed in
December 1997. Additionally, the Company has upgraded its financial reporting
systems and installed local and wide area networks to facilitate the transfer
of data between systems and from the stores to headquarters.

COMPETITION

The Company's stores compete on the basis of, among other things,
convenience of location and store layout, product mix, selection, customer
service and price. The New York City drugstore market is highly fragmented
due to the complexities and costs of doing business in the most densely
populated area of the country. The diverse labor pool, local customer needs
and complex real estate market in New York City

40
<PAGE>
all favor regional chains and independent drugstores that are familiar with
the market. Duane Reade's store format is designed to meet the unique needs
of the New York City market and has proven successful in both the business
and residential neighborhoods of Manhattan.

Because of the difficulties of operating in a densely populated area, the
New York City drugstore market remains under-penetrated by national chains as
compared to the rest of the country. According to industry sources,
approximately 74% of the nationwide drugstore market was controlled by
chains, while in New York City that number was approximately 50%. There can
be no assurance that such underpenetration will continue.

Duane Reade believes that it has significant competitive advantages over
the approximately 1,400 independent drugstores in New York City, including
purchasing economies of scale, centrally located warehouses that minimize
store inventory and maximize selling space, a full line of in stock, brand
name merchandise and a convenient store format. Major chain competitors in
the New York City market include Rite-Aid, Genovese and CVS. See "Risk
Factors--Competition."

GOVERNMENT REGULATION

Duane Reade's stores and its distribution facilities are registered with
the federal DEA and are subject to various state and local licensing
requirements. Each of Duane Reade's pharmacies and pharmacists located in New
York are licensed by the State of New York. The pharmacy and pharmacists
employed at Duane Reade's store in Newark, New Jersey are licensed by the
State of New Jersey. In addition, Duane Reade has been granted cigarette tax
stamping licenses from the State of New York and from the City of New York,
which permit Duane Reade to buy cigarettes directly from the manufacturers
and stamp the cigarettes themselves. Duane Reade's stores possess cigarette
tax retail dealers licenses issued by the State of New York, the City of New
York and the State of New Jersey. See "Risk Factors--Regulatory Matters."

EMPLOYEES

As of September 27, 1997, Duane Reade had approximately 2,000 employees,
almost all of whom were full-time. Approximately 1,800 of the Company's 2,000
employees are represented by unions. Non-union employees include employees at
corporate headquarters and store management. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. Duane
Reade's three year contracts with these two unions expire on August 31, 1999
and August 31, 1998, respectively. Duane Reade believes that its relations
with its employees are good. See "Risk Factors--Collective Bargaining
Agreements."

TRADEMARKS

The name "Duane Reade" and the "DR" logo are registered trademarks. The
Company believes that it has developed strong brand awareness within the New
York City area. As a result, the Company regards the Duane Reade logo as a
valuable asset.

LEGAL PROCEEDINGS

The Company is a party to certain legal actions arising in the ordinary
course of business. Based on information presently available to the Company,
the Company believes that it has adequate legal defenses or insurance
coverage for these actions and that the ultimate outcome of these actions
will not have a material adverse effect on the Company.

41
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the directors and executive officers of the
Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Anthony J. Cuti .... 51 Chairman, Chief Executive Officer and President
William Tennant .... 50 Senior Vice President and Chief Financial Officer
Gary Charboneau .... 53 Senior Vice President--Sales and Merchandising
Jerry M. Ray ........ 50 Senior Vice President--Store Operations
Nicole S. Arnaboldi 39 Director
David L. Jaffe....... 39 Director
Andrew J. Nathanson . 40 Director
</TABLE>

Two additional directors will be elected by the Board of Directors
following the completion of the Offering.

ANTHONY J. CUTI has been Chairman and Chief Executive Officer of the
Company since April 1996. Prior to joining the Company, Mr. Cuti served as
President and as a member of the Board of Directors of Supermarkets General
and Pathmark from 1993 to 1996 and, prior to being named President of
Supermarkets General and Pathmark, Mr. Cuti was Executive Vice President and
Chief Financial Officer of Supermarkets General. From 1984 to 1990, he was
the Chief Financial Officer of the Bristol-Myers International Group of the
Bristol-Myers Company and prior to that was employed by the Revlon
Corporation.

WILLIAM TENNANT has been Senior Vice President and Chief Financial Officer
of the Company since February 1997. Prior to joining the Company, Mr. Tennant
was Senior Vice President and Chief Financial Officer of Tops Appliance City,
a consumer electronics retailer, from 1993 to 1996. From 1986 to 1993, Mr.
Tennant served as Vice President and Controller for the Great Atlantic &
Pacific Tea Company.

GARY CHARBONEAU has been Senior Vice President in charge of Sales and
Merchandising of the Company since February 1993. Prior to joining the
Company, Mr. Charboneau held various positions at CVS, a retail drugstore
chain, from 1978 to February 1993, most recently as Executive Vice President.

JERRY M. RAY has been Senior Vice President in charge of Store Operations
since July 1996 and served as Vice President of Pharmacy Operations from
April 1995 to June 1996. From 1991 to 1994, Mr. Ray served as President and
CEO of Begley Drugstores, Inc.

NICOLE S. ARNABOLDI has been a Director of the Company since June 1997.
Ms. Arnaboldi is a Managing Director of DLJMB. She joined the DLJ Merchant
Banking Group in March 1993 after six years with The Sprout Group, DLJ's
venture capital affiliate.

DAVID L. JAFFE has been a Director of the Company since June 1997. Mr.
Jaffe is a Managing Director of DLJMB. Mr. Jaffe joined DLJ Merchant Banking
in 1984 and became a Managing Director in 1995. He currently sits on the
Board of Directors of each of EZ Buy and EZ Sell Recycler Corporation, OHA
Financial, Inc., OSF, Inc., Terra Nova Group, Pharmaceutical Fine Chemicals
SA and Brand Scaffold Services, Inc.

ANDREW J. NATHANSON has been a Director of the Company since June 1997.
Mr. Nathanson is a Managing Director of DLJ. Mr. Nathanson joined DLJ in 1989
from Drexel Burnham Lambert, and has been a Managing Director of DLJ since
1991. Mr. Nathanson also serves on the Board of Directors of Specialty Foods,
Inc.

Directors of the Company are currently elected annually by its
stockholders to serve during the ensuing year or until their respective
successors are elected and qualified. Executive officers of the Company are
elected by the Board of Directors to serve until their respective successors
are elected and qualified.

42
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS

Prior to the Offering, the Board of Directors had no formal committees. In
connection with the completion of the Offering, the Board of Directors will
establish two committees: (i) an Audit Committee and (ii) a Compensation
Committee.

The Audit Committee will make recommendations to the Board of Directors
regarding the Company's independent auditors, approve the scope of the annual
audit activities of the independent auditors and review audit results. It is
expected that a majority of the directors comprising the Audit Committee will
be directors not otherwise affiliated with the Company or its principal
stockholders.

The duties of the Compensation Committee will be to provide a general
review of the Company's compensation and benefit plans to ensure that they
meet corporate objectives. In addition, the Compensation Committee will
review management's recommendations on (i) compensation of all officers of
the Company and (ii) adopting and changing major Company compensation
policies and practices, and report its recommendations to the entire Board of
Directors for approval and authorization. The Compensation Committee will
administer the Company's stock plans. The Board of Directors may also
establish other committees to assist in the discharge of its
responsibilities.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes the principal components of compensation of
the Chief Executive Officer and the other four highest compensated executive
officers of the Company (the "Named Executive Officers") for the fiscal year
ended December 27, 1997. The compensation set forth below fully reflects
compensation for services performed on behalf of the Company and its
subsidiaries.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- --------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS (#) COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti............. 1997 $386,000 $-- $-- 496,569 $--
Chief Executive Officer
Gary Charboneau............. 1997 243,000 -- -- 141,877 --
Senior Vice
President--Sales and
Merchandising
Jerry M. Ray................ 1997 200,000 -- -- 118,231 --
Senior Vice
President--Store
Operations
William J. Tennant..........
Senior Vice 1997 151,000(2) -- -- 115,393 --
President--Chief Financial
Officer
Joseph S. Lacko............. 1997 150,000 -- -- 11,823 --
Vice President--Management
Information Systems
</TABLE>

- ------------
(1) Bonuses for 1997 have not yet been determined. Messrs. Cuti,
Charboneau, Ray and Lacko received bonuses in fiscal 1996 of $340,000,
$120,000, $100,000 and $25,000, respectively.
(2) Reflects Mr. Tennant's salary for the partial year from February 18,
1997 (when he joined the Company) through December 27, 1997.

43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table discloses options granted during fiscal 1997 to the
Named Executive Officers.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT
----------------------------------------------------------- ASSUMED RATES OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS TERM(2)
UNDERLYING GRANTED TO EXERCISE OR ----------------------------
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti ........ 496,569 45.5% $8.33 6/18/07 $2,602,022 $6,594,436
Gary Charboneau (3) .... 141,877 13.0 8.33 6/18/07 743,435 1,884,127
Jerry M. Ray (3)........ 118,231 10.8 8.33 6/18/07 619,530 1,570,081
William J. Tennant (4) 115,393 10.6 7.34-8.33 2/18/07-6/18/07 561,964(5) 1,425,104(5)
Joseph S. Lacko ........ 11,823 1.1 8.33 6/18/07 61,953 157,009
</TABLE>

- ------------
(1) All of such options vest fully on the eighth anniversary of the grant
date and may vest sooner based on the Company's achievement of certain
specified financial targets.
(2) Amounts reflect certain assumed rates of appreciation for the term of
the option as set forth in the executive compensation disclosure rules
of the Securities and Exchange Commission and are not intended to
forecast future appreciation of the Common Stock. Actual gains, if any,
on stock option exercises depend on future performance of the Company's
stock and overall market conditions. For each Named Executive Officer
other than Mr. Tennant, at an annual rate of appreciation of 5% per
year for the option term, the price of the Common Stock would be
approximately $13.57 per share as of the expiration date, and for Mr.
Tennant such price would be approximately $12.62 per share. For each
Named Executive Officer other than Mr. Tennant, at an annual rate of
appreciation of 10% per year for the option term, the price of the
Common Stock would be approximately $21.61 per share as of the
expiration date, and for Mr. Tennant such price would be approximately
$20.10 per share.
(3) All of such options were granted under the Equity Plan (as defined
below). The options granted under such plan are subject to repurchase
provisions upon termination of employment. See "--Stock Options."
(4) 68,101 of Mr. Tennant's options were granted pursuant to a separate
agreement with the Company, and the remaining 47,292 options were
granted pursuant to the Equity Plan.
(5) Amounts for Mr. Tennant are calculated based on a weighted average
exercise price of $7.75 per share.

FISCAL YEAR END OPTION VALUES

The following table summarizes the number and value of all unexercised
options held by the Named Executive Officers at the end of 1997. There were
no options exercised in the Company's last fiscal year.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT AT FISCAL YEAR END
NAME EXERCISE VALUE REALIZED FISCAL YEAR END ($)(1)
- ------------------- ------------- -------------- --------------- ---------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Anthony J. Cuti..... -- -- 364,530/496,569 2,825,108/0
Gary Charboneau..... -- -- 56,013/141,877 306,443/0
Jerry M. Ray........ -- -- 45,032/118,231 285,161/0
William J. Tennant -- -- 68,101/47,292 67,420/0
Joseph S. Lacko ... -- -- 17,025/11,823 131,944/0
</TABLE>

- ------------
(1) Assumes the value of the Common Stock as of December 27, 1997 is equal
to $8.33 per share.

44
<PAGE>
Mr. Weston, the Company's former Chief Executive Officer, resigned from
the Company effective as of February 28, 1997. In connection with Mr.
Weston's severance from the Company and the Recapitalization, Mr. Weston
received approximately $1.6 million from DLJMB and all of his unexercised
options were effectively cancelled. In addition, Mr. Weston received
approximately $412,000 from the Company during 1997, a portion of which was
attributable to his 1995 and 1996 bonus and the remainder of which was
attributable to severance payments.

COMPENSATION OF DIRECTORS

Directors of the Company who are employees of the Company, DLJ or DLJMB or
their respective subsidiaries are not compensated for serving as directors.
Presently, the Company does not have directors who are not employees of the
Company, DLJ or DLJMB ("Non-Employee Directors"). However, the Company plans
to compensate future Non-Employee Directors with option grants for serving in
such capacity and for serving on committees of the Board of Directors and to
reimburse Non-Employee Directors for out-of-pocket expenses incurred in such
capacity.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to the Offering, the Company did not have a compensation committee.
Instead, compensation decisions regarding the Company's executive officers
were made by the Board of Directors. Each executive officer of the Company
has an employment agreement with the Company that establishes his annual
compensation. See "--Employment Agreements."

EMPLOYMENT AGREEMENTS

Effective June 18, 1997, the Company entered into an employment agreement
with Anthony J. Cuti (the "Cuti Employment Agreement"). Pursuant to the Cuti
Employment Agreement, Mr. Cuti serves as Chairman, President and Chief
Executive Officer of the Company. The Cuti Employment Agreement provides for
(i) a base salary of $425,000 per year, which will increase to $500,000 in
1998 and $550,000 in 1999 if certain EBITDA targets (as defined in the Cuti
Employment Agreement) are met and will increase every 18 months commencing
July 1, 2001 by not less than the percentage increase in a designated
consumer price index for such 18-month period, (ii) an annual incentive bonus
of up to 200% of base salary based on certain EBITDA targets and (iii)
participation in all benefit plans generally available to executive officers
of the Company.

Pursuant to the Cuti Employment Agreement and the Equity Plan described
below, on June 18, 1997, Mr. Cuti was granted non-qualified stock options to
purchase an aggregate of 496,569 shares of Common Stock at an exercise price
of $8.33 per share. Subject to Mr. Cuti's continued employment with the
Company, the options generally will become 100% vested on the eighth
anniversary of the date of grant, but may vest sooner based on the Company's
achievement of certain specified financial targets. Furthermore, the vesting
of options will accelerate upon the occurrence of a Sale of the Company (as
defined in the Cuti Employment Agreement) on or prior to December 30, 2001,
based on the Company's achievement of specified financial targets prior to
the date of any such Sale of the Company.

The Cuti Employment Agreement provides that following the Offering, Mr.
Cuti may generally only transfer up to 10% of his shares of Common Stock in
each calendar year while he is an employee of the Company, except pursuant to
certain rights and obligations (i) to transfer ("put") his shares to the
Company upon termination of employment and (ii) to transfer shares in
connection with certain transfers of Common Stock by DLJMBPII. The Cuti
Employment Agreement also provides that Mr. Cuti will be given the
opportunity to invest additional amounts in stock of the Company in the event
that DLJMBPII invests new equity in the Company or creates an intrument that
may be dilutive to Mr. Cuti's equity position relative to DLJMBPII.

Mr. Cuti's initial term of employment is for three years and, unless
terminated by notice of non-renewal by either the Company or Mr. Cuti, will
continue thereafter for successive one-year periods. Pursuant to the Cuti
Employment Agreement, if the Company terminates Mr. Cuti without "cause" (as
defined in the Cuti Employment Agreement) or by notice of non-renewal or Mr.
Cuti resigns with "good

45
<PAGE>
reason" (as defined in the Cuti Employment Agreement), Mr. Cuti will be
entitled to continued base salary and incentive bonus payments (at the rate
of two times base salary and bonus for the year prior to termination, which
can be increased to three times base salary and bonus upon the occurrence of
certain events, including a Sale of the Company) and employee benefits for a
two year period, which, under certain circumstances, including Mr. Cuti's
termination of employment prior to June 18, 2003 and within one year
following a Sale of the Company, may be extended by one year. Additionally,
the vesting of Mr. Cuti's options may accelerate upon such a termination of
employment, based on the Company's financial performance prior to such
termination and whether a Sale of the Company has occurred. The Cuti
Employment Agreement also contains certain non-compete, non-solicitation and
confidentiality provisions. See also "Certain Relationships and Related
Transactions--Cuti Loan Agreement."

The Company has also entered into agreements with Messrs. Charboneau and
Ray and certain other executives that provide for their initial base salary
as well as annual incentive bonuses based on certain EBITDA targets. Mr.
Charboneau's employment agreement provides for an annual base salary of
$220,000 and for additional increases from time to time as the Company may
determine. Mr. Ray's employment agreement provides for an annual base salary
of $150,000 and for additional increases from time to time as the Company may
determine. Each of Messrs. Charboneau and Ray are entitled to severance
payments equalling 12 months of their respective salaries if they are
terminated without "cause" (as respectively defined in the agreements).

The Company's agreement with Mr. Lacko provides for payment of an annual
base salary of $150,000 as well as for payment of annual incentive bonuses
based upon achievement of certain corporate and financial objectives. Mr.
Lacko's agreement also provides for the grant of stock options to acquire an
aggregate of 6,805 shares of Common Stock. These options vested on June 18,
1997 and have an exercise price of $8.33 per share. In addition, Mr. Lacko's
agreement provides for 12 months of salary continuation in the event Mr.
Lacko is terminated without cause.

The Company's agreement with Mr. Tennant provides for payment of an annual
base salary of $175,000 per year as well as for payment of annual incentive
bonuses based upon achievement of certain financial targets. Mr. Tennant's
agreement also provides for the grant of stock options to acquire an
aggregate of 68,101 shares of Common Stock at an exercise price of $7.34 per
share and for 12 months of salary continuation in the event Mr. Tennant is
terminated without cause.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company has established the Supplemental Executive Retirement Plan
("SERP"), an unfunded retirement plan that provides a lump sum benefit equal
to the actuarial present value of a life annuity commencing at the later of
age 65 or termination of employment for any reason other than for "cause."
The SERP benefit is calculated as a percentage of a participant's Final
Average Earnings (defined as the average base salary and bonus for the five
years which produce the greatest amount multiplied by the participant's years
of services with the Company). Currently, Mr. Cuti is the only SERP
participant. Mr. Cuti's estimated SERP benefit, based on his annualized 1996
includable compensation and upon discount rates effective for termination of
employment in December 1997, is estimated to be $619,000, if termination of
employment occurs after 10 years when Mr. Cuti will be age 60 1/2, or
$1,263,000 if termination of employment occurs after 14 1/2 years, when Mr.
Cuti will be age 65. Pursuant to the Cuti Employment Agreement, the Company
is required to set aside funds in a "rabbi trust" to pay Mr. Cuti's SERP
benefit in specified circumstances, including a Sale of the Company,
termination without "cause" and resignation for "good reason" (as
respectively defined in the Cuti Employment Agreement). Furthermore, in the
event of his termination without "cause" or by reason of the Company's
non-renewal, his resignation for "good reason," or his death or disability,
Mr. Cuti's SERP benefit will be calculated on the basis of 20 years of
employment regardless of his actual number of years of employment with the
Company (the present value of which was approximately $680,000 as of
September 27, 1997).

STOCK OPTIONS

1992 STOCK OPTION PLAN. The Board of Directors adopted and the Company's
stockholders approved the 1992 Stock Option Plan (the "1992 Plan") in
September 1992. Under the 1992 Plan, the

46
<PAGE>
Board of Directors may grant to executive and other key employees of the
Company nonqualified stock options to purchase up to an aggregate of 510,757
shares of Common Stock of the Company at exercise prices and terms specified
by the Board of Directors.

At September 27, 1997, there were outstanding nonqualified stock options
issued under the 1992 Plan to purchase up to an aggregate of 281,657 shares
of Common Stock of the Company at exercise prices ranging from $0.58 to
$40.88 per share. The 1992 Plan will be frozen as to the future grants
following the Offering. All options issued under the 1992 Plan are 100%
vested.

1997 EQUITY PARTICIPATION PLAN. As of June 18, 1997, the Board of
Directors and stockholders of the Company approved the 1997 Equity
Participation Plan (the "Equity Plan"). The Equity Plan has been administered
by the Board of Directors and, following consummation of the Offering, will
be administered by the Compensation Committee. The Board of Directors is
authorized under the Equity Plan to select the individuals to whom awards
will be made (the "Participants") and determine the terms and conditions of
the awards under the Equity Plan. The Equity Plan provides that the Board of
Directors may grant or issue stock options, stock appreciation rights,
restricted stock, deferred stock, dividend equivalents, performance awards,
stock payments, and other stock related benefits, or any combination thereof,
to any eligible employee or consultant. Each such award will be set forth in
a separate agreement with the person receiving the award and will indicate
the type, terms and conditions of the award. An aggregate of 1,321,181 shares
of Common Stock of the Company have been reserved for issuance under the
Equity Plan, subject to certain adjustments reflecting changes in the
Company's capitalization. The Equity Plan provides that no Participant may
receive awards relating to more than 480,429 shares of Common Stock per year.

SECTION 162(M) LIMITATION. In general, under Section 162(m) of the Code
("Section 162(m)"), income tax deductions of publicly-held corporations may
be limited to the extent total compensation (including base salary, annual
bonus, stock option exercises and non-qualified benefits) for certain
executive officers exceeds $1 million (less the amount of any "excess
parachute payments" as defined in Section 280G of the Code) in any one year.
Under a Section 162(m) transition rule for compensation plans of corporations
which are privately held and which become publicly held in an initial public
offering, the Equity Plan will not be subject to Section 162(m) until the
"Transition Date" which is defined as the earliest of (i) the material
modification of the Equity Plan; (ii) the issuance of all Common Stock and
other compensation that has been allocated under the Equity Plan; and (iii)
the first meeting of stockholders at which directors are to be elected that
occurs after December 31, 2001. After the Transition Date, rights and awards
granted under the Equity Plan will not qualify as "performance-based
compensation" for purposes of Section 162(m) unless such rights and awards
are granted by an independent compensation committee, and such awards are
granted or vest upon pre-established objective performance goals, the
material terms of which are disclosed to and approved by the stockholders of
the Company. The transition rule will also apply to base salary and bonus
payments made pursuant to employment agreements in effect at the time of the
Offering.

The Board of Directors generally will have the power and authority to
amend the Equity Plan at any time without approval of the Company's
stockholders, subject to applicable federal securities and tax law
limitations (including rules and regulations of the New York Stock Exchange).

47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

DLJMB RELATIONSHIPS

In connection with the Recapitalization, DLJMBPII and certain of its
affiliates (the "DLJ Entities") purchased an aggregate of 9,383,420 shares of
Common Stock, certain members of management retained an aggregate of 284,832
shares of Common Stock and certain other stockholders retained an aggregate
of 589,577 shares of Common Stock. The aggregate purchase price for the
shares acquired by the DLJ Entities was approximately $78.7 million or
approximately $8.33 per share. Each of these shareholders other than members
of management signed the Stockholders and Registration Rights Agreement. See
"--Stockholders and Registration Rights Agreement." Mr. Jaffe and Ms.
Arnaboldi, directors of the Company, are Managing Directors of DLJMB, and Mr.
Nathanson, also a director of the Company, is a Managing Director of DLJ.

On September 30, 1997, the Company entered into the Existing Credit
Agreement in which DLJ Capital Funding, Inc., an affiliate of DLJMBPII, acted
as the arranger and syndication agent. In connection with the Existing Credit
Agreement, DLJ Capital Funding, Inc. received a customary funding fee of
approximately $2.4 million.

DLJ (one of the Underwriters and an affiliate of DLJMBPII) acted as
financial advisor to the Company in connection with the structuring of the
Recapitalization and received customary fees for such services of
approximately $3.5 million and reimbursement for reasonable out-of-pocket
expenses and affiliates of DLJ received standby commitment fees of
approximately $1.2 million in connection with change of control offers for
the Zero Coupon Notes and the Senior Notes, which were required as a result
of the Recapitalization. The Company agreed to indemnify DLJ in connection
with its acting as financial advisor. In addition, DLJ will receive its pro
rata portion of the underwriters compensation set forth on the cover page of
this Prospectus. DLJ is also serving as sole underwriter in connection with
the Notes Offering and will receive an estimated $2.4 million of underwriting
compensation payable in connection therewith. In addition, the DLJ Entities
have granted an option to the Underwriters, exercisable for 30 days after the
date of this Prospectus, to purchase an aggregate of up to 1,091,658
additional shares of Common Stock solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total net proceeds to
such DLJ Entities will be approximately $16.8 million. See "Principal and
Selling Stockholders."

CUTI LOAN AGREEMENT

Pursuant to the terms of the Cuti Employment Agreement and a Secured Loan
Agreement and related agreements among Mr. Cuti, the Company and DLJ (the
"Loan Documents"), on November 20, 1997, Mr. Cuti borrowed $1 million from
DLJ (the "Loan"). The Loan is secured by Mr. Cuti's pledge to DLJ of his
options granted under the Equity Plan and his option to purchase 496,569
shares of Common Stock, and all Common Stock and other proceeds payable upon
exercise or other disposition thereof (the "Pledged Security"). The Loan is
subject to interest at the Federal Mid-Term Rate as in effect from time to
time and is generally payable in five equal installments commencing within 30
days after Mr. Cuti has the ability to receive cash in exchange for any of
the Pledged Security. In addition, the Company may apply any amounts to which
Mr. Cuti is entitled upon termination of employment to repayment of the Loan.
The Cuti Employment Agreement and the Loan Documents further provide that in
the event of termination of Mr. Cuti's employment by reason of termination by
the Company without "cause" or the Company's non-renewal or his resignation
with "good reason" (as such terms are defined in the Cuti Employment
Agreement), the Company will reimburse Mr. Cuti for all interest accrued as
of the date of such termination if the Company has achieved certain specified
financial targets for the year prior to termination and the year of such
termination. The Loan Documents permit DLJ to assign the Loan to certain of
its affiliates, including the Company, and the Company is obligated pursuant
to the Cuti Employment Agreement to assume the Loan from DLJ as soon as
practicable after the Company and DLJ agree that the Company may do so.

48
<PAGE>
OTHER RELATIONSHIPS

The Company incurred aggregate fees owing to Credit Suisse First Boston
for financial services rendered from March 1995 through the consummation of
the Recapitalization in the aggregate amount of $3.6 million, of which $1.4
million was paid upon consummation of the Recapitalization and the remaining
$2.2 million will become payable upon consummation of the Offering.

STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT

In connection with the Recapitalization, certain of the shareholders of
the Company (the "Initial Shareholders") entered into a Stockholders and
Registration Rights Agreement, pursuant to which the Company has granted the
Initial Shareholders the right to cause the Company to register shares of
Common Stock (the "registrable securities") under the Securities Act. Upon
consummation of the Offering, 9,395,278 outstanding shares of Common Stock
will constitute registrable securities and therefore will be eligible for
registration pursuant to the Stockholders and Registration Rights Agreement.
Under the terms of the Stockholders and Registration Rights Agreement, at any
time after the one year anniversary date of the Offering, (i) the holders of
at least a majority of the registrable securities held by the DLJ Entities
can require the Company, subject to certain limitations, to file a
registration statement under the Securities Act covering all or part of the
registrable securities held by the DLJ Entities and (ii) the remaining
Initial Shareholders can require the Company, subject to certain limitations,
to file a registration statement covering all or part of the registrable
securities held by such Initial Shareholders (each, a "demand registration").
The Company is obligated to pay all registration expenses (other than
underwriting discounts and commissions and subject to certain limitations)
incurred in connection with the demand registrations. In addition, the
Stockholders and Registration Rights Agreement provides the Initial
Shareholders with "piggyback" registration rights, subject to certain
limitations, whenever the Company files a registration statement on a
registration form that can be used to register securities held by such
Initial Shareholders.

49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership (as defined by the regulations of the Securities and
Exchange Commission) of the Company's Common Stock (which constitutes the
only class of voting capital stock of the Company) by (i) each person known
to the Company to be the beneficial owner of 5% or more of the Common Stock,
(ii) each director, (iii) each Named Executive Officer and (iv) all executive
officers and directors as a group, based on data as of January 15, 1998.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------------
% OF CLASS % OF CLASS
PRIOR TO AFTER
NAME SHARES OFFERING OFFERING(2)
- -------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. and related
investors(3)(4) .................................. 9,383,420 91.5% 55.32%
Anthony Cuti....................................... 364,530 3.6% 2.1%
David Jaffe(5) .................................... -- -- --
Nicole S. Arnaboldi(5)............................. -- -- --
Andrew J. Nathanson(5) ............................ -- -- --
Gary Charboneau ................................... 259,464 2.5% 1.6%
Jerry M. Ray ...................................... 85,722 * *
William J. Tennant................................. 68,101 * *
Joseph S. Lacko.................................... 17,025 * *
All executive officers and directors as a group
(11 persons)(5) .................................. 815,996 8.0% 4.9%
</TABLE>

- ------------
* Less than one percent
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares that such person has the right to acquire
within 60 days after the date of this Prospectus. For purposes of
calculating the percentage of outstanding shares held by each person
named above, any shares that such person has the right to acquire
within 60 days after the date of this Prospectus are deemed to be
outstanding, but not for the purpose of calculating the percentage
ownership of any other person.
(2) Assumes no exercise of the Underwriters' overallotment option.
(3) Consists of 9,383,420 shares held directly by the following related
investors, each of whom is affiliated with DLJ: DLJ Merchant Banking
Partners II, L.P. ("DLJMBPII"), 5,910,855 shares; DLJ Merchant Banking
Partners II-A, L.P. ("DLJMBPII-A"), 235,398 shares; DLJ Offshore
Partners II, C.V. ("DLJOPII"), 290,665 shares; DLJ Diversified
Partners, L.P. ("DLJDP"), 345,575 shares; DLJ Diversified Partners-A,
L.P. ("DLJDPA"), 128,335 shares; DLJMB Funding II, Inc. ("DLJMBFII"),
1,049,442 shares; DLJ Millennium Partners, L.P. ("Millennium"), 95,572
shares; DLJ Millennium-A, L.P. ("Millennium-A"), 18,640 shares; DLJ EAB
Partners, L.P. ("DLJEAB"), 26,539 shares; UK Investment Plan 1997
Partners ("UK Investment"), 156,390 shares; and DLJ First ESC L.P.
("DLJ ESC" and, collectively with the aforementioned entities, the
"DLJMBPII Entities"), 1,126,010 shares. See "Certain Relationships and
Related Transactions--DLJMB Relationships." The address of each of
DLJMBPII, DLJMBIIA, DLJDP, DLJDPA, DLJMBFII, Millennium, Millennium-A,
DLJEAB, and DLJ ESC is 277 Park Avenue, New York, New York 10172. The
address of DLJOPII is c/o John B. Gorsiraweg, 14 Willemstad, Curacao,
Netherlands Antilles. The address of UK Investment is 2121 Avenue of
the Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. As a
general partner of each of DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA,
DLJEAB, Millennium and Millennium-A, DLJMB may be deemed to
beneficially own indirectly all of the shares held directly by
DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, DLJEAB, Millennium and
Millennium-A, and as the parent of each of DLJMB, DLJMBFII and DLJ LBO
Plans Management Corporation (the general partner of DLJ ESC and UK
Investment), Donaldson, Lufkin & Jenrette Inc., the parent of DLJ ("DLJ
Inc.") may be deemed to beneficially own indirectly all of the shares
held by DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, DLJEAB, Millennium,
Millennium-A, DLJMBFII, DLJ ESC and UK Investment. The address of DLJ
Merchant Banking, Inc. is 277 Park Avenue, New York, New York 10172.
(4) In the event that DLJMBPII Entities sell all of the shares of Common
Stock eligible to be sold pursuant to the Underwriters' overallotment
option, such entities will beneficially own approximately 48.9% of the
Common Stock outstanding after the Offering. See "--Selling
Stockholders."
(5) Mr. Nathanson is a Managing Director of DLJ and, as a result may be
deemed to beneficially own the shares of Common Stock held by the
DLJMBPII Entities. Mr. Nathanson expressly disclaims beneficial
ownership of such shares of Common Stock. Nicole Arnaboldi and David
Jaffe are managing directors of DLJMB and DLJ Diversified Partners,
Inc. ("DLJDPI"). DLJMB is the managing general partner of DLJMBII,
DLJMBIIA, DLJOPII, Millennium and Millennium-A. DLJDPI is the managing
general partner of DLJDP and DLJDPA. As a result, Ms. Arnaboldi and Mr.
Jaffe may be deemed to beneficially own the shares of Common Stock held
by each of DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, Millennium,
Millennium-A. Ms. Arnaboldi and Mr. Jaffe expressly disclaim beneficial
ownership of such shares of Common Stock.

50
<PAGE>
SELLING STOCKHOLDERS

The following table assumes that Underwriters' over-allotment option is
exercised in full and sets forth certain information with respect to the
Common Stock held by each Selling Stockholder and the DLJMBPII Entities,
other than as set forth above, as of February 5, 1998 and as adjusted to
reflect the sale of 1,669,376 shares by the Selling Stockholders and the
DLJMBPII Entities in the Offering. Prior to the Recapitalization, BCIP
Associates, BCIP Trust Associates, L.P. and Tyler Capital Fund, L.P.,
affiliates of Bain Capital, were affiliates of the Company. Bruce L. Weitz is
a former Chief Executive Officer of the Company.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP SHARES BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERINGS OFFERED AFTER OFFERING
---------------------- -------------- ----------------------
NAME SHARES PERCENT SHARES PERCENT
- --------------------------------- ----------- --------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DLJ Merchant Banking Partners II,
L.P. ............................ 5,910,855 59.3% 687,663(1) 5,223,192 30.8%
DLJ Merchant Banking Partners
II-A, L.P. ...................... 235,398 2.4% 27,386(1) 208,012 1.2%
DLJ Offshore Partners II, C.V. .. 290,665 2.9% 33,816(1) 256,849 1.5%
DLJ Diversified Partners, L.P. .. 345,575 3.5% 40,204(1) 305,371 1.8%
DLJ Diversified Partners-A, L.P. 128,335 1.3% 14,930(1) 113,405 *
DLJMB Funding II, Inc. ........... 1,049,442 11.5% 122,091(1) 927,351 5.5%
DLJ EAB Partners, L.P. ........... 26,539 * 3,087(1) 23,452 *
UK Investment Plan 1997 Partners 156,390 1.6% 18,194(1) 138,196 *
DLJ First ESC, L.P. .............. 1,126,010 10.3% 130,999(1) 995,011 5.9%
DLJ Millennium Partners-A, L.P. . 18,640 * 2,169(1) 16,471 *
DLJ Millennium Partners, L.P. ... 95,572 * 11,119(1) 84,453 *
BCIP Associates .................. 18,431 * 18,431 0 --
BCIP Trust Associates, L.P. ..... 3,948 * 3,948 0 --
Tyler Capital Fund, L.P. ......... 276,038 2.7% 276,038 0 --
BT Investment Partners, Inc. .... 32,821 * 32,821 0 --
Continental Assurance Company on
behalf of its Separate Account
Continental Assurance Company
Pension Investment Fund ......... 8,688 * 8,688 0 --
Muico & Co. ...................... 21,880 * 21,880 0 --
Thomas Stemberg .................. 282 * 282 0 --
The Marion Trust ................. 5,744 * 5,744 0 --
Ford Leasing Corporation ......... 6,435 * 6,435 0 --
Bruce L. Weitz ................... 203,451 2.0% 203,451 0 --

</TABLE>

- ------------
* Less than one percent
(1) Maximum number of shares to be sold in connection with the exercise of
the Underwriters' over-allotment option.

51
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS

NEW CREDIT AGREEMENT

In connection with the Refinancing Plan, the Company will enter into the
New Credit Agreement pursuant to which DLJ Capital Funding, Inc., an
affiliate of DLJ, will act as an arranger and syndication agent, and Fleet
National Bank N.A. will act as administrative agent. The New Credit Agreement
is expected to provide for total lending commitments of up to $160.0 million.
The New Credit Agreement will be comprised of (i) a Revolving Credit Facility
of up to $30.0 million, which includes borrowing capacity available for
letters of credit and for same-day notice swingline loans, (ii) Tranche A
Term Loans of up to $50.0 million and (iii) Tranche B Term Loans of up to
$80.0 million. Borrowings under the New Credit Agreement, together with the
proceeds of the Offering and the Notes Offering, will be used to repay the
Company's existing indebtedness as described under "Use of Proceeds." The
proceeds of loans under the New Credit Agreement may also be used to fund the
Company's working capital needs, capital expenditures and other general
corporate purposes, including the issuance of letters of credit.

Borrowings under the New Credit Agreement, like the Company's Existing
Credit Agreement, will bear interest annually, at the Company's option, at
the rate based on either (i) an "Alternate Base Rate" (defined as, generally,
the higher of the Federal Funds Rate, as published by the Federal Reserve
Bank of New York, plus 0.5%, or the administrative agent's prime lending
rate) plus (a) in the case of Tranche A Term Loans or revolving credit loans,
1.5% or (b) in the case of Tranche B Term Loans, 1.75% or (ii) a
reserve-adjusted "LIBO" rate, plus (x) in the case of Tranche A Term Loans or
revolving credit loans, 2.5% or (y) in the case of Tranche B Term Loans,
2.75%. Margins set forth for Tranche A Term Loans and revolving credit loans
will be subject to certain performance-based reductions occurring not earlier
than six months from the closing date of the New Credit Agreement. In
addition, the Company must pay a fee on the face amount of each letter of
credit outstanding at a rate equal to the LIBO margin.

Borrowings under the New Credit Agreement will be guaranteed by, and
secured by a pledge of all of the capital stock and assets of, the Company's
subsidiaries.

The New Credit Agreement will contain various covenants that limit or
restrict, among other things, subject to certain exceptions, the incurrence
of indebtedness, the creation of liens, transactions with affiliates,
restricted payments, investments and acquisitions, mergers, consolidations,
dissolutions, asset sales, dividends, distributions, and certain other
transactions and business activities by the Company.

NEW SENIOR SUBORDINATED NOTES

Upon consummation of the Notes Offering, the Company will have outstanding
$80.0 million aggregate principal amount of New Senior Subordinated Notes,
which will bear interest at a rate of 9.25% per annum, payable semi-annually
in arrears on each February 15 and August 15 beginning on August 15, 1998.
The New Senior Subordinated Notes will mature on February 15, 2008. The New
Senior Subordinated Notes will represent senior subordinated unsecured
obligations of the Company. The Company's payment obligations under the New
Senior Subordinated Notes will be guaranteed on a senior subordinated basis
by all of the Company's present and future subsidiaries.

The New Senior Subordinated Notes will not be redeemable at the option of
the Company prior to February 15, 2003, except that prior to February 15,
2001 the Company will be permitted to redeem up to 35% of the New Senior
Subordinated Notes at a redemption price of 109.25% of the principal amount
thereof, plus accrued and unpaid interest, if any, with the net proceeds of
one or more public or private sales of common stock or preferred stock of the
Company, provided that at least 65% of the New Senior Subordinated Notes
remain outstanding immediately after the occurrence of any such redemption.
At any time on or after February 15, 2003, the New Senior Subordinated Notes
will be redeemable at the option of the Company, in whole or in part, at a
premium declining ratably to par on February 15, 2006.

The New Senior Subordinated Note Indenture will provide that, in the event
of a Change of Control (as defined in the New Senior Subordinated Note
Indenture) of the Company, the Company will be required to make an offer to
purchase in cash all or any part of the outstanding New Senior Subordinated
Notes at a price of 101% of the aggregate principal amount thereof.

The New Senior Subordinated Note Indenture contains restrictive covenants
that, among other things, impose limitations on the ability of the Company
and its subsidiaries (i) to incur additional

52
<PAGE>
indebtedness, (ii) to merge, consolidate or sell or dispose of all or
substantially all of its assets, (iii) to issue certain preferred stock, pay
cash dividends or make other distributions on account of the Company's equity
interests, repurchase equity interests or subordinated indebtedness and make
certain other restricted payments, (iv) to create certain liens, (v) to enter
into transactions with affiliates and (vi) to sell assets.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of the Offering, the total amount of authorized capital
stock of the Company will consist of 30,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share (the "Preferred Stock"). Upon completion of the Offering,
16,957,832 shares of Common Stock will be outstanding and no shares of
Preferred Stock will be outstanding. Unless otherwise noted, the discussion
herein describes the Company's capital stock, the Amended and Restated
Certificate of Incorporation (the "Restated Certificate") and Amended and
Restated Bylaws (the "Bylaws") as anticipated to be in effect upon
consummation of the Offering. The following summary of certain provisions of
the Company's capital stock does not purport to be complete and is subject to
and qualified in its entirety by the Restated Certificate and the Bylaws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.

COMMON STOCK

The holders of the Company's Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered hereby will, upon payment therefor, be validly
issued, fully paid and nonassessable. Subject to the rights of the holders of
any shares of Preferred Stock, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board of Directors may from
time to time determine. See "Dividend Policy." The shares of Common Stock are
not redeemable or convertible, and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of shares
of Common Stock are entitled to receive on pro rata basis the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the preferential rights of any
holders of Preferred Stock.

The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."

PREFERRED STOCK

The Board of Directors has the authority, without further action of the
shareholders of the Company, to issue up to an aggregate of 5,000,000 shares
of Preferred Stock in one or more series and to fix or determine the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series.

The Board of Directors, without shareholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the
voting power of holders of Common Stock. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may have the effect of
discouraging, delaying, or preventing a change in control of the Company.

CERTAIN PROVISIONS OF THE BYLAWS

The Bylaws provide that special meetings of shareholders may be called
only by the Chairman of the Board of Directors, the President, or the Board
of Directors of the Company and that no business shall

53
<PAGE>
be transacted and no corporate action may be taken at a special meeting of
shareholders other than as stated in the notice of the meeting. The Bylaws
also provide that the only business that may be brought before an annual
meeting of shareholders is limited to matters (i) brought before the meeting
at the direction of the Board of Directors or (ii) specified in a written
notice given by or on behalf of a shareholder of the Company in accordance
with certain procedural requirements specified in the Bylaws. These
provisions could have the effect of delaying shareholder actions that are
favored by the holders of a majority of the outstanding voting securities of
the Company. These provisions may also discourage another person or entity
from making a tender offer for the Company's Common Stock because such person
or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be unable to call a special meeting of
shareholders to take action as a shareholder (such as electing new directors
or approving a merger).

SECTION 203 OF DELAWARE LAW

Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of the Delaware General Corporation
Law. In general, such provisions prohibit a publicly-held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of
the transaction in which the person became an "interested stockholder,"
unless (i) the transaction is approved by the board of directors prior to the
date the interested stockholder obtained such status, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such
date the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned
by the "interested stockholder." A "business combination" is defined to
include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or, within three years,
did own) 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts
with respect to the Company and, accordingly, may discourage attempts to
acquire the Company.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Restated Certificate provides that, to the fullest extent permitted by
Delaware law, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary
duties as a director. The effect of this provision is to eliminate the rights
of the Company and its stockholders (through stockholder derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting from
grossly negligent conduct). This provision does not, however, exonerate the
directors from liability under federal securities laws or for (i) breach of a
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) certain willful or negligent acts in
connection with the payment of dividends or the repurchase or redemption of
securities, or (iv) any transaction from which the director derived an
improper personal benefit. The Bylaws provide for indemnification of the
officers and directors of the Company to the fullest extent permitted by
applicable law.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock will be BankBoston,
N.A.

54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock.

Upon the closing of the Offering, there will be 16,957,832 shares of
Common Stock outstanding. All of the shares of Common Stock sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless held by an "affiliate" of the Company, as
that term is defined in Rule 144 under the Securities Act, which shares will
be subject to the resale limitations of Rule 144. All of the outstanding
shares have not been registered under the Securities Act and may not be sold
unless they are registered or unless an exemption from registration, such as
the exemption provided by Rule 144, is available.

In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities
acquired from the Company or an affiliate of the Company in a non-public
transaction) for at least one year, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the outstanding Common Stock or the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is
not an affiliate of the Company for at least 90 days prior to a proposed
transaction and who has beneficially owned "restricted securities" for at
least two years is entitled to sell such shares under Rule 144 without regard
to the volume limitations described above, and beginning 180 days after
completion of the Offering, up to 52,454 shares of Common Stock will be
eligible for sale without regard to such volume limitations.

Certain of the Company's stockholders, officers and directors have agreed
that they will not, without the prior written consent of DLJ on behalf of the
Underwriters, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date hereof. An aggregate of 8,544,920
outstanding shares of Common Stock are subject to such agreement.

REGISTRATION RIGHTS

Pursuant to the Stockholders and Registration Rights Agreement, the
Company has granted the Initial Shareholders the right to cause the Company
to register shares of Common Stock (the "registrable securities") under the
Securities Act. Upon consummation of the Offering, 9,395,278 outstanding
shares of Common Stock will constitute registrable securities and therefore
will be eligible for registration pursuant to the Stockholders and
Registration Rights Agreement. Under the terms of the Stockholders and
Registration Rights Agreement, at any time after the one year anniversary
date of the Offering, (i) the holders of at least a majority of the
registrable securities held by the DLJ Entities can require the Company,
subject to certain limitations, to file a registration statement under the
Securities Act covering all or part of the registrable securities held by the
DLJ Entities and (ii) the remaining Initial Shareholders can require the
Company, subject to certain limitations, to file a registration statement
covering all or part of the registrable securities held by such Initial
Shareholders (each, a "demand registration"). The Company is obligated to pay
all registration expenses (other than underwriting discounts and commissions
and subject to certain limitations) incurred in connection with the demand
registrations. In addition, the Stockholders and Registration Rights
Agreement provides the Initial Shareholders with "piggyback" registration
rights, subject to certain limitations, whenever the Company files a
registration statement on a registration form that can be used to register
the securities held by such Initial Shareholders.

55
<PAGE>
UNDERWRITING

Subject to the terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters"), for whom DLJ, Goldman, Sachs & Co. and Smith Barney Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders an aggregate of
7,277,718 shares of Common Stock. The number of shares of Common Stock that
each Underwriter has agreed to purchase is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation 1,915,377
Goldman, Sachs & Co. ................................ 1,915,376
Smith Barney Inc. ................................... 1,915,376
ABN AMRO Incorporated ............................... 65,174
BancAmerica Robertson Stephens ...................... 65,174
Bear, Stearns & Co. Inc. ............................ 65,174
BT Alex.Brown Incorporated .......................... 65,174
CIBC Oppenheimer Corp. .............................. 65,174
A.G. Edwards & Sons, Inc. ........................... 65,174
Furman Selz LLC ..................................... 65,174
Lehman Brothers Inc. ................................ 65,174
Merrill Lynch, Pierce, Fenner & Smith Incorporated . 65,174
Morgan Stanley & Co. Incorporated ................... 65,174
Arnhold and S. Bleichroeder, Inc. ................... 32,587
Robert W. Baird & Co. Incorporated .................. 32,587
William Blair & Company, L.L.C. ..................... 32,587
Balckford Securities Corporation .................... 32,587
Chatsworth Securities, Llc .......................... 32,587
EVEREN Securities, Inc. ............................. 32,587
Fahnestock & Co., Inc. .............................. 32,587
Gruntal & Co., L.L.C. ............................... 32,587
Janney Montgomery Scott Inc. ........................ 32,587
Johnston, Lemon & Co. Incorporated .................. 32,587
EDWARD D. JONES & CO., L.P. ......................... 32,587
C.L. King & Associates, Inc. ........................ 32,587
Ladenburg Thalmann & Co. Inc. ....................... 32,587
Laidlaw Global Securities, Inc. ..................... 32,587
Legg Mason Wood Walker, Incorporated ................ 32,587
McDonald & Company Securities, Inc. ................. 32,587
Needham & Company, Inc. ............................. 32,587
Ormes Capital Markets, Inc. ......................... 32,587
Parker/Hunter Incorporated .......................... 32,587
Pennsylvania Merchant Group Ltd ..................... 32,587
Ragen Mackenzie Incorporated ........................ 32,587
Raymond James & Associates, Inc. .................... 32,587
Redwine & Company Inc. .............................. 32,587
The Robinson-Humphrey Company, LLC .................. 32,587
Sanders Morris Mundy Inc. ........................... 32,587
Sands Brothers & Co., Ltd. .......................... 32,587
Scott & Stringfellow, Inc. .......................... 32,587

-----------
Total .............................................. 7,277,718
===========
</TABLE>

56
<PAGE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by
counsel and to certain other conditions. If any of the shares of Common Stock
are purchased by the Underwriters pursuant to the Underwriting Agreement, all
such shares (other than shares covered by the over-allotment option described
below) must be purchased.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose initially to offer the shares of Common Stock
to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers (who may include the
Underwriters) at such price less a concession not in excess of $0.69 per
share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per share of Common Stock on sales
to any other Underwriter or certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.

The DLJMBPII Entities have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 1,091,658 additional shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus, net of
underwriting discounts and commissions. Such option may be exercised at any
time until 30 days after the date of this Prospectus for the purpose of
covering over-allotments, if any. To the extent that the Representatives
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of option shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.

The Company will not receive any proceeds from the sale of the Common
Stock by the Selling Stockholders, including the DLJMBPII Entities.

At the Company's request, the Underwriters have reserved up to 5% of the
shares offered hereby for sale at the initial public offering price to
certain of the Company's employees, members of their immediate families and
other individuals who are business associates of the Company. The number of
shares of Common Stock available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.

The Company and certain of its shareholders, officers, directors and
employees have agreed, subject to certain exceptions, not to directly or
indirectly sell, offer to sell, grant any option for the sale of or otherwise
dispose of (or transfer any portion of the economic consequences associated
with the ownership of) any shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock, or demand or exercise
any registration rights with respect to such securities, in each case,
without the prior written consent of DLJ, on behalf of the Underwriters, for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale."

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price, in addition to prevailing
market conditions, were price-earnings ratios of publicly traded companies
that the Representatives believed to be comparable to the Company, certain
financial information of the Company, the history of, and the prospects for,
the Company and the industry in which it competes and assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.

57
<PAGE>
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."

The Underwriters do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.

In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
in the Offering, if the syndicate repurchases previously distributed Common
Stock in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may discontinue these activities
at any time.

Under Rule 2720 of the Conduct Rules of the NASD ("Rule 2720"), the
Company is considered an affiliate of DLJ. This Offering is being conducted
in accordance with Rule 2720, which provides that, among other things, when
an NASD member participates in the underwriting of an affiliate's equity
securities, the public offering price per share can be no lower than that
recommended by a "qualified independent underwriter" meeting certain
standards ("QIU"). In accordance with this requirement, Goldman, Sachs & Co.
has assumed the responsibilities of acting as QIU and has recommended a
public offering price for the Common Stock in compliance with the
requirements of Rule 2720. In connection with the Offering, Goldman, Sachs &
Co. performed due diligence investigations and reviewed and participated in
the preparation of this Prospectus and the Registration Statement of which
this Prospectus forms a part. As compensation for the services of Goldman,
Sachs & Co. as QIU, the Company has agreed to pay $10,000 to Goldman, Sachs &
Co.

DLJ is also acting as the underwriter in connection with the Notes
Offering and will receive customary discounts and commissions in connection
therewith. DLJ Capital Funding, Inc. is one of the lenders under the Existing
Credit Agreement. The proceeds of the Offering, together with the proceeds
from the New Credit Agreement, are being used to effect the Refinancing Plan,
including the repayment of the Existing Credit Agreement. DLJ Capital
Funding, Inc., an affiliate of DLJ, is expected to act as syndication agent
and be a lender under the New Credit Agreement. From time to time, DLJ
provides investment banking services to the Company, for which it receives
customary compensation. See "Certain Relationships and Related Transactions."

LEGAL MATTERS

The validity of the Common Stock being offered by the Company and by
certain Selling Stockholders and certain other legal matters relating to the
Offering will be passed upon for the Company by Latham & Watkins, New York,
New York. Latham & Watkins also represented DLJMBPII in connection with the
Recapitalization. Certain legal matters on behalf of certain Selling
Stockholders will be passed upon by Kirkland & Ellis, New York, New York.
Certain partners of Kirkland & Ellis own less than one percent of the Common
Stock. Certain legal matters relating to the Offering will be passed upon for
the Underwriters by Weil, Gotshal & Manges LLP, New York, New York.

EXPERTS

The consolidated financial statements of the Company as of December 30,
1995 and December 28, 1996 and for each of the 52 week periods ended December
31, 1994, December 30, 1995 and December 28, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

58
<PAGE>
ADDITIONAL INFORMATION

The Company has filed the Registration Statement on Form S-1 with respect
to the Common Stock being offered hereby with the Commission under the
Securities Act. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are omitted in accordance with the rules
and regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; at its Chicago Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and at its New
York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained from the public reference
section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a website on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information with respect to companies that file documents electronically with
the Commission. For further information pertaining to the Company and the
Common Stock being offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof.

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
INDEX TO FINANCIAL STATEMENTS
DUANE READE HOLDING CORP. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PAGE

--------

<S> <C>
Report of Independent Accountants ....................................................... F-2

Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996 .............. F-3

Consolidated Statements of Operations for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-4

Consolidated Statements of Stockholders' Equity (Deficiency) for each of the 52 weeks
ended December 31, 1994, December 30, 1995 and December 28, 1996........................ F-5

Consolidated Statements of Cash Flows for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-6

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

Consolidated Balance Sheet as of September 27, 1997 (Unaudited).......................... F-16

Consolidated Statements of Operations for each of the 39 weeks ended September 28, 1996
and September 27, 1997 (Unaudited)...................................................... F-17

Consolidated Statement of Stockholders' Equity (Deficiency) for the 39 weeks ended
September 27, 1997 (Unaudited).......................................................... F-18

Consolidated Statements of Cash Flows for the 39 weeks ended September 28, 1996 and
September 27, 1997 (Unaudited).......................................................... F-19

Notes to Consolidated Financial Statements (Unaudited) .................................. F-20
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Duane Reade Holding Corp.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows present fairly, in all material respects, the financial position
of Duane Reade Holding Corp. ("Holdings") and its subsidiaries at December
30, 1995 and December 28, 1996 and the results of their operations and their
cash flows for each of the 52 week periods ended December 31, 1994, December
30, 1995 and December 28, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Holdings' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
New York, New York
February 18, 1997, except as to the recapitalization and reverse stock split
described in Note 12 and net loss per common share described in Note 1 which
are as of January 14, 1998

F-2
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 2,133 $ 216
Government securities .............................................. 44 --
Receivables ........................................................ 5,740 7,171
Inventories ........................................................ 43,147 47,914
Prepaid expenses ................................................... 1,355 1,165
-------------- --------------
TOTAL CURRENT ASSETS ............................................... 52,419 56,466
Property and equipment, net ......................................... 24,832 23,065
Goodwill, net of accumulated amortization of $11,306 and $14,785 ... 127,848 124,369
Covenants not to compete, net of accumulated amortization of $48,660
and $60,000 ........................................................ 11,340 --
Other assets ........................................................ 19,421 18,576
-------------- --------------
TOTAL ASSETS ...................................................... $235,860 $222,476
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable.................................................... $ 20,427 $ 20,015
Accrued interest ................................................... 3,797 3,873
Other accrued expenses ............................................. 6,102 8,157
Current portion of long-term debt .................................. 5,625 12,000
Current portion of capital lease obligations ....................... 2,769 2,504
-------------- --------------
TOTAL CURRENT LIABILITIES ......................................... 38,720 46,549
Senior debt, less current portion ................................... 163,475 149,975
Subordinated zero coupon debt, net of unamortized discount of
$55,148 and $43,899 ................................................ 68,232 79,481
Capital lease obligations, less current portion ..................... 4,003 1,697
Other non-current liabilities ....................................... 2,626 4,170
-------------- --------------
TOTAL LIABILITIES ................................................. 277,056 281,872
-------------- --------------
Commitments and Contingencies (Note 8)
Stockholders' deficiency
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,184,565 and 10,062,497 shares ...................... 102 101
Paid-in-capital .................................................... 24,909 24,564
Accumulated deficit ................................................ (66,207) (84,061)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIENCY .................................... (41,196) (59,396)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY .................... $235,860 $222,476
============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales .................................... $281,103 $336,922 $381,466
Cost of sales ................................ 209,678 259,827 288,505
-------------- -------------- --------------
Gross profit ................................. 71,425 77,095 92,961
-------------- -------------- --------------
Selling, general and administrative expenses 39,741 50,326 59,048
Amortization ................................. 18,238 11,579 16,217
Depreciation ................................. 1,184 1,929 3,015
Store pre-opening expenses ................... 1,220 1,095 139
-------------- -------------- --------------
60,383 64,929 78,419
-------------- -------------- --------------
Operating income ............................. 11,042 12,166 14,542
Interest expense, net ........................ 27,480 30,224 32,396
-------------- -------------- --------------
Loss before income taxes ..................... (16,438) (18,058) (17,854)
Income taxes ................................. -- -- --
-------------- -------------- --------------
NET LOSS..................................... $(16,438) $(18,058) $(17,854)
============== ============== ==============
NET LOSS PER COMMON SHARE.................... $ (1.55) $ (1.70) $ (1.69)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 10,633 10,650 10,575
============== ============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ -------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance , January 1, 1994 . 10,154,041 $102 $24,852 $(31,711) $ (6,757)
Sale of common stock to
executives ................ 10,173 -- 25 -- 25
Net loss ................... -- -- -- (16,438) (16,438)
------------ -------- --------- ------------- ----------
Balance, December 31, 1994 10,164,214 102 24,877 (48,149) (23,170)
Sale of common stock to
executives ................ 40,692 -- 100 -- 100
Repurchase of common stock (20,341) -- (68) -- (68)
Net loss ................... -- -- -- (18,058) (18,058)
------------ -------- --------- ------------- ----------
Balance, December 30, 1995 10,184,565 102 24,909 (66,207) (41,196)
Repurchase of common stock (122,068) (1) (345) -- (346)
Net loss ................... -- -- -- (17,854) (17,854)
------------ -------- --------- ------------- ----------
Balance, December 28, 1996 10,062,497 $101 $24,564 $(84,061) $(59,396)
============ ======== ========= ============= ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(16,438) $(18,058) $(17,854)
Adjustments to reconcile net loss to net
cash provided by operating activities .....
Depreciation and amortization of property
and equipment ............................ 1,184 1,929 3,015
Amortization of goodwill and other
intangibles .............................. 20,646 13,940 18,897
Accretion of principal of zero coupon debt 8,282 9,628 11,249
Other ..................................... 724 1,769 1,526
Changes in operating assets and liabilities
Receivables ............................... (225) (1,962) (1,431)
Inventories ............................... (4,838) (6,745) (4,767)
Accounts payable .......................... 5,716 7,382 (412)
Prepaid and accrued expenses .............. (110) (658) 2,321
Increase in other assets (liabilities)--net 356 (491) 51
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . 15,297 6,734 12,595
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ........................ (9,947) (6,868) (1,247)
Systems development costs ................... (2,425) (6,268) (2,566)
Sale of government securities--net ......... 1,134 382 44
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES ..... (11,238) (12,754) (3,769)
-------------- -------------- --------------
Cash flows from financing activities:
Financing costs ............................. -- (885) (952)
Repayments of term loan ..................... (8,000) (15,000) (5,625)
Proceeds from issuance of long-term debt ... -- 15,000 --
Net (repayments) borrowings--Revolving
credit ..................................... -- 4,000 (1,500)
Proceeds from issuance of stock ............. -- 25 --
Repurchase of stock ......................... -- (68) (95)
Capital lease financing ..................... 5,492 4,329 274
Repayments of capital lease obligations .... (432) (2,617) (2,845)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES ................................ (2,940) 4,784 (10,743)
-------------- -------------- --------------
Net increase (decrease) in cash ............. 1,119 (1,236) (1,917)
Cash at beginning of year ................... 2,250 3,369 2,133
-------------- -------------- --------------
Cash at end of year.......................... $ 3,369 $ 2,133 $ 216
============== ============== ==============
Supplementary disclosures of cash flow
information ................................
Cash paid for interest...................... $ 16,969 $ 18,298 $ 18,391
============== ============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Duane Reade Holding Corp. ("Holdings") was formed on June 16, 1992 for the
purpose of acquiring Daboco, Inc. ("Daboco"). The acquisition took place on
September 25, 1992. Daboco and Duane Reade Inc. ("DR Inc."), a subsidiary of
Daboco, are general partners in Duane Reade, which operates a chain of retail
drug stores (60 at December 28, 1996) in the New York City area.

Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Holdings, Daboco, DR Inc. and Duane Reade (collectively, the
"Company"). All intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform with the
current presentation.

REPORTING YEAR: The fiscal year for the Company is the 52/53 week
reporting period ending on the last Saturday in December.

RECEIVABLES: Receivables consist primarily of amounts due from various
insurance companies and governmental agencies under third party payment plans
for prescription sales and amounts due from vendors, a majority of which
relate to promotional programs. The Company has not provided an allowance for
doubtful accounts as its historical write-offs have been immaterial. The
Company reflects promotional allowances from vendors as income when such
allowances are earned.

INVENTORIES AND COST OF SALES: Substantially all inventories are stated at
the lower of cost, determined pursuant to the last-in, first-out retail
dollar value method (LIFO), or market. When appropriate, provision is made
for obsolete, slow-moving or damaged inventory. If current cost had been
used, inventories at December 30, 1995 and December 28, 1996 would not be
materially different from the amounts reflected on the accompanying balance
sheets. Cost of sales includes distribution and occupancy costs.

PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method
over estimated useful lives of assets as follows:

<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements ............30 years
Furniture, fixtures and equipment .... 5-10 years
Leasehold improvements ................ Life of lease or, if shorter, asset
Property under capital leases.......... 7 years

</TABLE>

OTHER ASSETS: Deferred financing costs arose in connection with borrowings
under the Term Loan and with the issuance of the Senior Notes and the Zero
Coupon Notes and are amortized using the straight-line method, the results of
which are not materially different from the interest method, over the term of
the respective debt issue.

Systems development costs, consisting principally of costs relating to the
new management information systems, are amortized using the straight-line
method commencing in 1996 over a period of seven years.

F-7
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

in which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off and has been included in the
accompanying consolidated statement of operations as amortization expense.

Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based principally on its expected future undiscounted operating cash
flows. Should such evaluation result in the Company concluding that the
carrying amount of goodwill has been impaired, an appropriate write-down
would be made.

PRE-OPENING EXPENSES: Store pre-opening costs, other than capital
expenditures, are expensed when incurred.

INCOME TAXES: Income taxes are accounted for under the liability method
prescribed by Statement of Financial Accounting Standards No. 109.

RECENTLY ISSUED ACCOUNTING STANDARDS: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share ("FAS 128") which requires the presentation of
basic and diluted earnings per share in a company's financial statements for
reporting periods ending subsequent to December 15, 1997. Early adoption of
FAS 128 is not permitted. The adoption of FAS 128 is not expected to have
material impact on the Company's consolidated financial statements.

ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues, costs
and expenses during the reporting period. Actual results could differ from
those estimates.

NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period (10,632,936 for the 52
weeks ended December 31, 1994, 10,649,895 for the 52 weeks ended December 30,
1995 and 10,575,299 for the 52 weeks ended December 28, 1996). Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, options
granted with exercise prices below the estimated initial public offering
price during the 12 month period preceding the date of the initial filing of
the Registration Statement have been included in the calculation of net loss
per common share, using the treasury stock method based on the estimated
initial public offering price of $15.00 per share, as if the options were
outstanding for all periods presented.

2. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Land............................................ $ 489 $ 489
Buildings and building improvements ............ 4,514 4,523
Furniture, fixtures and equipment .............. 6,261 6,881
Leasehold improvements ......................... 12,684 13,134
Property under capital leases .................. 4,894 5,063
-------------- --------------
28,842 30,090
Less--Accumulated depreciation and amortization 4,010 7,025
-------------- --------------
$24,832 $23,065
============== ==============
</TABLE>

F-8
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. OTHER ASSETS

Other assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Deferred financing costs (net of accumulated amortization of $7,737
and $10,417)....................................................... $ 9,539 $ 7,811
Systems and integration costs (net of accumulated amortization of
$0 and $1,461) .................................................... 8,693 9,798
Other .............................................................. 1,189 967
-------------- --------------
$19,421 $18,576
============== ==============

</TABLE>

4. DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Senior debt
Term loan facility (A)...................... $ 75,100 $ 69,475
Notes payable bank--revolving credit (A) .. 4,000 2,500
12% Senior Notes due September 15, 2002 (B) 90,000 90,000
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due
September 15, 2004 (C) .................... 68,232 79,481
-------------- --------------
237,332 241,456
Less--Current portion ...................... 5,625 12,000
-------------- --------------
$231,707 $229,456
============== ==============

</TABLE>

(A) Outstanding balances under a Credit Agreement dated as of September 24,
1992, as amended, with a syndicate of lending institutions bear interest at
floating rates, which at December 28, 1996 averaged 9.0%. In addition to the
term loans, the Credit Agreement provides for a revolving credit facility of
$10.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of December 28, 1996, the borrowings outstanding
under the revolving credit facility were $2.5 million (classified as a
noncurrent liability) and $0.2 million in letters of credit had been issued,
leaving $7.3 million available for borrowing.

On March 23, 1995, the Credit Agreement, which provided an A Term loan and
a B Term loan, was amended providing the Company with a new Term loan (the "C
Term Loan") of $15.0 million and increasing the Company's existing capital
expenditure limits for its store expansion program.

The proceeds of such borrowing were used to prepay all amounts due under
the A Term Loan due during 1995 ($13.0 million) and a portion ($2.0 million)
of the payment due under the A Term Loan on March 31, 1996.

In 1996, the Credit Agreement was further amended providing for the
postponement of $2.5 million of principal payments due during 1997 until 1998
and $10.0 million of principal payments due during 1998 until 1999.

F-9
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 28, 1996, the aggregate principal amount of the term loan
matures during the fiscal year as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
1997 ... $12,000
1998 ... 17,625
1999 ... 25,150
2000 ... 14,700
2001 ... --
---------
$69,475
=========

</TABLE>

Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 52
weeks ended December 31, 1994, December 30, 1995 and December 28, 1996, there
were no voluntary or mandatory prepayments.

Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. In 1996, the
Company obtained an Amendment revising certain covenant requirements and
limiting capital expenditures. At December 28, 1996, the Company is in
compliance with all of the covenants in the Credit Agreement.

(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002, at face value.
Interest is payable at 12% semiannually. The Senior Notes are guaranteed by
Daboco and DR Inc. All of Daboco's assets are pledged to secure indebtedness
under the Credit Agreement discussed in (A) above. As a result, such
indebtedness will have claim on those assets that is prior to the claim of
holders of the Senior Notes. To the extent that the amount of senior
indebtedness exceeds the value of the collateral securing such indebtedness,
the Senior Notes will rank pari passu with the Term Loans.

Duane Reade is required to make a sinking fund payment on September 15,
2001 sufficient to retire 50% of the aggregate principal amount of Senior
Notes originally issued. The Senior Notes are subject to redemption at the
option of the issuer at 104.5% of par, plus accrued interest, at the end of
1997, declining to par, plus accrued interest, at the end of 2000. In the
event of a change in control, Duane Reade shall be obligated to make an offer
to purchase all outstanding Senior Notes at a repurchase price of 101% of the
principal amount.

(C) On September 25, 1992, Holdings issued $123,380,000 aggregate
principal amount of 15% Senior Subordinated Zero Coupon Notes due September
15, 2004 (the "Zero Coupon Notes"), net of an $81,909,000 discount. The
discount accretes through the Final Accretion Date of September 15, 1999.
Thereafter, cash interest is payable at 15% semi-annually through maturity.
Interest expense is determined using the effective interest method, which
applies a constant yield to carrying value over the life of the Zero Coupon
Notes.

The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.

F-10
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

to make an offer to purchase all outstanding Zero Coupon Notes at a
repurchase price of 101% of Accreted Value (as defined in the Indenture) or
principal amount, as applicable. The Accreted Value of the Zero Coupon Notes
was $83,443,000 at December 28, 1996.

Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000 (Note 10).

The Indentures governing the Zero Coupon Notes and the Senior Notes
include certain restrictive covenants. Subject to certain exceptions, the
Indentures restrict transactions with affiliates, the incurrence of
additional indebtedness, the payment of dividends, the creation of liens,
certain asset sales, mergers and consolidations and certain other payments.

The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
December 28, 1996.

The Zero Coupon Notes and the Senior Notes were issued pursuant to
Registration Rights Agreements under which Holdings and Duane Reade
consummated registered exchange offers pursuant to which Holdings and Duane
Reade exchanged the Zero Coupon Notes and the Senior Notes, respectively, for
identical notes which have been registered under the Securities Act of 1933,
as amended. Since 1994, the Company has not been required to follow the
periodic reporting requirements of the SEC.

5. CAPITAL LEASE OBLIGATIONS

During 1994, the Company commenced installation of new management
information systems. Capital requirements for hardware, software and
integration costs for the new systems were provided principally by capital
lease financing.

As of December 28, 1996, the present value of capital lease obligations
was $4.2 million (of which $2.5 million was payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.

F-11
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES

Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
December 30, 1995 and December 28, 1996 using a 44.7% combined federal, state
and local tax rate in each year and are comprised of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Inventories...................... $ (3,238) $ (3,501)
-------------- --------------
Gross deferred tax liabilities . (3,238) (3,501)
-------------- --------------
Property and equipment .......... 719 955
Covenants not to compete ........ 4,318 1,851
Targeted jobs credit ............ 268 268
Zero Coupon debt discount ...... 9,885 14,041
Other ........................... 1,492 2,335
Net operating loss carryforward 49,217 50,072
-------------- --------------
Gross deferred tax assets ...... 65,899 69,522
-------------- --------------
Net deferred tax assets ......... 62,661 66,021
Valuation allowance ............. (62,661) (66,021)
-------------- --------------
$ -- $ --
============== ==============

</TABLE>

The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $38.5
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $112.0 million which may be available to
offset future taxable income of the Company through 2011. Due to the nature
of the Retirement Payments, future reductions in that portion of the
valuation allowance related to the Retirement Payments will be credited to
goodwill. Further, certain income tax law provisions may limit the use of the
available net operating loss carryforwards in the event of a significant
change in ownership interest.

The provision for income taxes for the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996 differs from the amounts of income
tax determined by applying the applicable U.S. statutory federal income tax
rate to pretax loss as a result of the following (dollars in thousands):

<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax accounting loss ....... $(16,438) 100.0% $(18,058) 100.0% $(17,854) 100.0%
=========== ======== =========== ======== =========== ========
Statutory rate ............... (5,753) (35.0) (6,320) (35.0) (6,249) (35.0)
State and local taxes, net of
federal tax ................. (1,105) (6.7) (1,233) (6.8) (1,201) (6.7)
Goodwill amortization ........ 1,218 7.4 1,218 6.7 1,218 6.8
Net operating losses not
utilized .................... 5,213 31.7 5,828 32.3 5,534 31.0
Nondeductible interest
expense ..................... 504 3.1 585 3.2 684 3.8
Other ........................ (77) (0.5) (78) (0.4) 14 0.1
----------- -------- ----------- -------- ----------- --------
Effective tax rate ........... $ -- --% $ -- --% $ -- --%
=========== ======== =========== ======== =========== ========

</TABLE>

F-12
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. STORE PRE-OPENING EXPENSES

Duane Reade opened eleven new store locations during the 52 weeks ended
December 31, 1994, eight new store locations during the 52 weeks ended
December 30, 1995 and one new store location during the 52 weeks ended
December 28, 1996.

8. COMMITMENTS AND CONTINGENCIES

LEASES

Duane Reade leases most store facilities under operating lease agreements
expiring on various dates through the year 2014. In addition to minimum
rentals, certain leases provide for annual increases based upon real estate
tax increases, maintenance cost increases and inflation. Rent expense for the
52 weeks ended December 31, 1994, December 30, 1995 and December 28, 1996 was
$17,373,000, $22,703,000 and $24,420,000, respectively.

Minimum annual rentals at December 28, 1996 (including obligations under a
new store lease entered into but not opened as of December 28, 1996) are as
follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
1997................... $ 23,213
1998 .................. 22,879
1999 .................. 22,940
2000 .................. 22,070
2001 .................. 21,739
Remaining lease terms 126,837
----------
Total ................. $239,678
==========

</TABLE>

LITIGATION

The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

MANAGEMENT AGREEMENTS

The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years.
Pursuant to the terms of such employment and related agreements, the Company
and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established and (ii) executives purchased
shares of Holdings' Class P common stock at a price of $162.00 per share and
shares of Holdings' common stock at a price of $2.00 per share, each
representing original cost. In the event of employment termination, all of
the stock may be repurchased by Holdings. As a result of the recapitalization
and the reverse stock split (Note 12), all outstanding shares were converted
into common stock. As of December 28, 1996, an aggregate 488,283 shares of
common stock are held by employees and former employees.

In addition, the Company has established a Supplemental Executive
Retirement Plan ("SERP") which presently covers only its Chairman. Such SERP
provides for vesting over a twenty year period. However, if the Chairman's
employment is terminated without cause, as defined, or if the Chairman
resigns with cause, as defined, such vesting becomes immediate, in which
event the Company would be liable to the Chairman (in addition to amounts
accrued in the financial statements) in the amount of approximately $650,000.

F-13
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. EMPLOYEE BENEFIT PLANS

On October 12, 1992, the Board of Directors of Holdings adopted the 1992
Stock Option Plan of Duane Reade Holding Corp. (the "Plan"). Under the Plan,
a committee designated by the Board of Directors of Holdings to administer
the Plan (the "Committee") may grant, to executive and other key employees of
the Company, nonqualified stock options to purchase up to an aggregate of
510,757 (adjusted for the recapitalization and the reverse stock split--see
Note 12) shares of common stock of Holdings at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.

As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 52 weeks ended December 30, 1995 and
December 28, 1996 would have been less than $100,000.

At December 28, 1996, there were outstanding nonqualified stock options to
purchase up to an aggregate of 820,403 (adjusted for the recapitalization and
the reverse stock split--see Note 12) shares of common stock (including
options granted outside the Plan). Options outstanding at each price level
vest over five years at 20% each year that the executive is employed. At
December 28, 1996, there were 102,207 vested share options.

Changes in options outstanding during 1995 and 1996 are summarized as
follows (adjusted for recapitalization--see Note 12):

<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
------------------------------------------------- TOTAL
$.58 $7.34 $29.37 $40.86 OPTIONS
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 31,
1994.................................. 91,968 91,968 91,968 91,968 367,872
Options granted........................ 8,539 8,538 8,538 8,538 34,153
Options canceled....................... (60,397) (60,397) (60,397) (60,397) (241,588)
----------- ----------- ----------- ----------- -----------
Options outstanding, December 30,
1995.................................. 40,110 40,109 40,109 40,109 160,437
Options granted........................ 723,662 2,745 2,745 2,745 731,897
Options canceled....................... (13,728) (13,726) (13,726) (13,726) (54,906)
----------- ----------- ----------- ----------- -----------
Options outstanding, December 28,
1996.................................. 750,044 29,128 29,128 29,128 837,428
=========== =========== =========== =========== ===========
Weighted average remaining life on
outstanding options .................. 9.2 years 7.1 years 7.1 years 7.1 years 9.0 years

</TABLE>

The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non union employees, excluding in 1996 all key employees as
defined by IRC. Eligible participating employees may contribute up to 10% of
their pretax salaries, subject to certain IRC limitations. The 401(k) Plan,
as amended, provides for employer matching provisions at the discretion of
the Company (to a maximum of 1% of pretax salaries) and has a feature under
which the Company may contribute additional amounts for all eligible
employees. The Company's policy is to fund such costs under the 401(k) Plan
as accrued. For the 52 weeks ended December 31, 1994 and December 30, 1995,
employer contributions to the 401(k) Plan were $158,000 and $166,000,
respectively. There were no employer contributions for the 52 weeks ended
December 28, 1996.

Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, contributions to such plans were $3,899,000, $5,200,000
and $5,783,000, respectively.

F-14
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. STOCKHOLDERS' DEFICIENCY

In September 1992, pursuant to the terms of the Purchase Agreement
governing the Zero Coupon Notes (Note 4), purchasers of such notes received
15% of the fully diluted common stock of the Company for aggregate cash
consideration of $3,529,000.

Distributions made by the Company to the holders of its common stock,
which are restricted by the terms of the Indentures described in Note 4,
shall be made in the following order:

Class P voting and Class P-1 non-voting common stockholders are entitled
to the aggregate unpaid amount of approximately $19,210,000 accruing on
the outstanding shares at an annual rate of 15%, compounded quarterly.
Such holders are then entitled to the aggregate unreturned original cost
($162 per share) of the outstanding shares.

Common stockholders (together as a group, voting and Class A non-voting)
shall then receive an amount equal to the aggregate unreturned original
cost ($2 per share) of outstanding shares.

Final distribution of any remaining portion shall be made to all classes
of outstanding common stock.

In the event of a public offering of stock or a change of control, and
with a written request to the Company, each holder of Class A non-voting
common stock or Class P-1 non-voting common stock is entitled to convert its
stock, on a one-for-one basis, into voting common stock or Class P common
stock, respectively.

As a result of the recapitalization discussed in Note 12, all outstanding
classes of the Company's common stock were converted into a newly designated
class of common stock.

11. RELATED PARTY TRANSACTIONS

In 1992, the Company and its then principal stockholder entered into a
Professional Services Agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During each of the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, such fees aggregated approximately $1,000,000.

12. SUBSEQUENT EVENTS

During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by the
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.

Shares were converted as follows:

<TABLE>
<CAPTION>
APPROXIMATE
PRIOR CLASS CONVERSION RATE
- ------------------------------------ ---------------
<S> <C>
Common and Common Class A ........... 28/1
Common Class P and Common Class P-1 355/1
</TABLE>

Additionally, on January 14, 1998, the Company effected an 8.326 reverse
stock split of the Company's common stock.

All references to common stock amounts, shares and per share data included
in the consolidated financial statements and notes have been adjusted to give
retroactive effect to the above transactions.

F-15
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
---------------
<S> <C>
ASSETS
Current assets ..............................................................
Cash ....................................................................... $ 218
Receivables ................................................................ 9,084
Inventories ................................................................ 65,872
Prepaid expenses ........................................................... 1,371
---------------
TOTAL CURRENT ASSETS ..................................................... 76,545
Property and equipment, net ................................................. 24,918
Goodwill, net of accumulated amortization of $17,397 ........................ 121,757
Other assets, net ........................................................... 16,300
---------------
TOTAL ASSETS ............................................................. $239,520
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ........................................................... $ 30,710
Accrued interest ........................................................... 623
Other accrued expenses ..................................................... 13,193
Current portion of senior debt ............................................. 660
Current portion of capital lease obligations ............................... 1,510
---------------
TOTAL CURRENT LIABILITIES ................................................ 46,696
Senior debt, less current portion ........................................... 170,708
Subordinated zero coupon debt, net of unamortized discount of $34,277 ...... 89,094
Capital lease obligations, less current portion ............................. 677
Other non-current liabilities ............................................... 5,906
---------------
TOTAL LIABILITIES ........................................................ 313,081
---------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' Deficiency
Preferred stock, $0.01 par; authorized 5,000,000 shares; none issued or
outstanding................................................................ --
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,257,832 shares ............................................. 103
Paid-in-capital ............................................................ 24,562
Accumulated deficit ........................................................ (98,226)
---------------
TOTAL STOCKHOLDERS' DEFICIENCY ........................................... (73,561)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........................... $239,520
===============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-16
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Net Sales..................................... $281,093 $313,796
Cost of sales ................................ 215,797 236,413
--------------- ---------------
Gross profit ................................. 65,296 77,383
--------------- ---------------
Selling, general and administrative expenses 42,499 48,218
Amortization ................................. 8,514 3,826
Depreciation ................................. 2,295 2,584
Store pre-opening expenses ................... 139 600
Nonrecurring charges ......................... -- 10,887
--------------- ---------------
53,447 66,115
--------------- ---------------
Operating income ............................. 11,849 11,268
Interest expense, net ........................ 24,334 25,433
--------------- ---------------
Loss before income taxes ..................... (12,485) (14,165)
Income taxes ................................. -- --
--------------- ---------------
NET LOSS .................................. $(12,485) $(14,165)
=============== ===============
NET LOSS PER COMMON SHARE ................. $ (1.18) $ (1.34)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 10,589 10,600
=============== ===============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-17
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ------------ -------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1996 . -- -- 10,062,497 $101 $24,564 $(84,061) $(59,396)
Issuance of common stock ... -- -- 195,335 2 (2) -- --
Net loss .................... -- -- -- -- -- (14,165) (14,165)
-------- -------- ------------ -------- --------- ------------- -----------
Balance, September 27, 1997 -- -- 10,257,832 $103 $24,562 $(98,226) $(73,561)
======== ======== ============ ======== ========= ============= ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-18
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(12,485) $(14,165)
Adjustments to reconcile net loss to net cash provided by/(used
in) operating activities .........................................
Depreciation and amortization of property and equipment ........ 2,295 2,584
Amortization of goodwill and other intangibles .................. 10,505 5,803
Accretion of principal of zero coupon debt ...................... 8,437 9,622
Other............................................................ 1,156 1,182
Changes in operating assets and liabilities:
Receivables .................................................... (385) (1,913)
Inventories .................................................... (1,844) (17,958)
Accounts payable ............................................... 1,546 10,695
Interest payable ............................................... (2,620) (3,250)
Prepaid and accrued expenses and other ......................... 51 4,197
--------------- ---------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES ............ 6,656 (3,203)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of capital assets ............................. -- 1,075
Capital expenditures ............................................. (913) (4,931)
Systems development costs ........................................ (2,068) --
Sale of government securities .................................... 44 --
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES ........................... (2,937) (3,856)
--------------- ---------------
Cash flows from financing activities:
Deferred financing costs ......................................... (542) (309)
Repayments of senior debt ........................................ (4,625) (6,107)
Repayments of subordinated debt .................................. -- (9)
Proceeds from bank debt, revolving credit--net ................... 1,500 15,500
Capital lease financing .......................................... 274 --
Repayment of capital lease obligations ........................... (2,120) (2,014)
Repurchase of stock .............................................. (96) --
--------------- ---------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ............. (5,609) 7,061
--------------- ---------------
Net (decrease)/increase in cash .................................... (1,890) 2
Cash at beginning of period ........................................ 2,133 216
--------------- ---------------
Cash at end of period............................................... $ 243 $ 218
=============== ===============
Supplementary disclosure of cash flow information:
Cash paid for interest ........................................... $ 16,526 $ 16,541
=============== ===============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-19
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Holdings,
Daboco, DR Inc. and Duane Reade (collectively, the "Company"). All
intercompany transactions and balances have been eliminated.

The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The results of operations for any interim period should not
necessarily be considered indicative of the results of operations for a full
year.

The accompanying unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto for the 52 weeks ended December 28, 1996 included elsewhere in this
prospectus.

RECEIVABLES: Receivables consist primarily of amounts due from vendors, a
majority of which relate to promotional programs. Receivables also arise as a
result of third party payment plans from the sale of prescription drugs;
commencing in May 1997, substantially all such receivables are sold without
recourse to a funding entity. The discount on the sale of such third party
receivables amounted to approximately $381,000 during the 39 weeks ended
September 27, 1997 and is included in interest expense.

INTANGIBLE ASSETS: In September 1992, Holdings and Duane Reade entered
into agreements with certain former members of management of Duane Reade,
former shareholders of Daboco and shareholders of former partners of Duane
Reade (collectively, the "Group") precluding such persons from competing with
the operations of Duane Reade for a period of five years. The covenants not
to compete were recorded at acquisition cost and were being amortized over
the period of benefit using an accelerated method. During the first quarter
of 1997, Holdings and Duane Reade entered into agreements with the Group in
which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off during the fourth quarter of
1996 and charged to amortization expense.

Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based on its expected future undiscounted operating cash flows.
Should such evaluation result in the Company concluding that the carrying
amount of goodwill has been impaired, an appropriate write-down would be
made.

NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period: 10,588,862 and
10,599,722 for the 39 weeks ended September 28, 1996 and September 27, 1997,
respectively. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options granted with exercise prices below the estimated
initial public offering price during the 12 month period preceding the date
of the initial filing of the Registration Statement have been included in the
calculation of net loss per common share, using the treasury stock method
based on the estimated initial public offering price of $15.00 per share, as
if the options were outstanding for all periods presented. Outstanding share
amounts have been restated to give effect to the recapitalization described
in Note 10 and the reverse stock split described in Note 13.

F-20
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

2. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Land............................................ $ 312
Buildings and building improvements ............ 4,286
Furniture, fixtures and equipment .............. 9,468
Leasehold improvements ......................... 15,303
Property under capital leases .................. 5,102
------------------
34,471
Less--Accumulated depreciation and amortization (9,553)
------------------
$24,918
==================
</TABLE>

3. OTHER ASSETS

Other assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Deferred financing costs (net of accumulated amortization of
$11,585)..................................................... $ 6,144
Systems and integration costs (net of accumulated
amortization of $2,653) ..................................... 8,364
Other ........................................................ 1,792
------------------
$16,300
==================
</TABLE>

4. DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Senior debt
Term loan facility (A)....................... $ 65,475
Notes payable bank--revolving credit (A) ... 16,000
12% Senior Notes due September 15, 2002 (B) 89,893
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due September 15, 2004 (C) ................. 89,094
------------------
260,462
Less--Current portion ........................ 660
------------------
$259,802
==================
</TABLE>

(A) Outstanding balances under a Credit Agreement dated as of September
24, 1992, as amended, with a syndicate of lending institutions bear interest
at floating rates, which at September 27, 1997 averaged 10.5%. In addition to
the term loan, the Credit Agreement provides for a revolving credit facility
of $20.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of September 27, 1997, the borrowings outstanding
under the revolving credit facility were $16.0 million (classified as a
noncurrent liability) and $0.3 million in letters of credit had been issued.

F-21
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 39
weeks ended September 27, 1997, there were no voluntary or mandatory
prepayments.

Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. At September 27,
1997, the Company is in compliance with all of the covenants in the Credit
Agreement. See Note 13.

(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002 (the "Senior
Notes"), at face value. Interest is payable at 12% semiannually. The Senior
Notes are guaranteed by Daboco and DR Inc. All of Daboco's assets are pledged
to secure indebtedness under the Credit Agreement discussed in (A) above. As
a result, such indebtedness will have claim on those assets that is prior to
the claim of holders of the Senior Notes. To the extent that the amount of
senior indebtedness exceeds the value of the collateral securing such
indebtedness, the Senior Notes will rank pari passu with the Term Loans.

The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.

The notes are redeemable at the option of the issuer, in whole or in part,
at 107.5% of Accreted Value (as defined in the Zero Coupon Note Indenture),
plus accrued interest, at the end of 1997 declining to par, plus accrued
interest, at the end of 2002. In the event of a change in control, Holdings
shall be obligated to make an offer to purchase all outstanding Zero Coupon
Notes at a repurchase price of 101% of Accreted Value (as defined in the
Indenture) or principal amount, as applicable. A change of control did occur
in June 1997 (see Note 10). The Accreted Value of the Zero Coupon Notes was
$92,840,000 at September 27, 1997.

Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000.

F-22
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
September 27, 1997.

5. CAPITAL LEASE OBLIGATIONS

As of September 27, 1997, the present value of capital lease obligations
was $2.2 million (of which $1.5 million is payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.

6. INCOME TAXES

Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
September 27, 1997 using a 44.7% combined federal, state and local tax rate
and are comprised of (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Inventories .................... $ (3,382)
------------------
Gross deferred tax liabilities (3,382)
------------------
Property and equipment ......... 734
Deferred rent .................. 2,398
Targeted jobs credit ........... 284
Zero Coupon debt discount ..... 17,580
Net operating loss
carryforward................... 31,791
Other .......................... 352
------------------
Gross deferred tax assets ..... 53,139
------------------
Net deferred tax assets ........ 49,757
Valuation allowance............. (49,757)
------------------
$ --
==================
</TABLE>

The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $21
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $71 million which may be available to offset
future taxable income of the Company through 2012. Due to the nature of the
Retirement Payments, future reductions in that portion of the valuation
allowance related to the Retirement Payments will be credited to goodwill.
Further, due to the change in ownership arising as a result of the
recapitalization (see Note 10), certain income tax law provisions apply that
limit the ability of the Company to utilize the available net operating loss
carryforwards. It is estimated that the annual limitation will be $5.0
million.

F-23
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

The provision for income taxes for the 39 weeks ended September 28, 1996
and September 27, 1997 differs from the amounts of income tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax loss
as a result of the following (dollars in thousands):

<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 27, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Pretax accounting loss .................... $(12,485) 100% $(14,165) 100%
=========== ========= =========== =========
Statutory rate............................. $ (4,370) (35.0)% $ (4,958) (35.0)%
State and local taxes, net of federal tax (837) (6.7) (262) (1.8)
Goodwill amortization ..................... 914 7.3 914 6.5
Net operating losses not utilized ........ 3,870 31.0 1,207 8.5
Nondeductible recapitalization costs ..... -- -- 2,485 17.5
Nondeductible interest expense ............ 513 4.1 596 4.2
Other ..................................... (90) (0.7) 18 0.1
----------- --------- ----------- ---------
Effective tax rate......................... $ -- --% $ -- --%
=========== ========= =========== =========
</TABLE>

7. STORE PRE-OPENING EXPENSES

Duane Reade opened one new store location during the 39 weeks ended
September 28, 1996 and five new stores during the 39 weeks ended September
27, 1997.

8. COMMITMENTS AND CONTINGENCIES

LEASES

Duane Reade leases all of its store facilities under operating lease
agreements expiring on various dates through the year 2014. In addition to
minimum rentals, certain leases provide for annual increases based upon real
estate tax increases, maintenance cost increases and inflation. Rent expense
for the 39 weeks ended September 28, 1996 and September 27, 1997 was
$18,248,000 and $19,572,000, respectively.

Minimum annual rentals at September 27, 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
<S> <C>
13 weeks ending December 27, 1997 $ 6,074
1998............................... 27,518
1999 .............................. 27,069
2000 .............................. 26,274
2001 .............................. 25,959
2002 .............................. 25,404
Remaining lease terms ............. 135,497
---------
Total.............................. $273,795
=========
</TABLE>

LITIGATION

MANAGEMENT AGREEMENTS

Pursuant to the terms of various employment and related agreements, the
Company and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established

F-24
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

and (ii) executives purchased shares of Holdings' previously issued Class P
common stock at a price of $162.00 per share and shares of Holdings' common
stock at a price of $2.00 per share, each representing original cost. In the
event of employment termination, all of the stock may be repurchased by
Holdings. As a result of the recapitalization (see Note 10) and the reverse
stock split (see Note 13), all shares were converted into common stock. As of
September 27, 1997, an aggregate of 488,283 shares of common stock are held
by employees and former employees.

COMMITMENTS

At September 27, 1997, the Company had a commitment of approximately $4.0
million in connection with the acquisition and installation of a point of
sale scanning system. The Company intends to finance substantially all of
such acquisition and installation costs through capital lease financing.

The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years. In
addition, the Company has established a Supplemental Executive Retirement
Plan ("SERP") which presently covers only its Chairman. Such SERP provides
for vesting over a twenty year period. However, if the Chairman's employment
is terminated without cause, as defined, or if the Chairman resigns with
cause, as defined, such vesting becomes immediate, in which event the Company
would be liable to the Chairman (in addition to amounts accrued in the
financial statements) in the amount of approximately $680,000.

9. EMPLOYEE BENEFIT PLANS

On October 12, 1992, the Company adopted the 1992 Stock Option Plan of
Duane Reade Holding Corp. (the "Plan"). Under the Plan, a committee
designated by the Board of Directors to administer the Plan (the "Committee")
may grant, to executive and other key employees of the Company, nonqualified
stock options to purchase up to an aggregate of 510,757 (adjusted for the
recapitalization--See Note 10--and the reverse stock split--see Note 13)
shares of common stock of the Company at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.

At September 27, 1997, there were outstanding nonqualified stock options
to purchase up to an aggregate of 646,187 shares of common stock (including
options granted outside the Plan), all of which are vested.

Changes in options outstanding (including options granted outside the
Plan) during the 39 weeks ended September 27, 1997 are summarized as follows:

<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
----------------------------------------------------
TOTAL
$.58 $7.34-$12.77 $29.37 $40.86 OPTIONS
----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 28, 1996 . 750,044 29,128 29,128 29,128 837,428
Options granted......................... 851 68,953 851 851 71,506
Options canceled........................ (262,747) -- -- -- (262,747)
----------- -------------- ----------- ----------- -----------
Options outstanding, September 27,
1997................................... 488,148 98,081 29,979 29,979 646,187
=========== ============== =========== =========== ===========
Weighted average remaining life on
outstanding options.................... 8.4 years 8.5 years 6.4 years 6.4 years 8.3 years
</TABLE>

During the second quarter of 1997, the Company adopted an Equity
Participation Plan under which options for a total of 1,321,181 shares of
common stock of the Company may be granted to employees, consultants and
non-employee directors of the Company if the Company meets specific
performance targets. At September 27, 1997, options for 1,005,772 shares have
been granted to employees.

F-25
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Changes in options outstanding under the Equity Participation Plan during
the 39 weeks ended September 27, 1997 are summarized as follows:

<TABLE>
<CAPTION>
NUMBER
OF OPTIONS OPTION PRICE
------------ --------------
<S> <C> <C>
Options outstanding, December 28, 1996 -- --
Options granted ........................ 1,005,772 8.33
------------ --------------
Options outstanding, September 27,
1997................................... 1,005,772 $8.33
============ ==============
</TABLE>

As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 39 weeks ended September 28, 1996
and September 27, 1997 would have been less than $100,000 and $200,000,
respectively.

The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non-union employees other than key employees as defined by
IRC. Eligible participating employees may contribute up to 10% of their
pretax salaries, subject to certain IRC limitations. The 401(k) Plan, as
amended, provides for employer matching provisions at the discretion of the
Company (to a maximum of 1% of pretax salaries) and has a feature under which
the Company may contribute additional amounts for all eligible employees. The
Company's policy is to fund such costs under the 401(k) Plan as accrued.
There were no employer contributions for the 39 weeks ended September 28,
1996 and September 27, 1997.

Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 39 weeks ended September 28, 1996 and September 27, 1997,
contributions to such plans were $4,121,000 and $4,844,000, respectively.

10. RECAPITALIZATION

During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B Common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.

Shares were converted as follows:

In addition, because of the change in control, the Company was obligated
to and made offers to repurchase all outstanding Senior Notes and Zero Coupon
Notes at 101% of the principal amount or accreted value thereof,
respectively. Such offers expired on September 12, 1997. The Company
repurchased an aggregate of $107,000 principal amount of Senior Notes and
$9,000 of Zero Coupon Notes pursuant to the offers.

These financial statements do not reflect any adjustments as a result of
the June 1997 change in control.

F-26
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

11. NONRECURRING CHARGES

During the first quarter of 1997, the Company considered a public offering
of its common stock and took certain steps in connection with these plans.
Such plans were abandoned upon consummation of the transaction discussed in
Note 10.

Costs and expenses incurred in connection with the abandoned public
offering and the recapitalization and the exchange offers referred to in Note
10 aggregated approximately $10.9 million, including investment banking fees
of $7.7 million (including $3.5 million to an affiliate of the Investors and
$0.6 million to the Stockholders), legal and accounting fees of $1.6 million,
stand-by commitment fees relating to the exchange offers of $1.2 million to
an affiliate of the Investors, and other costs of $0.4 million. The Company
has treated these expenses as non-recurring because such expenses related to
financing activities in connection with the Recapitalization and related
events, which the Company does not expect to repeat.

12. RELATED PARTY TRANSACTIONS

In 1992, the Company and the then principal stockholder of the Company
(who has subsequently sold most of its shares--see Note 10) entered into a
professional services agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During the 39 weeks ended September 28, 1996, such fees aggregated
approximately $742,000. See Note 11.

In addition, the Investors paid an executive approximately $0.8 million
for advisory services rendered and a former executive approximately $1.6
million for the repurchase and cancellation of exercisable stock options. The
accompanying financial statements do not reflect such payments.

13. SUBSEQUENT EVENTS

On September 30, 1997, the Company entered into a credit agreement with an
affiliate of the Investors and various financial institutions providing for a
term loan of $65,475,000 and a revolving credit facility of $30,000,000.
Proceeds of the term loan were used to repay outstanding term loans
($63,475,000) and revolving loans ($2,000,000) pursuant to the Credit
Agreement discussed in Note 4.

The term loan is payable in quarterly installments of $165,000 from
December 1997 through March 2001, $31,000,000 in June 2001, quarterly
installments of $165,000 from September 2001 through March 2002 and
$31,000,000 in June 2002. Outstanding term and revolving loans at September
27, 1997 have been classified in accordance with such repayment terms.

Costs incurred in connection with the refinancing aggregated approximately
$2.7 million (including a funding fee of $2.4 million to an affiliate of the
Investors) and will be amortized over the term of the new credit agreement.
Unamortized deferred financing costs of approximately $1.8 million at
September 27, 1997 relating to the prior credit agreement will be charged to
earnings in the fourth quarter of 1997.

On January 14, 1998, the Company effected an 8.326 reverse stock split of
its common stock. All references to common stock amounts, shares and per
share data included herein have been adjusted to give retroactive effect to
such reverse stock split.

F-27
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<PAGE>

[DUANE READE INC. LOGO]

[PHOTO]

<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 9
Use of Proceeds ............................... 15
Dividend Policy ............................... 16
Capitalization ................................ 17
Dilution ...................................... 18
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 19
Selected Consolidated Historical Financial and
Operating Data ............................... 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Business ...................................... 33
Management .................................... 42
Certain Relationships and Related Transactions 48
Principal and Selling Stockholders ............ 50
Description of Certain Indebtedness ........... 52
Description of Capital Stock .................. 53
Shares Eligible for Future Sale ............... 55
Underwriting .................................. 56
Legal Matters ................................. 58
Experts ....................................... 58
Additional Information ........................ 59
Index to Financial Statements.................. F-1
</TABLE>

UNTIL MARCH 6, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

7,277,718 SHARES

[DUANE READE LOGO]

COMMON STOCK

PROSPECTUS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

GOLDMAN, SACHS & CO.

SALOMON SMITH BARNEY

FEBRUARY 9, 1998