Edgar Filing: DUANE READE INC

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As filed with the Securities and Exchange Commission on June 29, 2005

Registration No. 333-122206

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Post-Effective Amendment
No. 2 to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

DUANE READE INC. (Exact name of Registrant as specified in its charter)		DUANE READE (Exact name of Registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization)		NEW YORK (State or other jurisdiction of incorporation or organization)
04-3164702 (IRS Employer Identification No.)		11-2731721 (IRS Employer Identification No.)

440 Ninth Avenue
New York, NY 10001
(212) 273-5700
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

Michelle D. Bergman, Esq.
440 Ninth Avenue
New York, NY 10001
(212) 273-5700
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Lawrence G. Wee, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000

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

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o

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

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

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Amount to be registered	Proposed maximum offering price per share	Proposed maximum aggregate offering price(1)	Amount of registration fee(2)


Senior Secured Floating Rate Notes Due 2010	$160,000,000	100%	$160,000,000	$18,832

Guarantees of Senior Secured Floating Rate Notes Due 2010	N/A	N/A	N/A	N/A(3)

(1): Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) of the Securities Act of 1933.
(2): The registration fee has been calculated pursuant to Rule 457(f) under the Securities Act of 1933.
(3): No additional consideration is being received for the guarantees, and, therefore no additional fee is required.

This post-effective amendment shall become effective in accordance with Section 8(c) of the Securities Act of 1933 on such date as the Commission, acting pursuant to said Section 8(c), may determine.

TABLE OF ADDITIONAL REGISTRANTS

Name	State or Other Jurisdiction of Incorporation or Organization	Primary Standard Industrial Classification Code Number	IRS Employer Identification Number
Duane Reade Holdings, Inc.	Delaware	5912	05-0599589
Duane Reade International, Inc.	Delaware	5912	22-3672347
Duane Reade Realty, Inc.	Delaware	5912	13-4074383
DRI I Inc.	Delaware	5912	04-3166107

The address of Duane Reade Holdings, Inc. is c/o Oak Hill Capital Partners, L.P., 201 Main Street, Fort Worth, Texas 76102. The address of Duane Reade Realty, Inc. and DRI I Inc. is 440 Ninth Avenue, New York, NY 10001. The address of Duane Reade International, Inc. is 707 Broad Street, Newark, New Jersey 07102.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JUNE 29, 2005

PRELIMINARY PROSPECTUS

DUANE READE INC.

DUANE READE

Exchange Offer for $160,000,000 of their
Senior Secured Floating Rate Notes due 2010

Terms of the exchange offer

•: This prospectus relates to an offer to issue up to $160,000,000 aggregate principal amount of new Senior Secured Floating Rate Notes due 2010, which we refer to as the exchange notes, in exchange for an equivalent aggregate principal amount of existing Senior Secured Floating Rate Notes due 2010 that were issued on December 20, 2004, which we refer to as the existing notes.
•: On February 3, 2005, we commenced the exchange offer to which this prospectus relates; however, on March 7, 2005, we suspended that prior exchange offer when we, after discussions with our Audit Committee and our independent registered public accounting firm, determined that we would have to restate some of our previously issued financial statements, including some of the financial statements included in the original prospectus for the exchange offer. Additional information regarding the restatements that have been made is set forth on the first page of this prospectus and is discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Prior Period Restatements." As a result of the suspension of the exchange offer, we returned to the relevant holders all existing notes that had been tendered into the exchange offer as of March 7, 2005.
•: Therefore, in order to participate in the exchange offer, holders of the existing notes will have to complete all necessary procedures, as described in this prospectus, to re-tender their existing notes into the exchange offer.
•: It will expire at 5:00 p.m., New York City time, on , unless we extend it.
•: If all the conditions to this exchange offer are satisfied, we will exchange up to all of the initial notes, that are validly tendered and not withdrawn for a like aggregate principal amount of exchange notes.
•: You may withdraw your tender of initial notes at any time before the expiration of this exchange offer.
•: The exchange notes that we will issue you in exchange for your initial notes will be substantially identical to your initial notes except that, unlike your initial notes, the exchange notes will have no transfer restrictions or registration rights.
•: The exchange notes that we will issue you in exchange for your initial notes are new securities with no established market for trading.

Before participating in this exchange offer, please refer to the section in this prospectus entitled "Risk Factors" commencing on page 22.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is , 2005

TABLE OF CONTENTS

		Page
Suspension and Recommencement of the Exchange Offer		i
Special Note Regarding Forward-Looking Statements		ii
Industry and Market Data		iv
Prospectus Summary		1
Summary of The Exchange Offer		11
Summary Unaudited Pro Forma Financial Information and Statistical Data		17
Summary Historical Financial Information and Statistical Data		19
Risk Factors		22
Use of Proceeds		40
Capitalization		41
Unaudited Pro Forma Consolidated Financial Information		42
Selected Consolidated Financial and Operating Data		45
Management's Discussion and Analysis of Financial Condition and Results of Operations		51
Business		77
Management		94
Principal Stockholders		106
Certain Relationships and Related Transactions		108
Description of Other Indebtedness		112
The Exchange Offer		114
Description of Notes		122
Certain United States Federal Income Tax Consequences		186
Plan of Distribution		192
Legal Matters		192
Experts		192
Where You Can Find More Information		193
Index to Consolidated Financial Statements		F-1

SUSPENSION AND RECOMMENCEMENT OF
THE EXCHANGE OFFER

On February 3, 2005, we commenced the exchange offer to which this prospectus relates.

On March 7, 2005, we announced that, after discussions with our Audit Committee and our independent registered public accounting firm, we determined that we would restate some of our previously issued consolidated financial statements for the following periods to reflect changes in our accounting policies:

•: our predecessor company's 2000, 2001, 2002 and 2003 fiscal years,
•: all of our predecessor company's 2003 fiscal quarters,
•: our predecessor company's first two fiscal quarters of 2004,
•: our predecessor company's fiscal periods from December 28, 2003 to July 30, 2004 and from June 27, 2004 to July 30, 2004, and
•: our period from July 31, 2004 to December 25, 2004.

Because some of the financial statements to be restated were included in the original prospectus for the exchange offer, we suspended that prior exchange offer pending the completion of the necessary restatements. As a result of the suspension of the exchange offer, we returned to the relevant holders all existing notes that had been tendered into the exchange offer as of March 7, 2005.

On June 15 and June 29, 2005, we filed post-effective amendments to the registration statement on Form S-4 of which this prospectus forms a part in order to reflect the restatements described above and otherwise update the prospectus.

Therefore, in order to participate in the exchange offer, holders of the existing notes will have to complete all necessary procedures, as described in this prospectus, to re-tender their existing notes into the exchange offer.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. These statements relate to future events or our future financial performance with respect to our financial condition, results of operations, business plans and strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products such as private label merchandise, plans and objectives of management, capital expenditures, growth and maturation of our stores and other matters. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," or "continue" or the negative of those terms or other comparable terminology. These statements are only predictions and such expectations may prove to be incorrect. Some of the things that could cause our actual results to differ substantially from our expectations are:

•: the competitive environment in the drugstore industry in general and in the New York greater metropolitan area;
•: the ability to open and operate new stores on a profitable basis and the maturation of those stores and the ability to increase sales in existing stores;
•: the continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies and other third party payers to reduce prescription reimbursement rates and pricing pressure from internet-based and mail-order-based providers;
•: our significant indebtedness;
•: the continued efforts of federal, state and municipal government agencies to reduce Medicaid reimbursement rates, modify Medicare benefits and/or reduce prescription drug costs;
•: the impact of the newly enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-179), or, the Medicare Drug Act, and the contemplated Medicare Part D benefit created thereunder;
•: the strength of the economy in general and the economic conditions in the New York greater metropolitan area including, in particular, seasonal and weather-related factors, special events, changes in consumer purchasing power and/or spending patterns;
•: changes in the cost of goods and services;
•: trends in the healthcare industry, including continued conversion of various prescription drugs to over-the-counter medications, negative publicity and the related sales declines for certain categories of drugs including Cox-2 inhibitors and the increasing market share of internet-based and mail-order-based providers;
•: employment disputes and labor disturbances including any resulting from the suspension or termination of our collective bargaining agreements;
•: changes in federal and state laws and regulations, including the potential impact of changes in regulations surrounding the importation of pharmaceuticals from foreign countries and changes in laws governing minimum wage requirements;

•: liability and other claims asserted against us, including the items discussed under "Business—Legal Proceedings";
•: the outcome of the legal proceedings that have been instituted against us and others following announcement of the acquisition of Duane Reade Inc.;
•: changes in our operating strategy or development plans;
•: our ability to attract, hire and retain qualified personnel, including our ability to attract qualified pharmacists;
•: interest rate fluctuations and changes in capital market conditions or other events affecting our ability to obtain necessary financing on favorable terms to fund the anticipated growth of our business;
•: the continued impact of, or new occurrences of, terrorist attacks in the New York greater metropolitan area and any actions that may be taken by federal, state or municipal authorities in response to or in anticipation of such occurrences;
•: changes in timing of our acquisition of stores and prescription files and capital expenditure plans;
•: our ability to continue to secure suitable new store locations under acceptable lease terms;
•: our ability to successfully implement and manage new computer systems and technologies;
•: our ability to limit fraud and shrink;
•: demographic changes; and
•: other risks and uncertainties detailed elsewhere in this filing and from time to time in our other filings with the Securities and Exchange Commission.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus. We do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption "Risk Factors."

We caution you that the areas of risk described above may not be exhaustive. We operate in a continually changing business environment, and new risks emerge from time to time. Management cannot predict such new risks, nor can it assess the impact, if any, of such risks on our businesses or the extent to which any risk or combination of risks, may cause actual results to differ materially from those projected in any forward-looking statements. In light of these risks, uncertainties and assumptions, you should keep in mind that any forward-looking statement made in this prospectus might not occur.

iii

INDUSTRY AND MARKET DATA

The market share, ranking and other data regarding the drugstore industry contained in this prospectus are based either on our own estimates, independent industry publications, reports by market research firms or other published independent sources and, in each case, are believed by us to be reasonable estimates. However, market share data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. In addition, consumption patterns and consumer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be reliable. Where we refer to "market share," we mean market share, as measured by sales volume. Where we refer to our market share for Manhattan and New York City, we estimated such amounts based on the number of stores in the relevant market and average sales per store for each drugstore chain in the overall New York metropolitan area.

The "New York metropolitan area," for purposes of market data included in this prospectus, covers the five boroughs of New York City and the New York counties of Rockland, Putnam and Westchester. All references to the "New York greater metropolitan area" in this prospectus refer to the five boroughs of New York City, the New York counties of Nassau, Suffolk, Rockland, Putnam and Westchester, and northern New Jersey.

PROSPECTUS SUMMARY

In this prospectus, unless the context otherwise requires, "Duane Reade Holdings," the "Company," "we," "us" or "our" refers to Duane Reade Holdings, Inc. and its subsidiaries, "Duane Reade Inc." refers to Duane Reade Inc. and its subsidiaries, "Duane Reade" or "Duane Reade GP" refers to the Duane Reade general partnership, "Duane Reade Acquisition" refers to Duane Reade Acquisition Corp., and "Duane Reade Shareholders" refers to Duane Reade Shareholders, LLC. The "Acquisition" refers to the acquisition of Duane Reade Inc. by an investor group led by Oak Hill Capital Partners, L.P. through the merger of Duane Reade Acquisition into Duane Reade Inc. on July 30, 2004.

Although Duane Reade Inc. was the surviving legal entity in the Acquisition, under GAAP, as a result of the Acquisition and resulting change in control and change in historical cost basis of accounting, we are required to present separately our operating results for predecessor periods up to and including the closing date of the Acquisition (December 28, 2003 through July 30, 2004, the fiscal years from 2000 through 2003 and the first fiscal quarter of 2004) and the successor periods following the closing date of the Acquisition (July 31, 2004 through December 25, 2004 and the first fiscal quarter of 2005). The financial statements and operating results identified as belonging to the "predecessor" are those of Duane Reade Inc., the parent entity existing for all periods shown prior to the completion of the Acquisition. For the period following the Acquisition, the financial statements and operating results of the "successor" are those of Duane Reade Holdings, Inc., the newly created parent entity under whose name this and all future SEC filings will be made. We refer to Oak Hill Capital Partners, L.P. and its affiliates that are investing in the Acquisition collectively as "Oak Hill." The term "initial notes" refers to the Senior Secured Floating Rate Notes due 2010 that were issued on December 20, 2004. The term "exchange notes" refers to the Senior Secured Floating Rate Notes due 2010 offered by this prospectus. The term "notes" refers to the initial notes and the exchange notes, collectively. Duane Reade Holdings has guaranteed the notes, and, as a result, although Duane Reade Inc. and Duane Reade GP were the issuers of the notes, as permitted by SEC rules, the financial and other information presented in this registration statement is that of Duane Reade Holdings, unless otherwise noted. Certain statements in this summary are forward-looking statements. See "Special Note Regarding Forward-Looking Statements."

The following summary highlights basic information about us and this exchange offer. It may not contain all of the information that is important to you. For a more comprehensive understanding of our business and the exchange offer, you should read this entire prospectus, including "Risk Factors" and our historical and pro forma financial statements and the notes to those statements. In this prospectus, if a measurement is "on a pro forma basis," unless otherwise stated, that measurement is on a pro forma basis, giving effect to the transactions referred to in the introduction to "Unaudited Pro Forma Consolidated Financial Information."

The Company

We are the largest drugstore chain in New York City, which is the largest drugstore market in the United States (representing approximately 5.4% of domestic U.S. drugstore sales). As of March 26, 2005, we operated 134 of our 249 stores in Manhattan's high-traffic business and residential districts, representing over twice as many stores as our next largest competitor in Manhattan. In addition, at March 26, 2005, we operated 84 stores in New York's densely populated outer boroughs and 31 stores in the surrounding New York and New Jersey suburbs. From 1999 to 2004, we grew our share of the New York metropolitan market to approximately 30% from approximately 25%, and we grew our revenues at a compound annual growth rate of 13.7%. We believe we are well positioned to continue to grow our business due to:

•: our leading market position;
•: the strength of the Duane Reade brand, in which we have continuously invested throughout our 44 year history;
•: our unique operating model and market characteristics, which create high barriers to entry for competitors;

•: the significant capital we have invested in 116 new stores opened during the 2000 through 2004 fiscal years;
•: management's proven operating experience; and
•: the attractive long-term trends driving the drug retailing industry.

On a pro forma basis, for the 52 weeks ended December 25, 2004, we generated net sales, net loss and Adjusted FIFO EBITDA of $1.6 billion, $30.3 million and $59.2 million respectively.

Since opening our first store in 1960, we have successfully executed a marketing and operating strategy tailored to the unique characteristics of New York City and surrounding market areas, the most densely populated major retail market in the United States. We maintain an industry leading non-prescription, or "front-end," sales mix in our stores and enjoy significant brand recognition in our markets as a result of our concentration in densely populated residential and commercial areas and our presence in high traffic locations. Additionally, we have developed a low cost, efficient operating model that allows us to maintain high in-stock inventory positions in our stores while minimizing our overall investment in inventory through the use of a distribution network designed specifically for the unique demands of our market. We utilize a flexible store format that has allowed us to secure prime locations throughout our markets with a focus on customer convenience in high-traffic commercial and residential areas. These factors contribute to our market leading position, provide significant competitive advantages and, combined with the high cost and limited availability of suitable locations, create additional barriers to entry for our competitors, including national drugstore chains, big box discounters and grocery chains.

Because of our numerous convenient locations in high-traffic commercial and residential areas and the lack of other convenience store retailers in our core market areas, our sales are weighted toward front-end merchandise, where we typically enjoy gross product margins that are approximately twice that of our back-end business. Unlike most other major conventional drugstore industry participants, whose front-end sales typically account for between 30% and 40% of total sales, approximately 49% of our total sales for the year ended December 25, 2004 and approximately 50.5% of our total sales for the quarter ended March 26, 2005 consisted of higher-margin front-end products such as brand name and private label health and beauty care products, food and beverage items, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and other general merchandise.

During the 2000 through 2004 fiscal years, we opened 116 new store locations. During the quarter ended March 26, 2005, we opened two additional stores and closed eight. Approximately 46% of the stores we operated at March 26, 2005 had been opened since the beginning of fiscal 2000. We expect these newer locations to add significantly to our profitability and cash flow as they gradually reach performance levels consistent with those of our mature store base. In addition, we have greatly expanded our offerings of front-end merchandise, including private label products, and implemented store-level initiatives designed to lower our overall costs. We also believe that the gradually improving economic conditions in our core markets in the New York greater metropolitan area will benefit our business. We believe these factors provide us with unique opportunities to further grow our business and will allow us to leverage our fixed store costs, adding to our overall profitability.

Industry

Chain drugstores have increased their market share in the $2.5 trillion U.S. retail industry from 3.7% in 1997 to over 4.9% in 2004. This growth is predominantly driven by new store openings, strong prescription drug growth and front-end product expansion. Chain drugstores had a 42.0% market share in 2004 in the $203.1 billion prescription drug market, growing from a 40.0% market share in 1997, despite growth by other industry participants, such as mail-order providers, during this time period. Chain drugstores have increased their share of prescription sales largely at the expense of independently-owned drugstores, which have limited front-end assortments and less competitive pricing as a result of limited volume-based purchasing economies. In addition, chain drugstores offer superior convenience, which is a prime factor in consumers' choice of

where to shop. According to a 2004 National Association of Chain Drug Stores survey, 68% of consumers of prescription medications cite convenience as a key determinant of where they choose to fill their prescriptions. Other retailers of prescription drugs, such as supermarkets and mass merchants, are generally unable to match the perceived convenience of chain drugstores.

The prescription drug market has experienced a compound annual growth rate of approximately 13.4% from 1993 to 2004 as a result of sustained demographic and healthcare trends. Industry experts expect this strong growth to continue for the foreseeable future. According to industry sources, the compound annual growth rate for prescription drug sales in the U.S. is projected to be between 7% and 10% for the period 2005 through 2009. The key growth trends include:

Aging Population Base: The large baby boom generation is aging into the peak prescription drug utilization years of 55 years and older. In 2002, nearly 57% of all prescription drug spending came from the 21.4% of the population that was 55 and older. By 2010, the 55 and older age group is expected to exceed 24.6% of the total U.S. population. People aged 55 and above typically consume over 20 prescriptions per year versus the average consumption of 8 prescriptions per year. As this portion of the population ages, prescription drug usage is expected to accelerate.

Expanding Penetration of Third Party Private and Government Coverage: Third party plan sales of prescription drugs have increased from 61.8% of prescription drug sales in 1995 to 86.3% of prescription drug sales in 2004. Further, government plans such as Medicaid and Medicare have been designed to increase access to prescription drug coverage, especially for older age groups, which are the highest volume users of prescription drugs. Consumers covered by a public or private plan utilize over twice the number of prescription drugs as cash paying customers. While these plans exert pressure on margins per prescription, the expanded utilization over time should continue to drive higher sales and offer increased profitability for drug retailers.

Other Key Growth Factors: The prescription drug market is also expected to benefit from the following:

•: increasing use of prescription drugs as a preventative measure,
•: increasing utilization of prescription drugs to treat lifestyle diseases,
•: escalating direct-to-consumer advertising,
•: increased consumer awareness of health and wellness and
•: a strong new product pipeline, including approximately 160 new formulations that are currently awaiting final FDA approval with another approximately 400 formulations in Phase III clinical trials.

In addition, the increasing substitution of lower priced generic alternatives for branded drugs is driving increased profitability for drug retailers. Generic drugs are priced significantly below their branded equivalent, resulting in lower sales growth; however, they offer higher gross margin dollars per prescription. Generic drug penetration in the drugstore industry has increased from 40.2% of total prescriptions in 1995 to 45.8% in 2004. This dynamic is driven by the efforts of managed care providers to control costs, the expiration of patents on several key branded drugs and the promotion by pharmacies of generic alternatives.

We believe the growth of pharmacy sales will generate greater store level traffic, providing opportunities to expand front-end sales. Those industry participants with a large front-end selection, convenient locations and strong competitive advantages should realize a larger share of the benefits from these opportunities.

New York Metropolitan Area

The $8.9 billion retail drugstore market in the New York metropolitan area is an attractive environment for established retail drugstore operators who have experience operating in the high-traffic, high-density urban environment. This market includes the five New York boroughs, four of which would independently rank in

the top ten U.S. cities in terms of population. This complex real estate market requires significant local knowledge and flexibility in store formats as a result of dynamic, high-volume traffic patterns and limited available standardized retail space configurations. Additionally, the logistically complex market benefits retailers that maintain warehousing in close proximity to their stores and are able to make frequent, small deliveries efficiently in order to maintain high volumes of in-stock merchandise on the shelves without maintaining high storeroom inventory levels. These dynamics limit the effectiveness of alternative retail formats and significantly increase costs of entry for new market participants.

Between 2001 and 2003, the New York City economy experienced a regional cyclical downturn and a series of unusual events, such as the World Trade Center attacks and one-time increases in real estate taxes and insurance costs. The New York greater metropolitan area experienced above average unemployment levels, especially in the key midtown and downtown Manhattan financial districts and lagged behind the improving national economy throughout 2003 and the early part of 2004. However, more recently it has shown improvements in employment, tourism and overall commerce relative to the last few years. The April 2005 seasonally adjusted unemployment data for New York City indicated an unemployment rate of 5.7%, compared to a national rate of 5.2%. In addition, the New York City unemployment rate reflected an improvement in the first quarter of 2005 as compared to the monthly average rate of 8.5% reported for the first quarter of 2004.

Our Competitive Strengths

We believe our leading market position and compelling operating model provide a competitive advantage over other major drugstore chains in the New York metropolitan area. Our operating model is based on placing our stores in the most convenient high-traffic locations, which provide higher than industry average sales volumes and a larger proportion of higher margin front-end sales. These attributes, combined with an efficient distribution network, enable us to better leverage store labor and operating expenses and minimize capital investment in high cost, non-productive, store backroom square footage.

We believe that the following key competitive strengths will contribute to our continued success:

Industry Leading Market Position: With a 44-year operating history in the New York metropolitan area, we are the largest drugstore chain in the area, with an approximately 30% market share, compared with approximately 25% in 1999. We estimate that our market share exceeds 70% in Manhattan and exceeds 35% in New York City. We enjoy strong brand name recognition in the New York greater metropolitan area, which we believe results from our strategic locations in high-traffic areas of our markets, attractive window signage and displays, and the approximately 92 million shopping bags with the distinctive Duane Reade logo that were given to our customers in 2004. A survey conducted in recent years indicates that approximately 95% of the people who live in Manhattan have shopped at a Duane Reade store.

Significant Capital Invested in Large, Immature Store Base: We invested approximately $117.1 million in 116 new stores during the 2000 through 2004 fiscal years and an additional two stores in the first fiscal quarter of 2005. Our stores typically reach sales and EBITDA levels more consistent with our mature store base over a three to five year time horizon. As the 116 new stores mature and economic conditions improve in our existing markets, we expect these stores to contribute significantly to our profitability. If these locations reached performance levels that our stores opened from 1997 to 1999 achieved in 2003, the 116 stores would have generated over $20 million of incremental net income; however, there can be no assurance that these locations will reach such performance levels, and the sales growth of new stores will be influenced by factors that influence our business as a whole.

Proven Operating Experience Creates Barriers to Entry in Our Core Markets: We have an extensive knowledge of the various high density, high-traffic residential and commercial areas in the New York metropolitan area. Unlike our competitors that target standardized store configurations, our guiding principle in store selection has not been the shape of the space, but rather the strategic location in high-traffic areas, which provides greater convenience to our customers. We believe the unique nature of the New York

metropolitan area and our prime real estate locations with an emphasis on convenience limit the competitive threat of other national drugstore chains, big box discounters, grocery chains and mail-order providers. These factors and our differentiated operating philosophy have led to our industry leading front-end sales percentage of approximately 49% for the fiscal year ended December 25, 2004 and approximately 50.5% for the fiscal quarter ended March 26, 2005 and have allowed us to generate our industry leading average sales per square foot of approximately $813 for the fiscal year ended December 25, 2004. In addition, we averaged sales of approximately $476 per square foot in the front-end (assuming an average pharmacy size of 500 square feet) for the fiscal year ended December 25, 2004, which we believe is over twice the industry average. Our stores range in size from under 500 square feet to 17,200 square feet, and we currently operate 45 bi-level stores. We believe our expertise operating in the unique New York metropolitan area creates additional barriers to entry for our competitors and furthers our opportunities for growth.

Unique Distribution Capabilities: We believe we are the only chain drugstore operator in the New York metropolitan area with the ability to make cost effective, frequent store deliveries from two centrally located distribution centers. We believe that our competitors, which lack our store density, typically make fewer deliveries and maintain larger storeroom inventories at each location, which is inefficient and costly in the New York metropolitan area. In contrast, we operate two distribution centers that are located within 10 miles of over 85% of our stores, which enable us to cost-effectively deliver products an average of two to three times per week based on each store's specific needs. These unique distribution capabilities allow each store to maintain high in-stock inventory on the shelves, maximize utilization of store selling space and minimize the required amount of storeroom inventory, and they allow us to leverage our fixed store costs across a larger sales base. Our distribution network is also scaleable within our dense base of stores allowing us to accommodate additional stores at a low marginal cost.

Compelling Economic Model: We enjoy a low operating cost as a percentage of sales, driven by our high sales per store, high store density and knowledge of the diverse local labor pool. Management believes that as we realize stronger growth from the seasoning of our immature store base and the improvement of the economy in the New York greater metropolitan area, we will be able to further leverage our fixed store expenses, driving lower operating cost margins and improving our profitability.

Differentiated Back-End Operating Model: We contract with over 200 third party health plans, which we believe represent substantially all major third party payers in our market. To service our broad customer base, we use both store-based pharmacists as well as our central fill facility, which we believe is the first of its kind in the chain drugstore industry. The central fill facility receives, processes and fills prescriptions in our centralized location and delivers these prescriptions to the local pharmacies for customer pick-up. The central fill facility significantly improves our inventory management, reduces the labor cost of filling prescriptions by over 25% per prescription and leverages our in-store pharmacy staff to handle more time sensitive prescriptions as well as provide additional customer consultation.

Strong, Experienced Management Team with Significant Equity Interest: We have an experienced and successful senior management team, the top five of which average over 32 years of combined industry or related experience. Members of our management team have partnered with a financial investor in two prior transactions, and we have successfully executed our business plan in a highly leveraged environment. Management has demonstrated expertise in cost control, real estate selection, distribution and human resources unique to the New York metropolitan area. Furthermore, management's commitment to the business is evidenced by their ownership of a significant economic interest in us, including a management investment in connection with the Acquisition of $4.2 million.

Our Business Strategy

We have developed a business strategy designed to further strengthen our competitive position and improve overall profitability. The key elements of our operating strategy are:

Continue to Implement Front-End Merchandising Initiatives: Our overall front-end merchandising strategy is to provide a broad selection of competitively priced, branded and private label drugstore products. We will continue to expand our merchandise categories and service offerings through adding and supplementing categories for which we believe a high demand exists, such as convenience foods and one-hour photofinishing services. We are currently expanding our offering of over 900 private label products, which in fiscal 2004 accounted for 7.8% of front-end sales and provided gross profit margins almost two times higher than our comparable branded products. We are targeting an expansion of our sales of private label products to approximately 11% of front-end sales over the next three years. We believe that these initiatives will continue to improve our front-end selling gross margins, which have shown increases in 9 of the last 13 fiscal quarters when compared to the same fiscal periods in the prior year.

Leverage Pharmacy Operations: We will continue to increase our retail pharmacy sales by upgrading the service level of our in-store pharmacies, acquiring customer prescription files, providing remote pharmacy access through the use of interactive kiosks and expanding the reach of our central fill operation. Initiatives such as our customer pharmacy file acquisitions, which typically only have a two year pay back period, enable us to increase the prescription volume of an existing store or provide a new or relocated store immediate prescription volume. We plan to expand the use of our real-time interactive pharmacy kiosks to allow us to extend our service hours and market presence in locations, such as physicians' office complexes, assisted living centers and major employers, where our presence would previously have been economically unjustified. Further, in order to efficiently manage our high prescription sales volume, we plan to continue expanding the reach of our central fill operation, which currently services almost 50% of our store base. As a result of these initiatives, our leading presence in the New York Metropolitan area and favorable trends driving the prescription drug industry, we have increased the number of prescriptions filled by our stores from approximately 2.7 million during 1997 to approximately 10.2 million during 2004. We expect this number to continue to increase as our store base matures and attractive long-term fundamentals drive growth in the prescription drug industry.

Continue to Improve Operational Efficiencies: We will utilize our cost containment expertise and modern technology to maintain and improve our operating margins. Despite the high costs of operating in the New York greater metropolitan area, we believe we can continue to maintain our low operating cost base for our expanding network of stores through our continued focus on cost reduction initiatives, our significant experience with the diverse local labor pool, and our relatively low warehouse, distribution and advertising costs. We have implemented several cost reduction initiatives in 2003 and 2004, including:

•: A new shelf labeling system utilizing hand-held scanners and in-store printers that eliminates the need to individually item price certain merchandise, improves pricing accuracy and provides improved price visibility to customers. We believe this system will save over $4.3 million annually in labor and related costs.
•: A unit-cost based front-end inventory accounting system that provides the ability to analyze potential shrink losses by item and merchandise category enabling more timely and specific loss prevention interventions.
•: A workforce reduction that was implemented in January of 2004 in connection with the completion of the Acquisition reduced corporate general and administrative expenses by approximately $2.4 million in 2004.

We believe these and other initiatives, coupled with the improved efficiencies of our maturing store base will continue to contribute to improved earnings in the future. Further, we will continue to use our modern pharmacy and inventory management information systems, our scanning point-of-sale systems and our fully

automated merchandise replenishment systems to optimize product sales, and to improve labor productivity. We expect to continue to benefit from operating leverage in our business as we generate improved positive same-store sales growth.

Pursue Selective Growth: We have identified over 250 potential new locations in our current markets. We intend to open 10 to 12 new stores in each of the 2005 through 2008 fiscal years, which is a reduction from our average of 24 store openings per year during the 2000 through 2004 fiscal years. The high number of attractive potential locations will allow us to be extremely selective with our new store openings in Manhattan and the surrounding densely populated areas. Our flexible operating platform will allow us to alter this strategy as warranted by economic and competitive conditions. Further, where strategically advantageous, we will continue to renovate or relocate existing stores and acquire customer prescription files from independent pharmacies to continue to drive increased profitability. New York City has one of the lowest drugstore per population ratios among the top ten drug store markets in the country, and there are over 700 independent pharmacies in New York City, which are factors that provide future expansion opportunities. We believe that our long-standing presence in, and knowledge of, the real estate market in the New York greater metropolitan area will continue to allow us to quickly and successfully pursue attractive real estate opportunities in desirable locations.

The Acquisition and Related Transactions

The Acquisition. On July 30, 2004, the Acquisition of Duane Reade Inc. was completed by a group of investors, including Oak Hill and members of our management team led by Anthony J. Cuti, our Chairman and Chief Executive Officer. As part of the Acquisition, Duane Reade Acquisition merged with and into Duane Reade Inc., with Duane Reade Inc. remaining as the surviving corporation.

As a result of the Acquisition, Duane Reade Inc.'s shares were delisted from the New York Stock Exchange, and we operate as a privately held company. Each share of Duane Reade Inc.'s common stock outstanding immediately prior to the Acquisition was converted into the right to receive $16.50 per share, without interest, in cash.

The following transactions were completed in connection with the Acquisition:

•: an investor group led by Oak Hill made a cash equity contribution to Duane Reade Acquisition of approximately $239.5 million;
•: to complete the tender offer for the senior convertible notes (described below) and pay related interest due on such notes through July 30, 2004, Duane Reade GP borrowed a further $72.0 million under its amended asset-based revolving loan facility, resulting in total borrowings of approximately $153.8 million; on July 30, 2004, Duane Reade Inc. became a co-obligor under that facility;
•: Duane Reade Inc. and Duane Reade GP, as co-obligors, borrowed approximately $155.0 million under the senior term loan facility, which was refinanced as described under "—Refinancing of Senior Term Loan Facility";
•: Duane Reade Inc. and Duane Reade GP issued $195.0 million of 9³/4% senior subordinated notes due 2011;
•: Mr. Cuti forfeited the right to receive various payments under his existing employment contract and received, among other things, a profits interest in Duane Reade Shareholders and options in Duane Reade Holdings (See "Management—Contracts with Executive Officers—Mr. Cuti's Profits Interest"); and
•: the other members of senior management forfeited the right to receive approximately $4.2 million of payments under existing contracts, and we issued them phantom stock representing, in the aggregate, up to an approximately 1.5% fully diluted economic interest in our company.

The total consideration paid in the Acquisition was approximately $747.5 million, consisting of:

•: approximately $404.9 million to purchase the equity of Duane Reade Inc.;
•: an aggregate amount of approximately $81.8 million to assume the amended asset-based revolving loan facility;
•: an aggregate amount of approximately $203.2 million to repurchase our outstanding senior convertible notes (representing 100% of the principal amount of the notes purchased, plus $2.2 million of accrued but unpaid interest on those notes through July 30, 2004); and
•: an aggregate of approximately $57.6 million to pay fees, costs and expenses, including certain payments to members of our management, incurred in connection with the Acquisition and related transactions.

Tender Offer for Senior Convertible Notes. Under the terms of the indenture governing Duane Reade Inc.'s 2.1478% senior convertible notes due 2022, the Acquisition constituted a change of control, which required Duane Reade Inc. to make an offer to repurchase those notes. On August 12, 2004, Duane Reade Inc. commenced a cash tender offer to repurchase those notes in accordance with the indenture. Pursuant to that offer, on September 13, 2004, Duane Reade Inc. completed the repurchase of a total of approximately $350.9 million aggregate principal amount at maturity of the senior convertible notes for a cash purchase price of approximately $204.1 million, which represented 100% of the principal amount of the notes purchased, plus accrued but unpaid interest through the repurchase date. Following completion of the tender offer, only $55,000 principal amount at maturity of the senior convertible notes remains outstanding. Payment for the notes was made with cash on hand, which was provided primarily from borrowings under the amended asset-based revolving loan facility and the senior term loan facility.

Refinancing of Senior Term Loan Facility. On December 20, 2004, we closed an unregistered offering of the initial notes. Using the net proceeds (without deducting expenses) from that offering, together with approximately $2.2 million of borrowings under the amended asset-based revolving loan facility, we repaid all outstanding principal under the $155.0 million senior term loan facility, along with approximately $3.6 million of premium and accrued but unpaid interest through December 20, 2004. See "Description of Notes."

Our Equity Sponsor

Oak Hill Capital Partners, L.P. is a buyout fund with $1.6 billion of committed capital. Recent investments, other than the Acquisition, include Gecis, Atlantic Broadband, Align Technology, Progressive Moulded Products, TravelCenters of America, WideOpenWest, Blackboard and Caribbean Restaurants. Oak Hill Capital has entered into relationships with other separate investment partnerships that share the "Oak Hill" name and which manage capital across multiple asset classes, including high yield and bank debt, public equity, distressed debt, venture capital and real estate. Each of the other "Oak Hill" partnerships has a separate and dedicated management team, a different investor group and makes its investment decisions on an independent basis.

Corporate Structure and Capital Structure

The following chart describes our capital structure:

(1): Approximately $179.8 million was drawn under this revolving loan facility as of March 26, 2005.
(2): DRI I Inc., Duane Reade International, Inc. and Duane Reade Realty, Inc. are guarantors under the amended asset-based revolving loan facility, the notes and the senior subordinated notes.

The Obligors

Duane Reade Holdings, Inc. is a corporation organized under the laws of the state of Delaware in 2003. Our principal offices are located at c/o Oak Hill Capital Partners, L.P., 201 Main Street, Fort Worth, Texas 76102, and our telephone number is (817) 338-6205. Our web site address is www.duanereade.com. Our web site and the information contained in our web site are not a part of this prospectus.

Duane Reade Inc. is a corporation organized under the laws of the State of Delaware in 1992. Our principal executive offices are located at 440 Ninth Avenue, New York, New York 10001, and its telephone number is (212) 273-5700.

Duane Reade GP is a New York general partnership formed in 1985. Its principal offices are located at 440 Ninth Avenue, New York, New York 10001, and its telephone number is (212) 273-5700.

Summary of the Exchange Offer

We are offering to exchange $160,000,000 aggregate principal amount of the exchange notes for a like aggregate principal amount of the initial notes. In order to exchange your initial notes, you must properly tender them and we must accept your tender. We will exchange all outstanding initial notes that are validly tendered and not validly withdrawn.

Exchange Offer	We will exchange the exchange notes for a like aggregate principal amount at maturity of the initial notes.
Resumption of Exchange Offer	On February 3, 2005, we commenced the exchange offer to which this prospectus relates; however, on March 7, 2005, we suspended that prior exchange offer when we, after discussions with our Audit Committee and our independent registered public accounting firm, determined that we would have to restate some of our previously issued financial statements, including some of the financial statements included in the original prospectus for the exchange offer. Additional information regarding the restatements that have been made is discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Prior Period Restatements." As a result of the suspension of the exchange offer, we returned to the relevant holders all existing notes that had been tendered into the exchange offer as of March 7, 2005. Therefore, in order to participate in the exchange offer, holders of the existing notes will have to complete all necessary procedures, as described in this prospectus, to re-tender their existing notes into the exchange offer.
Expiration Date	This exchange offer will expire at 5:00 p.m., New York City time, on , unless we decide to extend it.
Conditions to the Exchange Offer	We will complete this exchange offer only if:
	•	there is no change in the laws and regulations that would impair our ability to proceed with this exchange offer,
	•	there is no change in the current interpretation of the staff of the Commission which permits resales of the exchange notes,
	•	there is no stop order issued by the Commission that would suspend the effectiveness of the registration statement which includes this prospectus or the qualification of the exchange notes under the Trust Indenture Act of 1939,
	•	there is no litigation or threatened litigation that would impair our ability to proceed with this exchange offer, and
	•	we obtain all the governmental approvals we deem necessary to complete this exchange offer.
	Please refer to the section in this prospectus entitled "The Exchange Offer—Conditions to the Exchange Offer."

Procedures for Tendering Initial Notes		To participate in this exchange offer, you must complete, sign and date the letter of transmittal or its facsimile and transmit it, together with your initial notes to be exchanged and all other documents required by the letter of transmittal, to U.S. Bank National Association, as exchange agent, at its address indicated under "The Exchange Offer—Exchange Agent." In the alternative, you can tender your initial notes by book-entry delivery following the procedures described in this prospectus. If your initial notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you should contact that person promptly to tender your initial notes in this exchange offer. For more information on tendering your notes, please refer to the section in this prospectus entitled "The Exchange Offer—Procedures for Tendering Initial Notes."
Special Procedures for Beneficial Owners		If you are a beneficial owner of initial notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your initial notes in the exchange offer, you should contact the registered holder promptly and instruct that person to tender on your behalf.
Guaranteed Delivery Procedures		If you wish to tender your initial notes and you cannot get the required documents to the exchange agent on time, you may tender your notes by using the guaranteed delivery procedures described under the section of this prospectus entitled "The Exchange Offer—Procedures for Tendering Initial Notes—Guaranteed Delivery Procedure."
Withdrawal Rights		You may withdraw the tender of your initial notes at any time before 5:00 p.m., New York City time, on the expiration date of the exchange offer. To withdraw, you must send a written or facsimile transmission notice of withdrawal to the exchange agent at its address indicated under "The Exchange Offer—Exchange Agent" before 5:00 p.m., New York City time, on the expiration date of the exchange offer.
Acceptance of Initial Notes and Delivery of Exchange Notes		If all the conditions to the completion of this exchange offer are satisfied, we will accept any and all initial notes that are properly tendered in this exchange offer on or before 5:00 p.m., New York City time, on the expiration date. We will return any initial note that we do not accept for exchange to you without expense as promptly as practicable after the expiration date. We will deliver the exchange notes to you as promptly as practicable after the expiration date and acceptance of your initial notes for exchange. Please refer to the section in this prospectus entitled "The Exchange Offer—Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes."
Federal Income Tax Considerations Relating to the Exchange Offer		Exchanging your initial notes for exchange notes will not be a taxable event to you for United States federal income tax purposes. Please refer to the section of this prospectus entitled "Certain Federal Income Tax Consequences to Non-United States Holders."³

Exchange Agent	U.S. Bank National Association is serving as exchange agent in the exchange offer.
Fees and Expenses	We will pay all expenses related to this exchange offer. Please refer to the section of this prospectus entitled "The Exchange Offer—Fees and Expenses."
Use of Proceeds	We will not receive any proceeds from the issuance of the exchange notes. We are making this exchange offer solely to satisfy certain of our obligations under our registration rights agreement entered into in connection with the offering of the initial notes.
Consequences to Holders Who Do Not Participate in the Exchange Offer	If you do not participate in this exchange offer:
	•	you will not necessarily be able to require us to register your initial notes under the Securities Act,
	•	you will not be able to resell, offer to resell or otherwise transfer your initial notes unless they are registered under the Securities Act or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act, and
	•	the trading market for your initial notes will become more limited to the extent other holders of initial notes participate in the exchange offer.
	Please refer to the section of this prospectus entitled "Risk Factors—Your failure to participate in the exchange offer will have adverse consequences."
Resales	It may be possible for you to resell the notes issued in the exchange offer without compliance with the registration and prospectus delivery provisions of the Securities Act, subject to some conditions. Please refer to the section of this prospectus entitled "Risk Factors—Risks Relating to the Exchange Offer—Some persons who participate in the exchange offer must deliver a prospectus in connection with resales of the exchange notes" and "Plan of Distribution."

Summary of the Terms of the Exchange Notes

Issuers		Duane Reade Inc. and Duane Reade GP.
Exchange Notes		$160,000,000 million aggregate principal amount of Senior Secured Floating Rate Notes due 2010. The forms and terms of the exchange notes are the same as the form and terms of the initial notes except that the issuance of the exchange notes is registered under the Securities Act, will not bear legends restricting their transfer and will not be entitled to registration rights under our registration rights agreement. The exchange notes will evidence the same debt as the initial notes, and both the initial notes and the exchange notes will be governed by the same indenture.
Maturity Date		December 15, 2010.
Interest Payment Dates		March 15, June 15, September 15 and December 15, commencing on March 15, 2005.
Guarantees		We and all of our existing direct and indirect subsidiaries, other than the co-obligors, Duane Reade Inc. and Duane Reade GP, will guarantee the exchange notes on a senior secured basis.
Collateral		The exchange notes, the guarantees and obligations under certain interest rate and other swap agreements will be secured (on an equal and ratable basis) by (i) a first priority lien on substantially all of the assets of us, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors (other than those assets in which the lenders under the amended asset-based revolving loan facility have a first priority security interest) such as certain intellectual property and certain intercompany capital stock and other securities; and (ii) a second priority lien on all collateral pledged on a first priority basis to the lenders under the amended asset-based revolving loan facility. The lenders under the amended asset-based revolving loan facility have a first priority security interest in all of our, Duane Reade Inc.'s, Duane Reade GP's and each subsidiary guarantor's present and future accounts, inventory, chattel paper, certain instruments, documents, prescription files, tax refunds and abatements and deposit accounts, letter of credit rights and certain other current assets and proceeds and products from any and all of the foregoing. See "Description of Notes—Collateral."

Ranking	The exchange notes and guarantees will be our general senior secured obligations, and will rank equally in right of payment with all existing and any future unsubordinated indebtedness that we, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors may incur. The exchange notes and guarantees will rank senior to the senior subordinated notes and any future subordinated indebtedness that we, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors may incur. The exchange notes and guarantees will be effectively subordinated to our obligations under the amended asset-based revolving loan facility and guarantees of those obligations, to the extent of the value of the collateral in which lenders under that facility have a first priority lien. As of March 26, 2005 we had a total of $550.4 million of consolidated senior indebtedness, including $179.8 million under the $250 million amended asset-based revolving loan facility, $195.0 million under the senior subordinated notes, $160.0 million under the initial notes and $15.6 million of capital leases.
Optional Redemption	We may redeem the exchange notes, in whole or in part, at any time on or after December 15, 2006, at the redemption prices and in the manner described in the section "Description of Notes—Optional Redemption," plus accrued and unpaid interest.
	In addition, we may redeem up to 35% of the exchange notes before December 15, 2006, with the net cash proceeds from certain equity offerings. However, we may only make such redemptions if at least 65% of the aggregate principal amount of the initial notes and exchange notes issued under the indenture, remains outstanding immediately after the occurrence of such redemption.
	In addition, upon an event of default and an acceleration of the exchange notes, the lenders under the amended asset-based revolving loan facility will have the option to purchase the exchange notes for an amount equal to the outstanding amount thereunder. See "Description of the Notes—Option to Purchase."
Change of Control	Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase all of the exchange notes. The purchase price will be 101% of the outstanding principal amount of the exchange notes plus accrued and unpaid interest to the date of repurchase. See "Description of Notes—Change of Control." Our ability to complete a change of control repurchase may be limited by the terms of our current and future indebtedness, including the amended asset-based revolving loan facility and the senior subordinated notes.
Certain Covenants	The indenture governing the notes limits the ability of Duane Reade Inc., Duane Reade GP and the restricted subsidiaries to:
	•	incur additional indebtedness;

	•	pay dividends, make repayments on indebtedness that is subordinated to the notes and make other "restricted payments";
	•	incur certain liens;
	•	use proceeds from sales of assets or certain events of loss;
	•	enter into business combination transactions (including mergers, consolidations and asset sales);
	•	enter into sale and leaseback transactions;
	•	impair the collateral;
	•	enter into transactions with our affiliates; and
	•	permit restrictions on the payment of dividends by restricted subsidiaries.
	These covenants are subject to important qualifications and exceptions. See "Description of Notes—Certain Covenants."
Absence of a Public Market for the Exchange Notes	The exchange notes are new securities with no established market for them. We cannot assure you that a market for these exchange notes will develop or that this market will be liquid. Please refer to the section of this prospectus entitled "Risk Factors—Risks Relating to the Exchange Offer—There may be no active or liquid market for the exchange notes."
Form of the Exchange Notes	The exchange notes will be represented by one or more permanent global securities in registered form deposited on behalf of The Depository Trust Company with U.S. Bank National Association, as custodian. You will not receive exchange notes in certificated form unless one of the events described in the section of this prospectus entitled "Description of Notes—Book Entry; Delivery and Form—Exchange of Book Entry Notes for Certificated Notes" occurs. Instead, beneficial interests in the exchange notes will be shown on, and transfers of these exchange notes will be effected only through, records maintained in book-entry form by The Depository Trust Company with respect to its participants.

Risk Factors

An investment in the exchange notes involves substantial risks. See "Risk Factors" immediately following this summary for a discussion of certain risks you should consider before participating in the exchange offer.

SUMMARY UNAUDITED PRO FORMA
FINANCIAL INFORMATION AND STATISTICAL DATA

The summary unaudited pro forma financial information and statistical data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the pro forma financial statements and the notes related to those statements appearing under the caption, "Unaudited Pro Forma Consolidated Financial Information," in this prospectus.

The summary unaudited pro forma financial information and statistical data presented below are derived from the unaudited pro forma consolidated financial information and related notes included under the caption, "Unaudited Pro Forma Consolidated Financial Information," in this prospectus and present summary unaudited pro forma financial data for the fiscal year ended December 25, 2004. The unaudited pro forma consolidated statement of operations data reflect adjustments to our consolidated historical financial information to give effect to the Acquisition and the other transactions described in the introduction to "Unaudited Pro Forma Consolidated Financial Information" as if these transactions occured at the first day of the fiscal year ended December 25, 2004. The summary unaudited pro forma financial information does not purport to present our actual results of operations had the Transactions and events reflected by them in fact occurred, on the dates specified, nor is it necessarily indicative of the results of operations that may be achieved in the future. The summary unaudited pro forma financial information is based on certain assumptions and adjustments described in the notes in the unaudited pro forma consolidated financial information and should be read in conjunction with those notes.

	Pro Forma Fiscal Year Ended December 25, 2004
	(dollars in thousands)
Statement of Operations Data:
Net sales	$	1,598,369
Cost of sales		1,283,208

Gross profit		315,161
Selling, general & administrative expenses		244,286
Labor contingency expense(1)		4,400
Depreciation and amortization		63,390
Store pre-opening expenses		835
Other(2)		4,571

Operating income (loss)		(2,321	)
Interest expense, net		35,651
Debt extinguishment		7,525

Loss before income taxes.		(45,497	)
Income tax benefit		(15,248	)

Net loss	$	(30,249	)

Operating and Other Data:
Adjusted FIFO EBITDA(3)	$	59,201

(1): Under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", Duane Reade Inc. recorded a non-cash pre-tax charge of $2.6 million during the period from December 28, 2003 through July 30, 2004, and Duane Reade Holdings, Inc. recorded a non-cash pre-tax charge of $1.8 million during the period from July 31, 2004 through December 25, 2004, representing management's current best estimate of the loss that would result upon application of a National Labor Relations Board decision in a litigation matter relating to our collective bargaining agreement with the Allied Trades Council, a union representing employees in 139 of our stores. Until such time as further legal developments warrant a change in the application of this accounting standard, or until this matter is resolved, we will record additional non-cash pre-tax charges, which are calculated on the same basis as the charge recorded in our fiscal 2003 and 2004 historical financial statements. We currently estimate that the charge for the 2005 fiscal year will approximate $4.4 million. See Note 20 to the audited

consolidated financial statements for the periods ending December 25, 2004, which provides additional information with respect to this charge. See also "Business—Legal Proceedings."

(2): Records a management fee payable to Oak Hill and payments made to our CEO in connection with the Acquisition.
(3): As used in this prospectus, Adjusted FIFO EBITDA means earnings before interest, income taxes, depreciation, amortization, expenses related to the Acquisition, labor contingency expense, non-cash charges and credits related to the LIFO inventory valuation method, extraordinary charges and other non-recurring charges. We believe that Adjusted FIFO EBITDA, as presented, represents a useful measure of assessing the performance of our ongoing operating activities, as it reflects our earnings trends without the impact of certain non-cash charges and other non-recurring labor contingency expenses. Targets and positive trends in Adjusted FIFO EBITDA are used as performance measures for determining certain compensation of management. Adjusted FIFO EBITDA is also a primary component in the calculation used by some of our creditors in assessing debt covenant compliance.
: We understand that, although security analysts frequently use Adjusted FIFO EBITDA 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. Adjusted FIFO EBITDA is not intended as an alternative to net income as an indicator of our operating performance, or as an alternative to any other measure of performance in conformity with generally accepted accounting principles, nor as an alternative to cash flow from operating activities as a measure of liquidity.
: A reconciliation of net loss to Adjusted FIFO EBITDA is as follows:

	Pro Forma Fiscal Year Ended December 25, 2004
Net (loss)	$	(30,249	)
Income tax (benefit)		(15,248	)
Interest expense, net		35,651
Debt extinguishment		7,525
Depreciation and amortization(a)		63,390
Labor contingency expense		4,400
LIFO (Income) Provision		(6,268	)

Adjusted FIFO EBITDA(b)	$	59,201

(a): Excludes amortization expense associated with deferred financing costs, which is included in the line item entitled "Interest expense."
(b): Pro forma Adjusted FIFO EBITDA also includes the following items:

	Pro Forma Fiscal Year Ended December 25, 2004
Non-cash deferred rent expense(A)	$	14,074
Oak Hill management fee(B)		1,250
Employee benefit cost due to the CEO(C)		3,321

(A): Under GAAP, in each fiscal period, for each leased store we record as rent expense the total amounts payable as rent during the term of the store's lease, evenly distributed over the lease term. Non-cash deferred rent expense for a period equals our total rent expense recorded under GAAP less cash rent expense actually payable in the period.
(B): Represents an annual management fee of $1.25 million per year payable to Oak Hill.
(C): Represents a long-term cash award of $0.9 million per year and the accrued costs related to the expected transfer of a 1998 corporate owned life insurance policy to the CEO in July 2006. See "Management—Contracts with Executive Officers—Mr. Cuti's Employment Agreement" for more information.

SUMMARY HISTORICAL FINANCIAL INFORMATION AND STATISTICAL DATA

The summary historical consolidated financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes related to those statements appearing elsewhere in this prospectus.

The summary historical consolidated financial and other data set forth below as of and for the fiscal years ended December 30, 2000, December 29, 2001, December 28, 2002, December 27, 2003 and the periods December 28, 2003 through July 30, 2004 and July 31, 2004 through December 25, 2004 have been derived from our audited consolidated financial statements. The consolidated statement of operations data for the thirteen weeks ended March 26, 2005 and March 27, 2004 and the consolidated balance sheet data as of March 26, 2005, have been derived from our unaudited interim consolidated financial statements and related notes.

																Successor- Restated			Predecessor			Successor
	Predecessor—Restated																		Predecessor			Successor
	Predecessor—Restated																		For the 13 Weeks Ended
													December 28, 2003 through July 30, 2004			Period from July 31, 2004 through December 25, 2004
	Fiscal Year(1)
	Fiscal Year(1)																					March 26, 2005
	2000			2001			2002			2003									March 27, 2004			March 26, 2005
													(dollars in thousands)
Statement of Operations Data:
Net sales	$	1,000,068		$	1,170,016		$	1,325,523		$	1,465,275		$	927,801		$	670,568		$	383,310		$	394,767
Cost of sales		748,440			898,952			1,041,303			1,168,408			745,090			542,897			306,808			321,958

Gross profit		251,628			271,064			284,220			296,867			182,711			127,671			76,502			72,809
Selling, general & administrative expenses		155,584			172,972			198,770			229,148			142,293			101,677			58,643			64,499
Transaction expenses(2)		—			—			—			644			3,005			37,575			1,102			427
Labor contingency expense(3)		—			—			—			12,600			2,611			1,789			1,100			1,100
Depreciation and amortization		23,151			26,634			26,935			32,335			21,902			27,051			9,066			17,646
Insurance recovery(4)		—			—			(9,378	)		—			—			—			—			—
Store pre-opening expenses		1,395			1,667			2,086			1,063			470			365			157			100
Other(5)		—			—			—			—			—			26,433			—			1,148

Operating income (loss)		71,498			69,791			65,807			21,077			12,430			(67,219	)		6,434			(12,111	)
Interest expense, net		35,935			27,623			17,925			14,117			7,977			15,880			3,437			(11,165	)
Debt extinguishment(6)		—			2,616			11,371			812			—			7,525			—			—

Income (loss) before income taxes & cumulative effect of accounting change		35,563			39,552			36,511			6,148			4,453			(90,624	)		2,997			(23,276	)
Income tax benefit (expense)		(14,352	)		(15,513	)		(12,994	)		(1,669	)		(1,136	)		35,175			(1,245	)		10,474

Income (loss) before cumulative effect of accounting change		21,211			24,039			23,517			4,479			3,317			(55,449	)		1,752			(12,802	)
Cumulative effect of accounting change, net(7)		—			—			(9,262	)		—			—			—			—			—

	$	21,211		$	24,039		$	14,255		$	4,479		$	3,317		$	(55,449	)	$	1,752		$	(12,802	)

Balance Sheet Data (at end of period):
Working capital(8)	$	152,026		$	212,534		$	230,031		$	155,873			N/A		$	66,703			147,983			58,078
Total assets		572,076			682,070			742,711			797,372			N/A			940,159			802,472			942,362
Total debt and capital lease obligations		353,001			247,155			269,741			272,910			N/A			511,690			277,894			550,458
Stockholders' equity		107,046			287,064			320,403			327,261			N/A			184,049			329,070			171,247

																	Successor- Restated			Predecessor			Successor
		Predecessor—Restated																		Predecessor			Successor
		Predecessor—Restated																		For the 13 Weeks Ended
														December 28, 2003 through July 30, 2004			July 31, 2004 through December 25, 2004
		Fiscal Year(1)
		Fiscal Year(1)																					March 26, 2005
		2000			2001			2002			2003									March 27, 2004			March 26, 2005
														(dollars in thousands)
Operating and Other Data:
Net cash provided by (used in) operating activities		$	22,074		$	25,762		$	42,537		$	47,444		$	21,552		$	(8,107	)	$	12,193		$	(16,650	)
Net cash used in investing activities			(32,647	)		(48,052	)		(60,520	)		(55,115	)		(32,477	)		(440,703	)		(17,119	)		(8,005	)
Net cash provided by financing activities			10,539			26,283			17,194			4,740			11,011			448,801			4,959			24,662
Adjusted FIFO EBITDA(9)			94,649			96,425			83,275			67,016			40,739			24,570			18,039			7,380
Adjusted FIFO EBITDA as a percentage of sales(9)			9.5	%		8.2	%		6.3	%		4.6	%		4.4	%		3.7	%		4.7	%		1.9	%
Investing activities:
	Purchase of Duane Reade	$	—		$	—		$	—		$	—		$	—		$	413,684		$	—		$	—
	New, remodeled and relocated stores		22,821			36,818			39,497			29,074			17,214			11,803			7,823			4,612
	Office and warehouse expansions		—			—			528			2,070			—			—			—			1,058
	Acquisitions		1,247			2,259			5,954			7,579			8,741			7,361			6,193			835
	Other		8,579			10,375			14,541			16,392			6,522			7,855			3,103			1,500

	Total investing activities	$	32,647		$	49,452		$	60,520		$	55,115		$	32,477		$	440,703		$	17,119		$	8,005

	Fiscal Year(1)										For the 13 Weeks Ended
	2000		2001		2002		2003		2004		March 27, 2004		March 26, 2005
	(dollars in thousands, except percentages and store data)
Operating Statistics:
Number of stores at end of period	172		200		228		241		255		243		249
Total sales growth	19.1	%	17.0	%	13.3	%	10.5	%	9.1	%	7.7	%	3.0	%
Same-store sales growth(10)	7.3	%	6.3	%	4.8	%	2.7	%	0.6	%	1.6	%	2.0	%
Pharmacy same-store sales growth(10)	18.8	%	16.6	%	12.1	%	7.5	%	5.0	%	6.6	%	2.0	%
Front-end same-store sales growth(10)	1.8	%	0.6	%	0.0	%	(0.8	)%	(2.8	)%	-2.3	%	2.0	%
Average store size (square feet) at end of period	7,166		7,169		6,921		7,115		7,035		7,131		6,957
Pharmacy sales as a % of net sales	35.4	%	40.6	%	44.0	%	46.7	%	52.3	%	50.1	%	49.5	%
Third party plan sales as a % of prescription sales	84.0	%	86.9	%	90.2	%	91.4	%	92.3	%	92.0	%	92.7	%

(1): The 2000 fiscal year contains 53 weeks. All other fiscal years presented contain 52 weeks.
(2): We incurred one-time pre-tax expenses of approximately $3.0 million and $37.6 million during the period from December 28, 2003 to July 30, 2004 and the period from July 31, 2004 to December 25, 2004, respectively, related to the Acquisition. We incurred additional costs of $0.4 million in the quarter ended March 26, 2005. These transaction expenses included legal and professional fees, change of control payments to management and a transaction fee paid to Oak Hill.
(3): We incurred pre-tax charges of $12.6 million in fiscal 2003, $2.6 million in the period from December 28, 2003 through July 30, 2004, $1.8 million in the period from July 31, 2004 through December 25, 2004 and $1.1 million in the fiscal quarters ended March 27, 2004 and March 26, 2005 in connection with the recognition of a National Labor Relations Board decision in a litigation matter relating to our collective bargaining agreement with the Allied Trades Council, a union representing employees in 139 of our stores.
(4): Represents the recovery of a portion of our business interruption claim related to the September 11, 2001 World Trade Center disaster.
(5): For the successor period ended December 25, 2004, other expenses represents (i) costs related to the early retirement of the Chairman's SERP benefits ($24.5 million), (ii) costs related to the required future transfer of a 1998 Corporate-owned life insurance policy to the Chairman ($1.0 million), (iii) costs related to the Chairman's long-term cash award ($0.4 million) and (iv) Oak Hill management fees ($0.5 million). For the first quarter of 2005, other expenses includes (i) costs related to the required future transfer of a 1998 Corporate-owned life insurance policy to the Chairman ($0.6 million) (ii) costs related to the Chairman's long-term cash award ($0.2 million) and (iii) Oak Hill management fees ($0.3 million).
(6): We incurred pre-tax expenses of approximately $7.5 million, $0.8 million, $11.4 million and $2.6 million in the period from July 31, 2004 to December 25, 2004, and the 2003, 2002 and 2001 fiscal years, respectively, related to the retirement of a portion of our debt. Note 16 of the audited consolidated financial statements for the periods ending December 25, 2004 provides a further explanation of these charges.
(7): We incurred after-tax expenses of approximately $9.3 million in fiscal 2002 related to the conversion of our inventory valuation method from retail dollar FIFO to specific cost LIFO. Note 1 of the audited consolidated financial statements for the periods ending December 25, 2004 provides a further explanation of this charge.

(8): For the successor periods ended March 26, 2005 and December 25, 2004 and the predecessor periods ended March 27, 2004 and December 27, 2003, working capital reflects the classification of our amended asset-based revolving loan facility as a current liability, rather than as long-term debt as previously reported because cash receipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of FAS 6 to reclassify the debt as long-term. For such periods, the revolving loan balance was $179.8 million, $153.9 million, $75.4 million and $70.4 million, respectively.
(9): A reconciliation of net income (loss) to Adjusted FIFO EBITDA for each period included above is set forth below:

												Successor- Restated			Predecessor		Successor
	Predecessor—Restated														Predecessor		Successor
	Predecessor—Restated														For the 13 Weeks Ended
										December 28, 2003 through July 30, 2004		July 31, 2004 through December 25, 2004
	Fiscal Year
	Fiscal Year														March 27, 2004		March 26, 2005
	2000		2001		2002			2003							March 27, 2004		March 26, 2005
										(dollars in thousands)
Net income (loss)	$	21,211	$	24,039	$	14,255		$	4,479	$	3,317	$	(55,449	)	$	1,752	$	(12,802	)
Income tax (benefit) expense		14,352		15,513		12,994			1,669		1,136		(35,175	)		1,245		(10,474	)
Interest expense		35,935		27,623		17,925			14,117		7,977		15,880			3,437		11,165
Depreciation and amortization(a)		23,151		26,634		26,935			32,335		21,902		27,051			9,066		17,646
Debt extinguishment		—		2,616		11,371			812		—		7,525			—		—
Transaction expenses		—		—		—			644		3,005		37,575			1,102		427
Labor contingency expenses		—		—		—			12,600		2,611		1,789			1,100		1,100
CEO SERP settlement fees		—		—		—			—		—		24,500			—		—
Insurance recovery		—		—		(9,378	)		—		—		—			—		—
Cumulative effect of accounting change, net		—		—		9,262			—		—		—			—		—
LIFO (Income) Provision		—		—		(89	)		360		791		(7,059	)		337		(216	)
Purchase accounting inventory valuation adjustment		—		—		—			—		—		7,933			—		534

Adjusted FIFO EBITDA (b)	$	94,649	$	96,425	$	83,275		$	67,016	$	40,739	$	24,570		$	18,039	$	7,380

(a): Excludes amortization expense associated with deferred financing costs, which is included in the line item entitled "Interest expense."
(b): Adjusted FIFO EBITDA includes non-cash deferred rent expense and other non-cash items. Under GAAP, in each fiscal period, for each leased store, we record as rent expense the total amounts payable as rent during the term of the store's lease evenly distributed over the lease term. Non-cash deferred rent expense for a period equals our total rent expense recorded under GAAP less cash rent expense actually paid in the period. Amounts listed below as "other non-cash items" relate to (1) a gain of $1.4 million in the 2001 fiscal year resulting from the sale of several of our pharmacy customer files, (2) $1.9 million of non-cash expenses in the 2004 successor period for costs incurred in connection with the Acquisition and (3) $1.1 million of non-cash expenses in the first quarter of 2005 for costs incurred in connection with the Acquisition. The non-cash deferred rent and other non-cash items recorded in each period are as follows:

												Successor- Restated		Predecessor		Successor
	Predecessor—Restated													Predecessor		Successor
	Predecessor—Restated													For the 13 Weeks Ended
										December 28, 2003 through July 30, 2004		July 31, 2004 through December 25, 2004
	Fiscal Year
	Fiscal Year													March 27, 2004		March 26, 2005
	2000		2001			2002		2003						March 27, 2004		March 26, 2005
										(dollars in thousands)
Non-cash deferred rent	$	6,029	$	7,473		$	11,933	$	9,554	$	4,383	$	6,221	$	1,902	$	3,594
Other non-cash items		—		(1,379	)		—		—		—		1,933		—		1,148

(10): Same-store sales figures include stores that have been in operation for at least 13 months.

RISK FACTORS

Investing in the exchange notes involves a high degree of risk. Prospective purchasers of the exchange notes should carefully consider the following matters, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes, before making an investment in the notes. While these are the risks and uncertainties we believe are most important for you to consider, you should know that they are not the only risks or uncertainties facing us or that may adversely affect our business. Information contained in this section may be considered "forward-looking statements." See "Special Note Regarding Forward-Looking Statements" for a discussion of certain qualifications regarding such statements.

Risks Related to Our Capital Structure

Our substantial indebtedness could prevent us from fulfilling our obligations under the exchange notes and may otherwise restrict our activities.

We have a significant amount of indebtedness. As of March 26, 2005, we had a total of approximately $550.4 million of indebtedness outstanding, consisting of approximately $179.8 million outstanding under the amended asset-based revolving loan facility, $160.0 million outstanding under the notes, $195.0 million of senior subordinated notes and approximately $15.6 million of capital lease obligations. See "Description of Other Indebtedness."

Our outstanding indebtedness, including that under the exchange notes, the amended asset-based revolving loan facility and the senior subordinated notes, could have important consequences to you. For example, it could:

•: make it more difficult for us to satisfy our obligations with respect to the exchange notes;
•: limit our ability to obtain additional financing for funding our growth strategy, capital expenditures, acquisitions, working capital or other purposes;
•: require us to dedicate a substantial portion of our operating cash flow to service our debt, thereby reducing funds available for our growth strategy, capital expenditures, acquisitions, working capital and other purposes;
•: increase our vulnerability to adverse economic, regulatory and industry conditions;
•: limit our flexibility in planning for, or responding to, changing business and economic conditions, including reacting to any economic slowdown in the New York greater metropolitan area;
•: place us at a competitive disadvantage relative to our competitors with less indebtedness; and
•: subject us to financial and other restrictive covenants, and our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of all of our indebtedness.

In addition, the amended asset-based revolving loan facility will mature in 2008. As a result, we may be required to refinance any outstanding amounts under the amended asset-based revolving loan facility prior to the maturity of the exchange notes. We may not be able to obtain such refinancing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material, adverse effect on us and could require us to dispose of assets if we cannot refinance our indebtedness.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantial additional indebtedness. This could further exacerbate the risks associated with our existing substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. We are able to incur up to $250.0 million in total indebtedness under the amended asset-based revolving loan facility and request that the maximum be increased to $275.0 million. Approximately $179.8 million was outstanding under the amended asset-based revolving loan facility as of March 26, 2005. Our ability to borrow under the

amended asset-based revolving loan facility is also subject to a borrowing base formula. The agreement governing the amended asset-based revolving loan facility also allows us to incur additional other indebtedness. The indenture governing the exchange notes contains some limitations on the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur indebtedness; however, it may not prohibit those entities from incurring additional indebtedness. There is no restriction on the ability of Duane Reade Holdings to incur indebtedness. If new indebtedness is added to our and our subsidiaries' current indebtedness levels, the related risks that we and they now face would intensify. See "Description of Notes—Certain Covenants—Incurrence of Indebtedness and Issuance of Disqualified Stock," and "Description of Other Indebtedness—Amended Asset-Based Revolving Loan Facility."

In addition to the covenants under the indenture governing the exchange notes, the agreement governing the amended asset-based revolving loan facility and the indenture governing the senior subordinated notes include restrictive and financial covenants that may limit our operating and financial flexibility.

The indenture governing the exchange notes, the agreement governing the amended asset-based revolving loan facility and the indenture governing the senior subordinated notes contain covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest. These include restrictions on the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to:

•: incur additional indebtedness;
•: pay dividends or distributions on, or redeem or repurchase, capital stock;
•: incur certain liens;
•: prepay, redeem or repurchase specified indebtedness;
•: merge, consolidate or sell assets or enter into other business combination transactions;
•: make acquisitions, capital expenditure investments or other investments;
•: enter into transactions with affiliates;
•: incur certain liens;
•: enter into sale-leaseback transactions;
•: use proceeds from sale of assets;
•: permit restrictions on the payment of dividends by their subsidiaries;
•: impair the collateral; and
•: change their business.

In addition, the agreement governing the amended asset-based revolving loan facility contains a financial covenant that will become effective in the event our borrowings under the facility loan result in less than 10% of the borrowing base remaining available. This financial covenant would require us to comply with a minimum fixed charge coverage ratio. Our failure to meet this financial covenant may result in the accelerated repayment of indebtedness under our amended asset-based revolving loan facility.

Risks Related to the Exchange Notes

Some of the collateral securing our obligations under the exchange notes and the guarantees is shared with creditors that have first-priority liens on that shared collateral. If there is a default, the value of that collateral may not be sufficient to repay the first-priority lien creditors and the holders of the exchange notes and guarantees.

Our obligations under the amended asset-based revolving loan facility are secured, up to a maximum amount, by a first-priority lien on all present and future:

•: accounts, inventory, chattel paper, instruments, documents, prescription files, tax refunds and abatements and deposit accounts,
•: letter of credit rights and supporting obligations related to the items referred to in the previous bullet,
•: all books and records relating to any of the above,
•: all payment intangibles constituting proceeds of the above and
•: all other products and proceeds of the above (including related insurance proceeds).

Our obligations under the exchange notes and the guarantees will be secured by a second-priority lien on all of the collateral securing our obligations under the amended asset-based revolving loan facility, up to the maximum amount. The relative priority of the liens on the shared collateral will be governed by an intercreditor agreement and the related collateral documents.

Accordingly, any proceeds received upon a realization of the shared collateral will be applied first to obligations (including expenses and other amounts) under the amended asset-based revolving loan facility, up to the maximum amount before any amounts will be available to pay the holders of exchange notes. That maximum amount is equal to the amount of expenses and other amounts plus the greater of (x) $275.0 million and (y) the borrowing base under the amended asset-based revolving facility (without giving effect to any reserves) plus permitted overadvances. See "Description of Notes—Collateral—Priority of Security Interests." We will be permitted to borrow such amounts under the indenture governing the exchange notes. See "Description of Notes—Certain Covenants—Incurrence of Indebtedness and Issuance of Disqualified Stock." As a result, if there is a default, the value of that collateral may not be sufficient to repay the first lien creditors, the holders of the exchange notes and the guarantees.

Your right to exercise remedies with respect to the shared collateral is limited, even during an event of default under the indenture. In addition, shared collateral will be subject to any exceptions, defects, encumbrances, liens and other imperfections that are accepted by the lenders under the amended asset-based revolving loan facility.

The rights of the holders of the exchange notes with respect to the collateral shared with the lenders under the amended asset-based revolving loan facility are limited, even during an event of default under the indenture. If the amended asset-based revolving loan facility (or any replacement thereof) is not terminated or our obligations under it or any other obligations secured by first-priority liens are outstanding, any actions that may be taken in respect of any of the shared collateral, including the ability to cause the commencement of enforcement proceedings against the shared collateral and to control the conduct of such proceedings are limited and, in most cases, controlled and directed by the lenders under the amended asset-based revolving loan facility and other obligations secured by first-priority liens. In those circumstances, the trustee, on behalf of the holders of the exchange notes, will not have the ability to control or direct such actions, even if an event of default under the indenture governing the exchange notes has occurred or if the rights of the holders of the exchange notes are or may be adversely affected. The agent and the lenders under the amended asset-based revolving loan facility are under no obligation to take into account the interests of holders of the exchange notes and guarantees when determining whether and how to exercise their rights with respect to the shared collateral, subject to the intercreditor agreement, and their interests and rights may be significantly different from or adverse to yours. To the extent that shared collateral is released from the first-priority liens in accordance with the amended asset-based revolving loan facility, the second-priority liens securing the

exchange notes and the guarantees will also automatically be released. See "Description of Notes—Intercreditor Agreement" and "Description of Notes—Possession, Use and Release of Collateral—Release of Collateral."

The shared collateral will also be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the lenders under the amended asset-based revolving loan facility and other creditors that have the benefit of first-priority liens on the shared collateral from time to time, whether on or after the date the exchange notes and guarantees are issued. The shared collateral also will not include certain "excluded assets," such as assets securing purchase money obligations or capital lease obligations incurred in compliance with the indenture, which obligations would effectively rank senior to the exchange notes to the extent of the value of such excluded assets. In addition, the excluded assets include the capital stock and other securities of our operating subsidiaries, which hold substantially all of our assets on a consolidated basis. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the exchange notes as well as the ability of the collateral agent to realize or foreclose on such collateral. The initial purchasers have neither analyzed the effect of, nor participated in any negotiations relating to such exceptions, defects, encumbrances, liens and imperfections and the existence thereof could adversely affect the value of the collateral securing the exchange notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

Holders of the exchange notes and guarantees will share all collateral equally and ratably with the lenders under certain additional secured indebtedness we will be permitted by the indenture to incur in the future. If there is a default, the value of that collateral may not be sufficient to repay the holders of the exchange notes and guarantees and the lenders under such indebtedness. Furthermore, if there is a default, the collateral agent will be directed by a majority in aggregate principal amount of exchange notes and such indebtedness, taken as a whole.

The exchange notes and guarantees will be secured equally and ratably with the lenders under certain additional secured indebtedness we will be permitted by the indenture to incur in the future, subject to compliance with covenants in our outstanding debt agreements. See "Description of Notes—Certain Covenants—Incurrence of Indebtedness and Issuance of Disqualified Stock" and "See "Description of Notes—Certain Covenants—Liens." As a result, if there is a default, even after all claims secured by first-priority liens on the collateral have been paid, the value of the remaining collateral may not be sufficient to repay the holders of the exchange notes and guarantees and the lenders under any such additional secured indebtedness.

Once any such additional secured indebtedness, other than in the form of additional notes, is incurred, the collateral agency agreement that will provide, among other things, that all instructions to the collateral agent, including with respect to foreclosure, are to be made pursuant to the vote of the holders of a majority of the aggregate indebtedness outstanding under the exchange notes and such additional secured indebtedness, voting as a single class; provided that each of the lenders under such indebtedness or the holders of the exchange notes may, by vote of their class, delegate to any subset of the class the right to further vote 100% of the principal amount of their class. Therefore, a majority of noteholders may not be sufficient to direct the actions of the collateral agent. See "Description of Notes—Collateral—Instructions to the Collateral Agent" and "Description of Notes—Collateral—Foreclosure."

There may not be sufficient collateral to pay all or any of the exchange notes, especially if we incur additional senior secured indebtedness, which will dilute the value of the collateral securing the exchange notes and guarantees.

Although we are presently engaged in an appraisal of the fair market value of certain assets in connection with the Acquisition, no appraisals of any collateral have been prepared in connection with the issuance of the notes. The fair market value of the collateral is subject to fluctuations based on factors that include, among others, the condition of the markets and sectors in which we operate, the ability to sell the collateral in an orderly sale, the condition of the national and local economies, the availability of buyers and

similar factors. The value of the assets pledged as collateral for the exchange notes could be also impaired in the future as a result of our failure to implement our business strategy, competition or other future trends.

In the event of foreclosure on the collateral, the proceeds from the sale of the collateral may not be sufficient to satisfy in full our obligations under the exchange notes, any additional indebtedness secured equally and ratably with the exchange notes and the amended asset-based revolving loan-facility (in the case of shared collateral). The amount to be received upon such a sale would be dependent on numerous factors, including but not limited to the timing and the manner of the sale. In addition, the book value of the collateral should not be relied on as a measure of realizable value for such assets. By its nature, portions of the collateral may be illiquid and may have no readily ascertainable market value. In particular, the collateral on which the exchange notes and guarantees have a first-priority security interest (including equipment, contracts and intellectual property) is generally more illiquid than the collateral shared with the lenders of the amended asset-based revolving loan facility (receivables and inventory). Accordingly, there can be no assurance that the collateral can be sold in a short period of time in an orderly manner. A significant portion of the collateral includes assets that may only be usable, and thus retain value, as part of our existing operating business. Accordingly, any such sale of the collateral separate from the sale of certain of our operating businesses may not be feasible or of significant value.

To the extent that pre-existing liens, liens permitted under the indenture and other rights, including liens on excluded assets, such as those securing purchase money obligations and capital lease obligations granted to other parties (in addition to the holders of obligations secured by first-priority liens), encumber any of the collateral securing the exchange notes and the guarantees, those parties have or may exercise rights and remedies with respect to the collateral that could adversely affect the value of the collateral and the ability of the collateral agent, the trustee under the indenture or the holders of the exchange notes to realize or foreclose on the collateral. Consequently, liquidating the collateral securing the exchange notes may not result in proceeds in an amount sufficient to pay any amounts due under the exchange notes after also satisfying the obligations to pay any creditors with prior liens. If the proceeds of any sale of collateral are not sufficient to repay all amounts due on the exchange notes, the holders of the exchange notes (to the extent not repaid from the proceeds of the sale of the collateral) would have only an unsecured, unsubordinated claim against our and the guarantors' remaining assets.

Duane Reade Inc., Duane Reade GP or any subsidiary guarantor may incur additional secured indebtedness under the indenture governing the exchange notes, including the issuance of additional notes or the incurrence of other forms of indebtedness secured equally and ratably with the exchange notes and borrowings under the amended asset-based revolving loan facility, subject to certain specified conditions. "Description of Notes—Certain Covenants—Incurrence of Indebtedness and Issuance of Disqualified Stock." There is no restriction on the ability of Duane Reade Holdings to incur indebtedness. Any such incurrences could dilute the value of the collateral securing the exchange notes and guarantees.

We will in most cases have control over the collateral, and the sale of particular assets by us could reduce the pool of assets securing the exchange notes and the guarantees.

The collateral documents allow us to remain in possession of, retain exclusive control over, to freely operate and to collect, invest and dispose of any income from, the collateral securing the exchange notes and the guarantees. To the extent the proceeds from any such sale of collateral are shared collateral that is subject to a first-priority lien in favor of the lenders under the amended asset-based revolving facility, the exchange notes will only be secured by a second-priority lien on such shared collateral.

In addition, we will not be required to comply with all or any portion of Section 314(d) of the Trust Indenture Act of 1939 if we determine, in good faith based on advice of counsel, that, under the terms of that section and/or any interpretation or guidance as to the meaning thereof of the SEC and its staff, including "no action" letters or exemptive orders, all or such portion of Section 314(d) of the Trust Indenture Act is inapplicable to the released collateral. For example, so long as no default or event of default under the indenture would result therefrom and such transaction would not violate the Trust Indenture Act, we may, among other things, without any release or consent by the indenture trustee, conduct ordinary course activities

with respect to collateral, such as selling, factoring, abandoning or otherwise disposing of collateral and making ordinary course cash payments (including repayments of indebtedness). With respect to such releases, Duane Reade Inc. and Duane Reade GP must deliver to the collateral agent, from time to time, an officers' certificate to the effect that all releases and withdrawals during the preceding six-month period in which no release or consent of the collateral agent was obtained in the ordinary course of our business were not prohibited by the indenture. See "Description of Notes—Possession, Use and Release of Collateral—Permitted Ordinary Course Activities with Respect to Collateral."

There are circumstances other than repayment or discharge of the exchange notes under which the collateral securing the exchange notes and guarantees will be released automatically, without your consent, the consent of the lenders under the amended asset-based revolving facility or the consent of the trustee.

Under various circumstances, all or a portion of the collateral securing the exchange notes and guarantees will be released automatically, including:

•: a taking by eminent domain, condemnation or other similar circumstances;
•: a sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture;
•: with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee (and its guarantee of any other indebtedness secured equally and ratably with the exchange notes in accordance with the indenture;
•: with respect to any shared collateral, upon any sale or other disposition of such shared collateral (i) by the lenders under the amended asset-based revolving loan facility or (ii) by us or our subsidiaries with the consent of those lenders.

See "Description of Notes—Possession, Use and Release of Collateral—Release of Collateral."

The indenture also permits us to designate one or more of the restricted subsidiaries as unrestricted subsidiaries, subject to certain conditions. If we designate a subsidiary as an unrestricted subsidiary, all of the liens on any collateral owned by the unrestricted subsidiary or any of its subsidiaries and any guarantees of the exchange notes by the unrestricted subsidiary or any of its subsidiaries will be automatically released under the indenture. Designation of an unrestricted subsidiary will therefore reduce the aggregate value of the collateral securing the exchange notes. See "Description of Notes—Possession, Use and Release of Collateral—Release of Collateral."

The pledge of the capital stock, other securities and similar items of our subsidiaries that secure the exchange notes will automatically be excluded from the collateral to the extent the pledge of such capital stock or such other securities would require the filing of separate financial statements with the SEC for that subsidiary.

The exchange notes and the guarantees will be secured by a pledge of Duane Reade Inc. stock that is owned by us and the capital stock, other securities and similar items of some of our subsidiaries. Under SEC regulations in effect as of the issue date of the exchange notes, if the par value, book value as carried by us or market value (whichever is greatest) of the capital stock, other securities or similar items of a subsidiary pledged as part of the collateral is greater than or equal to 20% of the aggregate principal amount of the exchange notes then outstanding, such a subsidiary would be required to provide separate financial statements to the SEC. Therefore, the indenture and the collateral documents provide that any capital stock and other securities of any of our principal subsidiaries, Duane Reade GP, DRI I, Inc. and Duane Reade International, Inc. will be excluded from the collateral to the extent that the pledge of such capital stock or other securities to secure the exchange notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time). We conduct substantially all of our operations through the subsidiaries, which hold substantially all of our assets on a consolidated basis. In addition, the stock of subsidiaries created or acquired by us after the issue date can be "excluded assets" if the aggregate fair market value of all such subsidiaries does not exceed $30.0 million.

As a result, holders of the exchange notes could lose a portion or all of their security interest in the capital stock or other securities of those subsidiaries. It may be more difficult, costly and time-consuming for holders of the exchange notes to foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities, so the proceeds realized upon any such foreclosure could be significantly less than those that would have been received upon any sale of the capital stock or other securities of such subsidiary. See "Description of Notes—Collateral—Excluded Assets."

The imposition of certain permitted liens will cause the asset on which such liens are imposed to be excluded from the collateral securing the exchange notes and the guarantees. There are certain other categories of property that are also excluded from the collateral.

The indenture will permit liens in favor of third parties to secure purchase money indebtedness and capital lease obligations, and any assets subject to such liens will be automatically excluded from the collateral securing the exchange notes and the guarantees. The ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur purchase money indebtedness and capital lease obligations is subject to the limitations, as described in "Description of Notes—Certain Covenants—Incurrence of Indebtedness and Issuance of Disqualified Stock." Other categories of excluded assets and property include owned and leased real property, certain contracts, certain equipment, assets of unrestricted subsidiaries and foreign subsidiaries, capital stock and other securities of our existing subsidiaries (through which we conduct substantially all of our operations) certain stock of foreign subsidiaries and the proceeds from any of the foregoing. See "Description of Notes—Collateral—Excluded Assets." If an event of default occurs and the exchange notes are accelerated, the exchange notes and the guarantees will rank equally with the holders of other unsubordinated and unsecured indebtedness of the relevant entity with respect to such excluded property.

The assets of our subsidiaries that are not guarantors of the exchange notes will be subject to prior claims by creditors of those subsidiaries.

You will not have any claim as a creditor against our subsidiaries that are not guarantors of the exchange notes. All of our current subsidiaries, other than the co-obligors, will guarantee the exchange notes, and there are no unrestricted subsidiaries under the indenture. Nevertheless, any future unrestricted subsidiaries will not guarantee the exchange notes. In addition, although we will have no such subsidiaries at the issue date of the exchange notes, certain non-wholly-owned restricted subsidiaries will not be required to guarantee the exchange notes or pledge their assets, subject to certain limitations, as described in "Description of Notes—Guarantees" and "Description of Notes—Issuances of Guarantees by New Restricted Subsidiaries and Non-Guarantor Restricted Subsidiaries." Therefore, the assets of our non-guarantor subsidiaries will be subject to prior claims by creditors of those subsidiaries, whether secured or unsecured. Unrestricted subsidiaries under the indenture are also not subject to the covenants in the indenture.

The collateral is subject to casualty risks.

We intend to maintain insurance or otherwise insure against hazards in a manner appropriate and customary for our business. There are, however, certain losses that may be either uninsurable or not economically insurable, in whole or in part. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any of the pledged collateral, the insurance proceeds may not be sufficient to satisfy all of the secured obligations, including the exchange notes and the guarantees.

Rights of holders of exchange notes in the collateral may be adversely affected by the failure to perfect security interests in certain collateral.

The security interests in the collateral securing the exchange notes include both tangible and intangible assets, whether now owned or acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. There can be no assurance that the collateral agent will monitor, or that we will inform the collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after acquired collateral. The collateral agent does not have any duty to monitor the acquisition of

additional property or rights that constitute collateral or perfection of the security interests therein. Such failure may result in the loss of the security interest therein or the priority of the security interest in favor of the holders of exchange notes against third parties. In addition, we, under certain circumstances, may not be required to grant or perfect security interests in property acquired after the issue date of the exchange notes. For example, we will not be required to grant or perfect a lien on any collateral that consists of rights that are licensed or leased from a third party, if we would be required to obtain the third party's consent for such grant or perfection, and we are unable to do so after use of commercially reasonable efforts. See "Description of Notes—Collateral—After-Acquired Property."

Bankruptcy laws and other factors may limit or delay the trustee's ability to foreclose on the collateral.

If we, Duane Reade Inc., Duane Reade GP or any of the subsidiary guarantors become a debtor in a case under the United States Bankruptcy Code, the right of the holders of obligations secured by liens on the collateral to foreclose upon and sell such collateral upon the occurrence of an event of default could be subject to limitations under federal bankruptcy laws. Under the Bankruptcy Code, secured creditors such as the holders of the exchange notes are prohibited from repossessing or foreclosing upon their collateral from a debtor in a bankruptcy case, or from disposing of collateral already repossessed, without prior bankruptcy court approval. Other provisions of the Bankruptcy Code permit a debtor to retain and to use the collateral (and the proceeds, products, rents, or profits of such collateral), including cash collateral such as deposit accounts, over the secured creditors' objection, even if the debtor is in default under applicable debt instruments so long as the secured creditor is afforded "adequate protection" of its interest in the collateral. Although the precise meaning of the term "adequate protection" may vary according to circumstances, it is intended in general to protect a secured creditor against any diminution in the value of the creditor's interest in its collateral. The determination as to whether adequate protection exists depends on the valuation of the collateral and the discretion of the bankruptcy court. As a result, it is impossible to predict how long payments under the exchange notes could be delayed following commencement of a bankruptcy case, whether or when the collateral agent could repossess or dispose of the collateral, or whether or to what extent holders of the exchange notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of "adequate protection."

Moreover, the collateral agent and the indenture trustee may need to evaluate the impact of the potential liabilities before determining to foreclose on collateral consisting of real property, if any, because secured creditors that hold a security interest in real property may be held liable under environmental laws for the costs of remediating or preventing the release or threatened releases of hazardous substances at such real property. Consequently, the collateral agent may decline to foreclose on such collateral or exercise remedies available in respect thereof if it does not receive indemnification to its satisfaction from the holders of the exchange notes.

Finally, the collateral agent's ability to foreclose on the collateral on your behalf may be subject to lack of perfection, the consent of third parties, prior liens (as discussed above), and practical problems associated with the realization of the security interest in the collateral. It is impossible to predict what recovery (if any) would be available for such an unsecured claim if the issuer or a guarantor became a debtor in a bankruptcy case, including what form any such recovery would take, such as cash, new debt instruments, or other securities.

Certain pledges of collateral might be avoidable by a trustee in bankruptcy.

Any future pledge of collateral, or any future perfection of any other pledge, to secure the exchange notes might be avoidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of the exchange notes to receive a greater recovery than if the pledge had not been given, and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period.

It may be difficult to realize the value of the collateral pledged to secure the exchange notes and the guarantees.

The security interest of the trustee may be subject to practical problems generally associated with the realization of security interests in the collateral. For example, the trustee may need to obtain the consent of a third party or governmental agency to obtain or enforce a security interest in a license or contract or to otherwise operate our business. We cannot assure you that the trustee will be able to obtain any such consent. If the trustee exercises its rights to foreclose on certain assets, transferring required government approvals to, or obtaining new approvals by, a purchaser of assets may require governmental proceedings with consequent delays. In addition, any foreclosure on the assets of a subsidiary, rather than upon its capital stock as a result of the stock of such subsidiary being an "excluded asset", may result in delays and additional expense, as well as less proceeds than would otherwise have been the case.

The exchange notes may be subject to repurchase by the lenders under the amended asset-based revolving loan facility or their nominees upon an event of default under the indenture and an acceleration of the exchange notes.

Under the intercreditor agreement, if an event of default under the indenture or any other indebtedness secured equally and ratably with the exchange notes occurs, and the exchange notes or such indebtedness are accelerated, persons designated by the lenders under the amended asset-based revolving facility have the option to purchase all of the exchange notes and such indebtedness. The purchase price will be the full amount then outstanding and unpaid under the exchange notes such indebtedness (including principal, interest, fees and expenses, including reasonable attorneys' fees and legal expenses). The option to purchase does not include any premium and is exercisable at any time upon an event of default and acceleration, regardless of whether the exchange notes are otherwise subject to redemption at such time. See "Description of Notes—Option to Purchase." Depending on the circumstances of such a purchase, the purchase price for the exchange notes may not reflect their actual value at the time.

We may not have the ability to purchase the exchange notes upon a change of control.

Upon the occurrence of specified change of control events, we will be required to offer to purchase each holder's exchange notes at a price equal to 101% of their principal amount plus accrued and unpaid interest, unless all exchange notes have been previously called for redemption. The holders of other debt securities that we may issue in the future, which rank equally in right of payment with the exchange notes, may also have this right. The occurrence of a change of control could constitute an event of default under agreements governing other indebtedness that is secured equally and ratably with the exchange notes and/or any of our future credit agreements, in which case our lenders may terminate their commitments under those agreements and accelerate all amounts outstanding under the relevant facilities. Therefore, we may not have sufficient financial resources to purchase all of the debt securities or other indebtedness with such provisions as a result of a change of control.

We, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors may be subject to laws relating to fraudulent conveyance.

Various fraudulent conveyance laws have been enacted for the protection of creditors and may be used by a court to subordinate or void the exchange notes in favor of our other existing and future creditors. If a court, in a lawsuit on behalf of any of our unpaid creditors or a representative of those creditors, were to find that, at the time Duane Reade Inc. and Duane Reade GP issue the exchange notes, Duane Reade Inc. and/or Duane Reade GP:

•: intended to hinder, delay, or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or did not receive fair consideration or reasonably equivalent value for issuing the exchange notes; and
•: were insolvent;

•: were rendered insolvent by reason of that issuance;
•: were engaged or about to engage in a business or transaction for which our remaining assets constituted unreasonably small capital to carry on our business; or
•: intended to incur, or believed that we would incur, debts beyond our ability to pay as they matured,

the court could void their obligations under the exchange notes. Alternatively, the claims of the holders of exchange notes could be subordinated to claims of our other creditors. Similar risks apply to the guarantees of the exchange notes and the granting of liens to secure the exchange notes and the guarantees.

The measures of insolvency for purposes of these fraudulent conveyance laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent conveyance has occurred. Generally, however, any of the obligors under the exchange notes or the guarantees would be considered insolvent if:

•: the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets, as the case may be;
•: the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
•: it could not pay its debts as they became due.

Based on financial and other information currently available to us, we believe:

•: the exchange notes and the guarantees will be issued and the relevant liens will be granted for proper purposes and in good faith;
•: each of we, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors will be solvent after issuing the exchange notes and the guarantees, respectively and granting the relevant liens;
•: each of we, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors will be able to pay its debts as they mature after issuing the exchange notes and the guarantees, respectively and granting the relevant liens; and
•: each of we, Duane Reade Inc., Duane Reade GP and the subsidiary guarantors will not have unreasonably small capital for the business in which it is engaged.

We did not obtain a valuation opinion. A court may apply a different standard in making these determinations or disagree with our conclusions in this regard.

An active trading market for the exchange notes may not develop.

The exchange notes are a new issue of securities for which there is currently no public market. The exchange notes will not be listed on any securities exchange or included in any automated quotation system. We do not know whether an active trading market will develop for the exchange notes. Although the initial purchasers have informed us that they intend to make a market in the exchange notes, they are under no obligation to do so and may discontinue any market making activities at any time without notice. Accordingly, no market for the exchange notes may develop, and any market that develops may not last.

Even if a trading market for the exchange notes does develop, you may not be able to sell your exchange notes at a particular time, if at all, or you may not be able to obtain the price you desire for your exchange notes. If the exchange notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on many factors including prevailing interest rates, the market for similar securities, our credit rating, the interest of securities dealers in making a market for the exchange notes, the price of any other securities we issue, the performance prospects and financial condition of our company as well as of other companies in our industry. We do not intend to apply for listing of the exchange notes on any securities or other stock market.

Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial fluctuations in the price of the securities. Even if a trading market for the exchange notes develops, it may be subject to disruptions and price volatility.

Risks Related to the Exchange Offer

The issuance of the exchange notes may adversely affect the market for the initial notes.

If initial notes are tendered for exchange and accepted in the exchange offer, the trading market for the untendered and tendered but unaccepted initial notes could be adversely affected. Please refer to "—Your failure to participate in the exchange offer will have adverse consequences," below.

Your failure to participate in the exchange offer will have adverse consequences.

The initial notes were not registered under the Securities Act or under the securities laws of any state and you may not resell them, offer them for resale or otherwise transfer them unless they are subsequently registered or resold under an exemption from the registration requirements of the Securities Act and applicable state securities laws. If you do not exchange your initial notes for exchange notes in this exchange offer, or if you do not properly tender your initial notes in this exchange offer, you will not be able to resell, offer to resell or otherwise transfer the initial notes unless they are registered under the Securities Act or unless you resell them, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. In addition, you may no longer be able to obligate us to register the initial notes under the Securities Act.

Some persons who participate in the exchange offer must deliver a prospectus in connection with resales of the exchange notes.

Based on certain no-action letters issued by the staff of the Commission, we believe that you may offer for resale, resell or otherwise transfer the exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act. However, in some instances described in this prospectus under "Plan of Distribution," you will remain obligated to comply with the registration and prospectus delivery requirements of the Securities Act to transfer your exchange notes. In these cases, if you transfer any exchange note without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from registration of your exchange notes under the Securities Act, you may incur liability under the Securities Act. We do not and will not assume, or indemnify you against, this liability.

Risks Related to the Acquisition

We are named parties to a number of purported class action complaints in connection with the Acquisition that may have a negative impact on us.

A number of purported class action complaints challenging the Acquisition have been filed in various jurisdictions. All of these complaints purport to be brought on behalf of our former common stockholders and allege that the named defendants purportedly breached duties owed to the common stockholders in connection with the Acquisition. See "Business—Legal Proceedings—Litigation Relating to the Acquisition."

An adverse outcome in this litigation could have a material, adverse effect on our results of operations and cash flows.

We are a company whose equity is not publicly traded and which is effectively controlled by a single stockholder. That stockholder may effect changes to our board of directors, management and business plan, and interests of that stockholder may conflict with your interests as a noteholder.

Duane Reade Shareholders owns substantially all of the outstanding shares of our common stock. Oak Hill owns a majority of the voting membership interests in Duane Reade Shareholders. See "Principal Stockholders."

Accordingly, Oak Hill indirectly beneficially owns a majority of our outstanding shares of common stock and can determine the outcomes of the elections of members of our board of directors and the outcome of corporate actions requiring stockholder approval, including mergers, consolidations and the sale of all or substantially all of our assets. Oak Hill also controls our management, policies and financing decisions and is in a position to prevent or cause a change of control of us. The interests of Oak Hill could conflict with yours. For example, if we encounter financial difficulties or are unable to pay our debts as they come due, the interests of Oak Hill as an equity holder might conflict with your interests as a noteholder. Oak Hill may have an interest in pursuing acquisitions, divestitures or financings or other transactions that, in its judgment could enhance its equity investment, even though such transactions may involve significant risks to you as a noteholder. In addition, Oak Hill and its affiliates may in the future own interests in businesses that compete with ours.

Risks Related to Our Business

We face a high level of competition in our markets.

We operate in highly competitive markets. In the New York greater metropolitan area, we compete 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 greater metropolitan area include CVS, Rite Aid, Eckerd and Walgreens. In addition, other chain stores may enter the New York greater metropolitan area and become significant competitors in the future. Many of our competitors have greater financial and other resources than we do. Currently, we have the largest market share in the New York metropolitan area compared to our competitors in the drugstore business. If any of our current competitors, or new competitors, were to devote significant resources to enhancing or establishing an increased presence in the New York greater metropolitan area, they could make it difficult for us to maintain or grow our market share or maintain our margins, and our advertising and promotional costs could increase. Our photofinishing business has recently experienced negative growth as the industry as a whole experiences declines in use of traditional technologies and as we have made the transition to digital photofinishing. Our digital photofinishing business may not grow as expected. As a result, our business and prospects could suffer. This competition could materially adversely affect our results of operations and financial condition in the future. In addition to competition from the drugstore chains named above, our pharmacy business also competes with hospitals, health maintenance organizations and Canadian imports.

Another adverse trend for drugstore retailing has been the rapid growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug costs experienced in recent years. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by an increasing number of third party pharmacy benefit managers, many of which also own and manage mail-order distribution operations. In addition to these forms of mail-order distribution, there have also been an increasing number of internet-based prescription distributors that specialize in offering certain high demand lifestyle drugs at deeply discounted prices. A number of these internet-based distributors operate illicitly and outside the reach of regulations that govern legitimate drug retailers. Competition from Canadian imports has also been increasing significantly recently and also creates volume and pricing pressure. Imports from foreign countries may increase further if recently introduced legislation seeking to legalize the importation of drugs from Canada and other countries is eventually enacted. These alternate distribution channels have acted to restrain the rate of sales growth for traditional chain drug retailers in the last few years.

We operate in a concentrated region and, as a result, our business is significantly influenced by the economic conditions and other characteristics of the New York greater metropolitan area.

Substantially all of our stores are located in the New York greater metropolitan area. As a result, we are sensitive to, and our success will be substantially affected by, economic conditions and other factors affecting

this region, such as the regulatory environment, the cost of energy, real estate, insurance, taxes and rent, weather, demographics, the availability of labor, and geopolitical factors such as terrorism. We cannot predict economic conditions in this region. During the 1990s, the New York City economy grew substantially, and our business benefited from this high rate of economic growth. As a result of the economic recession and the terrorist attack on the World Trade Center in September 2001, however, the New York City economy has been materially adversely affected. Although the national average unemployment rate was 5.2%, the April 2005 seasonally adjusted unemployment rate for New York City was 5.7%. Recent improvements in the New York City economy may not continue or impact our business favorably. During a downturn in New York's economic conditions, our revenues and profitability could be materially adversely affected because of, among other things, a reduction in the size of the workforce in the New York greater metropolitan area, reduced income levels, a resulting increase in shrink or a decline in population growth. Because most of our stores are located in the highly urbanized areas throughout New York City and the surrounding metropolitan area, our stores experience a higher rate of shrink than our national competitors. In addition, our front-end sales have been negatively affected by declining tobacco sales in metro New York City, which has experienced increased restrictions on smoking in public places along with higher taxes on tobacco products. Our revenues and profitability were adversely affected by the August 2003 power blackout that affected the New York greater metropolitan area and by significant one-time increases in real estate taxes and insurance costs. In addition, our results were negatively impacted during the summer of 2004 by the Republican National Convention and related disruptions and the heightened security and terrorist alerts during the weeks leading up to the Convention. In the first fiscal quarter of 2005 our results were negatively affected by increased labor costs associated with the ongoing shortage of pharmacists in the New York City metropolitan area and increases in New York state minimum wage rates. Any other unforeseen events or circumstances that affect the area could also materially adversely affect our revenues and profitability.

Failure to successfully implement our growth plan may adversely affect our financial performance.

We have grown primarily through opening new stores and store acquisitions, growing from 67 stores at the end of fiscal 1997 to 249 stores at March 26, 2005. We intend to continue to grow incrementally through these methods. Currently, we plan to open 10 to 12 new stores in each of the 2005 through 2008 fiscal years. As we pursue our growth plan, we may have difficulty expanding and improving our operating and financial systems to keep pace with the increased complexity of our operations and management responsibilities. Also, we may be unable to hire a sufficient number of qualified pharmacists, and recent market dislocations have increased our labor costs in this area. The maturation of our recently opened stores has also been slowed by the sluggish economy in, and other factors and events affecting, our primary market areas. In addition, because of our high store density, some of our new stores may draw customers from other stores we operate. The recent completion of the Acquisition and the attention that our management was required to devote to the Acquisition also resulted in delays in acquisitions of pharmacy files, which negatively impacted our results.

The success of our growth program will also depend on a number of other factors, including, among other things:

•: economic conditions;
•: competition;
•: consumer preferences and purchasing power;
•: financing and working capital requirements;
•: labor disturbances, including any resulting from the suspension or termination of our collective bargaining agreements;
•: our ability to negotiate store leases on favorable terms; and
•: the availability of additional warehouse space and new store locations.

Even if we succeed in opening new stores as planned, our newly opened or recently opened stores may not achieve revenue or profitability levels comparable to those of our mature stores in the time periods

estimated by us or at all. Moreover, our newly opened or recently opened stores may adversely affect the revenues and profitability of our existing stores. Failure of our growth strategy may have a material adverse effect on our financial results.

We require a significant amount of cash flow from operations and third party financing to pay our indebtedness, to execute our business plan and to fund our other liquidity needs.

We may not be able to generate sufficient cash flow from operations, and future borrowings may not be available to us under the amended asset-based revolving loan facility or otherwise in an amount we will need to pay our indebtedness, to execute our business plan or to fund our other liquidity needs. We expect to spend approximately $28 million in 2005 on capital expenditures, and an additional approximately $11 million for lease acquisition, pharmacy customer file and other costs. We also require working capital to support inventory for our existing stores. In addition, we may need to refinance some or all of our indebtedness, including indebtedness under the amended asset-based revolving loan facility, the senior subordinated notes and these notes, at or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future business initiatives or expenditure plans.

Our operations are subject to trends in the healthcare industry.

Pharmacy sales, which are lower-margin than front-end sales, represent a significant percentage of our total sales. Pharmacy sales accounted for approximately 49.5% of total sales in the fiscal quarter ended March 26, 2005, approximately 51% of total sales in the fiscal year ended December 25, 2004, 46.7% of our total sales for the fiscal year ended December 27, 2003 and 44% of our total sales for fiscal 2002. Pharmacy sales not only have lower margins than non-pharmacy sales but are also subject to increasing margin pressure, as managed care organizations, insurance companies, government funded programs, employers and other third party payers, which collectively we call third party plans, have become prevalent in the New York greater metropolitan area and as these plans continue to seek cost containment. Also, any substantial delays in reimbursement, significant reduction in coverage or payment rates from third party plans may have a material, adverse effect on our business. In addition, an increasing number of employers are now requiring participants in their plans to obtain some of their prescription drugs, especially those for non-acute conditions, through mail-order providers. See "—We face a high level of competition in our markets." Sales to third party prescription plans represented 92.7% of our prescription sales for the fiscal quarter ended March 26, 2005, 92.3% of our prescription sales for the fiscal year ended December 25, 2004, 91.4% of our prescription sales for the fiscal year ended December 27, 2003 and 90.2% of our prescription sales for fiscal 2002. In addition, our results may be affected adversely by recently enacted Medicare legislation. See "—Changes in reimbursement levels for prescription drugs continue to reduce our margins on pharmacy sales and could have a material, adverse effect on our overall performance."

The continued conversion of various prescription drugs to over-the-counter medications may materially reduce our pharmacy sales and customers may seek to purchase such medications at non-pharmacy stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy or front-end product mix.

Healthcare reform and enforcement initiatives of federal and state governments may also affect our revenues from prescription drug sales. These initiatives include:

•: 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;

•: the Medicare Drug Act;
•: increased scrutiny of, and litigation relating to, prescription drug manufacturers' pricing and marketing practices; and
•: regulatory changes relating to the approval process for prescription drugs.

These initiatives could lead to the enactment of, or changes to, federal regulations and state regulations in New York and New Jersey that could adversely impact our prescription drug sales and, accordingly, our results of operations. It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. Future healthcare or budget legislation or other changes, including those referenced above, may materially adversely impact our pharmacy business.

Changes in reimbursement levels for prescription drugs continue to reduce our margins on pharmacy sales and could have a material, adverse effect on our overall performance.

During the fiscal quarter ended March 26, 2005, the fiscal year ended December 25, 2004 and the fiscal year ended December 27, 2003, we were wholly or partially reimbursed by third party plans for approximately 92.7%, 92.3% and 91.4% of the prescription drugs that we sold, respectively. The percentage of prescription sales reimbursed by third party plans has been increasing, and we expect that percentage to continue to increase. Prescription sales reimbursed by third party plans, including Medicare and Medicaid plans, have lower gross margins than other pharmacy sales. Third party plans may not increase reimbursement rates sufficiently to offset expected increases in prescription acquisition costs, thereby reducing our margins and adversely affecting our profitability. In addition, continued increases in co-payments by third party plans may result in decreases in drug usage.

In particular, Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective reimbursement rate adjustments, administrative rulings, executive orders and freezes and funding restrictions, all of which may significantly impact our pharmacy operations. For the 2004 fiscal year, 24% of our total prescription sales were paid for by Medicaid or Medicare. Over the last several years, a number of states experiencing budget deficits have moved to reduce Medicaid prescription reimbursement rates. In fiscal 2003 and again in fiscal 2004, New York State reduced Medicaid and EPIC prescription reimbursement rates, adversely impacting our pharmacy gross margins. The most recent reductions became effective on October 1, 2004 and are expected to reduce reimbursements by approximately $1.4 million on an annual basis. New Jersey also implemented reduced Medicaid reimbursement rates in 2003.

During 2003, President Bush signed the Medicare Drug Act, which created a new Medicare Part D benefit that will expand Medicare coverage of prescription drugs for senior citizens not participating in third party plans. Sales to such customers represent less than 2% of our total revenue. This new Medicare coverage is scheduled to take effect in 2006 and is expected to result in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on prescriptions that are not subject to third party plan reimbursement. In June 2004, a temporary senior citizen prescription drug discount program furnished under this Medicare legislation was implemented and is expected to remain in effect until the full Medicare program takes effect in 2006. This temporary program is also expected to result in lower pharmacy margins than those currently realized on prescriptions that are not subject to third party plan reimbursement.

If we fail to comply with all of the government regulations that apply to our business, we could incur substantial reimbursement obligations, damages, penalties, injunctive relief and/or exclusion from participation in federal or state healthcare programs.

Our pharmacy operations are subject to a variety of complex federal, state and local government laws and regulations, including federal and state civil fraud, anti-kickback and other laws. We endeavor to structure all of our relationships to comply with these laws. However, if any of our operations are found to violate

these or other government regulations, we could suffer severe penalties, including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements.

Federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Violations of federal, state, and common law privacy protections could give rise to significant damages, penalties, and/or injunctive relief. Additionally, we are subject to federal and state regulations relating to our pharmacy operations, including purchasing, storing and dispensing of controlled substances. Laws governing our employee relations, including minimum wage requirements, overtime and working conditions also impact our business. Increases in the federal minimum wage rate, employee benefit costs or other costs associated with employees could significantly increase our cost of operations, which could materially adversely affect our level of profitability.

Changes in our effective tax rate could adversely affect our results of operations and cash flow.

Our effective tax rate, which was 45% for the first fiscal quarter of 2005 and 41.5% for the comparable period in 2004, has been and is expected to continue to be a major factor in the determination of our profitability and cash flow. As such, a significant shift in the relative sources of our earnings, or changes in tax rules or interpretations, could have a material, adverse effect on our results of operations and cash flow.

A New York State Tax Appeal ruling in a matter involving another company may have an adverse impact upon our New York State Franchise Tax filings from years 1999 through 2002. This matter relates to the required combination of affiliated subsidiaries in recognizing royalty fee and related income for intangible property. The ruling is subject to further legal appeal and interpretation in light of our specific facts and circumstances. The outcome of this matter, and the resulting amount, if any, of additional income tax expense (which could be material) cannot be determined by us at this time.

We could be materially and adversely affected if either of our distribution centers is shut down.

We operate two centralized distribution centers, one in Queens, New York and the other in North Bergen, New Jersey. We ship nearly all of our non-pharmacy products to our stores through our distribution centers. If either of our distribution centers is destroyed or shut down for any other reason, including because of weather or labor issues, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes for us to reopen or replace the centers. We maintain business interruption insurance to protect us from the costs relating to matters such as a shutdown, but our insurance may not be sufficient, or the insurance proceeds may not be timely paid to us, in the event of a shutdown.

We rely on a primary supplier of pharmaceutical products to sell products to us on satisfactory terms. A disruption in our relationship with this supplier could have a material, adverse effect on our business.

We are party to multi-year, merchandise supply agreements in the normal course of business. The largest of these is with AmerisourceBergen, our primary pharmaceutical supplier, which supplied approximately 83.2% and 77.7% of our pharmaceutical products in the year ended December 27, 2003 and year ended December 25, 2004 respectively. Although it is the opinion of management that if any of these agreements were terminated or if any contracting party was to experience events precluding fulfillment of its obligations, we would be able to find a suitable alternative supplier, we may not be able to do so without significant disruption to our business. This could take a significant amount of time and result in a loss of customers.

We may be unable to attract, hire and retain qualified pharmacists, which could harm our business.

As our business expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified pharmacists. Our industry is experiencing an ongoing shortage of licensed pharmacists. There have also been recent market dislocations in this area; as a result competition for qualified pharmacists and other pharmacy professionals has been especially strong, resulting in higher salaries, which we have recently matched. Although we generally have been able to meet our pharmacist staffing requirements in the past, our inability to do so in the future at costs that are favorable to us, or at all, could impair our ability to increase revenue, and our customers could experience lower levels of customer care.

Most of our employees are covered by collective bargaining agreements. A failure to negotiate new agreements when the existing agreements terminate could disrupt our business. In addition, we are a party to a National Labor Relations Board administrative proceeding regarding a dispute with one of our unions.

As of March 26, 2005, we had approximately 6,300 employees, 80% of whom were full-time. Unions represent approximately 4,600 of our employees. Non-union employees include employees at corporate headquarters, store and warehouse management and most part-time employees, as well as approximately 40% of our store pharmacists. The distribution facility employees are represented by the International Brotherhood of Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815. Our three-year contract with this union expires on August 31, 2005. Employees in some stores are represented by the Allied Trades Council, or ATC, and other stores are represented by Local 340A New York Joint Board, UNITE AFL-CIO, or UNITE.

On August 31, 2001, our collective bargaining agreement with the ATC expired after we were unable to reach agreement with the ATC on terms for a successor agreement. The ATC unsuccessfully attempted to strike at some of our stores, but our employees remained at work at all times and have been working under the terms of our December 6, 2001 implemented contract with the ATC, which expired on August 31, 2004. We are a respondent in a National Labor Relations Board, or NLRB, administrative proceeding regarding a dispute with the ATC over whether a negotiating impasse was reached between us and the ATC. On February 18, 2004, an Administrative Law Judge, or ALJ, who had reviewed various matters related to this proceeding issued a decision and related recommendation, which concluded that the parties were not at impasse. The remedies recommended by the ALJ included, among other things, a requirement for us to make our employees whole by reimbursing them for expenses ensuing from the failure to make contributions to the union funds and to make such funds whole, plus interest. This recommendation was adopted by a three-member panel of the NLRB on September 15, 2004. While it is our belief that the final financial outcome of this litigation cannot be determined at this time, in accordance with the provisions of Statement of Financial Accounting Standard No. 5, which addresses contingencies, we have recorded non-cash pre-tax charges of $12.6 million for the year ended December 27, 2003, $2.6 million during the period from December 28, 2003 through July 30, 2004, $1.8 million during the period from July 31, 2004 through December 25, 2004 and $1.1 million for the first fiscal quarter of 2005. While this represents our current best estimate of the loss that would result upon application of the NLRB's decision, we believe that, as of March 26, 2005, the actual range of loss in this matter could be from $0, if the NLRB's decision is not enforced at all by the Circuit Court of Appeals, to approximately $40 million, if the NLRB's decision is not modified to provide for an offset. Until such time as further legal developments warrant a change in the application of this accounting standard, or until this matter is resolved, we will record additional non-cash pre-tax charges, including interest, which are calculated on the same basis as the charge recorded in our 2003 and 2004 financial statements. We estimate that the pre-tax charge to be recorded during the full 12 months of 2005 will approximate $4.4 million, subject to fluctuations in the relevant interest rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" and "Business—Legal Proceedings."

The ATC has attempted to affiliate with a larger union, Local 338 of the Retail, Wholesale and Department Store Union, UFCW, AFL-CIO, CLC, which is subject to a favorable vote from a majority of the

ATC's membership. Two votes of the membership conducted to date are in dispute and are the subject of litigation, the outcome of which is uncertain at this time.

Our collective bargaining agreement with UNITE expired on March 31, 2005. The parties have agreed to an extension of this contract through July 31, 2005. Upon the expiration of any of our collective bargaining agreements, we may be unable to negotiate new collective bargaining agreements on terms favorable to us, and our business operations may be interrupted as a result of labor disputes, strikes, work stoppages or difficulties and delays in the process of renegotiating our collective bargaining agreements.

We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.

Products that we sell could become subject to contamination, product tampering, mislabeling or other damage requiring us to recall our private label products. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be asserted against us with respect to any of the products or pharmaceuticals we sell and we may be obligated to recall our private label products. A product liability judgment against us or a product recall could have a material, adverse effect on our business, financial condition or results of operations.

We depend on our management team, and the loss of their services could have a material, adverse effect on our business.

Our success depends to a large extent on the continued service of our executive management team. Departures by our executive officers could have a negative impact on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not maintain key-man life insurance on any of our executive officers.

Continued volatility in insurance related expenses and the markets for insurance coverage could have a material adverse effect on us.

The costs of employee health, workers' compensation, property and casualty, general liability, director and officer and other types of insurance have continued to rise, while the amount and availability of coverage have decreased. Claims costs for workers' compensation and other self-insured exposures have also increased. These conditions have been exacerbated by rising healthcare costs, legislative changes, economic conditions and the terrorist attacks of September 11, 2001. If our insurance-related costs continue to increase significantly, or if we are unable to obtain adequate levels of insurance, our financial position and results of operations could be materially adversely affected.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging, dispensing and distribution of pharmaceuticals and other healthcare products. Although we maintain professional liability and errors and omissions liability insurance, the coverage limits under our insurance programs may not be adequate to protect us against future claims, and we may not maintain this insurance on acceptable terms in the future, which could materially adversely affect our business.

USE OF PROCEEDS

We will not receive any cash proceeds from the issuance of the exchange notes in exchange for the outstanding initial notes. We are making this exchange solely to satisfy our obligations under the registration rights agreements entered into in connection with the offering of the initial notes. In consideration for issuing the exchange notes, we will receive initial notes in like aggregate principal amount.

The gross proceeds from the offering of the initial notes were $160.0 million. The actual sources and uses of funds in connection with the offering of the initial notes and the related refinancing of the senior term loan facility are set forth below:

(dollars in millions)

Sources of Funds
Senior secured floating rate notes		$	160.0
Draw on amended asset-based revolving loan facility			2.2

	Total Sources	$	162.2

Uses of Funds
Refinancing of senior term loan facility		$	155.0
Call premium and accrued but unpaid interest through December 20, 2004 (the date of the closing of the refinancing) on senior term loan facility			3.6
Estimated fees, expenses, and transaction costs			3.6


	Total Uses	$	162.2

The proceeds of the senior term loan facility were used to finance, in part, the Acquisition, which closed on July 30, 2004.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization on a historical basis as of March 26, 2005.

For additional information regarding our indebtedness, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources," "Description of Other Indebtedness," "Description of Notes" and "Use of Proceeds." You should read this table in conjunction with "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, in each case, included elsewhere in this prospectus.

			Historical
			(dollars in millions)
Cash and cash equivalents			$	1.3

Debt (including current portion):
	Asset-based revolving loan facility(1)		$	179.8
	Senior secured floating rate notes due 2010			160.0
	9³/4% senior subordinated notes due 2011			195.0
	Capitalized lease obligations(2)			15.6

		Total debt (including current portion)		550.4
Total stockholders' equity				171.2

		Total capitalization	$	721.6

(1): The amended asset-based revolving loan facility uses a pre-determined percentage of the current value of our inventory, selected accounts receivable and pharmacy prescription files to calculate the availability of funds eligible to be borrowed up to an aggregate principal amount of $250.0 million, which includes a $50.0 million sublimit for the issuance of letters of credit and swingline loans. We have an option to request that availability be increased to $275.0 million. The facility matures in 2008. See "Description of Other Indebtedness—Amended Asset-Based Revolving Loan Facility."
(2): In January 2005, we entered into a 60-month lease for equipment to be used in the photofinishing departments of our stores. This lease requires monthly payments of $0.3 million, which approximates the payments being made for leases of similar equipment which were satisfied in December 2004. In the first quarter of 2005, our incremental capital lease obligation amounted to $13.5 million.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma financial data in this prospectus reflects adjustments to our consolidated historical financial data to give pro forma effect to the following transactions and other items (excluding non-recurring items), including:

•: the completion of the Acquisition;
•: the $239.5 million cash equity contribution by the investor group led by Oak Hill;
•: the forfeiture by certain members of senior management of approximately $4.2 million of payments under existing contracts and our issuance of phantom stock to them;
•: an additional $72.0 million of borrowings under the amended asset-based revolving loan facility;
•: the borrowing of $155.0 million under the senior term loan facility;
•: the issuance of $195.0 million of senior subordinated notes;
•: the repurchase of the outstanding 2.1478% senior convertible notes due 2022 for an aggregate purchase price of $203.2 million (representing 100% of the principal amount of those notes, plus $2.2 million of accrued but unpaid interest on those notes through July 30, 2004); and
•: the payment of an annual $1.25 million management fee, paid quarterly, to an affiliate of Oak Hill.

The following summarizes the allocation of the purchase price to the net assets acquired:

	(dollars in thousands)
Cash	$	83,800
Inventory		258,900
Other current assets		85,600
Property, plant & equipment		225,600
Identified intangibles		264,600
Other assets		54,100
Goodwill		52,200
Current liabilities		(98,500)
Non-current liabilities		(42,400)
Debt(1)		(47,200)
Capital leases		(3,100)
Deferred tax liabilities		(86,100)

Total purchase price	$	747,500

(1): Represents the Company's net liability for the period between the July 30, 2004 Acquisition and the September 13, 2004 completion of the repurchase of the Senior Convertible Notes.

In accordance with SEC rules, the pro forma consolidated financial information does not give effect to the refinancing of the senior term loan facility and related transactions, which occurred on December 20, 2004, because those transactions did not occur in connection with the Acquisition. See "Prospectus Summary—Recent Developments—Refinancing of the Senior Term Loan Facility" and "Use of Proceeds" for more information about the refinancing.

The unaudited pro forma statements of operations for the fiscal year ended December 25, 2004 give pro forma effect to each of the above items as if it had occurred as of the first day of that fiscal year.

The proforma financial information does not include a balance sheet as of December 25, 2004, or a statement of operations for the 13 weeks ended March 26, 2005, because the impact of the proforma adjustments are included in the historical results for each of those periods due to the nature of the timing of the Acquisition. Such historical results are included in the Annual Report on Form 10-K/A for the year ended December 25, 2004, filed on May 17, 2005, and the Quarterly Report on Form 10-Q for the 13 weeks ended March 26, 2005, filed on May 16, 2005, respectively.

The pro forma adjustments are based on appraisals, available information and certain assumptions that we believe are reasonable and may be revised as additional information becomes available. We expect to complete these valuations and the final allocation of the purchase price within the allowable one-year time frame from the completion of the Acquisition. The pro forma adjustments and certain assumptions are described in the accompanying notes.

The unaudited pro forma financial information set forth below should be read in conjunction with our historical financial information and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are included elsewhere in this prospectus.

DUANE READE HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 25, 2004
(dollars in thousands)

		Duane Reade Holdings, Inc. (Successor)			Duane Reade Inc. (Predecessor)		Pro Forma Adjustments			Pro Forma
Net sales		$	670,568		$	927,801	$	—		$	1,598,369
Cost of sales			542,897			745,090		(7,933)	(1)		1,283,208
								3,154	(2)

	Gross profit		127,671			182,711		4,779			315,161
Selling, general & administrative expenses			101,677			142,293		316	(2)		244,286
Labor contingency expense			1,789			2,611		—			4,400
Transaction expenses			37,575			3,005		(40,580	)(3)		—
Depreciation and amortization			27,051			21,902		14,437	(4)		63,390
Store pre-opening expenses			365			470		—			835
Other			26,433			—		(24,500	)(5)		4,571
								2,638	(6)

	Operating income (loss)		(67,219	)		12,430		52,468			(2,321	)
Interest expense, net			15,880			7,977		11,155	(7)		35,651
								639	(8)
Debt extinguishment			7,525			—		—			7,525

	Income (loss) before income taxes		(90,624	)		4,453		40,674			(45,497	)
Income tax expense (benefit)			(35,175	)		1,136		18,791	(9)		(15,248	)

	Net income (loss)	$	(55,449	)	$	3,317	$	21,883		$	(30,249	)

The accompanying notes are an integral part of the
unaudited pro forma consolidated statement of operations.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)

(1): In conjunction with the valuation of the net assets acquired at the acquisition date pursuant to FAS 141, the inventory was valued at an amount $8.5 million greater than its FIFO inventory value, and $7.9 million was charged to cost of sales in 2004. This adjustment eliminates the charge to cost of sales.
(2): Records additional deferred rent expense for the period from December 28, 2003 to July 30, 2004.
(3): Records the reversal of non-recurring transaction-related expenses associated with the Acquisition, including change of control payments to management ($14.7 million), legal and professional fees ($17.4 million) and transaction fees payable to Oak Hill upon consummation of the Acquisition ($8.0 million) for the year ended December 25, 2004.
(4): Records pro forma depreciation and amortization expense. The identifiable intangible assets and their weighted average amortizable lives are shown in the table below.

Description	Amount		Amortizable Life (years)
Lease acquisition costs	$	103,573	6.6
Pharmacy customer files		93,021	5.9
Tradename		62,600	—

	$	259,194

(5): Represents the reversal of the non-recurring expense associated with our election to terminate our CEO's Supplemental Executive Retirement Plan obligations in accordance with his amended employment agreement. See "Management—Contracts with Executive Officers—Mr. Cuti's Employment Agreement" for more information.
(6): Records an annual management fee of $1.25 million payable to Oak Hill and employee benefit costs due to our CEO as a result of his new employment contract.
(7): Records pro forma interest expense associated with the notes, the senior term loan facility and additional borrowings under the amended asset-based revolving loan facility, and the elimination of interest expense on the senior convertible notes. As detailed in the table below, a change in the overall interest rate of one-eighth of one percent would affect annual interest expense by approximately $0.6 million.

	Pro forma adjustment
Debt component	12 months ended December 25, 2004			Principal amount at December 25, 2004		Impact of 0.125% change in interest rate
Amended asset-based revolving loan facility	$	1,100		$	153,870	$	192
Term loan facility		4,222			—
Senior secured floating rate notes		—			160,000		200
9.75% senior subordinated notes		11,253			195,000		244
2.1478% senior convertible notes		(5,420	)		32		0

	$	11,155		$	508,902	$	636

(8): Records the pro forma amortization of deferred financing fees, utilizing the interest method calculated over the lives of the underlying debt.
(9): Records the adjustment to the tax provision resulting from the pro forma adjustments. The calculation contemplates a federal statutory tax rate of 35%, a combined New York State and New York City statutory tax rate (net of the federal benefit) of 11.2%, and an overall effective tax rate of 46.2%.

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected historical consolidated financial and operating data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Unaudited and Audited Financial Statements and the notes related to those statements contained herein.

The selected historical consolidated financial and other data set forth below as of and for the fiscal years ended December 30, 2000, December 29, 2001, December 28, 2002 and December 27, 2003 and for the periods from December 28, 2003 to July 30, 2004 and from July 31, 2004 to December 25, 2004 have been derived from our audited consolidated financial statements. The consolidated statement of operations data for the thirteen weeks ended March 26, 2005 and March 27, 2004 and the consolidated balance sheet data as of March 26, 2005, have been derived from our unaudited interim consolidated financial statements and related notes.

The consolidated financial information included in this prospectus reflects the following restatements that we determined to be necessary based upon our review of our accounting methods, as well as discussions with our independent registered public accounting firm and our audit committee:

(1): We restated reported net sales and cost of sales to reflect revenues from resales of certain retail inventory on a gross basis rather than on a net basis as previously reported. These transactions have experienced significant growth over the last few years, and this change reflects the need to conform our accounting practice to the provisions of Emerging Issues Task Force Issue 99-19. The restatements relating to the resales had no effect on net income or cash flows from operations, as the amount of increase in net sales is equal to the amount of increase in cost of sales as the profit margin on these sales had previously been recorded to cost of goods sold. Pharmacy same-store sales do not include such resales.
(2): We restated cost of sales to reflect changes in our lease accounting to conform to the requirements of FASB Technical Bulletin No. 85-3. As has been the case for many companies within the retail and other industries, we determined, based on a review of our lease-related accounting methods, that our previous policy of commencing rent expense when a store opens (and not at the commencement of a lease) was inconsistent with FTB 85-3. For construction purposes, we often take possession of leased properties prior to opening. The revised accounting policy records rent expense commencing on the date of possession. The restatements relating to lease accounting had no impact upon lease maturities, the timing of any lease payments or cash flows from past or future operating activities.
(3): In accordance with the provisions of Statement of Financial Accounting Standard No. 141 "Business Combinations," we have restated reported balance sheet liabilities, goodwill and results of operations, cost of sales and selling, general and administrative expenses to correct the lease accounting to reflect

straight-line rent expense (for leases in effect on the July 30, 2004 acquisition date) calculated from the date of the acquisition by Oak Hill rather than from the original lease commencement dates as previously recorded. This adjusted lease accounting has no impact upon lease maturities, the timing of any lease payments or cash flows from past or future operating activities.

(4): We have restated our previously reported balance sheets for fiscal 2004 and 2003 to reflect the classification of outstanding borrowings under the revolving loan facility as current liabilities rather than as long-term debt, as previously reported. The change is being made because cash receipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of Statement of Financial Accounting Standard No. 6, "Classification of Short Term Obligations Expected to be Refinanced" to reclassify the debt as long-term. This is not an indication that this credit facility is expected to be retired within the next year. This facility expires in July 2008, and we intend to continue to access it for our working capital needs throughout its remaining term.
(5): We have restated our consolidated statement of cash flows for the 2002 through 2004 fiscal years to reflect the reporting of revolving loan facility borrowings and repayments separately on a gross basis as required under Statement of Financial Accounting Standard No. 95 "Statement of Cash Flows". In addition, we restated our financial results to include certain previously unrecorded and immaterial audit adjustments relating to the periods affected. These restatements are included in the discussion of our results of operations below and within the consolidated financial statements.

See Note (3) below and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Prior Period Restatements."

																			Predecessor
																Successor— Restated						Successor
	Predecessor—Restated																					Successor
	Predecessor—Restated																		For the 13 Weeks Ended
													December 28, 2003 through July 30, 2004(2)(3)			Period from July 31, 2004 through December 25, 2004(3)
	Fiscal Year(1)
	Fiscal Year(1)																					March 26, 2005
	2000(3)			2001(3)			2002(3)			2003(3)									March 27, 2004			March 26, 2005
	(dollars in thousands, except percentages and store data)
Statement of Operations Data
Net sales	$	1,000,068		$	1,170,016		$	1,325,523		$	1,465,275		$	927,801		$	670,568		$	383,310		$	394,767
Cost of sales		748,440			898,952			1,041,303			1,168,408			745,090			542,897			306,808			321,958

Gross profit		251,628			271,064			284,220			296,867			182,711			127,671			76,502			72,809
Selling, general & administrative expenses		155,584			172,972			198,770			229,148			142,293			101,677			58,643			64,499
Transaction expenses(4)		—			—			—			644			3,005			37,575			1,102			427
Labor contingency expense(5)		—			—			—			12,600			2,611			1,789			1,100			1,100
Insurance recovery(6)		—			—			(9,378	)		—			—			—
Depreciation and amortization		23,151			26,634			26,935			32,335			21,902			27,051			9,066			17,646
Store pre-opening expenses		1,395			1,667			2,086			1,063			470			365			157			100
Other(7)		—			—			—			—			—			26,433			—			1,148

Operating income (loss)		71,498			69,791			65,807			21,077			12,430			(67,219	)		6,434			(12,111	)
Interest expense, net		35,935			27,623			17,925			14,117			7,977			15,880			3,437			11,165
Debt extinguishment expense(9)		—			2,616			11,371			812			—			7,525

Income (loss) before income taxes and cumulative effect of accounting change		35,563			39,552			36,511			6,148			4,453			(90,624	)		2,997			(23,276	)
Income tax (expense) benefit		(14,352	)		(15,513	)		(12,994	)		(1,669	)		(1,136	)		35,175			(1,245	)		10,474

Income (loss) before cumulative effect of accounting change		21,211			24,039			23,517			4,479			3,317			(55,449	)		1,752			(12,802	)
Cumulative effect of accounting change, net(10)		—			—			(9,262	)		—			—			—			—			—

Net income (loss)	$	21,211		$	24,039		$	14,255		$	4,479		$	3,317		$	(55,449	)	$	1,752		$	(12,802	)

Balance Sheet Data (at end of period)
Working capital(11)	$	152,026		$	212,534		$	230,031		$	155,873			N/A		$	66,703		$	147,983		$	58,078
Total assets		572,076			682,070			742,711			797,372			N/A			940,159			802,472			942,362
Total debt and capital lease obligations		353,001			247,155			269,741			272,910			N/A			511,690			277,894			550,458
Stockholders' equity		107,046			287,064			320,403			327,261			N/A			184,049			329,070			171,247
Operating and Other Data
Net cash (used in) provided by operating activities	$	22,074		$	25,762		$	42,537		$	47,444		$	21,552		$	(8,102	)		12,193			(16,550	)
Net cash used in investing activities		(32,647	)		(48,052	)		(60,520	)		(55,115	)		(32,477	)		(440,703	)		(17,119	)		(8,005	)
Net cash provided by financing activities		10,539			26,283			17,194			4,740			11,011			448,801			4,959			24,662
Adjusted FIFO EBITDA(8)	$	94,649		$	96,425		$	83,275		$	63,016		$	40,339		$	24,570		$	18,039		$	7,380
Adjusted FIFO EBITDA as a percentage of sales(8)		9.5	%		8.2	%		6.3	%		4.6	%		4.4	%		3.7	%		4.7	%		1.9	%
Number of stores at end of period		172			200			228			241			N/A			255			243			249
Same store sales growth(12)(13)		7.3	%		6.3	%		4.8	%		2.7	%		N/A			0.6	%		1.6	%		2.0	%
Pharmacy same store sales growth(12)(13)		18.8	%		16.6	%		12.1	%		7.5	%		N/A			5.0	%		6.6	%		2.0	%
Front-end same store sales growth(12)(13)		1.8	%		0.6	%		0.0	%		-0.8	%		N/A			-2.8	%		-2.3	%		2.0	%
Average store size (square feet) at end of period		7,166			7,169			6,921			7,115			N/A			7,035			7,131			6,957
Sales per square foot	$	847		$	818		$	836		$	816			N/A		$	813			N/A			N/A
Pharmacy sales as a % of net sales(13)		35.4	%		40.6	%		44.0	%		46.7	%		N/A			52.3	%		50.1	%		49.5	%
Third party plan sales as a % of prescription sales(13)		84.0	%		86.9	%		90.2	%		91.4	%		N/A			92.3	%		92.0	%		92.7	%
Investing Activities:
Purchase of Duane Reade	$	—		$	—		$	—		$	—		$	—		$	413,684		$	—		$	—
New, remodeled and relocated stores		22,821			36,818			39,497			29,074			17,214			11,803			7,823			4,612
Office and warehouse expansions		—			—			528			2,070			—			—			—			1,058
Acquisitions		1,247			2,259			5,954			7,579			8,741			7,361			6,193			835
Other		8,579			10,375			14,541			16,392			6,522			7,855			3,103			1,500

Total	$	32,647		$	49,452		$	60,520		$	55,115		$	32,477		$	440,703		$	17,119		$	8,005

(1): The 2000 fiscal year contains 53 weeks. All other years shown contain 52 weeks.
(2): Items identified as N/A are not reported for the periods shown.
(3): We have restated our consolidated financial statements as described above. Additional detail regarding the effect of the restatements on our consolidated financial data for our fiscal years ended December 28, 2002 and December 27, 2003 and the periods from December 27, 2003 to July 30, 2004 and from July 31, 2004 to December 25, 2004 and on the balance sheets as of the end of each of those periods is set forth in Note 2 to our audited consolidated financial statements for the periods ended December 25, 2004, which are included in this prospectus. Additional detail regarding the effect of the restatements on our consolidated financial data as of and for the fiscal years ended December 30, 2000, December 29, 2001 is set forth below:

Duane Reade Inc.
Profit and Loss Restatement

		2000		2001
Net sales	as reported	1,000,068		1,143,564
	adjustment—EITF 99-19	—		26,452

	as restated	1,000,068		1,170,016

Cost of sales	as reported	745,717		871,215
	adjustment—EITF 99-19	—		26,452
	adjustment—FTB 85-3	2,044		1,729
	adjustment—Other	679		(444	)

	as restated	748,440		898,952

Gross profit	as reported	254,351		272,349
	adjustment—FTB 85-3	(2,044	)	(1,729	)
	adjustment—Other	(679	)	444

	as restated	251,628		271,064

Earnings before income taxes and cumulative effect of accounting change	as reported	38,286		40,837
	adjustment	(2,723	)	(1,285	)

	as restated	35,563		39,552

Income tax (expense) benefit	as reported	(15,610	)	(16,107	)
	adjustment	1,258		594

	as restated	(14,352	)	(15,513	)

Net income	as reported	22,676		24,730
	adjustment	(1,465	)	(691	)

	as restated	21,211		24,039

Duane Reade Inc.
Balance Sheet Restatement

		2000		2001
Working capital	as reported	154,466		214,109
	adjustment	(2,440	)	(1,575	)

	as restated	152,026		212,534

Total assets	as reported	570,930		678,985
	adjustment	1,146		3,085

	as restated	572,076		682,070

Shareholders' equity	as reported	114,497		295,207
	adjustment	(7,451	)	(8,142	)

	as restated	107,046		287,065

(4): We incurred pre-tax expenses of approximately $0.6 million in fiscal 2003, $3.0 million in the period from December 28, 2003 through July 30, 2004, $37.6 million in the period from July 31, 2004 through December 25, 2004 and $0.4 million for the first quarter of fiscal 2005 related to the Acquisition. Note 3 to the audited consolidated financial statements for the periods ended December 25, 2004 provides additional detail with respect to these charges.
(5): We incurred pre-tax charges of $12.6 million in fiscal 2003, $2.6 million in the period from December 28, 2003 through July 30, 2004, $1.8 million in the period from July 31, 2004 through December 25, 2004 and $1.1 million in the first quarters of fiscal 2004 and 2005 in connection with the recognition of a National Labor Relations Board decision in a litigation matter relating to our collective bargaining agreement with the Allied Trades Council, a union representing employees in 139 of our stores. "Business—Legal Proceedings" provides additional information with respect to this charge.
(6): Represents collection of a portion of our business interruption insurance claim related to the September 11, 2001 World Trade Center disaster.
(7): Other expenses represents (i) costs related to the early retirement of the Chairman's SERP benefits ($24.5 million), (ii) costs related to the required future transfer of a 1998 Corporate-owned life insurance policy to the Chairman ($1.0 million), (iii) costs related to the Chairman's long-term cash award ($0.4 million) and (iv) Oak Hill management fees ($0.5 million). The costs related to the Chairman's employment agreement and various related benefits are more fully described under "Management—Executive Compensation."
(8): A reconciliation of net income (loss) to Adjusted FIFO EBITDA for each period included above is set forth below:

															Predecessor		Successor
	Predecessor—Restated											Successor—Restated			Predecessor		Successor
	Predecessor—Restated											Successor—Restated			For the 13 Weeks Ended
	Fiscal Year											July 31, 2004 through December 25, 2004			For the 13 Weeks Ended
	Fiscal Year									December 28, 2003 through July 30, 2004					March 27, 2004		March 26, 2005
	2000		2001		2002			2003		December 28, 2003 through July 30, 2004					March 27, 2004		March 26, 2005
Net income (loss)	$	21,211	$	24,039	$	14,255		$	4,479	$	3,317	$	(55,449	)		1,752		(12,802	)
Income tax (benefit) expense		14,352		15,513		12,994			1,669		1,136		(35,175	)		1,245		(10,474	)
Interest expense		35,935		27,623		17,925			14,117		7,977		15,880			3,437		11,165
Depreciation and amortization(a)		23,151		26,634		26,935			32,335		21,902		27,051			9,066		17,646
Debt extinguishment		—		2,616		11,371			812		—		7,525			—		—
Transaction expenses		—		—		—			644		3,005		37,575			1,102		427
Labor contingency expense		—		—		—			12,600		2,611		1,789			1,100		1,100
CEO SERP settlement fees		—		—		—			—		—		24,500			—		—
Insurance recovery		—		—		(9,378	)		—		—		—			—		—
Cumulative effect of accounting change, net		—		—		9,262			—		—		—			—		—
LIFO (Income) Provision		—		—		(89	)		360		791		(7,059	)		337		(216	)
Purchase accounting inventory valuation adjustment		—		—		—			—		—		7,933			—		534

Adjusted FIFO EBITDA (b)	$	94,649	$	96,425	$	83,275		$	67,016	$	40,739	$	24,570		$	18,039	$	7,380

(a): Excludes amortization expense associated with deferred financing costs, which is included in the line item entitled "Interest expense."
(b): Adjusted FIFO EBITDA includes non-cash deferred rent expense and other non-cash items. Under GAAP, in each fiscal period, for each leased store, we record as rent expense the total amounts payable as rent during the term of the store's lease evenly distributed over the lease term. Non-cash deferred rent expense for a period equals our total rent expense recorded under GAAP less cash rent expense actually paid in the period. Amounts listed below as "other non-cash items" relate to (1) a gain of $1.4 million in the 2001 fiscal year resulting from the sale of several of our pharmacy customer files, (2) $1.9 million of non-cash expenses in the 2004 successor period for costs incurred in connection with the Acquisition and (3) $1.1 million of non-cash expenses in the first quarter of 2005 for costs incurred in connection with the Acquisition. The non-cash deferred rent and other non-cash items recorded in each period are as follows:

														Predecessor		Successor
	Predecessor—Restated											Successor—Restated		Predecessor		Successor
	Predecessor—Restated											Successor—Restated		For the 13 Weeks Ended
	Fiscal Year											July 31, 2004 through December 25, 2004		For the 13 Weeks Ended
	Fiscal Year									December 28, 2003 through July 30, 2004				March 27, 2004		March 26, 2005
	2000		2001			2002		2003		December 28, 2003 through July 30, 2004				March 27, 2004		March 26, 2005
Non-cash deferred rent	$	6,029	$	7,473		$	11,933	$	9,554	$	4,383	$	6,221	$	1,902	$	3,594
Other non-cash items		—		(1,379	)		—		—		—		1,933		—		1,148

(9): We incurred pre-tax expenses of approximately $7.5 million, $0.8 million, $11.4 million and $2.6 million in the period from July 31, 2004 to December 25, 2004, and the 2003, 2002 and 2001 fiscal years, respectively, related to the retirement of a portion of our debt. Note 17 of the audited consolidated financial statements for the periods ended December 25, 2004 provides a further explanation of these charges.

(10): We incurred after-tax expenses of approximately $9.3 million in fiscal 2002 related to the conversion of our inventory valuation method from retail dollar FIFO to specific cost LIFO. Note 1 of the audited consolidated financial statements for the periods ended December 25, 2004 provides a further explanation of this charge.
(11): For the successor periods ended March 26, 2005 and December 25, 2004 and the predecessor periods ended March 27, 2004 and December 27, 2003, working capital reflects the classification of our amended asset-based revolving loan facility as a current liability, rather than as long-term debt as previously reported, because cash receipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of FAS 6 to reclassify the debt as long-term. For such periods, the revolving loan balance was $179.8 million, $153.9 million, $75.4 million and $70.4 million, respectively.
(12): Same-store sales figures include stores that have been in operation for at least 13 months.
(13): Statistics shown in the successor period reflect 12 month data, as the Company does not provide these statistics on a partial year basis.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion regarding our financial condition and results of operations for the fiscal quarter ended March 26, 2005, the period from July 31, 2004 through December 25, 2004, the period from December 28, 2003 through July 30, 2004, and the 52 weeks ended December 27, 2003 and December 28, 2002 should be read in connection with the more detailed financial information contained in our consolidated financial statements and their notes included elsewhere in this prospectus. Certain of the statements in this section are forward-looking statements and involve numerous risks and uncertainties including, but not limited to, those described in the "Risk Factors" section of this prospectus. See "Special Note Regarding Forward-Looking Statements."

Duane Reade Inc. was acquired by Duane Reade Acquisition Corp., a wholly owned subsidiary of Duane Reade Holdings, Inc., through a merger transaction completed on July 30, 2004. Although Duane Reade Inc. was the surviving legal entity in the Acquisition, as a result of the Acquisition and resulting change in control and change in historical cost basis of accounting, we are required to present separately our operating results for predecessor periods up to and including the closing date of the Acquisition (December 28, 2003 through July 30, 2004 and the 2002 and 2003 fiscal years) and the successor period following the closing date of the Acquisition (July 31, 2004 through December 25, 2004). The financial statements and operating results identified as belonging to the "predecessor" are those of Duane Reade Inc., the parent entity existing for all periods shown prior to the completion of the Acquisition. For the period following the Acquisition, the financial statements and operating results of the "successor" are those of Duane Reade Holdings, Inc., the newly created parent entity under whose name this and all future SEC filings will be made. Except where the context otherwise requires, all references to "we," "us," and "our" (and similar terms) in the data below and the related footnotes mean the successor for periods ending after July 30, 2004 and the predecessor for periods ending on or prior to July 30, 2004.

General

Our business consists of the sale of a wide variety of health and beauty care products, convenience oriented food and general merchandise items and a pharmacy operation managed to supply customers with their prescription needs. We refer to the non-prescription portion of our business as front-end sales because most of these sales are processed through the front main check-out sections of our stores. This portion of our business consists of brand name and private label health and beauty care items, food and beverages, tobacco products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies and seasonal and general merchandise. Health and beauty care products, including over-the-counter items, represent our highest volume categories within front-end sales. The front-end portion of our business represented 49.0% of our sales in fiscal 2004 and is characterized by generally higher gross margins that are approximately twice that of our pharmacy or back-end business.

Because of our numerous convenient locations in high-traffic commercial and residential areas and the lack of other convenience-oriented retailers in our core market areas, our front-end business is generally a larger proportion of our total sales than other major conventional drugstore chains, which average between 30% and 40%, but, as is the case with most other drugstore chains, represents a decreasing share of business year after year due to the faster rate of pharmacy sales growth. Our pharmacy sales include all items we sell by prescriptions filled at our retail locations or by our central fill facility and delivered to our stores or direct to customers. In addition, we include in our pharmacy sales certain resales of retail pharmaceutical inventory that are required to be reported on a gross basis in accordance with Emerging Issues Task Force bulletin 99-19. The pharmacy portion of our business is dominated by and dependent upon a number of third party private and government-sponsored plans that contract with us as an authorized provider of prescriptions.

Sales to third party prescription plans represented 92.3% of our prescription sales in fiscal 2004 and 91.4% of our prescription sales in fiscal 2003. Pharmacy sales have been experiencing a faster rate of growth than the front-end portion of our business. The pharmacy portion of our business is subject to a number of

federal, state and local regulations that govern the conduct of this business. The higher rate of growth in pharmacy sales has been due to an increased amount of resale activity and a number of favorable demographic and industry trends such as the aging of the population, expanding penetration of third party private and government-sponsored coverage and the increasing usage of prescription drugs to improve quality of life and in place of medical procedures. Nevertheless, the retail pharmacy industry has experienced substantially reduced rates of pharmacy same-store sales growth in both 2003 and 2004 from earlier years, primarily attributable to a decline in the demand for hormonal replacement drugs, conversion of some high volume prescription drugs to over-the-counter status, increased levels of required co-payments by insurers, increased utilization of lower priced generic medications, increased penetration by mail order and internet-based pharmacies and reductions in coverage resulting from continued high unemployment rates. While there has been a marked improvement in levels of employment during 2004, these same factors have generally continued to restrain pharmacy sales growth. Growth in late 2004 was slowed by the negative publicity surrounding the temporary recall of Vioxx and other Cox-2 inhibitors, which negatively impacted pharmacy sales. Along with the faster pace of growth in the use of prescription medications have come generally higher rates of product cost inflation, resulting in an increased focus on the part of both government and private plans to control their costs of providing these benefits. As a result, pharmacy gross margins have been under pressure.

During 2003, President Bush signed the Medicare Drug Act, which created a new Medicare Part D benefit that will expand Medicare coverage of prescription drugs for senior citizens not participating in third party plans. Sales to such customers represent less than 2% of our total revenue. This new Medicare coverage is scheduled to take effect in 2006 and is expected to result in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on prescriptions that are not subject to third party reimbursement. In June 2004, a temporary senior citizen prescription drug discount program furnished under this Medicare legislation was implemented and will remain in effect until the full Medicare program takes effect in 2006. This temporary program has also resulted in lower pharmacy margins than those realized on prescriptions that are not subject to third party plan reimbursement. Based on our experience over time, we expect that increased utilization of prescription drugs by senior citizens participating in the new programs will offset the effect of the lower margins on our revenues.

In fiscal 2003 and again in fiscal 2004, New York State reduced Medicaid and EPIC prescription reimbursement rates, adversely impacting our pharmacy gross margins. The most recent reductions became effective on October 1, 2004, and are expected to reduce reimbursements by approximately $1.4 million on an annual basis. New Jersey also implemented reduced Medicaid reimbursement rates in 2003. The New York State legislature has also recently approved increases in co-payments by $1.00 per prescription for branded drugs and $0.50 per prescription for generics in the new budget which takes effect on April 1, 2005. Under the Medicaid guidelines, providers cannot refuse to dispense prescriptions to Medicaid recipients who claim they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments resulting in the requirement for the provider to absorb this cost. These increased co-payments for NY Medicaid are expected to result in further reduced reimbursements of approximately $1.4 million per year.

In an effort to offset some of the adverse pharmacy gross margin impacts from the trends discussed above, there has been an intensified effort on the part of retailers to support increased utilization of lower priced but higher margin generic prescriptions in place of branded medications. Improved generic utilization rates as well as increased purchases direct from manufacturers rather than through wholesalers enabled us to achieve improved pharmacy gross margins during 2004.

We are also impacted by recent legislation in states to increase the minimum hourly wages above the federal minimum of $5.15. New York State increased the minimum hourly wage from $5.15 to $6.00 on January 1, 2005 with further scheduled increases to $6.75 on January 1, 2006 and $7.15 on January 1, 2007. The New Jersey legislature has approved increases in the minimum hourly wage from $5.15 to $6.15 on October 1, 2005 and to $7.15 on October 1, 2006. While these increases will impact our cost of labor, we

believe we can offset a significant portion of these cost increases through initiatives designed to further improve our labor efficiency.

As of March 26, 2005, we operate approximately 87.5% of our 249 stores in New York City and the remainder in the surrounding areas, and our financial performance is therefore heavily influenced by the local economy. We analyze a number of economic indicators specific to New York City to gauge the health of this economy, including unemployment rates, job creation, gross city product and bridge and tunnel commuter traffic patterns. We also analyze market share data, same-store sales trends, average store sales and sales per square foot data among other key performance indicators to monitor our overall performance. During 2004, the New York City economy generally reflected an improving trend for most of these external economic indicators.

Our primary assets are our ownership of 100% of the outstanding capital stock of Duane Reade Inc., which in turn owns 99% of the outstanding partnership interest of Duane Reade GP and all of the outstanding common stock of DRI I Inc. DRI I Inc. owns the remaining 1% partnership interest in Duane Reade GP. Substantially all of our operations are conducted through Duane Reade GP. In August 1999, we established two new subsidiaries, Duane Reade International, Inc. and Duane Reade Realty, Inc. Duane Reade GP distributed to Duane Reade Inc. and DRI I Inc. all rights, title, and interest in all its trademarks, trade names and all other intellectual property rights. In turn, Duane Reade Inc. and DRI I Inc. made a capital contribution of these intellectual property rights to Duane Reade International. This change created a controlled system to manage and exploit these intellectual property rights separate and apart from the retail operations. In addition, Duane Reade GP distributed some of its store leases to Duane Reade Inc. and DRI I Inc., which in turn made a capital contribution of these leases to Duane Reade Realty. Duane Reade Realty is the lessee under certain store leases entered into after its creation. Duane Reade Realty subleases to Duane Reade GP the properties subject to those leases. The consolidated financial statements included in this filing reflect the accounts of Duane Reade Holdings, Inc. and its subsidiaries for periods ending after July 30, 2004 and Duane Reade Inc. and its subsidiaries for periods ending on or earlier than July 30, 2004. All significant intercompany transactions and balances have been eliminated.

New York City Economy

Impact of the Acquisition

The July 30, 2004 acquisition of Duane Reade Inc. was completed through a merger transaction with Duane Reade Acquisition, which was an acquisition vehicle formed by Oak Hill, a private equity firm. The aggregate value of the Acquisition was $747.5 million, including transaction expenses and the repayment of a portion of our indebtedness. As a result of the Acquisition, Duane Reade Inc.'s shares are no longer listed on the New York Stock Exchange, and we now operate as a privately held company. Each share of Duane Reade Inc.'s common stock outstanding immediately prior to the Acquisition was converted into the right to receive $16.50 per share, without interest, in cash.

In connection with the Acquisition, we incurred significant additional indebtedness, including $195.0 million of senior subordinated notes, $155.0 million of borrowings under a senior term loan facility

(which was refinanced in December 2004 in connection with the issuance of $160.0 million of senior secured floating rate notes), and $72.0 million of new borrowings under the amended asset-based revolving facility. On August 12, 2004, Duane Reade Inc. commenced a cash tender offer to repurchase the outstanding 2.1478% senior convertible notes in accordance with the indenture governing those notes. Pursuant to that offer, on September 13, 2004, Duane Reade Inc. completed the repurchase of a total of approximately $350.9 million aggregate principal amount at maturity of the senior convertible notes for a cash purchase price of approximately $204.1 million, which represented 100% of the originally issued amount of the notes purchased, plus accrued but unpaid interest through the payment date. Following completion of the tender offer, $55,000 principal amount at maturity of those notes remained outstanding. As a result of the debt related financing of the Acquisition, our interest expense has been substantially higher following the Acquisition than our predecessor incurred in prior periods. We also pay a management fee of $1.25 million per year, paid quarterly, under our management agreement with an affiliate of Oak Hill Capital Partners, L.P.

The Acquisition was accounted for as a purchase, in accordance with the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations", which resulted in new valuations for our and our subsidiaries' assets and liabilities based on fair values as of the date of the Acquisition. These valuations were largely based on appraisals provided by an independent valuation consultant employed for this purpose.

Prior Period Restatements

The consolidated financial statements in this prospectus reflect the following restatements that we determined to be necessary based upon our review of our accounting methods, as well as discussions with our independent registered public accounting firm and our audit committee:

(1) We restated reported net sales and cost of sales to reflect revenues from resales of certain retail inventory on a gross basis rather than on a net basis as previously reported. These transactions have experienced significant growth over the last few years and this change reflects the need to conform our accounting practice to the provisions of EITF 99-19. The restatements relating to the resales had no effect on net income or cash flows from operations, as the amount of increase in net sales is equal to the amount of increase in cost of sales as the profit margin on these sales had previously been recorded to cost of goods sold. Pharmacy same-store sales do not include such resales.

(2) We restated cost of sales to reflect changes in our lease accounting to conform to the requirements of FASB Technical Bulletin No. 85-3. As has been the case for many companies within the retail and other industries, we determined, based on a review of our lease-related accounting methods, that our previous policy of commencing rent expense when a store opens (and not at the commencement of a lease) was inconsistent with FTB 85-3. For construction purposes, we often take possession of leased properties prior to opening. The revised accounting policy records rent expense commencing on the date of possession. The restatements relating to lease accounting had no impact upon lease maturities, the timing of any lease payments or cash flows from past or future operating activities.

(3) In accordance with the provisions of Statement of FAS 141, we have restated reported balance sheet liabilities, goodwill and results of operations, cost of sales and selling, general and administrative expenses to correct the lease accounting to reflect straight-line rent expense (for leases in effect on the July 30, 2004 acquisition date) calculated from the date of the acquisition by Oak Hill rather than from the original lease commencement dates as previously recorded. This adjusted lease accounting has no impact upon lease maturities, the timing of any lease payments or cash flows from past or future operating activities.

(4) We have restated our previously reported balance sheets for fiscal 2004 and 2003 to reflect the classification of outstanding borrowings under the revolving loan facility as current liabilities rather than as long-term debt, as previously reported. The change is being made because cash receipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of FAS 6 to reclassify the debt as long-term. This is not an indication that this credit facility is expected to be retired within the next year.

This facility expires in July 2008, and we intend to continue to access it for our working capital needs throughout its remaining term.

(5) We have restated our consolidated statement of cash flows for the 2002 through 2004 fiscal years to reflect the reporting of revolving loan facility borrowings and repayments separately on a gross basis as required under FAS 95 "Statement of Cash Flows" (FAS 95). In addition, we restated our financial results to include certain previously unrecorded and immaterial audit adjustments relating to the periods affected. These restatements are included in the discussion of our results of operations below and within the consolidated financial statements presented elsewhere in this prospectus and are discussed in Note 2 to our audited consolidated financial statements for the periods ended December 25, 2004.

In connection with these restatements, we obtained from the administrative agent under the amended asset-based revolving loan facility, an acknowledgement confirming that these restatements do not constitute an event of technical default, as defined in the document governing the amended asset-based revolving loan facility.

RESULTS OF OPERATIONS

First Fiscal Quarter 2005 and First Fiscal Quarter 2004 Overview

For the first quarter of 2005, we achieved net sales of $394.8 million and sustained a net loss of $12.8 million, as compared to net sales of $383.3 million and net income of $1.8 million in the first quarter of the previous year. The decline in earnings is due to the following factors:

•: An increase in depreciation and amortization expense by $8.6 million. This increase was attributable to the acquisition related purchase accounting adjustments to the valuation of store leases, prescription pharmacy files and property, plant and equipment under FAS 141 as well as the depreciation of capital expenditures and amortization of intangibles acquired in 2004 and 2005.
•: Increased interest expenses by $7.7 million resulting from the new debt incurred in connection with the Acquisition.
•: A decline in gross margin from 20.0% in the first quarter of 2004 to 18.4% in the first quarter of 2005. The decrease was primarily attributable to lower vendor allowances, increased inventory shrink losses, lower levels of real estate related income and increased non-cash rent expense of $1.9 million, or 0.5% of sales, that was attributable to the application of purchase accounting under FAS 141 in connection with the July 30, 2004 acquisition by Oak Hill.
•: Increased store payroll costs resulting from higher minimum wages in New York and increased pharmacy labor rates driven by the pharmacist shortage.
•: Increased legal and litigation related expenses that resulted from certain labor related disputes, the World Trade Center business interruption insurance claim and litigation with a former pharmacy supplier.

2004 and 2003 Overview

As mentioned above, due to the Acquisition and the resulting change in ownership, we are required to present separately our operating results for the predecessor period in the 2004 fiscal year (December 28, 2003 through July 30, 2004) and the successor period in the 2004 fiscal year (July 31, 2004 through December 25, 2004). In the following discussion, these are compared to the 52-week predecessor period ended December 27, 2003. Management believes this is the most practical way to comment on our results of operations.

For the period from July 31, 2004 through December 25, 2004, we achieved net sales of $670.6 million and sustained a net loss of $55.4 million, and for the period from December 28, 2003 through July 30, 2004, we achieved net sales of $927.8 million and generated net income of $3.3 million, as compared to aggregate net sales of $1.465 billion and net income of $4.5 million in the 52 weeks ended December 27, 2003.

Resales of pharmaceutical retail inventory were $81.9 million for the period from July 31, 2004 through December 25, 2004, $81.0 million for the period from December 28, 2003 through July 30, 2004 and $81.4 million for fiscal year 2003. The net loss sustained in the period from July 31, 2004 through December 25, 2004 was primarily attributable to the following factors:

•: Pre-tax transaction expenses of $37.6 million in the successor period ended December 25, 2004 compared to $3.0 million in the predecessor period ended July 30, 2004 and $0.6 million in the 52 weeks ended December 27, 2003. These expenses in the successor period ended December 25, 2004 included legal and professional fees, certain change-of-control payments to management and contractual fees that were paid to Oak Hill upon consummation of the transaction;
•: Pre-tax expenses of $26.4 million in the successor period ended December 25, 2004 primarily associated with the CEO Supplemental Executive Retirement Plan termination and other compensation related costs incurred in connection with the Acquisition;
•: Pre-tax debt extinguishment costs of $7.5 million related to the December 2004 refinancing of a $155.0 million term loan with new $160.0 million floating rate notes;
•: Depreciation and amortization expenses of $27.1 million in the successor period ended December 25, 2004 compared to $21.9 million in the predecessor period ended July 30, 2004 and $32.3 million in the 52 weeks ended December 27, 2003. The increase in depreciation and amortization expenses during the shorter successor period was primarily attributable to the acquisition related purchase accounting adjustments to the valuation of store leases, prescription pharmacy files and property, plant and equipment.

For the 2004 periods subsequent to and prior to the Acquisition, gross profit margins were 19.0% and 19.7%, respectively, as compared to 20.3% in the prior year. The lower gross profit margin in the successor period compared to the predecessor periods was primarily attributable to increased resale activity of pharmaceutical retail inventory, which generally has gross margins less than one percent of sales and tends to reduce overall pharmacy margins. In addition, pharmacy selling margins were adversely impacted by reductions in New York State Medicaid reimbursements that became effective on Oct 1, 2004. The overall decline in gross margins versus the previous year was primarily due to increased lower margin resale activity of pharmaceutical products.

Selling, general and administrative expenses for the 2004 periods subsequent to and prior to the Acquisition were 15.2% and 15.3% respectively, as compared to 15.6% in the 52 weeks ended December 27, 2003. The decline during the predecessor and successor periods of 2004 and as compared to fiscal 2003 was due to the increased level of resale activity between the periods that had the effect of reducing our operating expense ratios to sales. Because resale activity does not incur any significant selling, general and administrative costs, we believe it is more informative to discuss such costs as a percentage of sales, excluding such resale activity. Excluding the impact of the resale activity, SG&A expenses for the 2004 periods subsequent and prior to the acquisition were 17.3% and 16.8%, respectively, as compared to 16.5% in the 52 weeks ended December 27, 2003. The increased SG&A expenses in the successor period compared to the predecessor periods in 2004 were primarily due to increased store pharmacist labor costs and higher promotional spending. The increased pharmacist labor rates were due to the industry-wide workforce shortage of these professionals and the resultant increase in costs to fill these critical positions. The increase in selling, general and administrative costs in the successor period of 2004 compared to fiscal 2003 was principally attributable to increased pharmacist labor rates as well as higher legal and litigation related expenses, the most significant of which related to our efforts to recover the balance of our September 11 business interruption insurance claim and our litigation over the NLRB ruling in a dispute with the Allied Trade Council, a union representing employees in 139 of our stores. For a more detailed discussion of litigation related matters see "Business—Legal Proceedings."

2003 and 2002 Overview

In fiscal 2003, we achieved sales of $1.465 billion and net income of $4.5 million compared to fiscal 2002 sales of $1.326 billion and net income before the cumulative effect of an accounting change of $23.5 million. Fiscal 2003 results included pre-tax charges of $0.8 million for debt extinguishment costs and $0.6 million for transaction costs associated with the Acquisition. Fiscal 2002 results included debt extinguishment costs of $11.4 million partially offset by the receipt of an initial payment of our World Trade Center business interruption insurance claim of $9.4 million. Net income for fiscal 2002, including the cumulative effect of the accounting change, was $14.3 million. The most significant factors contributing to the decline in profitability in fiscal 2003 compared to fiscal 2002 were:

•: A pre-tax charge in fiscal 2003 of $12.6 million related to recognition of the NLRB's decision in a litigation matter concerning our collective bargaining agreement with the Allied Trades Council, a union representing employees in 139 of our stores.
•: Declines in pharmacy gross margins attributable to reductions in New York Medicaid reimbursement rates enacted during 2003 and continued pressure by other third party plans to reduce prescription costs;
•: A lower rate of pharmacy same-store sales growth generally experienced throughout the industry during 2003. Our pharmacy same-store sales growth declined from 12.1% in fiscal 2002 to 7.5% in fiscal 2003, resulting in part from higher unemployment rates that reduced the number of customers with prescription coverage insurance plans, increased third party plan co-payments, declines in demand for hormone replacement medications and conversion of certain high volume medications from prescription to over-the-counter status;
•: The relative immaturity of recently opened stores, which are generally not expected to be profitable until some time after opening;
•: Decreases in front-end same-store sales resulting from the depressed New York City economy as well as an August 2003 power blackout that disrupted business, resulting in a loss of approximately $1.3 million of pre-tax income. These sales declines reduced our gross margins because front-end products have gross margins that are generally double the margins of pharmacy products;
•: Increases in store occupancy costs resulting from new stores, which generally pay higher rent than older stores, lower real estate related income from lease terminations and store relocations and an 18.5% increase in New York City real estate taxes that became effective on January 1, 2003;
•: Increased professional and legal related costs of approximately $3.4 million associated with various litigation, including our efforts to recover the full value of the World Trade Center business interruption insurance claim and various real estate and labor matters;
•: Increased store-level expenses associated with the significant number of one-hour photo departments opened in 2002 and 2003 that were immature and not yet profitable as well as costs to expand the number of 24-hour stores and increased operating hours in other stores to improve convenience for our customers; and
•: In the second half of 2003, we also incurred approximately $1.0 million in costs to implement a new shelf labeling system. These costs of the shelf labeling system were partially offset by a labor savings benefit from this system resulting from the elimination of certain individual item price marking requirements.

The factors detailed above reduced our ability to continue to absorb a high rate of new store growth while increasing profitability. New stores are generally not profitable on average for 12 to 18 months and historically do not reach mature levels of sales and profitability until three to five years after opening. Approximately 43% of our stores were less than four years old at December 27, 2003. The large number of immature stores in a period of declining front-end same-store sales and reduced rates of pharmacy same-store sales growth combined to adversely impact our results more significantly than in past periods of more robust same-store sales growth. The sales growth of new stores is also influenced by factors that affect our business as a whole.

The following sets forth our results of operations in dollars (in thousands) and as a percentage of sales for the periods indicated.

	13 Weeks Ended
	Successor March 26, 2005					Predecessor March 27, 2004
In thousands, except percentages	Successor March 26, 2005					Predecessor March 27, 2004
In thousands, except percentages	Dollars			% of Sales		Dollars		% of Sales
Net sales	$	394,767		100.0	%	$	383,310	100.0	%
Cost of sales		321,958		81.6			306,808	80.0

Gross profit		72,809		18.4			76,502	20.0
Selling, general & administrative expenses		64,499		16.3			58,643	15.3
Labor contingency		1,100		0.3			1,100	0.3
Transaction expense		427		0.1			1,102	0.3
Depreciation and amortization		17,646		4.5			9,066	2.4
Store pre-opening expenses		100		0.0			157	0.0
Other		1,148		0.3			—	0.0

Operating (loss) income		(12,111	)	-3.1			6,434	1.7
Interest expense, net		11,165		2.8			3,437	0.9

(Loss) income before income taxes		(23,276	)	-5.9			2,997	0.8
Income tax (benefit) expense		(10,474	)	-2.7			1,245	0.3

Net (loss) income	$	(12,802	)	-3.2	%	$	1,752	0.5	%

	Successor— Restated				Predecessor—Restated
	Period from July 31, 2004 through Dec. 25, 2004				Period from Dec. 28, 2003 through July 30, 2004				Fiscal Years Ended
	Period from July 31, 2004 through Dec. 25, 2004				Period from Dec. 28, 2003 through July 30, 2004				December 27, 2003				December 28, 2002
	Dollars		% of Sales		Dollars		% of Sales		Dollars		% of Sales		Dollars		% of Sales
Net sales	670,568		100.0	%	927,801		100.0	%	1,465,275		100.0	%	1,325,523		100.0	%
Cost of sales	542,897		81.0	%	745,090		80.3	%	1,168,408		79.7	%	1,041,303		78.6	%

Gross profit	127,671		19.0	%	182,711		19.7	%	296,867		20.3	%	284,220		21.4	%
Selling, general and administrative expenses	101,677		15.2	%	142,293		15.3	%	229,148		15.6	%	198,770		15.0	%
Transaction expenses	37,575		5.6	%	3,005		0.3	%	644		0.0	%	—		0.0	%
Labor contingency expense	1,789		0.3	%	2,611		0.3	%	12,600		0.9	%	—		0.0	%
Insurance recovery	—		0.0	%	—		0.0	%	—		0.0	%	(9,378	)	-0.7	%
Depreciation and amortization	27,051		4.0	%	21,902		2.4	%	32,335		2.2	%	26,935		2.0	%
Store pre-opening expenses	365		0.1	%	470		0.1	%	1,063		0.1	%	2,086		0.2	%
Other	26,433		3.9	%	—		0.0	%	—		0.0	%	—		0.0	%

Operating (loss) income	(67,219	)	-10.0	%	12,430		1.3	%	21,077		1.5	%	65,807		5.0	%
Net interest expense	15,880		2.4	%	7,977		0.9	%	14,117		1.0	%	17,925		1.3	%
Debt extinguishment	7,525		1.1	%	—		0.0	%	812		0.1	%	11,371		0.9	%

(Loss) income before income taxes and cumulative effect of accounting change	(90,624	)	-13.5	%	4,453		0.5	%	6,148		0.4	%	36,511		2.8	%
Income tax (expense) benefit	35,175		5.2	%	(1,136	)	-0.1	%	(1,669	)	-0.1	%	(12,994	)	-1.0	%

(Loss) income before cumulative effect of accounting change	(55,449	)	-8.3	%	3,317		0.4	%	4,479		0.3	%	23,517		1.8	%
Cumulative effect of accounting change, net	—		0.0	%	—		0.0	%	—		0.0	%	(9,262	)	-0.7	%

Net (loss) income	(55,449	)	-8.3	%	3,317		0.4	%	4,479		0.3	%	14,255		1.1	%

The Thirteen Weeks Ended March 26, 2005 for the Successor as Compared to the Thirteen Weeks Ended March 27, 2004 for the Predecessor

Net sales were $394.8 million in the thirteen weeks ended March 27, 2005, representing an increase of 3.0% as compared to net sales of $383.3 million in the thirteen weeks ended March 27, 2004. Resale activity accounted for a decrease of 1.5%, while retail sales to customers increased by 4.5% over this period. Same-store sales increased by 2.0% over the first quarter last year with the balance of the increase coming from the full quarterly results of two net new stores opened in the first quarter last year and six net new stores opened since the end of last year's first quarter.

Pharmacy sales increased from $192.2 million in the first quarter of 2004 to $195.5 million in the first quarter of 2005, an increase of 1.7%, and represented 49.5% of total sales, as compared with 50.1% of total sales in the first quarter of 2004. The overall pharmacy sales increase includes a decrease of 2.9% resulting from the reduced resale activity, offset by an increase of 4.6% in normal retail pharmacy sales. Pharmacy same-store sales increased by 2.0% over last year, and third-party reimbursed pharmacy sales represented 92.7% of total prescription sales compared to 92.0% in the first quarter of 2004. Pharmacy same-store sales were adversely impacted by approximately 1.6% due to negative publicity and significantly reduced consumer demand for arthritis medications and certain other high volume drugs and approximately 1.4% due to increased mail order penetration resulting from conversion of certain third party plans to mandatory mail order requirements. The percentage of generic prescriptions dispensed increased by 4% this year, resulting in a reduction of the pharmacy same-store sales increase by approximately 2.9%, but an increase in gross margin per prescription dispensed. Generic prescriptions generally have lower retails but are more profitable than branded prescriptions.

Front-end sales increased from $191.1 million in the first quarter of 2004 to $199.3 million in the first quarter of 2005, an increase of 4.3%, and represented 50.5% of total sales, as compared to 49.9% of total sales in the first quarter of 2004. Front-end same-store sales increased by 2.0%, primarily due to the earlier timing of the Easter holiday as compared to the prior year, a stronger cough and cold season and a generally improved level of consumer demand.

During the thirteen weeks ended March 26, 2005, we opened two stores and closed eight stores, as compared to three stores opened and one store closed during the thirteen weeks ended March 27, 2004. At March 26, 2005, we operated 249 stores, as compared to 243 stores at March 27, 2004.

Cost of sales as a percentage of net sales was 81.6% in the first quarter of 2005 and 80.0% in the first quarter of 2004, resulting in gross profit margins of 18.4% and 20.0%, respectively. This decrease in gross profit margins was primarily attributable to lower levels of vendor allowances and real estate related income combined with higher inventory shrink losses and increased non-cash rent expense of $1.9 million, or 0.5% of sales, that was attributable to the application of purchase accounting under FAS 141, "Business Combinations," in connection with the July 30, 2004 acquisition by Oak Hill. Cost of sales also includes (i) a $0.2 million LIFO benefit in the current year's first quarter as compared to a LIFO provision of $0.3 million in the corresponding period last year, and (ii) real-estate related income of $0.1 million in the first quarter of 2005 as compared to $0.8 million in the first quarter of 2004.

Selling, general and administrative expenses were $64.5 million, or 16.3% of net sales and $58.6 million, or 15.3% of net sales, in the first quarter of 2005 and 2004, respectively. The increase in these expense ratios to sales as compared to the prior year primarily reflects the increased legal and litigation related expenses incurred in the current year, as well as increased labor costs associated with the ongoing shortage of pharmacists in the marketplace and increases in the New York minimum wage rates.

Depreciation and amortization of capital expenditures and intangible assets amounted to $17.6 million in the first quarter of 2005, as compared to $9.1 million in the first quarter of 2004. This increase was attributable to the aforementioned step-up in asset values resulting from the application of purchase accounting under FAS 141 that was required in connection with the Acquisition as well as increases resulting

from the depreciation of capital expenditures made in 2004 and 2005 and amortization of identifiable intangibles acquired over the same period.

We incurred store pre-opening expenses of $0.1 million in the first quarter of 2005, related to the opening of two stores. In the first quarter of last year, we incurred pre-opening costs of $0.2 million, attributable to the opening of three stores.

Net interest expense for the first quarter of 2005 was $11.2 million, as compared to $3.4 million in the first quarter of 2004. This increase was primarily attributable to the higher interest costs and increased debt in the current year that was associated with the new debt structure resulting from the Acquisition, as compared to the lower debt levels and interest rates incurred on our revolving credit borrowings and convertible notes in the prior year. At March 26, 2005, the weighted average interest rate on our variable rate outstanding debt was 5.60%, as compared to 2.85% at March 27, 2004.

In the first quarter of 2005, we recorded an income tax benefit of $10.5 million, reflecting an estimated effective tax rate of 45.0%, inclusive of the anticipated benefits of employment tax credits. In the comparable period last year, the income tax provision of $1.2 million reflected an estimated effective tax rate of 41.5%, inclusive of the anticipated benefits of employment tax credits. The employment tax credits represent the economic benefits earned by us for our participation in various federal and state hiring incentive programs. The increase in the current year's effective rate reflects the combined impact of the employment tax credits and the reduced levels of pre-tax income generated by us.

The Period from July 31, 2004 through December 25, 2004 for the Successor and the Period from December 28, 2003 through July 30, 2004 for the Predecessor Compared to the Twelve Months Ended December 27, 2003 for the Predecessor

Net sales were $670.6 million in the July 31, 2004 through December 25, 2004 period and $927.8 million in the December 28, 2003 through July 30, 2004 period. Overall, predecessor and successor net sales for 2004 increased by 9.1% as compared to net sales of $1.465 billion for 2003. Resale activity accounted for 5.6% of this increase while normal retail sales to customers increased by 3.5% over this period. Overall 2004 same-store sales increased by 0.6% over 2003 with the balance of the increase coming from the full twelve month results of 13 net new stores opened last year and 14 net new stores opened since the end of last year.

Pharmacy sales were $350.4 million in the July 31, 2004 through December 25, 2004 period and $465.3 million in the December 28, 2003 through July 30, 2004 period. Overall, predecessor and successor pharmacy sales for 2004 increased by 19.1% as compared to pharmacy sales of $684.8 million in 2003. Resale activity in 2004 accounted for 11.9% of the pharmacy sales increase. Pharmacy same-store sales increased by 5.0% over 2003, and third-party reimbursed pharmacy sales represented 92.3% of total prescription sales, compared to 91.4% in fiscal 2003. During 2004, pharmacy same-store sales continued to experience the general industry trend of reduced growth rates experienced during fiscal 2003. The major factors driving the slower sales growth rates in pharmacy were the trends toward increases in third party plan customer co-payments, reduced sales of hormonal replacement drugs and certain arthritis medications, limitations on maximum reimbursements for certain generic medications by third party plans, increased penetration by mail order and internet-based pharmacies and continued high rates of unemployment that have reduced the number of customers covered by insured plans.

Front-end sales were $320.1 million in the July 31, 2004 through December 25, 2004 period and $462.5 million in the December 28, 2003 through July 30, 2004 period. Overall, predecessor and successor front-end sales for 2004 increased by 0.3% as compared to net front-end sales of $780.4 million in fiscal 2003. Overall 2004 front-end same-store sales declined by 2.8% from 2003 partly due to declining tobacco sales in metro New York City, which has experienced increased restrictions on smoking in public places along with higher taxes on tobacco products. Excluding tobacco sales, front-end same-store sales decreased by approximately 1.7%. We believe that the remaining decline in same-store front-end sales is partly attributable

to the continued high unemployment rates that have restrained consumer demand, as well as disruptions in customer purchases in Manhattan prior to and during the Republican National Convention in August of 2004.

During the period from July 31, 2004 through December 25, 2004, we opened seven stores and closed one store, and from December 28, 2003 through July 30, 2004 we opened nine stores and closed one store, as compared to 17 stores opened and four stores closed during 2003.

Cost of sales as a percentage of net sales was 81.0% for the period from July 31, 2004 through December 25, 2004 and 80.3% for the period from December 28, 2003 through July 30, 2004, resulting in gross profit margins of 19.0% and 19.7%, respectively. In 2003, cost of sales as a percentage of net sales was 79.7%, resulting in a gross profit margin of 20.3%. The increase in resale activity resulted in 2.7% and 1.9% lower gross profit margins in the period from July 31, 2004 through December 25, 2004 and the period from December 28, 2003 through July 30, 2004, respectively. As discussed above, the lower gross profit margin results for the successor and predecessor periods of 2004 compared to 2003 are primarily attributable to increased levels of low margin resale activity for pharmaceutical products as well as a reduction in New York Medicaid prescription reimbursement rates.

Selling, general and administrative expenses were $101.7 million, or 15.2% of net sales, and $142.3 million or 15.3% of net sales, in the July 31, 2004 through December 25, 2004 period and the December 28, 2003 through July 30, 2004 periods, respectively, as compared to $229.1 million, or 15.6% of net sales, in 2003. The decrease in these expense ratios to sales in 2004 from 2003 is entirely due to the impact of an increased level of resale activity. Because resale activity does not incur any significant selling, general and administrative costs, we believe it is more informative to discuss such costs as a percentage of sales, excluding such resale activity. Excluding the impact of this resale activity, selling, general and administrative expense ratios for the periods subsequent and prior to the Acquisition were 17.3% and 16.8% respectively, compared to 16.5% for fiscal 2003. As discussed above, the increased SG&A expenses, without the effect of resales, in the successor period compared to the predecessor periods in 2004 were primarily due to increased store pharmacist labor costs and higher promotional spending. The increased pharmacist labor rates were due to the industry-wide workforce shortage of these professionals and the resultant inflation in costs to fill these critical positions. The increase in selling, general and administrative costs, without the effect of resales, in the successor period of 2004 compared to fiscal 2003, were principally attributable to increased pharmacist labor rates as well as higher legal and litigation related expenses, the most significant of which related to our efforts to recover the balance of our September 11 business interruption insurance claim and our litigation over the NLRB ruling in a dispute with the Allied Trade Council, a union representing employees in 139 of our stores. For a more detailed discussion of litigation related matters see "Business—Legal Proceedings."

Depreciation of capital expenditures and amortization of intangibles amounted to $27.1 million and $21.9 million for the July 31, 2004 through December 25, 2004 and December 28, 2003 through July 30, 2004 periods, respectively, versus $32.3 million for the full year of 2003. The overall 2004 increase versus 2003 resulted from the depreciation of capital expenditures made in 2003 and 2004 as well as increases in the depreciation and amortization from the write-up of fixed assets and certain intangibles to their fair value in connection with the Acquisition.

We incurred store pre-opening expenses of $0.4 million in the July 31, 2004 through December 25, 2004 period, and $0.5 million in the December 28, 2003 through July 30, 2004 period, related to the opening of seven stores and nine stores, respectively. In the comparable period last year, we incurred pre-opening costs of $1.1 million, attributable to the opening of 17 stores.

Net interest expense for the July 31, 2004 through December 25, 2004 period was $15.9 million, and for the December 28, 2003 through July 30, 2004 period was $8.0 million. For fiscal 2003, net interest expense amounted to $14.1 million. The overall increase in 2004 was primarily attributable to the interest costs of increased debt and higher interest rates associated with our new debt structure resulting from the Acquisition financing.

In the period from July 31, 2004 through December 25, 2004 we recorded a debt extinguishment charge of $7.5 million related to the December 2004 refinancing of a $155.0 million term loan with $160.0 million in floating rate notes. In fiscal 2003, we recorded a debt extinguishment charge of $0.8 million, reflecting (i) the payment of early termination premiums related to the retirement of the $1.6 million outstanding balance of the 9.25% senior subordinated notes and the write-off of the remaining deferred financing costs associated with those notes and (ii) the accelerated amortization of the remaining deferred financing costs related to the term loans and a revolving credit facility which were fully repaid in connection with the July 2003 refinancing of such indebtedness with an asset-based revolving credit facility.

In the period from July 31, 2004 through December 25, 2004, we recorded an income tax benefit of $35.2 million, reflecting a post-acquisition effective tax rate of 38.8%, inclusive of the anticipated benefits of employment tax credits. In the period from December 28, 2003 through July 30, 2004, the income tax provision of $1.1 million reflects an effective tax rate of 25.5%, inclusive of the anticipated benefits of employment tax credits. For fiscal 2003, the income tax provision of $1.7 million reflected an effective tax rate of 27.1%, inclusive of the anticipated benefits of employment tax credits. The changes in effective tax rates between these periods are primarily due to the impact of employment tax credits in relation to pre-tax income and certain non-deductible transaction expenses incurred during the period from July 31, 2004 to December 25, 2004. Employment tax credits do not vary with reported pre-tax income as they are based upon specific numbers of qualified new hires and represent the economic benefits earned by us for our participation in various federal and state hiring incentive programs.

Fiscal 2003 Compared to Fiscal 2002

Net sales in the year ended December 27, 2003 were $1.465 billion, an increase of 10.5% over the year ended December 28, 2002 sales of $1.326 billion. Approximately 2.3% of the increase was attributable to higher levels of inventory resale activity in 2003. The balance of the increase was due to an increase in same-store sales of 2.7% and the inclusion of 28 net new stores opened in 2002 for the entire 2003 period and 13 net new stores opened in 2003. The increase in same-store sales was due to a pharmacy same-store sales increase of 7.5% partially offset by a front-end same-store sales decline of 0.8%. The most significant factors impacting our front-end sales performance during 2003 compared to 2002 were the continued depressed economic conditions and high unemployment that combined to restrain consumer demand. Front-end sales were also negatively affected by the August 2003 power blackout. Pharmacy same-store growth rates also decelerated from the 12.1% achieved in 2002 due to the factors discussed in the introduction above.

Cost of sales as a percentage of net sales increased to 79.7% for 2003 from 78.6% in 2002, resulting in a decrease in gross margin to 20.3% for 2003 from 21.4% in 2002. The gross margin decline primarily resulted from the following factors:

•: Reduced pharmacy gross margins resulting from reductions in New York State Medicaid prescription reimbursement rates and increased use of generic reimbursement limitations by both private third party and government-sponsored plans;
•: Reduced pharmacy gross margins resulting from increased levels of lower margin resale activity in 2003 compared to 2002;
•: An increased proportion of lower margin third party and general pharmacy prescription sales along with a decline in higher margin front-end same-store sales; and
•: Increased store occupancy costs attributable to immature stores opened over the last three years (which have higher rent costs because their rents were closer to current market rates than those of older, more mature stores), lower real estate related income from lease terminations and store relocations and higher New York City real estate taxes that increased by 18.5% effective January 1, 2003.

Selling, general and administrative expenses increased as a percentage of sales from 15.0% in 2002 to 15.6% in 2003. Increased resale activity reduced the change in this expense ratio between these two periods.

Excluding resale activity, selling, general and administrative expenses increased from 15.6% in 2002 to 16.5% of sales in 2003. This increase was due to the following factors:

•: A lower rate of same-store sales growth in 2003 than in 2002, particularly in the pharmacy portion of our business which declined from a growth rate of 12.1% in 2002 to 7.5% in 2003;
•: Increased professional and legal expenses associated with various litigation matters, including our efforts to recover our business interruption insurance claim related to the September 11 disaster;
•: Increased labor costs to support greater numbers of 24-hour stores and expanded operating hours, increased pharmacy wages and costs to implement a new shelf labeling system;
•: Increased expenses to support immature one-hour photo departments opened in 2002 and 2003;
•: Increases in credit and debit card processing fees; and
•: Increased costs of insurance due to changes in the market.

Excluding the impact of the increase in professional and legal expenses associated with the litigation matters noted above, selling, general and administrative expenses were 16.3% of net sales in 2003.

Depreciation and amortization expense in 2003 and 2002 was $32.3 million and $26.9 million, respectively. The increase was attributable to capital spending for property and equipment additions during 2002 and 2003, primarily in support of new store growth as well as amortization expenses for pharmacy customer lists and lease acquisition costs for acquisitions completed during 2002 and 2003. In December 2002, we began to reduce our rate of new store growth from an average of 27 stores per year over the period from 1999 through 2002 to 17 stores opened in fiscal 2003. The reduction in new store growth recognized our need to grow more slowly in the face of depressed economic conditions and reduced profit margins.

Store pre-opening expenses were $1.1 million related to the opening of 17 stores in fiscal 2003, compared to pre-opening expenses of $2.1 million reflecting 32 store openings in 2002.

During 2003, we recorded total debt extinguishment charges of $0.8 million, which consisted of $0.7 million related to the write-off of deferred financing costs associated with term loans and the revolving credit facility that were replaced with a new asset-based revolving credit facility in July 2003, and $0.1 million related to deferred financing costs and consent premiums associated with the remaining 9.25% senior subordinated notes that were retired in February 2003.

During 2002, we recorded total debt extinguishment costs of $11.4 million, which consisted of the following:

•: $3.0 million, reflecting the write-off of deferred financing costs related to loans under our senior credit agreement that were repaid with the proceeds of our offering of senior convertible notes, our 9.25% senior subordinated notes that were purchased in a tender offer completed in June 2002, and the December 2002 repurchase of a portion of the senior convertible notes;
•: $7.0 million associated with the payment of consent premiums and other expenses related to the tender offer for the 9.25% senior subordinated notes;
•: $4.0 million in connection with the termination of the interest rate swap related to the loans under the senior credit agreement that were repaid; and
•: a gain of $2.6 million related to the December 2002 repurchase of senior convertible notes.

Net interest expense decreased to $14.1 million in 2003 from $17.9 million in 2002. The decrease in interest expense was primarily due to the retirement of most of the 9.25% senior subordinated notes in June 2002 as well as lower interest costs associated with the replacement of our previous senior credit agreement with a new asset-based revolving credit agreement in July 2003.

Our effective tax rate in 2003 was 27.1% as compared to 35.6% in 2002. The lower effective tax rate is attributable to the impact of employment tax credits on significantly reduced pre-tax income, partially offset

by incremental tax expense recorded in connection with New York State legislation which eliminated deductions for royalty fee expenses paid to out of state affiliated companies. Employment tax credits represent the benefits earned by us for our participation in various Federal and state hiring incentive programs. These benefits are based on the number of qualifying employees hired and retained by us for a specified time period. Employees qualify for these hiring programs primarily as a result of their enrollment in various economic assistance programs. The annual increase in the value of the employment tax credits reflects the hiring of additional qualifying employees from year to year as a result of our expansion and ongoing presence in economically challenged regions within the New York greater metropolitan area.

During 2002, as a result of the change in accounting method for inventory valuation from the retail dollar-based FIFO method to a specific cost-based LIFO method, we recorded a one-time, non-cash after-tax charge of $9.3 million. There were no cumulative effects of accounting changes recorded in 2003.

Liquidity and Capital Resources

Working Capital

Working capital was $58.1 million as of March 26, 2005 and $66.7 million as of December 25, 2004. Working capital reflects the classification of outstanding borrowings under our revolving loan facility of $179.8 million at March 26, 2005 and $153.9 million at December 25, 2004 as current liabilities. This current classification is required because cash receipts controlled by the lenders are used to reduce outstanding debt and the Company does not meet the criteria of Statement of Financial Accounting Standards No. 6 "Classification of Short Term Obligations Expected to be Refinanced" (FAS 6) to reclassify the debt as long-term, but is not an indication that this credit facility is expected to be retired within the next year. This facility expires in July of 2008 and we intend to continue to access it for our working capital needs throughout its remaining term.

Cash Flow for the Fiscal Quarter ended March 26, 2005 and for the Fiscal Quarter ended March 27, 2004

Net cash used in operating activities was $16.7 million in the thirteen weeks ended March 26, 2005 compared to cash provided by operations of $12.2 million in the thirteen weeks ended March 27, 2004. The use of cash in the current year reflects the scheduled $19.0 million CEO SERP early termination payment.

Net cash used in investing activities was $8.0 million in the thirteen weeks ended March 26, 2005, compared to $17.1 million in the thirteen weeks ended March 27, 2004. In the first quarter of 2005, capital expenditures, primarily related to new store openings and the remodeling of existing locations, were $7.1 million, while lease acquisition, pharmacy customer file and other costs were $3.1 million of cash used in investing activities. These amounts were partially offset by $2.2 million of cash received in connection with the sale of property. In the first quarter of 2004, we spent $7.9 million on capital expenditures and $9.2 million on lease acquisition, pharmacy customer file and other costs.

Net cash provided by financing activities was $24.7 million in the thirteen weeks ended March 26, 2005, compared to $5.0 million in the thirteen weeks ended March 27, 2004. The increase in cash provided by financing activities in the current year was primarily attributable to fund the use of cash for operating and investing activities.

Cash Flow for the Period from July 31, 2004 through December 25, 2004 for the Successor and the Period from December 28, 2003 through July 30, 2004 for the Predecessor Compared to the Twelve Months Ended December 27, 2003 for the Predecessor

Net cash used in operating activities was $8.1 million in the period from July 30, 2004 through December 25, 2004 and net cash provided by operations was $21.6 million in the period from December 28, 2003 through July 30, 2004 compared to cash provided by operations of $47.4 million in 2003. Cash Acquisition-related expenses of $40.6 million accounted for the use of cash in the successor period.

Net cash used in investing activities was $440.7 million and $32.5 million, in the periods from July 30, 2004 through December 25, 2004 and December 28, 2003 through July 30, 2004, respectively, compared to $55.1 million in 2003. The increase in the successor period primarily represents the $413.7 million cash cost of acquiring the predecessor. In addition, capital expenditures in the 2004 successor period of $10.4 million and 2004 predecessor period of $17.6 million, declined by $13.1 million compared to fiscal 2003 while lease acquisition, pharmacy customer file and other costs in the 2004 successor period of $14.5 million and 2004 predecessor period of $14.9 million, increased by $16.7 million versus fiscal 2003. Fiscal 2004 cash flow used in investing activities included $2.2 million related to a sale-leaseback transaction while fiscal 2003 cash flow used in investing activities also included $1.4 million in connection with the completion of a store acquisition initiated in 2001.

Net cash provided by financing activities was $448.8 million and $11.0 million in the periods from July 30, 2004 through December 25, 2004 and December 28, 2003 through July 30, 2004, respectively, compared to net cash provided by financing activities of $4.7 million in fiscal 2003. The increase in cash provided by financing activities in the current year was primarily attributable to the equity contribution received and the new debt incurred in connection with the Acquisition.

Cash Flow for Fiscal 2003 Compared to Fiscal 2002

For fiscal 2003, net cash provided by operating activities was $47.4 million or 3.4% of sales, compared to $42.5 million, or 3.3% of sales in 2002. The primary reason for the increase was the lower rate of growth in working capital in 2003 over 2002 than experienced in 2002 over 2001.

For fiscal 2003, net cash used in investing activities was $55.1 million, compared to $60.5 million in fiscal 2002. Net cash used in investing activities in 2003 was for capital expenditures of $41.0 million, primarily related to the opening and remodeling of new and renovated stores, combined with $12.7 million for lease acquisition, pharmacy file and other costs and $1.4 million associated with the completion of a store acquisition initiated in 2001. Net cash used in investing activities in 2002 was due to capital expenditures of $47.6 million and $12.9 million for lease acquisition, pharmacy file and other costs. The decrease in cash used for investing activities in 2003 was primarily due to a reduction in the number of store openings from 32 in 2002 to 17 in 2003, partially offset by increased capital expenditures in 2003 for technology related projects.

For fiscal 2003, net cash provided by financing activities was $4.7 million, compared to $17.2 million in fiscal 2002. The lower levels of cash provided by financing activities in 2003 resulted from the improved level of cash flow from operating activities combined with decreased capital expenditures reflective of the less aggressive store expansion program employed in 2003.

The Acquisition

The Acquisition was financed as an all-cash transaction whereby Duane Reade Inc.'s common stock outstanding immediately prior to the Acquisition was converted into the right to receive $16.50 per share, without interest. The total transaction value, including transaction expenses and the repayment of indebtedness was $747.5 million, which was funded through new equity investments of approximately $244 million and debt of approximately $504 million.

Operating Capital Requirements

Our operating capital requirements primarily result from opening and stocking new stores, remodeling and renovating existing retail locations, purchasing pharmacy files and the continuing development of management information systems. We opened 16 new stores during 2004, a decline from 17 stores opened in 2003 and 32 stores opened in 2002. We opened 2 new stores in the first quarter of 2005 and currently plan to open approximately 8-10 additional new stores during the remainder of this year (a total of 10-12 for all of 2005), and 10-12 new stores in each of fiscal 2006 through fiscal 2008. We spent approximately $27.9 million in fiscal 2004 and $7.1 million in the first quarter of 2005, on capital expenditures, and we spent an additional

$29.4 million in fiscal 2004 and approximately $3.1 million in the first fiscal quarter of 2005 for lease acquisition, pharmacy customer files and other costs. We also require working capital to support inventory for our existing and new stores. Historically, we have been able to lease almost all of our store locations, so acquisitions of real estate are not expected to have a significant impact on our capital requirements.

Liquidity Assessment

Duane Reade Holdings is a holding company formed in connection with the Acquisition to hold 100% of the common stock of Duane Reade Inc. Duane Reade Holdings operates all of its business through Duane Reade Inc. and its subsidiaries and has no other independent assets, liabilities or operations, so, to the extent it has liquidity requirements, it will depend on distributions of cash from Duane Reade Inc., to the extent permitted by the various agreements to which Duane Reade Inc. is a party. Currently, we do not expect Duane Reade Holdings to have any material liquidity requirements.

We believe that, based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including revolving loan borrowings under the amended asset-based revolving loan facility will be adequate for at least the next two years, to make required payments on our indebtedness, to fund anticipated capital expenditures and to satisfy our working capital requirements. We base this belief on our recent levels of cash flow from operations of approximately $47.4 million in fiscal 2003 and cash flow from operations of $11.3 million in 2004 (which includes the absorption of $40.6 million in Acquisition-related costs) and the significant additional borrowing capacity under the amended asset-based revolving loan facility, which amounted to approximately $62.6 million at March 26, 2005. In January 2005, we borrowed an additional $19.0 million under the amended asset-based revolving loan facility to fund a settlement obligation in connection with the termination of the Chairman's SERP benefit. We expect to recover a portion of this additional revolver borrowing (approximately $10.0 million) upon the retirement of the Chairman's split dollar life insurance policy on June 30, 2005. Our ability to meet our debt service obligations and reduce our total debt will depend upon our future performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. In addition, our operating results, cash flow and capital resources may not be sufficient for repayment of our indebtedness in the future. Some risks that could adversely affect our ability to meet our debt service obligations include, but are not limited to, reductions in third party prescription reimbursement rates, declines in the New York City economy, increases in competitive activity, changes in drug consumption patterns, additional adverse legislative changes or a major disruption of business in our markets from a terrorist event, natural disaster or other unexpected events. Other factors that may adversely affect our ability to service our debt are described above under "Special Note Regarding Forward-Looking Statements." Borrowings under the amended asset-based revolving loan facility and the $160.0 million floating rate notes bear interest at floating rates. Therefore, our financial condition will be affected by changes in prevailing interest rates. On May 25, 2005 we entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, we capped our exposure on $130 million of LIBOR-based borrowings under the notes at a maximum LIBOR rate of 5.30%. In addition, we established a minimum "floor" LIBOR rate of 3.45%, in line with current LIBOR rates. This hedging arrangement expires on June 16, 2008.

Debt

Amended Asset-Based Revolving Loan Facility. On July 21, 2003, Duane Reade GP entered into a new credit agreement. This credit agreement was an asset-based revolving loan facility which used a pre-determined percentage of the current value of our inventory and selected accounts receivable to calculate the availability of funds eligible to be borrowed up to an aggregate principal amount of $200 million. Prior to the amendment described below, our obligations under the credit agreement and related guarantees were collateralized by substantially all of our assets.

On July 22, 2004, in connection with the Acquisition, the asset-based revolving loan facility was amended to increase the borrowing capacity to an aggregate principal amount of $250 million, subject to an adjusted borrowing base calculation based upon specified advance rates against the value of our selected inventory, pharmacy prescription files and selected accounts receivable. The amended asset-based revolving loan facility includes a $50 million sub-limit for the issuance of letters of credit. Obligations under the asset-based revolving loan facility are collateralized by a first priority security interest in inventory, receivables, pharmacy prescription files, deposit accounts and certain other current assets. Under the asset-based revolving loan facility, Duane Reade Inc. and Duane Reade GP are co-obligors. The asset-based revolving loan facility is guaranteed by us, and each of our other domestic subsidiaries other than Duane Reade Inc. and Duane Reade GP.

The asset-based revolving loan facility contains a single fixed charge coverage requirement which only becomes applicable when borrowings exceed 90 percent of the borrowing base, as defined in the asset-based revolving loan facility. Borrowings under the asset-based revolving loan facility have not exceeded 90 percent of the borrowing base and, as a result, the fixed charge covenant has not become applicable. There are no credit ratings related triggers in the asset-based revolving loan facility that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity. The asset-based revolving loan facility is scheduled to mature on July 20, 2008.

Revolving loans under the asset-based revolving loan facility, at our option, bear interest at either:

•: a rate equal to LIBOR (the London Interbank Offered Rate) plus a margin of from 1.50% to 2.00%, determined based on levels of borrowing availability reset each fiscal quarter; or
•: a rate equal to the prime rate of Banc of America Retail Group Inc. plus a margin of from 0.00% to 0.50%, determined based on levels of borrowing availability reset each fiscal quarter. Borrowings under the amended facility continue to be primarily LIBOR-based.

At March 26, 2005, there was $179.8 million outstanding under the asset-based revolving loan facility, and approximately $62.6 million of remaining availability, net of $4.2 million reserved for standby letters of credit. Obligations under this facility have been classified as current liabilities because cash receipts controlled by the lenders are used to reduce outstanding debt and we do not meet the criteria of FAS 6 to reclassify the debt as long-term. We intend to continue to utilize this facility for our working capital needs though the date of its maturity in July 2008. This availability balance reflects the January 2005 borrowing of $19.0 million in connection with the termination of the Chairman's SERP benefit discussed above.

Senior Secured Notes. On December 20, 2004, we closed an unregistered offering of $160.0 million aggregate principal amount of senior secured floating rate notes due 2010. Using the net proceeds (without deducting expenses) from that offering, together with approximately $2.2 million of borrowings under the amended asset-based revolving loan facility, we repaid all outstanding principal under the $155.0 million senior term loan facility, along with approximately $3.6 million of premium and accrued but unpaid interest through December 20, 2004.

The senior secured notes bear interest at a floating rate of LIBOR plus 4.50%, reset quarterly. Interest on the senior secured notes is payable quarterly on each March 15, June 15, September 15, and December 15, beginning on March 15, 2005.

Duane Reade Inc. and Duane Reade GP are co-obligors under the senior secured notes. The senior secured notes rank equally in right of payment with any of our or Duane Reade GP's unsubordinated indebtedness and senior in right of payment to any of our or Duane Reade GP's subordinated or senior subordinated indebtedness. All obligations under the senior secured notes are guaranteed on a senior secured basis by us and each of our existing subsidiaries, other than Duane Reade Inc. and Duane Reade GP, and will be guaranteed by future subsidiaries except certain foreign and certain domestic subsidiaries. The senior secured notes and the guarantees are collateralized by a first priority security interest in substantially all of our assets other than those assets in which the lenders under the amended asset-based revolving loan facility

have a first priority interest. The senior secured notes and the guarantees are also collateralized by a second priority security interest in all collateral pledged on a first priority basis to lenders under the amended asset-based revolving loan facility.

Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase all of the senior secured notes at 101% of the outstanding principal amount of the senior secured notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior secured notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur additional indebtedness, pay dividends, make repayments on indebtedness that is subordinated to the senior secured notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into sale-leaseback transactions, enter into transactions with affiliates and permit restrictions on the payment of dividends by restricted subsidiaries. The indenture governing the senior secured notes contains customary events of default, which, if triggered, may result in the acceleration of the indebtedness outstanding under the indenture. The indenture governing the senior secured notes does not contain financial maintenance covenants. Under a registration rights agreement entered into as part of the offering of the senior secured notes, we are required to (i) file a registration statement with the SEC within 120 days after the completion of the offering of the senior secured notes, (ii) use our reasonable best efforts to cause the registration statement to become effective within 180 days after the completion of offering of the senior secured notes, and (iii) use our reasonable best efforts to complete an exchange offer of the initial senior secured notes for registered senior secured notes within 210 days after the offering of the senior secured notes is completed. On January 21, 2005, we filed a registration statement on Form S-4, registering an exchange offer relating to the senior secured notes. On February 3, 2005, the registration statement was declared effective. However, on March 7, 2005, prior to the completion of the exchange offer, we suspended the exchange offer as a result of the restatement of our financial results described under "—Prior Period Restatements." The exchange offer has been recommenced as of the date of this prospectus, which prospectus includes restated financial results. Because the Expiration Date of the exchange offer, , 2005, is more than 210 days after our offering of senior secured notes, the Company expects to pay liquidated damages under the registration rights agreement entered into in connection with the offering of the senior secured notes. Assuming we successfully consummate the exchange offer on the Expiration Date, we will pay, as of the next interest payment date on the notes, $ per $1,000 of notes, or a total of $ , in liquidated damages. There are no credit ratings related triggers in the indenture governing the senior secured notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity.

Senior Subordinated Notes. On July 30, 2004, upon completion of the Acquisition, Duane Reade Inc. and Duane Reade GP co-issued $195.0 million of 9.75% senior subordinated notes due 2011. The senior subordinated notes mature on August 1, 2011 and bear interest at 9.75% per annum payable in semi-annual installments on February 1 and August 1, commencing February 1, 2005. The senior subordinated notes are uncollateralized obligations and subordinated in right of payment to all of our existing and future unsubordinated indebtedness, including borrowings under the amended asset-based revolving loan facility and the senior secured notes. The senior subordinated notes will rank equally with any future senior subordinated indebtedness and senior to any future subordinated indebtedness. The senior subordinated notes are guaranteed on an uncollateralized, senior subordinated basis by us and all of Duane Reade Inc.'s existing direct and indirect domestic subsidiaries other than Duane Reade GP, which is a co-obligor under the senior subordinated notes. On March 25, 2005, Duane Reade Holdings became a guarantor of the senior subordinated notes on the same basis as the other guarantors. Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase all of the senior subordinated notes at 101% of the outstanding principal amount of the senior subordinated notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior subordinated notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur additional indebtedness, pay dividends, make repayments on indebtedness that is

subordinated to the senior subordinated notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into transactions with affiliates and permit restrictions on the payment of dividends by restricted subsidiaries. The indenture governing the senior subordinated notes contains customary events of default, which, if triggered, may result in the acceleration of the indebtedness outstanding under the indenture. There are no credit ratings related triggers in the indenture governing the senior subordinated notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity.

Other Factors Influencing our Liquidity

We have been recently advised that the appraisal panel in the World Trade Center insurance claim litigation has determined that the amount of our business interruption loss as a result of the events of September 11, 2001 is approximately $40.7 million greater than the amount we have already recovered from the insurance provider (after giving effect to interest adjustments). This award is subject to existing appeals and potentially additional appeals, and on June 22, 2005, the Court of Appeals affirmed the decision of the trial court, with modifications, including modifications to certain of the legal tests on which the appraisal panel's decision was based. We are currently in the process of evaluating the opinion and its effect on the recovery and are considering our options. As a result of the appeal process and other uncertainties, we may not actually receive any or all of the panel's appraised value of this claim. It should also be noted that any payment to us that might be forthcoming as a result of this claim may also result in the incurrence of additional expenses that are contingent upon the amount of such insurance claim settlement. These expenses, if incurred, are not expected to exceed $6.0 million. Please see "Business—Legal Proceedings" for a more detailed explanation of this matter.

Eleven of our stores, which generated approximately 3.8% of our net sales for fiscal 2004, have leases scheduled to expire before the end of fiscal 2006. Four of these leases have a renewal option. We believe that we will be able to renew the other expiring leases on economically favorable terms or, alternatively, find other economically attractive locations to lease.

As of March 26, 2005, approximately 4,600 of our approximately 6,300 employees were represented by various labor unions and were covered by collective bargaining agreements. Pursuant to the terms of the collective bargaining agreements covering these employees, we are required, in some instances, to pay specified annual increases in salary and benefits contributions relating to the member employees. We do not believe that these increases will have a material impact on our liquidity or results of operations. Our collective bargaining agreement with Local 340A New York Joint Board, UNITE AFL-CIO or UNITE, who represents approximately 700 of our employees in 113 stores, expired on March 31, 2005. The parties have agreed to an extension of this contract through July 31, 2005

Under an employment agreement with our Chairman and CEO originally entered into in 1997 and subsequently amended in 2000 and 2001, and then amended and restated in 2002, and again amended and restated in connection with the completed Acquisition, we were required to fund premiums for a split dollar life insurance policy that would provide certain post-retirement benefits. During fiscal 2003 and fiscal 2004, the annual premiums amounted to $5.0 million, and were scheduled to remain at $5.0 million per year through 2010. The enactment of the Sarbanes-Oxley Act has resulted in the need for additional guidance concerning the permissibility of spilt dollar life insurance policies for executives. While we believe this split dollar policy is permitted under current interpretations of the legislation, there can be no assurance that further interpretations or guidance to be provided by the SEC concerning this legislation will concur. Upon completion of the Acquisition, under Mr. Cuti's amended and restated employment agreement, we elected to terminate the split dollar life insurance contract in exchange for, among other things, the payment to Mr. Cuti of $20.5 million on or prior to January 3, 2005 and $4.0 million on or prior to June 30, 2005. We have made all such required payments. A portion of these payment obligations (approximately $14.3 million) will be offset by the proceeds of the cash surrender value of the split dollar life insurance contract at the time we

elect to terminate it (approximately $14.3 million as of May 31, 2005) which we expect to occur on June 30, 2005.

The following tables provide information with respect to our commitments and obligations on a historical basis as at December 25, 2004:

	Payments due by Period—Restated
Contractual Cash Obligations	Total		Within 1 year		2-3 years		4-5 years		After 5 years
	(dollars in thousands)
Debt(1)(2)	$	508,902	$	153,870	$	—	$	—	$	355,032
Capital Lease Obligations(3)		2,788		780		1,368		640		—
Operating Leases(4)		1,344,893		119,602		237,090		219,849		768,352
CEO SERP Termination(5)		23,000		23,000		—		—		—
Fixed Interest Payments(6)		133,088		19,013		38,025		38,025		38,025

Total Contractual Cash Obligations	$	2,012,671	$	316,265	$	276,483	$	258,514	$	1,161,409

(1): These amounts include $195.0 million outstanding under the senior subordinated notes, $160.0 million outstanding under the senior secured floating rate notes, $153.9 million outstanding under the amended asset-based revolving loan facility due in 2008, and $32,000 outstanding under the senior convertible notes due in 2022. At December 25, 2004, a further $90.7 million was available for borrowing under the amended asset-based revolving loan facility. In January 2005, we borrowed an additional $19.0 million under the amended asset-based revolving loan facility. For more information about the terms of the indebtedness described above, please see "—Debt," above.
(2): At December 25, 2004, approximately $153.9 million was outstanding under our asset-based revolving loan facility. Obligations under this facility have been classified as current liabilities because cash receipts controlled by the lenders are used to reduce outstanding debt and the Company does not meet the criteria of FAS 6 to reclassify the debt as long-term, however this is not an indication that this credit facility is expected to be retired within the next year. We intend to continue to use this facility for our working capital needs through the date of its maturity in July 2008.
(3): In January 2005, we entered into a 60-month lease for equipment to be used in the photofinishing departments of our stores. This lease requires monthly payments of $0.3 million, which approximates the payments being made for leases of similar equipment which were satisfied in December 2004. In the first quarter of 2005, we will record a capital lease obligation of $13.5 million in connection with the new lease. Note 11 of the audited consolidated financial statements for the periods ended December 25, 2004 provides further detail on Capital Lease obligations.
(4): Note 15 of the audited consolidated financial statements for the periods ended December 25, 2004 provides further detail on Operating Lease obligations.
(5): In January 2005, we made a scheduled payment of $19.0 million to Mr. Cuti.
(6): Reflects interest payable on $195.0 million outstanding under the senior subordinated notes.

We currently have $313.9 million of variable rate debt outstanding. Assuming a constant weighted average interest rate of 5.49%, we estimate that our future interest payable on such debt would be

$17.2 million within one year, $34.5 million within two to three years, $22.3 million within four to five years and $8.8 million thereafter.

	Amount of Commitment Expiration per Period
Other Commercial Commitments	Total Amounts Commited		Within 1 year		2-3 years		4-5 years		After 5 years
	(dollars in thousands)
Standby Letters of Credit(1)	$	2,789	$	2,518	$	124	$	147	$	—

Total Commercial Commitments	$	2,789	$	2,518	$	124	$	147	$	—

(1): Standby letters of credit, primarily representing self-insured general liability claims and property lease security deposits, are renewed on an annual basis, unless otherwise requested by the beneficiary.

The Acquisition resulted in a restructuring of our debt, as well as the elimination of our obligations under the CEO Split Dollar Life Insurance Policy, in exchange for certain direct payments to Mr. Cuti. We also refinanced the senior term loan facility incurred in connection with the Acquisition with the proceeds from the issuance of the senior secured floating rate notes and borrowings under the amended asset-based revolving loan facility. The following tables provide information with respect to certain of our commitments and obligations as at March 26, 2005:

	Payments due by Period
Contractual Cash Obligations	Total		Within 1 year		2-3 years		4-5 years		After 5 years
	(dollars in thousands)
Debt Obligations(1)	$	534,842	$	179,810	$	—	$	—	$	355,032
Capital Lease Obligations(2)		15,616		2,899		6,405		6,312		—
CEO SERP Termination(3)		4,043		4,043		—		—		—
Fixed Interest Payments(4)		123,581		19,012		38,025		38,025		28,519

Total Contractual Cash Obligations	$	678,082	$	205,764	$	44,430	$	44,337	$	383,551

(1): These amounts include $195.0 million outstanding under the senior subordinated notes, $160.0 million outstanding under the senior secured floating rate notes, $179.8 million outstanding under the amended asset-based revolving loan facility due in 2008, and $32,000 outstanding under the senior convertible notes due in 2022. Obligations under the amended asset-based revolving loan facility have been classified as current liabilities because cash receipts controlled by the lenders are used to reduce outstanding debt and the Company does not meet the criteria of FAS 6 to reclassify the debt as long-term, although this is not an indication that this credit facility is expected to be retired within the next year. We intend to continue to use this facility for our working capital needs through the date of its maturity in July 2008.
(2): In January 2005, we entered into a 60-month lease for equipment to be used in the photofinishing departments of our stores. This lease requires monthly payments of $0.3 million, which approximates the payments being made for leases of similar equipment which were satisfied in December 2004. In the first quarter of fiscal 2005, we recorded a capital lease obligation of $13.5 million in connection with this new lease. Note 11 of the audited consolidated financial statements for the periods ended December 25, 2004 provides further detail on Capital Lease obligations.
(3): In January 2005, we made a scheduled payment of $19.0 million to Mr. Cuti.
(4): Reflects interest payable on $195.0 million outstanding under the senior subordinated notes.

We currently have $339.8 million of variable rate debt outstanding. Assuming a constant weighted average interest rate of 5.60%, we estimate that our future interest payable on such debt would be

$19.0 million within one year, $38.1 million within two to three years, $21.0 million within four to five years and $6.7 million thereafter.

	Amount of Commitment Expiration per Period
Other Commercial Commitments	Total Amounts Committed		Within 1 year		2-3 years		4-5 years		After 5 years
	(dollars in thousands)
Standby Letters of Credit(1)	$	4,237	$	3,966	$	124	$	147	$	—

Total Commercial Commitments	$	4,237	$	3,966	$	124	$	147	$	—

(1): Standby letters of credit, primarily representing self-insured general liability claims and property lease security deposits, are renewed on an annual basis, unless otherwise requested by the beneficiary.

We are party to multi-year, merchandise supply agreements in the normal course of business. The largest of these agreements is with AmerisourceBergen, our primary pharmaceutical supplier. Generally, these agreements provide for certain volume commitments and may be terminated by us, subject in some cases to specified termination payments, none of which we believe would constitute a material, adverse effect on our financial position, results of operations or cash flows. It is the opinion of management that if any of these agreements were terminated or if any contracting party was to experience events precluding fulfillment of its obligations, we would be able to find a suitable alternative supplier.

In connection with the Acquisition, Mr. Cuti was granted equity interests in Duane Reade Shareholders and Duane Reade Holdings, consisting of options to purchase shares of our common stock and a profits interest in Duane Reade Shareholders. Upon the occurrence of certain events, including the fifth anniversary of the effective date of the Acquisition, Mr. Cuti will have the right to require us to purchase for cash over a two year period all or a portion of these equity interests as he may designate, at fair market value determined in accordance with a formula. The profits interest and options will have no value unless the value of Duane Reade Shareholders and Duane Reade Holdings, respectively, appreciate following the Acquisition. Mr. Cuti's purchase right will be suspended at any time when the exercise of such purchase rights would result in a default under the financing arrangements of Duane Reade Shareholders, Duane Reade Holdings or Duane Reade Inc. Mr. Cuti's purchase right will also terminate upon certain public offerings by us, Duane Reade Shareholders, Duane Reade Holdings or Duane Reade Inc. Because the actual amount of the purchase obligation will depend on the market value of the equity interests and because the timing of the purchases will depend on a number of factors outside of our control, the purchase obligation is not reflected in the table above.

At March 26, 2005 we have recorded a litigation-related non-current liability of $18.1 million (including $1.1 million in the fiscal quarter ended March 26, 2005) in connection with the NLRB's decision in a litigation-related matter with the Allied Trades Council, a union representing employees in 139 of our stores. Because this decision is the initial phase of a complex administrative and judicial process, the ultimate outcome, financial impact and related timing of any future cash disbursement relating to this matter cannot be determined at this time. Until this matter is resolved, we will record additional non-cash pre-tax charges, including interest, which are calculated on the same basis as the charges recorded in the 2003 and 2004 financial statements. We currently estimate that the charge in 2005 will approximate $4.4 million, subject to changes in the relevant interest rate. Any payments we make in respect of such litigation will have an impact on our liquidity, although we believe that we will have sufficient available borrowings under the amended asset-based loan facility plus cash on hand to make any necessary payments.

Off-Balance Sheet Arrangements

We are not a party to any agreements with, or commitments to, any special purpose entities that would constitute material off-balance sheet financing other than the operating lease commitments and standby letters of credit listed above.

Critical Accounting Policies

Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial reporting to gain a more complete understanding of our consolidated financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the paragraphs below are those that depend most heavily on these judgments and estimates.

Receivables—Reserves for Uncollectible Accounts

At March 26, 2005 and December 25, 2004, accounts receivable included $38.1 million and $40.5 million, respectively, of amounts due from various insurance companies and governmental agencies under third party payment plans for prescription sales made prior to those dates. Our accounting policy, which is based on our past collection experience, is to fully reserve for all pharmacy receivables over 120 days old that are unpaid at the evaluation date, as well as any other pharmacy receivables deemed potentially uncollectible. Pharmacy receivables other than NY Medicaid are adjudicated at the point of sale and do not generally have issues of collectibility. There was approximately $2.3 million and $3.0 million reserved for uncollectible pharmacy receivables at March 26, 2005 and December 25, 2004, respectively. Other receivables, which primarily consist of amounts due from vendors, are reserved for based upon a specific application of our historical collection experience to the total aged receivable balance. At March 26, 2005 and December 25, 2004, this reserve was approximately $5.2 million and $5.1 million, respectively.

Inventory Shrink Estimates

We take front-end and pharmacy physical inventories in all of our stores and the distribution centers at least once per year on a staggered cycle basis. Inventories at balance sheet dates are valued using the specific-cost, item-based last-in, first-out (LIFO) method reduced by estimated inventory shrink losses for the period between the last physical inventory in each store and the balance sheet date. These shrink estimates are based on the latest chain-wide trends. At March 26, 2005 and December 25, 2004, a change in this shrink estimate of 1.0% of front-end sales would impact year-to-date pre-tax earnings by approximately $4.4 million and $4.3 million, respectively.

Insurance Liabilities and Reserves

At March 26, 2005 and December 25, 2004, there were $3.0 million and $3.5 million of accrued general liability claim costs, respectively, that primarily related to the gross amount payable for customer accident claims. Our policy is to recognize a liability for the estimated projected ultimate settlement value of these claims as well as a provision for incurred but unreported claims as of each balance sheet date. These estimates are made based on a review of the facts and circumstances of each individual claim using experienced third party claims adjustors. These estimates are also reviewed and monitored on an ongoing basis by management. For a majority of the claims, the maximum self-insured portion of any individual claim amounts to $100,000; however, our historical claim settlement experience is significantly lower. At March 26, 2005, there were 260 outstanding claims with an average projected settlement value of approximately

$11,700, as compared to 246 outstanding claims with an average projected settlement value of approximately $14,150 at December 25, 2004.

Impairment of Goodwill and Intangible Assets

At March 26, 2005, goodwill, net of accumulated amortization, was approximately $52.2 million. Other net intangible assets consisted of lease acquisition costs of $100.3 million, customer lists of $89.5 million, our trade name of $62.6 million and non-competition agreements of $0.6 million. Our policy is to evaluate our intangible assets, exclusive of goodwill, for impairment, when circumstances indicate that impairment may have occurred. These circumstances include, but are not limited to, a significant adverse change in legal factors or in the business climate, adverse action or assessment by a regulator, unanticipated competition or the loss of key personnel. We evaluate our intangible assets for impairment by comparing the expected undiscounted cash flows from the underlying stores or assets over their remaining asset lives to the net intangible asset values. Any intangible asset for which the projected undiscounted cash flow is insufficient to recover the asset's carrying value is considered impaired and would be written down to its net recoverable value based on discounted cash flows. Such write-downs would result in a non-cash charge to earnings. Goodwill is evaluated annually as of the year end balance sheet date as required under Statement of Financial Accounting Standards No. 142. Prior to the Acquisition, we utilized the market capitalization of our common stock in performing the required impairment test. Subsequent to the acquisition we employed a market multiple valuation technique utilizing other public chain drug retailers. Our most recent evaluation did not indicate any impairment of goodwill; however, we may be required to perform an interim impairment review if circumstances similar to those listed above indicate that impairment may have occurred. We may be required to recognize an impairment charge at the time an interim or future annual impairment review is performed, depending in part on the estimated value of our market capitalization.

Other Loss Contingencies

Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Loss contingencies often take years to resolve and can involve complicated litigation matters and potential regulatory actions, the outcomes of which are difficult to predict. At March 26, 2005, we have recorded two loss contingencies representing (i) the estimated liability associated with the NLRB's decision in a litigation-related matter with the Allied Trades Council and (ii) other legal settlement costs of $0.9 million. At December 25, 2004, we have recorded two loss contingencies representing (i) the estimated liability associated with the NLRB matter and (ii) other legal settlement costs of $1.0 million. At December 27, 2003, we had recorded two loss contingencies, representing (i) the estimated liability associated with the NLRB matter and our (ii) estimated portion of a potential settlement of an ongoing lawsuit between various retailers and a delivery driver's union.

Income Taxes

Our effective tax rate was 45% in the thirteen weeks ended March 26, 2005, 25.5% in the predecessor period from December 28, 2003 through July 30, 2004, 38.8% in the successor period from July 31, 2004 through December 25, 2004, 27.1% in fiscal 2003 and 35.6% in fiscal 2002. The reduced tax rate experienced in the predecessor period of 2004 as compared to the prior year reflects the impact of the tax credits on our reduced pre-tax income generated in the predecessor period of 2004. The effective tax rate has been and is expected to continue to be a major factor in the determination of our profitability and cash flow. As such, a significant shift in the relative sources of our earnings, or changes in tax rules or interpretations, could have a material, adverse effect on our results of operations and cash flow. The decrease in our effective rate in 2003 as compared to 2002 is attributable to the impact of employment tax credits on significantly reduced pre-tax income, partially offset by incremental tax expense recorded in connection with the New York State legislation enacted during the second quarter of 2003, that eliminated deductions for royalty fee expenses paid to out of state affiliated companies. Employment tax credits represent the benefits earned by us

for our participation in various Federal and state hiring incentive programs. These benefits are based on the number of qualifying employees hired and retained by us for a specified time period. Employees qualify for these hiring programs primarily as a result of their enrollment in various economic assistance programs. The annual increase in the value of the employment tax credits reflects the hiring of additional qualifying employees from year to year as a result of our continuing expansion and ongoing presence in the economically challenged regions within the New York greater metropolitan area.

Change in Accounting Method

During the first quarter of 2002, we adopted a change in accounting method to convert from the retail dollar based first-in, first-out ("FIFO") method of inventory valuation to an item specific cost-based last-in, first-out ("LIFO") method of inventory valuation. This change resulted in a one-time non-cash after-tax charge of approximately $9.3 million, which was recorded in the first quarter of the 2002 fiscal year as the cumulative effect of an accounting change. Adoption of the specific cost LIFO method has resulted in the recognition of the latest item costs in our reported gross margins, and has made our results more comparable to those of other major retailers in our industry.

Seasonality

The non-pharmacy business is seasonal in nature, with the Christmas holiday season generating a higher proportion of sales and earnings than other periods.

Inflation

We believe that inflation has not had a material impact on our results of operations during the three years ended December 25, 2004 or in the first fiscal quarter of 2005.

Recently Issued Accounting Pronouncements

In December 2002, FAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" was issued. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We have not adopted such voluntary change to the fair value based method. In addition, this statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures about the method of accounting for stock-based compensation and the effect of the method used on reported results. As required, we adopted the disclosure-only provisions of FAS No. 148 effective in 2002.

In December 2004, SFAS No. 123R, "Share-Based Payment" was issued. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based transactions. The provisions of this statement are required to be adopted for interim or annual periods beginning after December 15, 2005. We are currently evaluating the effect of adopting this statement.

Quantitative and Qualitative Disclosures About Market Risk

Our financial results are subject to risk from interest rate fluctuations on debt, which carries variable interest rates. Variable rate debt outstanding at March 26, 2005 included $179.8 million of borrowings under the amended asset-based revolving loan facility and $160.0 million under the senior secured floating rate notes. At March 26, 2005, the weighted average combined interest rate in effect on all variable rate debt outstanding was 5.60%. A 0.50% change in interest rates applied to the $339.8 million balance of floating rate debt would affect pre-tax annual results of operations by approximately $1.7 million. In addition, there were also $195.0 million of senior subordinated notes and $32,000 of senior convertible notes outstanding at March 26, 2005. The senior subordinated notes and senior convertible notes bear interest payable

semi-annually at fixed rates of 9.75% and 3.75%, respectively, and are therefore not subject to risk from interest rate fluctuations.

Variable rate debt outstanding at December 25, 2004 included $153.9 million of borrowings under the amended asset-based revolving loan facility and $160.0 million under the senior secured floating rate notes. At December 25, 2004, the weighted average combined interest rate in effect on all variable rate debt outstanding was 5.49%. A 0.50% change in interest rates applied to the $313.9 million balance of floating rate debt would affect pre-tax annual results of operations by approximately $1.6 million. In addition, there were also $195.0 million of senior subordinated notes and $32,000 of senior convertible notes outstanding at December 25, 2004. The senior subordinated notes and senior convertible notes bear interest payable semi-annually at fixed rates of 9.75% and 3.75%, respectively, and are therefore not subject to risk from interest rate fluctuations.

On May 25, 2005 we entered into a hedging transaction through the acquisition of a "no cost collar." Under this arrangement, we capped our exposure on $130 million of LIBOR-based borrowings under the notes at a maximum LIBOR rate of 5.30%. In addition, we established a minimum "floor" LIBOR rate of 3.45%, in line with current LIBOR rates. This hedging arrangement expires on June 16, 2008.

The principal objective of our investment management activities is to maintain acceptable levels of interest rate and liquidity risk to facilitate our funding needs. As part of our risk management, we may use derivative financial products such as interest rate hedges and interest rate swaps in the future.

BUSINESS

General

We are the largest drugstore chain in New York City, which is the largest drugstore market in the United States in terms of sales volume, representing approximately 5.4% of domestic U.S. drugstore sales. In 2004, we believe that we led the drugstore market in the New York metropolitan area in sales of both back-end and front-end categories. We have grown our market share from approximately 25% in 1999 to approximately 30% in 2003 in the New York metropolitan area, where we enjoy strong brand recognition. We believe our strong market share, concentrated distribution capabilities and proven operating experience results in our low operating costs as a percentage of sales. As of March 26, 2005, we operated 134 of our 249 stores in Manhattan's high-traffic business and residential districts, representing over twice as many stores as our next largest competitor in Manhattan. In addition, at March 26, 2005, we operated 84 stores in New York's densely populated outer boroughs and 31 stores in the surrounding New York and New Jersey suburbs, including the Hudson River communities of northeastern New Jersey. Since opening our first store in 1960, we have successfully executed a marketing and operating strategy tailored to the unique characteristics of New York City, the most densely populated major market in the United States. Sales of higher margin front-end items accounted for approximately 49% of our total sales in fiscal 2004 and approximately 50.5% of our total sales in the first fiscal quarter of 2005, the highest in the chain drug industry.

We enjoy strong brand name recognition in the New York greater metropolitan area, which we believe results from our many locations in high-traffic areas of New York City, attractive window displays and signage, frequent radio advertising and the approximately 92 million shopping bags with the distinctive Duane Reade logo that were given to our customers in 2004. According to a survey conducted in the New York Metropolitan area approximately 95% of the people who live in Manhattan have shopped at a Duane Reade store.

We have developed an operating strategy designed to capitalize on the unique characteristics of the New York greater metropolitan area, which include high-traffic volume, complex distribution logistics and high costs of occupancy, advertising and personnel. The key elements of our operating strategy are:

•: a convenient and value-oriented shopping experience;
•: a low cost operating structure supported by high per store sales volume and relatively low warehouse, distribution and advertising costs; and
•: a differentiated real estate strategy using flexible store formats.

We believe that our competitive price format and broad product offerings provide a convenient and value-oriented shopping experience for our customers and help to build customer loyalty.

Despite the high costs of operating in the New York greater metropolitan area, we have successfully achieved low operating cost margins due, in part, to high per store sales volume and relatively low warehouse, distribution and advertising costs. Our high volume stores generally allow us to effectively leverage occupancy costs, payroll and other store expenses. Our approximately 506,000 square foot primary distribution facility is centrally located in Maspeth, Queens, New York City. The facility is located within ten miles of approximately 85% of our stores, and none of our retail locations are more than approximately 50 miles from this facility. During fiscal 2003, we opened an additional approximately 165,000 square foot warehouse support facility in North Bergen, New Jersey that replaced 60,000 square feet of public warehouse space previously used by us. This support facility, which is used for seasonal and other slower-moving merchandise, enjoys similar proximity to most of our New York City locations while providing additional capacity and closer proximity to our expanding group of stores located in New Jersey. We believe that these two central locations result in our relatively low warehouse and distribution costs as a percentage of sales.

We have demonstrated our ability to successfully operate stores using a wide variety of store configurations and sizes. Rather than confine our stores to a single, standardized format, we successfully adapt our store design to a variety of sizes and configurations. We believe this strategy provides us with a

competitive advantage, as many of our competitors target more standardized spaces, which are difficult to find in the New York greater metropolitan area. For example, our store sizes range from under 500 to 17,200 square feet, and we operate 45 bi-level stores. Our guiding principle in store selection has not been the shape of the space, but rather its strategic location in high-traffic areas in order to provide greater convenience to our customers. In addition, our management team has extensive experience with, and knowledge of, the New York greater metropolitan real estate market, allowing us to quickly and successfully pursue attractive real estate opportunities.

As of March 26, 2005, we operated 249 stores, 16 of which were opened during fiscal 2004 and two of which were opened in the first fiscal quarter of 2005. During fiscal 2003, 2002 and 2001, we opened 17 stores, 32 stores and 31 stores, respectively. We closed eight stores in the first fiscal quarter of 2005, two stores in 2004, four stores in each of 2003 and 2002, and we closed one store in 2001 and lost two stores as a result of the September 11 terrorist attack on the World Trade Center. Among the 16 new stores we opened during 2004, ten were in Manhattan, five were in the outer boroughs of New York City and one was in the densely populated, nearby suburbs. As of March 26, 2005, approximately 54% of our stores were in Manhattan, 34% were in the outer boroughs and 12% were located outside New York City. At March 26, 2005, we occupied 1.7 million square feet of retail space, approximately 3% less than at the end of fiscal 2004 and approximately 75% more than at the end of fiscal 1998. Approximately 48% of the stores we operated at March 26, 2005 had been opened since the beginning of fiscal 2000.

Company Operations

Front-End Merchandising

Our overall front-end merchandising strategy is to provide a broad selection of competitively priced, branded and private label drugstore products available in the New York greater metropolitan area. To further enhance customer service and loyalty, we attempt to maintain a consistent in-stock position in all merchandise categories. We offer brand name and private label health and beauty care products (including over-the-counter items), food and beverage items, tobacco products, cosmetics, housewares, greeting cards, photofinishing services, photo supplies, seasonal and general merchandise and other products. Health and beauty care products represent our highest volume product categories. We allocate ample shelf space to popular brands of health and beauty care products. We also offer large sizes, which we believe appeal to the value consciousness of many New York consumers. We place convenience items, such as candy, snacks and seasonal goods, near the check-out registers to provide all customers with optimum convenience and to stimulate impulse purchases, while allowing the store employees to monitor those product categories that are particularly susceptible to theft.

In addition to a wide array of branded products, we also offer our own private label products. Private label products provide customers with high-quality, lower priced alternatives to brand name products, while generating higher gross profit margins than brand name products. These offerings also enhance our reputation as a value-oriented retailer. We currently offer in excess of 900 private label products, which, in the first fiscal quarter of 2005, accounted for approximately 7.8% of non-pharmacy sales. We are targeting an expansion of our private label products to approximately 11% of front-end sales over the next three years. We believe that our strong brand image, reputation for quality and reliability in the New York City market, and our economies of scale in purchasing allow us to effectively manage an increasing assortment of private label goods that offer an alternative for increased value to the consumer with higher profitability than comparable branded products.

We offer next-day photofinishing services in all of our stores, and from fiscal 2002 through 2004 we increased the number of stores with one-hour photofinishing departments from 33 to 105 stores. We believe that photofinishing services contribute significantly to sales of other merchandise categories because of the customer traffic increases that result from the customer visiting a store twice, in order to drop off film or digital media and to pick up the processed photos. Our photofinishing business has recently experienced negative growth as the industry as a whole experiences declines in use of traditional technologies and as we

have made the transition to digital photofinishing. Our digital photofinishing business may not grow as expected.

We complement our product offerings with additional customer services such as ATMs, sales of lottery tickets, movie rentals and money transfer services. We believe these services enhance our convenience image and promote stronger customer loyalty.

Pharmacy

We believe that our pharmacy business will continue to contribute significantly to our growth. We also believe that a larger pharmacy business will enhance customer loyalty and generate incremental customer traffic, which we believe is likely to increase sales of our wide variety of over-the-counter drugs and other non-pharmacy merchandise. Our prescription drug sales, as reflected by same-store pharmacy sales, grew by 2.0% in the first fiscal quarter of 2005 compared to the corresponding period in 2004, 5.0% in 2004 compared to 2003, and by 7.5% in 2003 compared to 2002. Sales of prescription drugs including resales of certain retail inventory, represented 49.5% of total sales in the first fiscal quarter of 2005, compared to 51.0% of total sales in 2004, 46.7% of total sales in 2003 and 44% of total sales in 2002. The number of generic prescriptions filled represented 42.3% of total prescriptions filled in 2004, compared to 40.3% of total prescriptions filled in 2003 and 39.0% of total prescriptions filled in the 2002 fiscal year. The percentage of generic prescriptions dispensed increased by 4% in 2004, resulting in a reduction of the pharmacy same-store sales increase by approximately 2.9%, but an increase in gross margin per prescription dispensed. The trend of increases in generic prescriptions filled is the result of several high volume branded drug patent expirations that have enabled the introduction of lower cost generic alternatives. We have also made several operational changes to improve overall consumer awareness of generic alternatives.

We believe that our extensive network of conveniently located stores, strong local market position, pricing policies and reputation for high quality healthcare products and services provide a competitive advantage in attracting pharmacy business from individual customers as well as managed care organizations, insurance companies, employers and other third party payers. The percentage of our total prescription drug sales covered by third party plans increased to approximately 92.7% in the first fiscal quarter of 2005 as compared to approximately 92.3% in 2004, approximately 91.4% in 2003 and approximately 90.2% in 2002.

Gross margins on sales covered by 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. During 2003, President Bush signed the Medicare Drug Act, which created a new Medicare Part D benefit that will expand Medicare coverage of prescription drugs for senior citizens not participating in third party plans. Those customers represent less than 2% of our total revenue. This new Medicare coverage is scheduled to take effect in 2006 and is expected to result in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on prescriptions that are not subject to third party plan reimbursement. In June 2004, a temporary senior citizen prescription drug discount program furnished under this Medicare legislation was implemented and is expected to remain in effect until the full Medicare program takes effect in 2006. This temporary program has also resulted in lower pharmacy margins than those previously realized on prescriptions that are not subject to third party plan reimbursement. Based on our experience over time, we believe that increased utilization of prescription drugs by senior citizens participating in the new programs will offset the effect of the lower margins on our revenues.

We believe that the higher volume of pharmacy sales to third party plan customers offsets these lower gross profit margins and allows us to leverage other fixed store operating expenses. In addition, we believe that increased third party plan sales generate additional general merchandise sales by increasing customer traffic in our stores. As of March 26, 2005, we had contracts with over 200 third party plans, including virtually all major third party plans in our market areas. During fiscal 2004, New York Medicaid, the largest third party payer, represented approximately 19.3% and 9.8% of our pharmacy and chain sales, respectively.

Medicaid reimbursement rates to drugstore providers are regulated under state administered programs. Over the last two years, a number of states experiencing budget deficits have moved to reduce Medicaid

reimbursement rates to participating drugstore providers. In fiscal 2003 and again in fiscal 2004, New York State reduced Medicaid and Elderly Pharmaceutical Insurance Coverage ("EPIC") prescription reimbursement rates, adversely impacting our pharmacy gross margins. The most recent reductions became effective on October 1, 2004, and are expected to reduce reimbursements we receive by approximately $1.4 million on an annual basis. New Jersey also reduced Medicaid reimbursement rates during 2003. The New York State legislature has also recently approved increases in co-payments by $1.00 per prescription for branded drugs and $0.50 per prescription for generics in the new budget which will take effect on July 1, 2005. Under the Medicaid guidelines, providers cannot refuse to dispense prescriptions to Medicaid recipients who claim that they do not have the means to pay the required co-payments. Most Medicaid recipients do in fact decline to make the co-payments, resulting in the requirement for the provider to absorb this cost. These increased co-payments for NY Medicaid are expected to result in further reduced reimbursements of approximately $1.4 million per year.

While our pharmacy business has continued to lead our overall sales growth, the rate of growth in pharmacy sales significantly declined during 2003 and 2004 as it has for most other chain drug retailers in our industry. This is attributable to a number of factors, including a decline in demand for hormonal replacement medications, increasing third party plan co-payments, negative publicity surrounding certain categories of drugs including Cox-2 inhibitors, conversion of certain prescription drugs to over-the-counter status increased mail order and internet penetration and generally high levels of unemployment relative to the U.S. average that reduce the number of customers with prescription coverage insurance plans. These trends, along with the continued pressure on the part of third party plans to reduce reimbursement rates to participating providers, combined with a number of other factors to reduce our overall profitability during 2003 and 2004.

In 1999, we launched our central fill facility, a service initiative aimed at improving customer service at our higher volume pharmacies and, we believe, the first of its kind in the chain drugstore industry. Our central fill facility, which receives orders via internet, phone or fax from customers and physicians, determines which prescriptions can be most efficiently filled centrally and forwards the balance to the local stores. The selected prescriptions are filled and then delivered to the appropriate store in advance of the scheduled pickup, thereby reducing waiting times during peak periods.

We believe the central fill facility has several distinct advantages. One such advantage is improved inventory management, as stores supported by the facility are able to reduce their on-hand quantities of higher cost, slower turning drugs. We believe this is a substantial advantage because a majority of available drugs are prescribed infrequently. The 1,000 most popular drugs sold by us account for more than 90% of all prescription purchases by our customers, with the remaining 1,500 accounting for less than 10%. We believe it is more efficient to keep the bulk of this less frequently requested inventory in a central location rather than spread throughout the stores.

Dispensing accuracy can also be improved through the central fill facility because it permits the utilization of large, automated dispensing machines, which would be too expensive for use in individual stores. We believe the cost of filling prescriptions is reduced and customer service is enhanced because in-store pharmacy staff members have more time to handle prescriptions required on a more immediate basis, as well as to provide customer counseling. At December 25, 2004, this facility serviced 128 of our stores and handled approximately 3,300 prescriptions per day, reflecting an increase of more than 5% compared to the daily volume at the end of fiscal 2003.

Another important component of our pharmacy growth strategy is the continued acquisition of customer prescription files from independent pharmacies in market areas currently served by existing Duane Reade

stores. In 2004, we purchased the prescription files of eight pharmacies and we purchased the prescription file of one additional pharmacy in the first fiscal quarter of 2005. When appropriate, we will retain the services of the corresponding pharmacist, whose personal relationship with the customers generally enhances the retention rate of customers associated with the purchased file. Given the large number of independent pharmacies in the New York greater metropolitan area, we believe that these stores present additional future acquisition opportunities.

All of our pharmacies are linked by computer systems that enable them to provide customers with a broad range of services. Our 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. At the time of sale, on-line adjudication confirms customer eligibility, prescription coverage, pricing and co-payment requirements and automatically bills the respective plan. On-line adjudication also reduces losses from rejected claims and eliminates a portion of our administrative burden related to the billing and collection of receivables and related costs.

During 2003, we piloted an in-store pharmacy kiosk system that enables customers to interact with a pharmacist located at our central fill facility. These kiosks also contain a digital scanning device designed to transmit customers' prescriptions to our central fill facility for processing and delivery to the customer's store of choice or directly to the customer through our home delivery service. The kiosks are designed to reduce store-level wait times while providing a more cost-effective means of servicing customers during peak activity periods. At March 26, 2005 there were approximately 45 kiosks operating in remote locations, including hospitals, physician's offices, independent living facilities and major employers.

Internet

In 1999, we launched an interactive website, www.duanereade.com, which customers may use to access company information, refill prescriptions and purchase over-the-counter medications as well as health and beauty care products and other non-pharmacy items. Internet-based purchases are available for both front-end and pharmacy products and can be delivered directly to the customer or made available at the customer's store of choice for pickup. Our strategy has been to develop the website as an additional vehicle to deliver superior customer service, further supporting our strength as a "brick-and-mortar" retailer. While sales generated on the website to date have been immaterial to our business overall, we believe www.duanereade.com has better positioned us to mitigate some of the adverse impact of mail-order and internet-based pharmacy distributors.

Store Operations

Our stores range in size from under 500 to 17,200 square feet, with an average of 6,957 square feet per store as of March 26, 2005. Our stores are designed to facilitate customer movement and convenience. We believe that our shelf configurations allow customers to find merchandise easily and allows store managers, security guards, cashiers and stock clerks to effectively monitor customer behavior. We attempt to group merchandise logically in order to enable customers to locate items quickly and to stimulate impulse purchases.

We establish each store's hours of operation in an attempt to best serve customer traffic patterns and purchasing habits and to optimize store labor productivity. Most stores in Manhattan's business districts are generally open five days per week. In residential and certain business/shopping districts, stores are open six or seven days per week, with a heavy emphasis on convenient, early morning openings and late evening closings. At March 26, 2005, 55 of our stores were open 24 hours a day. We intend to continue to identify stores where we believe extended operating hours would improve customer service and convenience and contribute to our profitability. Many of our stores offer delivery services as an added customer convenience. Customers can arrange for delivery by phone, fax, internet or at the store. Each store is supervised by a store manager and one or more assistant store managers. Stores are supplied by deliveries from our primary

warehouse located in Maspeth, Queens, New York City and, for certain seasonal items, from our secondary distribution facility located in North Bergen, New Jersey, from one to as many as five times per week based on their volume and size constraints. This delivery frequency allows the stores to maintain a high in-stock position, maximize utilization of store selling space and minimize the amount of inventory required to be in the stores.

Purchasing and Distribution

We purchase approximately 95% of our non-pharmacy merchandise directly from manufacturers. We distribute approximately 84% of our non-pharmacy merchandise through our warehouses and receive direct-to-store deliveries for approximately 16% of our non-pharmacy purchases. Direct-to-store deliveries are made primarily for greeting cards, photofinishing, convenience foods and beverages. In total, we purchase from over 1,000 vendors. We believe that there are ample sources of supply for the merchandise we currently sell, and that the loss of any one non-pharmacy supplier would not have a material effect on our business.

We manage non-pharmacy purchasing through a combination of forward buying and vendor discount buying in ways that we believe maximize our buying power. For example, we use a computerized forecasting and inventory investment program that is designed to determine optimal forward buying quantities before an announced or anticipated price increase has been implemented. By forward buying, we stock up on regularly carried items when manufacturers temporarily reduce the cost of goods or when a price increase has been announced or is anticipated. Forward buying activity has the potential to influence our inventory levels.

We generally purchase prescription medications under long-term supply agreements. Approximately 43% of our pharmacy inventory at March 26, 2005 was shipped directly to our stores on a consignment basis.

We currently operate two warehouses, one of which is centrally located in Maspeth, Queens, New York City, and the other of which is located in the northern New Jersey community of North Bergen. The primary Maspeth warehouse, which is approximately 506,000 square feet, is located within ten miles of approximately 85% of our stores, and within approximately 50 miles of our farthest outlying locations. The North Bergen location, which is used for seasonal and other slower-moving merchandise, is also located within a convenient distance of a majority of our stores. The close proximity of the warehouses to the stores allows us to supply the stores frequently, thereby minimizing inventory and maximizing distribution economies. We also operate a fleet of trucks and vans, which we use for deliveries from the warehouses to the stores.

Advertising and Promotion

We regularly promote key items at reduced retail prices during promotional periods. We also use store window banners and in-store signs to communicate savings and value to shoppers. We distributed over 92 million bags with the highly recognizable Duane Reade logo in 2004, helping to promote our name throughout the New York greater metropolitan area. We usually do not rely heavily on distributed print media to promote our core market stores but, because of our strong brand recognition and high-traffic locations, we typically rely on store window signage and displays as our primary method of advertising. We also employ radio advertising that focuses on our convenient locations and timely seasonal promotions.

In November 1999, we launched the Dollar Rewards Club, the first major chain-wide "loyalty card" in the drugstore industry, to provide frequent shoppers with additional discounts. Membership currently exceeds 4.0 million members. Our recent statistics indicate that the average Dollar Rewards card member spends approximately 45% more per visit than does a non-member. The Dollar Rewards Club promotional offerings were expanded during the first quarter of 2005 to include an ongoing program of customer awards based on the dollar value of purchases. The loyalty card also enables us to tailor many of our promotions to the needs of these more frequent shoppers. Members of the Dollar Rewards Club may use their loyalty cards when making purchases through our website, www.duanereade.com.

Management Information Systems

We have modern pharmacy and inventory management information systems. The pharmacy system, PDX, has reduced the processing time for electronic reimbursement approval for prescriptions from third party plans. We use scanning point-of-sale, or POS, systems in each of our stores. These systems allow better control of pricing, inventory and shrink. POS also provides sales analysis that allows for improved labor scheduling and helps optimize product shelf space allocation and design by allowing detailed analysis of stock-keeping unit sales.

We utilize a fully automated computer-assisted merchandise replenishment system for store front-end orders sourced through our distribution centers. This system uses item-specific and store-specific sales history to produce "suggested" orders for each store, which can be accepted or modified by the stores before being released to the distribution centers.

We use radio frequency hand held scanning devices to communicate directly with our central processor located at our headquarters facility and permit real-time updates of adjustments to on-hand quantities in our perpetual inventory system. These devices are also used to support inventory ordering, transfers, price changes and direct store deliveries. In 2002, we completed the implementation of a full chain-wide specific item cost-based inventory tracking and valuation system. We believe this system provides improved controls over inventory management and shrink-related losses. During 2003, we implemented a new computerized in-store shelf labeling system designed to improve pricing accuracy, upgrade our ability to communicate item prices to our customers and reduce the costs associated with processing weekly price changes.

Competition

Our stores compete on the basis of 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. We believe the diverse labor pool, local customer needs and complex real estate market in New York City all favor regional chains and independent operators that are familiar with the market. We tailor our store format to meet all of these requirements, which has proven successful in the business and residential neighborhoods of Manhattan, as well as the outer boroughs and surrounding areas.

Our primary competition comes from over 700 independent pharmacies located in New York City, as well as stores operated by major drugstore chains including CVS, Rite Aid, Eckerd and Walgreens. We believe that we have significant competitive advantages over independent drugstores in New York City. These include purchasing economies of scale, two strategically located warehouses that minimize store inventory and maximize selling space, a broad line of in-stock, brand name merchandise, the ability to offer a broad range of value-oriented private label products and a convenient store format. Against major drug chain competition, we enjoy the advantages of strategically located warehouses, a larger number of convenient locations and greater experience operating stores in the New York greater metropolitan area.

We also compete to a lesser extent with other classes of retail trade, including supermarkets, mass merchants and Canadian imports. We believe that our concentration in the densely populated New York City market limits the ability of big box retailers and supermarkets to expand meaningfully in many of our prime trading areas.

An adverse trend for drugstore retailing has been the rapid growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug costs experienced in recent years. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by an increasing number of third party pharmacy benefit managers, many of which also own and manage mail-order distribution operations. In addition to these forms of mail-order distribution, there have also been an increasing number of internet-based prescription distributors that specialize in offering certain high demand lifestyle drugs at deeply discounted prices. A number of these

internet-based distributors operate illicitly and outside the reach of regulations that govern legitimate drug retailers. These alternate distribution channels have acted to restrain the rate of sales growth for traditional chain drug retailers in the last few years.

Drugstore chains have increased their market share from 40.0% of prescription sales in 1996 to 42.0% in 2004, while mail-order market share has increased from approximately 12.0% in 1996 to approximately 18.0% in 2004, predominantly at the expense of independent drug retailers. We expect the increase in market share for mail-order to continue, which will continue to restrain growth for market participants and cause negative pricing pressure. While mail-order market shares are expected to continue to increase, we believe that the use of mail-order is limited due to the time delay associated with mail-order sales, which limits the ability of customers to use this channel to obtain drugs to treat acute conditions. Approximately 45% of our new prescriptions are for acute cases. Further, we believe the cost savings associated with mail-order prescriptions are generally achieved through large volume orders, and typically orders of less than a 90-day supply will cost the same or more than a retail purchase due to shipping costs.

In the New York metropolitan area, mail-order sales represent approximately 12.0% of prescription drug sales versus 18.0% nationally. We believe the New York metropolitan area is naturally resistant to mail-order penetration because the high relative population density allows for closely spaced drugstores. As a result, most people live in close proximity to a pharmacy, thus mitigating the convenience edge traditionally enjoyed by mail-order operators in most rural and suburban environments.

Government Regulation

Our business is subject to extensive federal, state and local regulations. These regulations cover required qualifications, day to day operations, reimbursement and documentation of activities. We continuously monitor the effects of regulatory activity on our pharmacy and non-pharmacy related operations.

Licensure and Registration Laws

New York and New Jersey require that companies operating a pharmacy within the state be licensed by the state board of pharmacy. We currently have pharmacy licenses for each pharmacy we operate in New York and New Jersey including our central fill facility. The central fill facility was recently granted a pharmacy license by the New York State Board of Pharmacy. In addition, our pharmacies are required to be registered with state and federal authorities under statutes governing the regulation of controlled substances. Pharmacists who provide services on our behalf are required to obtain and maintain professional licenses and are subject to state regulations regarding professional standards of conduct. Each of our pharmacists located in New York is required to be licensed by the State of New York. The State of New Jersey requires the pharmacists employed at our stores in New Jersey to be licensed.

Medicare and Medicaid

The pharmacy business operates under regulatory and cost containment pressures from federal and state legislation primarily affecting Medicaid and, to a lesser extent, Medicare.

We receive reimbursement from government sponsored third party plans, including Medicaid and Medicare, non-government third party plans such as managed care organizations and also directly from individuals (i.e. private-pay). For the 2004 fiscal year, our pharmacy payer mix, as a percentage of total prescription sales, was approximately 68% managed care organizations, 24% Medicaid/Medicare and 8% private-pay. Pricing for private-pay patients is based on prevailing regional market rates. However, federal laws and regulations contain a variety of requirements relating to the reimbursement and furnishing of prescription drugs under Medicaid. First, states are given authority, subject to applicable standards, to limit or specify conditions for the coverage of some drugs. Second, as discussed below, federal Medicaid law establishes standards for pharmacy practice, including patient counseling and drug utilization review. Third, federal regulations impose reimbursement requirements for prescription drugs furnished to Medicaid beneficiaries. Prescription drug benefits under Medicare are significantly more limited than those available under Medicaid

and the effects of the newly enacted "Medicare Prescription Drug, Improvement, and Modernization Act of 2003" (P.L. 108-173), or the Medicare Drug Act, on us are uncertain at this time. In addition to requirements mandated by federal law, individual states have substantial discretion in determining administrative, coverage, eligibility and reimbursement policies under their respective state Medicaid programs that may affect our pharmacy operations.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding restrictions, all of which may significantly impact our pharmacy operations. We cannot assure you that payments for pharmaceuticals under the Medicare and Medicaid programs will continue to be based on current methodologies or even remain similar to present levels. We may be subject to rate reductions as a result of federal or state budgetary constraints or other legislative changes related to the Medicare and Medicaid programs including, but not limited to, the contemplated Medicare Part D drug benefit that was created pursuant to the Medicare Drug Act. In fiscal 2003 and again in fiscal 2004, New York State reduced Medicaid and EPIC prescription reimbursement rates, adversely impacting our pharmacy gross margins. The most recent reductions became effective on October 1, 2004, and are expected to reduce reimbursements to us by approximately $1.4 million on an annual basis. New Jersey also reduced Medicaid reimbursement rates during 2003.

Fraud and Abuse Laws

We are subject to federal and state laws and regulations governing financial and other arrangements between healthcare providers. Commonly referred to as the Fraud and Abuse laws, these laws prohibit certain financial relationships between pharmacies and physicians, vendors and other referral sources. During the last several years, there has been substantially increased scrutiny and enforcement activity by both government agencies and the private plaintiffs' bar relating to pharmaceutical marketing practices under the Fraud and Abuse laws. Five of the largest retail pharmacies in the U.S. were served with document requests in connection with a Congressional investigation into Medicaid fraud, waste and abuse. Violations of Fraud and Abuse laws and regulations could subject us to, among other things, significant fines, penalties, injunctive relief, pharmacy shutdowns and possible exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Changes in healthcare laws or new interpretations of existing laws may significantly affect our pharmacy business. Some of the Fraud and Abuse Laws that have been applied in the pharmaceutical industry include:

Federal Anti-Kickback Statute: The federal anti-kickback statute, Section 1128B(b) of the Social Security Act (42 U.S.C. 1320a-7b(b)), prohibits, among other things, the knowing and willful offer, payment, solicitation or acceptance of remuneration, directly or indirectly, in return for referring an individual to a provider of services for which payment may be made in whole or in part under a federal healthcare program, including the Medicare or Medicaid programs. Remuneration has been interpreted to include any type of cash or in-kind benefit, including long-term credit arrangements, gifts, supplies, equipment, prescription switching fees, or the furnishing of business machines. Several courts have found that the anti-kickback statute is violated if any purpose of the remuneration, not just the primary purpose, is to induce referrals.

Potential sanctions for violations of the anti-kickback statute include felony convictions, imprisonment, substantial criminal fines and exclusion from participation in any federal healthcare program, including the Medicare and Medicaid programs. Violations may also give rise to civil monetary penalties in the amount of $50,000, plus treble damages.

Although we believe that our relationships with vendors, physicians, and other potential referral sources have been structured in compliance with Fraud and Abuse laws, including the federal anti-kickback statute, the Department of Health and Human Services has acknowledged in its pharmaceutical industry compliance guidance that many common business activities potentially implicate the anti-kickback statute. We cannot offer any assurance that a government enforcement agency, private litigant, or court will not interpret our business relations to violate the Fraud and Abuse laws.

The False Claims Act: Under the False Claims Act, or the FCA, civil penalties may be imposed upon any person who, among other things, knowingly or recklessly submits, or causes the submission of false or fraudulent claims for payment to the federal government, for example in connection with Medicare and Medicaid. Any person who knowingly or recklessly makes or uses a false record or statement in support of a false claim, or to avoid paying amounts owed to the federal government, may also be subject to damages and penalties under the False Claims Act.

Moreover, private individuals may bring qui tam, or "whistle blower," suits under the False Claims Act, and may receive a portion of amounts recovered on behalf of the federal government. Such actions must be filed under seal pending their review by the Department of Justice. Penalties of between $5,500 and $11,000 and treble damages may be imposed for each violation of the FCA. Several federal district courts have held that the False Claims Act may apply to claims for reimbursement when an underlying service was delivered in violation of other laws or regulations, including the anti-kickback statute.

In addition to the False Claims Act, the federal government has other civil and criminal statutes, which may be utilized if the government suspects that we have submitted false claims. Criminal provisions that are similar to the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency, it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Many states also have similar false claims statutes that impose liability for the types of acts prohibited by the FCA, and bills for state false claims laws similar to the federal FCA have recently been introduced in the New York and New Jersey legislatures. Finally, the submission of false claims may result in termination of our participation in federal or state healthcare programs. Members of management and persons who actively participate in the submission of false claims can also be excluded from participation in federal healthcare programs.

We believe that we have sufficient procedures in place to provide for the accurate completion of claim forms and requests for payment. Nonetheless, given the complexities of the Medicare and Medicaid programs, we may code or bill in error, and such claims for payment may be treated as false claims by the enforcing agency or a private litigant.

Drug Utilization Review

The Omnibus Budget Reconciliation Act of 1990, or OBRA 90, establishes a number of regulations regarding state Medicaid prescription drug benefits. Although OBRA 90 primarily focuses on drug manufacturers' obligations to provide drug rebates under state Medicaid programs, it also requires states to create drug utilization review, or DUR, requirements in order to combat fraud, abuse, gross overuse, inappropriate or medically unnecessary care as well as to educate patients about potential adverse reactions. DUR requires pharmacists to discuss with patients relevant information in connection with dispensing drugs to patients. This information may include the name and description of the medication, route and dosage form of the drug therapy, special directions and precautions for patients, side effects, storage, refill and what a patient should do upon a missed dosage. Under DUR requirements, pharmacists are also required to make a reasonable effort to obtain the patient's identification information, medical and drug reaction history and to keep notes relevant to an individual's drug therapy. We believe our pharmacists provide the required drug use consultation with our customers.

Healthcare Information Practices

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, sets forth standards for electronic transactions; unique provider, employer, health plan and patient identifiers; security and electronic signatures as well as privacy protections relating to the exchange of individually identifiable health information. The Department of Health and Human Services, or DHHS, has released several rules mandating compliance with the standards set forth under HIPAA. We believe our pharmacies achieved compliance with DHHS's standards governing the privacy of the use and disclosure of individually identifiable health

information by the required compliance date of April 14, 2003. In addition, we implemented the uniform standards governing common healthcare transactions by the required compliance date of October 16, 2003. Finally, management has taken or will undertake all appropriate steps necessary to achieve compliance with other HIPAA rules as applicable, including the security rule, the standard unique employer identifier rule, the standard health care provider identifier rule, and the enforcement rule.

We continue to evaluate the effect of the HIPAA standards on our business. At this time, management believes that our pharmacies have taken all appropriate steps to achieve compliance with the HIPAA requirements. However, by letter dated October 25, 2004, we were notified by the Department of Health and Human Services Office for Civil Rights that it is informally investigating a complaint regarding an alleged violation of the HIPAA privacy standards by a Duane Reade employee. Based on the description of the alleged conduct in the DHHS letter, we do not believe that the complaint is likely to result in actions by the DHHS that would have a material adverse effect on our operations. Moreover, HIPAA compliance is an ongoing process that will require continued attention and adaptation even after the official compliance dates. Management does not currently believe that the cost of compliance with the existing HIPAA requirements will be material to us; however, management cannot predict the cost of future compliance with HIPAA requirements. Noncompliance with HIPAA may result in criminal penalties and civil sanctions. The HIPAA standards have increased our regulatory and compliance burden and have significantly affected the manner in which our pharmacies use and disclose health information, both internally and with other entities.

In addition to the HIPAA restrictions relating to the exchange of healthcare information, individual states have adopted laws protecting the confidentiality of patient information which impact the manner in which pharmacy records are maintained. Violation of patient confidentiality rights under common law, state or federal law could give rise to damages, penalties, civil or criminal fines and/or injunctive relief. We believe that our pharmacy operations and prescription file-buying program are in compliance with federal and state privacy protections. However, an enforcement agency or court may find a violation of state or federal privacy protections arising from our pharmacy operations or our prescription file-buying program.

Healthcare Reform and Federal Budget Legislation

In recent years, Congress has passed a number of federal laws that have created major changes in the healthcare system. In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, or BIPA, was signed into law. Generally, BIPA, which became effective in April 2001, included provisions designed to further mitigate the reimbursement cuts contained in the Balanced Budget Act of 1997. BIPA also clarified the government's policy with regard to coverage of drugs and biologics, and addressed certain reimbursement issues. BIPA mandated a study by the General Accounting Office regarding payment for drugs and biologics under Medicare Part B, and required the General Accounting Office to report to the secretary of the DHHS specific recommendations for revised payment methodologies. BIPA established a temporary moratorium on direct or indirect reductions, but not increases, in payment rates in effect on January 1, 2001.

BIPA also addressed attempts to modify the calculation of average wholesale prices of drugs, or AWPs, upon which Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average wholesale prices, and several pharmaceutical manufacturers have paid significant civil and criminal penalties to resolve litigation relating to allegedly improper practices affecting AWP.

In response to BIPA and other criticisms of AWP pricing methodologies, the recently enacted Medicare Drug Act described above contains a number of drug pricing reforms, some of which were effective January 1, 2004. The new Medicare Part D drug benefit goes into effect on January 1, 2006. Prior to January 1, 2006, Medicare beneficiaries are able to receive some assistance with their prescription drug costs through a prescription drug discount card program which began in June, 2004. This discount card program gives enrollees access to negotiated discount prices for prescription drugs.

On January 28, 2005, the Centers for Medicare and Medicaid Services, or CMS, published a final rule to implement the Medicare Part D drug benefit. Under the Medicare Part D drug benefit, Medicare beneficiaries will be able to enroll in prescription drug plans offered by private entities or, to the extent private entities fail to offer a plan in a given area, through a government contractor. Medicare Part D prescription drug plans will include both plans providing the drug benefit on a stand alone basis and Medicare Advantage plans that provide drug coverage as a supplement to an existing medical benefit under the applicable Medicare Advantage plan. Pursuant to the CMS final rule, we will be reimbursed for drugs that we provide to enrollees of a given Medicare Part D prescription drug plan in accordance with the terms of the agreements negotiated between the Medicare Part D plan and us. We intend to negotiate agreements with the Medicare Part D plans in our market areas. However, until these agreements are negotiated, we are not in a position to determine the changes, if any, we may have to make to the terms and conditions under which we provide prescription drugs to Medicare beneficiaries who become enrollees under the Medicare Part D plans.

CMS is continuing to issue subregulatory guidances on many additional aspects of the CMS final rule. We are monitoring these government pronouncements and statements of guidance and we cannot predict at this time the ultimate effect of the CMS final rule or other potential developments relating to its implementation on our business or results of operations.

Beginning January 1, 2005, many drugs are being reimbursed under new pricing methodologies. Although reporting obligations that currently arise under the AWP system and Medicaid Best Price statutes are imposed on pharmaceutical manufacturers, current and future changes in pricing methodologies may affect reimbursement rates, pharmaceutical marketing practices and the offering of discounts and incentives to purchasers, including retail pharmacies, in ways that are uncertain at this time.

It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. We cannot assure you that future healthcare or budget legislation or other changes, including those referenced above, will not materially adversely impact our pharmacy business.

Non-Healthcare Licenses

We have been granted cigarette tax stamping licenses from the State of New York and the City of New York, which permit us to buy cigarettes directly from the manufacturers and stamp the cigarettes ourselves. Our stores possess cigarette tax retail dealer licenses issued by the State of New York, the City of New York and the State of New Jersey. In addition, a number of our stores possess beer licenses issued by the State of New York. We seek to comply with all of these licensing and registration requirements and continue to actively monitor our compliance. By virtue of these license and registration requirements, we are obligated to observe certain rules and regulations, and a violation of these rules and regulations could result in suspension or revocation of one or more licenses or registrations and/or the imposition of monetary penalties or fines.

Minimum Wage Requirements

Employees

As of March 26, 2005, we had approximately 6,300 employees, 80% of whom were full time. Unions represent approximately 4,600 of our employees. Non-union employees include employees at corporate headquarters, store and warehouse management and most part-time employees, as well as approximately 40% of our store pharmacists. The distribution facility employees are represented by the International Brotherhood of Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815. Our three year contract with this union expires on August 31, 2005. Employees in 139 stores are represented by the Allied Trades Council, or ATC, and other stores are represented by Local 340A New York Joint Board, UNITE AFL CIO, or UNITE. On August 31, 2001, our collective bargaining agreement with the ATC expired after we were unable to reach agreement with the ATC on terms for a successor agreement. The ATC unsuccessfully attempted to strike at some of our stores, but our employees remained at work at all times and have been working under the terms of our December 6, 2001 implemented contract with the ATC, which expired on August 31, 2004. We are a respondent in a National Labor Relations Board, or NLRB, administrative proceeding regarding a dispute with the ATC over whether a negotiating impasse was reached between us and the ATC. See "—Legal Proceedings." A new agreement with this union was completed on November 22, 2004 and expired on March 31, 2005. The parties have agreed to an extension of this contract through July 31, 2005

Intellectual Property

The name "Duane Reade" and the "DR" logo are registered trademarks. We believe that we have developed strong brand awareness within the New York City area. As a result, we regard the Duane Reade logo as a valuable asset. In September of 1998, we acquired 29 Rock Bottom stores which we converted to the Duane Reade format in the 1999 fiscal year. In addition, in connection with the Rock Bottom acquisition, we acquired the "Rock Bottom" name and the "Rock Bottom" logo, each of which are registered trademarks. In 2002, we introduced a new private label cosmetic line that sells under the brand name "apt.5." We have filed trademark applications for the "apt.5" name and "apt.5" logo. In 2003, we filed a patent application for our pharmacy kiosk. We currently have a "patent pending" status on our pharmacy kiosk invention.

Properties

As of March 26, 2005, we were operating stores in the following locations:

		Number of Stores
Manhattan, NY		134
Brooklyn, NY		33
Queens, NY		30
New Jersey		13
Bronx, NY		11
Nassau County, NY		10
Staten Island, NY		10
Westchester County, NY		6
Suffolk County, NY		2

Total		249

With the exception of two stores, all of our stores operated at March 26, 2005 are leased. Store leases generally average initial terms of 12 to 15 years. The average year of expiration for stores operating as of December 25, 2004 was 2014. Lease rates are generally subject to scheduled increases that average approximately 12% every five years. The following table sets forth the lease expiration dates of our leased

stores on an annual basis through 2009 and thereafter. Of the 62 stores with leases expiring by December 31, 2009, 28 have renewal options.

Year	No. of Leases Expiring	Number With Renewal Options
2005	5	1
2006	6	3
2007	15	7
2008	20	12
2009	16	5
Thereafter	191	95

We occupy approximately 70,000 square feet for our corporate headquarters, located in Manhattan, New York City, under a lease that expires in 2012.

We occupy an approximately 506,000 square foot warehouse in Maspeth, Queens, New York City under a lease that expires in 2017.

We occupy an approximately 165,000 square foot warehouse in North Bergen, New Jersey under a lease that expires in 2008.

Legal Proceedings

We are party to legal actions arising in the ordinary course of business. Based on information presently available to us, we believe that we have 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 financial position, results of operations or cash flows of our company. In addition, we are a party to the following legal actions and matters:

During 2002, we initiated a legal action against our former property insurance carrier, in an attempt to recover what we believe to be a fair and reasonable settlement for the business interruption portion of our claim originating from the September 11, 2001 World Trade Center terrorist attack, during which our single highest volume and most profitable store was completely destroyed. The claim is pending before the United States District Court for the Southern District of New York. In September 2003, a trial on certain issues was held regarding some of the matters at issue in the litigation, including whether we would have obtained a renewal of our lease at the World Trade Center. We received a favorable ruling of the trial court on this and other legal issues in the case. The trial court's decision was appealed by the insurance carrier to the Second Circuit Court of Appeals with respect to several aspects of the decision.

In the meantime, the matter moved into an appraisal process based on the trial court's interpretation of certain legal tests, which interpretation was among the aspects of the decision challenged by the insurance carrier in its appeal. The appraisal process involves a panel of two appraisers and an arbitrator (to resolve differences between the two appraisers) who determine the amount of insured loss we have sustained. We were advised in early June 2005 that the panel reached a unanimous decision that the total amount of the business interruption loss we suffered as a result of the events of September 11, 2001 is $50.6 million, including all interest adjustments. We have been advised that a written award will be provided by the panel in the near future. We were also advised that the actual amount to be paid by the insurer to us should be reduced by approximately $9.9 million, which represents the amount that was previously paid to us in cash in fiscal 2002, for which we recognized approximately $9.4 million of income. In the event of an unfavorable outcome for us, we will not be required to return any of the $9.9 million initial payment. We have been further advised that the written opinion of the panel will include calculations of the amount of the loss based on alternative interpretations of the legal tests proposed by the insurance carrier that may apply if the trial court's decision is overturned or modified.

On June 22, 2005, the Court of Appeals affirmed the decision of the trial court, with modifications, including modifications to certain of the legal tests on which the appraisal panel's decision was based. We are currently in the process of evaluating the opinion and its effect on the recovery and are considering our options.

Accordingly, given the risks and uncertainties inherent in litigation, there can be no definitive assurance that we will actually receive any or all of the panel's appraised value of this claim, and we have not recognized any additional income related to this matter. It should be noted that any payment to us that might be forthcoming as a result of this claim may also result in the incurrence of additional expenses that are contingent upon the amount of such insurance claim settlement. These expenses, if incurred, are not expected to exceed $6.0 million.

We, Mr. Cuti, Mr. Henry and Mr. Charboneau have been named as defendants in connection with the consolidation of several class action complaints alleging violations of the federal securities laws that were filed from August 2002 through October 2002. The action, which was in the United States District Court for the Southern District of New York, was on behalf of shareholders who purchased our common stock between April 1, 2002 and July 24, 2002, inclusive. The complaint, which sought an unspecified amount of damages, alleged that the defendants violated the federal securities laws by issuing materially false and misleading statements during the class period. On December 1, 2003, the district judge granted our motion to dismiss the plaintiff's action, with prejudice. The plaintiffs subsequently filed an appeal. On August 17, 2004, the U.S. Court of Appeals affirmed the district court's ruling in our favor.

We are a defendant in a class action suit in the Federal Court for the Southern District of New York filed in January 2000 regarding alleged violations of the Fair Labor Standards Act as to a group of individuals who provided delivery services on a contract basis to us. In December 2002, the judge in the action issued a partial summary judgment in favor of a subclass of the plaintiffs and against us. In December 2003, we settled the issue of the amount of our liability to the plaintiffs without any admission of wrongdoing and in an amount consistent with our previously established reserves. By a decision dated August 4, 2004, the district court awarded the plaintiffs certain attorneys' fees in this matter. We have fully reserved the amounts of the fees in question and have appealed this award.

We are a party to an NLRB administrative proceeding regarding a dispute with the Allied Trades Council over whether a negotiating impasse was reached between us and the union in August of 2001. The Allied Trades Council represents employees in 139 of our stores in a collective bargaining agreement that expired on August 31, 2001. Our employees have been working pursuant to the terms of our December 6, 2001 implemented contract with the ATC, which expired on August 31, 2004. We believe an impasse did in fact occur and as a result, we had the right to implement our latest contract proposal at that time which included wage increases, health and welfare benefits, vacation and sick benefits and a 401(k) retirement program. We discontinued making additional payments into the various funds associated with the union as we were providing many of these benefits on a direct basis and because our past contributions to these funds caused these funds to be in a position of excessive overfunding. In addition, we had concerns that our past payments into these funds were not being managed in a way to ensure they were being properly utilized for the benefit of our employees. On February 18, 2004, an Administrative Law Judge who had reviewed various matters related to this proceeding issued a decision and related recommendation, which concluded that the parties were not at impasse. The remedies recommended by the ALJ included, among other things, a requirement for us to make our employees whole by reimbursing them for expenses ensuing from the failure to make contributions to the union funds and to make such funds whole, plus interest. This recommendation was adopted by a three-member panel of the NLRB on September 15, 2004. We have appealed the NLRB's determination. If it is enforced by the circuit court of appeals, it could result in our being required to contribute amounts that have yet to be determined into the union's pension benefit, health and welfare and vacation funds. Any potential required contributions resulting from a final judicial determination of this matter would potentially be subject to offset by the amounts that we had funded since we implemented our final contract proposal for these same benefits that were paid for our Allied Trades Council employees.

Because the NLRB decision represents the first phase of a long and complicated administrative process to be followed by a full judicial review of all of the facts and circumstances, the final outcome cannot be reliably determined at this time. The NLRB's decision is subject to judicial review by the D.C. Circuit Court of Appeals and a compliance hearing before any financial remedy can be determined. We are in the process of filing appeal papers with the D.C. Circuit Court of Appeals. Subsequent to the completion of filing these papers, which will be mid-summer 2005, the Court will schedule a hearing and sometime thereafter will render a decision. While there can be no definitive assurance, we have been advised by our outside labor counsel that our petition for review contains a number of valid defenses and arguments against enforcement of the NLRB decision.

In light of the foregoing, while it is our belief that the final financial outcome of this litigation cannot be determined, under the provisions of Statement of Financial Accounting Standard No. 5 which addresses contingencies, we have recorded cumulative pre-tax charges of $18.1 million, including $1.1 million in the fiscal quarter ended March 26, 2005. These charges represent our current best estimate of the loss that would result upon application of the NLRB's decision. We note that such charges were based upon the facts available to us at the time. In our opinion, such charges could be subject to significant modification in the future, upon review by the D.C. Circuit Court of Appeals, completion of a compliance hearing and any appeals relating to the outcome of that hearing. These charges reflect the amount of contributions that we did not make into the union benefit funds for the period from the August 31, 2001 expiration of the contract through March 26, 2005, reduced by a portion of the benefits we paid directly to or for the benefit of these employees over the same period. It also includes an interest cost for these net contributions from the date they would have been paid until March 26, 2005. While this represents our current best estimate of the NLRB's decision, we believe that, as of March 26, 2005, the actual range of loss in this matter could be from $0 if the Circuit Court of Appeals does not enforce the NLRB decision at all, to approximately $40 million, if the NLRB's decision is upheld and there is no offset for any benefits paid over this period.

Until such time as further legal developments warrant a change in the application of this accounting standard, or until this matter is resolved, we will record additional non-cash pre-tax charges, including interest, which are calculated on the same basis as the charges recorded in the 2003 and 2004 financial statements. We currently estimate that the pre-tax charge recorded during the full 12 months of 2005 will approximate $4.4 million, subject to changes in the relevant interest rate.

We are a party to related lawsuits, Irving Kroop, et al v. Duane Reade, NY, NY et al, 00 Civ. 9841, et al., instituted by the trustees of several union benefit funds wherein the funds claim that we did not make certain required contributions to these funds from January 2000 through August 2001. By decisions dated August 5, 2004 and September 27, 2004, the District Court awarded judgment to the funds on certain aspects of their complaints. These partial judgments, for which we have provided adequate reserves, are subject to further appeal by us. The remaining unresolved portions of the plaintiffs' claims are still being litigated and accordingly, we intend to continue to vigorously defend ourself in these matters. At this time, it is not possible to determine the ultimate outcome of this case or the actual amount of liability we may face, if any.

We are involved in an ongoing dispute with Cardinal Health, one of our former suppliers of pharmaceutical products. Both parties have claims against the other involving, among other things, breach of contract, promissory estoppel and unjust enrichment. Duane Reade is seeking from Cardinal an unspecified amount of damages and punitive damages of at least $20 million. Cardinal is seeking approximately $18 million in damages plus attorney's fees and interest. While there can be no definitive assurance, we believe we have counterclaims that offset the claims against us by Cardinal, as well as meritorious defenses to these claims, and plan to vigorously pursue our affirmative claims and to vigorously defend ourselves in this action. Non-party discovery in the case has concluded and it is expected to go to trial in the second half of 2005.

required combination of affiliated subsidiaries in recognizing royalty fee and related income for intangible property. The ruling is subject to further legal appeal and interpretation in light of our own specific facts and circumstances. The outcome of this matter, and the resulting amount of additional income tax expense, if any, cannot be determined by us at this time.

In November 2004, we were notified that a class action complaint, Damassia v. Duane Reade Inc. The lawsuit was filed in the United States District Court, Southern District of New York. The complaint alleges that, from the period beginning November 1998, we incorrectly gave some employees the title, "Assistant Manager," in an attempt to avoid paying these employees overtime, in contravention of the Fair Labor Standards Act and the New York Law. The complaint seeks twice an unspecified amount of unpaid wages. We believe this claim to be without merit, and we intend to defend ourselves against this claim. However, due to the uncertainty of litigation, there can be no assurance as to the ultimate outcome of this matter.

In January 2005, the Equal Employment Opportunity Commission filed an action against us in the U.S. District Court for the Southern District of New York alleging, among other things, that we created a hostile work environment for three female store employees, and potentially a class of such female employees. This action is in its early stages, and accordingly it is not possible to determine the ultimate outcome, which, if adverse, could be material. However, we believe that the allegations are wholly without merit and intend to vigorously defend ourselves in this matter.

Litigation Relating to the Acquisition

We are aware of six purported class action complaints challenging the Acquisition consummated by us and Duane Reade Acquisition that have been filed in the Court of Chancery of the State of Delaware, referred to as the "Delaware Complaints," and three purported class action complaints that have been filed in the Supreme Court of the State of New York. Two of the New York complaints have been dismissed without prejudice. The other New York complaint (the "New York Complaint") is pending, but has not been served on us. The Delaware Complaints name Mr. Cuti and certain other members of our board of directors and executive officers as well as Duane Reade as defendants. Four of the Delaware Complaints name Oak Hill as a defendant. The New York Complaint names Mr. Cuti and certain other members of our board of directors and executive officers as well as Duane Reade as defendants. One of the dismissed New York complaints named Oak Hill as a defendant.

The Delaware Complaints were consolidated on January 28, 2004, and on April 8, 2004 the plaintiffs in the Delaware actions filed a consolidated class action complaint. We believe these lawsuits are without merit and plan to defend these lawsuits vigorously.

MANAGEMENT

Directors and Executive Officers

The following table sets forth information regarding our directors and executive officers:

Name	Age	Position
Anthony J. Cuti	59	Chairman, Chief Executive Officer and President
Gary Charboneau	60	Senior Vice President—Sales and Marketing (Duane Reade Inc.)
John K. Henry	55	Chief Financial Officer
Jerry M. Ray	57	Senior Vice President—Store and Pharmacy Operations (Duane Reade Inc.)
Timothy R. LaBeau	50	Senior Vice President—Merchandising (Duane Reade Inc.)
Michael S. Green	31	Vice President and Director
John P. Malfettone	49	Director
Andrew J. Nathanson	46	Vice President and Director
Denis J. Nayden	50	Director
Tyler J. Wolfram	37	Vice President and Director

Anthony J. Cuti has been our Chairman of the Board, Chief Executive Officer and President since July 30, 2004. He is also the Chairman of the Board, Chief Executive Officer and President of Duane Reade Inc., having served in such capacities since April 1996. Prior to joining us, 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. Mr. Cuti serves on the Board of Trustees of Fairleigh Dickinson University. Mr. Cuti's current Employment Agreement expires on July 30, 2009.

Gary Charboneau has been Senior Vice President in charge of Sales and Marketing of Duane Reade Inc. since February 1993. Prior to joining us, Mr. Charboneau held various positions at CVS, a retail drugstore chain, from 1978 to February 1993, most recently as Executive Vice President.

John K. Henry has been our Chief Financial Officer since July 30, 2004. In addition, he is the Senior Vice President and Chief Financial Officer of Duane Reade Inc., having served in that capacity since August 1999. Prior to joining us, Mr. Henry was Senior Vice President and Chief Financial Officer of Global Household Brands from 1998 to 1999, Executive Vice President and Chief Financial Officer of Rickel Home Centers from 1994 to 1998 and Vice President of Finance of Supermarkets General Holdings Corporation from 1992 to 1994.

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

Timothy R. LaBeau has been Senior Vice President in charge of Merchandising of Duane Reade Inc. since July 2003. Prior to joining us, Mr. LaBeau was Operating Group President of Fleming Inc. from January 2002 through April 2003. In this capacity, Mr. LaBeau held sales, marketing and purchasing responsibilities across 12 operating divisions of Fleming Inc. From 1998 to 2001, Mr. LaBeau was President of the American Sales Division of Ahold USA, Inc., during which time his responsibilities included, among others, merchandising, operations and human resources for all general merchandise and pharmacy business

done by Ahold. From 1994 to 1998, Mr. LaBeau held the position of Executive Vice President of Merchandising with Ahold USA, Inc. From 1977 to 1994, Mr. LaBeau held various management positions with Aldi, an international grocery retailer.

Michael S. Green became one of our directors and a Vice President in July 2004. He has been a Principal at Oak Hill since August 2004, and prior to that, he was a Vice President at Oak Hill since 2000.

John P. Malfettone became one of our directors and a director of Duane Reade Inc. in January 2005. He is the Chief Operating Officer of Oak Hill and is responsible for finance, operations, human resources, administration, information technology and business planning. In addition, Mr. Malfettone provides assistance to the Oak Hill investment team in managing portfolio company financial and business matters. He serves on the board of directors of Dovebid, Inc., a used equipment auction and valuation services company. Prior to joining Oak Hill in 2004, Mr. Malfettone was the Executive Vice President and Chief Financial Officer of MacDermid Inc., a New York Stock Exchange specialty chemical company. Prior to that, from 1990 to 2001, he worked at General Electric Co. serving in numerous roles including GE Capital Assistant Corporate Controller, GE Capital Corporate Controller, GE Capital EVP CFO and Managing Director in GE's private equity business. He joined GE from the accounting and audit firm, KPMG Peat Marwick, where he was promoted to partner in 1988.

Andrew J. Nathanson became one of our directors and a Vice President at the time of our formation. His principal occupation since March 2000 has been Managing Partner at Oak Hill and Vice President of Oak Hill Capital Management, Inc., the principal business of which is acting as the investment adviser of Oak Hill. From 1989 to 2000, Mr. Nathanson served as Managing Director at Donaldson Lufkin & Jenrette Securities Corporation, an investment bank.

Denis J. Nayden became a director of Duane Reade Inc. in November 2004 and one of our directors in January 2005. He is currently a Managing Partner of Oak Hill. Prior to joining Oak Hill, he was Chairman and Chief Executive Officer of GE Capital, a global, diversified financial services company, from 2000. During his 27-year tenure at General Electric Co., Mr. Nayden also served as Chief Operating Officer from 1994 to 2000 and in various positions of increasing responsibility prior to that. Mr. Nayden continues to serve in a consulting capacity to General Electric Co. He also serves on the board of directors of SES Global, a global satellite operator, and United Way, a charitable organization. Mr. Nayden also serves on the Board of Trustees of the University of Connecticut.

Tyler J. Wolfram became one of our directors and a Vice President at the time of our formation. His principal occupation since 2000 has been Partner at Oak Hill. During 2000, Mr. Wolfram served as Managing Director of Whitney & Co., a private equity investment firm. From 1998 to 2000, Mr. Wolfram served as Managing Director of Cornerstone Equity Investors, LLC, a private equity investment firm.

Board Committees

On February 14, 2005, an Audit Committee of the board of directors of Duane Reade Holdings, Inc. was established following the Acquisition in accordance with Section 3(a)(58)(A) of the Exchange Act. Messrs. Michael S. Green, John P. Malfettone and Tyler J. Wolfram were designated and appointed to serve as the members of the Audit Committee. Mr. Malfettone was designated and appointed to serve as its Chairman. The board of directors has determined that Mr. Malfettone is qualified and designated as an Audit Committee Financial Expert.

On February 14, 2005, a Compensation Committee of the board of directors of Duane Reade Inc. was established. Messrs. Andrew J. Nathanson, Denis J. Nayden and Tyler J. Wolfram were designated and appointed to serve as the members of the Compensation Committee. Mr. Nathanson was designated and appointed to serve as its Chairman.

Compensation Committee Interlocks and Insider Participation

Messrs. Nathanson and Wolfram are Vice Presidents of Duane Reade Holdings, Inc. Mr. Nayden is not an employee of the Company or any of its subsidiaries.

Executive Compensation

Summary Compensation Table

The following table summarizes the principal components of compensation of the Chief Executive Officer and our other four most highly compensated executive officers for the fiscal years ended December 25, 2004, December 27, 2003 and December 28, 2002. The compensation set forth below fully reflects compensation for services performed on our behalf and on behalf of our subsidiaries.

								Long-Term Compensation
		Annual Compensation						Long-Term Compensation
Name		Annual Compensation						Securities Underlying Stock Options(1)	All Other Compensation(2)
Name	Principal Position	Year	Salary			Bonus		Securities Underlying Stock Options(1)	All Other Compensation(2)
Anthony J. Cuti	Chief Executive	2004	$	907,692			—	115,277	$	7,631,928
	Officer	2003	$	850,000			—	462,550	$	555,835
		2002	$	750,000			—	282,250	$	1,170,833
Gary Charboneau	SVP—Sales	2004	$	450,000			—	8,500	$	2,763,139
	and Marketing	2003	$	450,000			—	163,582	$	6,220
		2002	$	330,000			—	77,600	$	106,781
John K. Henry	SVP—Chief	2004	$	380,769			—	30,600	$	892,821
	Financial	2003	$	350,000			—	177,600	$	9,403
	Officer	2002	$	275,000			—	77,600	$	123,801
Timothy R. LaBeau	SVP—	2004	$	385,000		$	75,000	8,500	$	107,913
	Merchandising	2003	$	162,885	(3)		—	75,000	$	8,874
		2002		N/A			N/A	N/A		N/A
Jerry M. Ray	SVP—Store and	2004	$	380,769			—	13,600	$	1,633,363
	Pharmacy Operations	2003	$	350,000			—	143,090	$	4,273
		2002	$	280,000			—	77,600	$	56,822

(1): The numbers in this column related to the 2004 fiscal year reflect options to purchase shares of common stock of Duane Reade Holdings granted in connection with the Acquisition under our New Option Plan. The numbers in this column related to the 2003 and 2002 fiscal years reflect grants of options to purchase shares of Duane Reade Inc., the predecessor of Duane Reade Holdings, Inc. Such options were cashed out in connection with the Acquisition. See "Aggregate Options Exercised in Fiscal Year Ended December 25, 2004" and "—Senior Vice President Arrangements" below.
(2): The amounts in this column include (i) the dollar value of the premiums paid by us with respect to the term portion of split dollar life insurance policies purchased on the life of Mr. Cuti ($81,658); and (ii) the actuarial equivalent of the benefit to Mr. Cuti of the remainder of the premiums paid on the split dollar life insurance policy by us based on certain assumptions regarding interest rates and life expectancy ($412,684). In the case of Messrs. Charboneau, Ray and Henry, these arrangements were canceled as of the date of the Acquisition. In the case of Mr. Cuti, we have elected to terminate the SERP obligations and insurance contract arrangements. Mr. LaBeau does not participate in any split dollar life insurance programs. In addition, this column includes the income tax reimbursement to Mr. Cuti in connection with the dollar value of the premiums for the term portion of the split dollar life policy paid in 2003 ($65,487), as well as the value of certain perquisites paid to Mr. Cuti ($88,862, including club membership expenses of $57,855). In addition, this column includes matching contributions made by us to our 401(k) plan during 2004 as follows: Mr. Cuti ($3,200); Mr. Charboneau ($2,600); Mr. Henry ($992) and Mr. Ray ($3,200). The amounts in this column also include (i) change of control payments made by us in 2004 in connection with the Acquisition: Mr. Cuti ($4,962,286), Mr. Charboneau ($2,254,471), Mr. Henry ($884,336) and Mr. Ray ($1,626,949); (ii) a grossed-up relocation allowance for Mr. LaBeau ($107,913); and (iii) a payment to Mr. Cuti in the amount of $1,500,000, reflecting an accelerated portion of the amounts payable in connection with our election to terminate the SERP obligation.
(3): Mr. LaBeau joined us effective July 21, 2003.

Option Grants in Last Fiscal Year

The following table sets forth information concerning stock options granted to the named executive officers in fiscal 2004:

	Individual Grants
	Number of Securities Underlying Options Granted (#)(1)	% of Total Options Granted to Employees in Fiscal Year					Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)
Name				Exercise Price ($/SH)
Name				Exercise Price ($/SH)		Expiration Date	5% ($)		10% ($)
Anthony J. Cuti	115,277	65.3	%	$	100.00	July 30, 2014	$	7,249,709	$	18,372,185
Gary Charboneau	8,500	4.8	%	$	100.00	July 30, 2014	$	534,560	$	1,354,681
John K. Henry	30,600	17.4	%	$	100.00	July 30, 2014	$	1,924,418	$	4,876,852
Timothy R. Labeau	8,500	4.8	%	$	100.00	July 30, 2014	$	534,560	$	1,354,681
Jerry M. Ray	13,600	7.7	%	$	100.00	July 30, 2014	$	855,297	$	2,167,490

(1): All of the above stock option awards to purchase shares of common stock of Duane Reade Holdings were granted in connection with the Acquisition under our New Option Plan. The options granted to Messrs. Charboneau, Henry, Labeau and Ray vest in five equal installments beginning on the first anniversary of the date of the grant, with all options becoming fully vested on the fifth anniversary of the date of grant. The options granted to Mr. Cuti vest as follows: one third vests equally during the first, second and third years after the grant, one third vests equally during the second, third and fourth year after the grant, and one third vests equally during the third, fourth and fifth year after the grant. The exercise prices were based on the fair market value of the shares of common stock at the time the options were granted (as determined in accordance with our New Option Plan). The options terminate ten years after the date of grant. Upon a termination of employment for any reason, all unvested options will expire immediately and vested options will expire as of (i) the date of the executive's termination of employment for cause, as determined by our compensation committee, (ii) 180 days after the executive's termination by reason of death or permanent disability, or (iii) 30 days after the executive's termination of employment for any reason other than death, permanent disability or cause. Vesting will accelerate in certain instances, including a "sale of the company," as defined in the plan.
(2): The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and therefore are not intended to forecast possible future appreciation, if any, of our stock price. The gains reflect a future value based upon growth at these prescribed rates.

Aggregated Option Exercises in Fiscal Year Ended December 25, 2004 and Fiscal Year-End Option Values

The following table summarizes the number and value of all unexercised options held by the Chief Executive Officer and our other four most highly compensated executive officers at the end of fiscal 2004.

				Number of Securities Underlying Unexercised Options at Fiscal Year End		Value of Unexercised In-The-Money Options at Fiscal Year End
Name	Shares Acquired on Exercise(1)
Name	Shares Acquired on Exercise(1)	Value Realized		Exercisable	Unexercisable(2)	Exercisable		Unexercisable
Anthony J. Cuti	61,125	$	517,751	—	115,277	$	—	$	—
Gary Charboneau	62,100	$	502,854	—	8,500	$	—	$	—
John K. Henry	—		—	—	30,600	$	—	$	—
Timothy R. Labeau	—		—	—	8,500	$	—	$	—
Jerry M. Ray	—		—	—	13,600	$	—	$	—

(1): The number of shares set forth in this column result from stock options to purchase shares of common stock in Duane Reade Inc. granted under its 1997 Equity Participation Plan, which were exercised prior to the completion of the Acquisition on July 30, 2004.
(2): This column reflects stock options to purchase shares of common stock of Duane Reade Holdings granted in connection with the Acquisition under our New Option Plan. The exercise price was based on the fair market value of the shares of common stock at the time the options were granted. For more information on the Management Stock Option Plan, see "—Executive Compensation, —Management Stock Option Plan".

Management Stock Option Plan

Our board of directors adopted the Duane Reade Holdings, Inc. Management Stock Option Plan, which is referred to in this prospectus as the "New Option Plan," which became effective on the date the Acquisition was completed. The New Option Plan is administered by the compensation committee of our board of directors. Any officer, employee, director or consultant of Duane Reade Holdings or any of its subsidiaries or affiliates is eligible to be designated a participant under the New Option Plan. A maximum of 244,930 shares of our common stock (on a fully diluted basis) may be granted under the New Option Plan.

Under the New Option Plan, the compensation committee of Duane Reade Holdings may grant awards of nonqualified stock options, incentive stock options, or any combination of the foregoing. A stock option granted under the New Option Plan will provide a participant with the right to purchase, within a specified period of time, a stated number of shares of our common stock at the price specified in the award agreement. Stock options granted under the New Option Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, not inconsistent with the New Option Plan, as may be determined by the compensation committee and specified in the applicable stock option agreement or thereafter.

Senior Vice President Phantom Stock

Senior vice presidents of Duane Reade Inc. were awarded SVP phantom stock under a phantom stock plan that was adopted effective as of the date of the Acquisition, representing, in the aggregate, approximately 1.5% of the shares of our common stock (on a fully diluted basis). The SVP phantom stock was granted to the senior vice presidents for future services and in exchange for relinquishing certain payments in connection with the Acquisition and in entering into new employment letters. At the closing of the Acquisition, Messrs. Charboneau, Henry and Ray relinquished an aggregate amount of approximately $2.6 million with respect to their rights under Duane Reade Inc.'s supplemental executive retirement plan/split dollar life insurance arrangement which would have required us to transfer ownership of the underlying life insurance policies to each of them. At the closing of the Acquisition, Mr. LaBeau relinquished payments with respect to "in the money" options totaling approximately $55,000 and retention payments totaling approximately $0.8 million. Mr. Ray also relinquished retention payments totaling approximately $0.3 million and a payment of approximately $0.4 million under an existing price guarantee on stock options awarded to him in May 1999.

Each senior vice president entered into an award agreement under the Phantom Stock Plan under which he was awarded a specific number of shares of SVP phantom stock. References to awards are references to the total number of shares of SVP phantom stock granted to a particular senior vice president. This was a one time award of phantom stock to the senior vice presidents, and no other awards of phantom stock have been or are expected to be made. Each share of SVP phantom stock represents a share of our common stock. The SVP phantom stock awards vest ratably over a two year period, subject to partial acceleration upon a change of control. Acceleration occurring in connection with a change of control will be to the extent necessary to participate in a transfer giving rise to a tag-along or drag-along right (as if the phantom shares representing the SVP phantom stock were actual shares, to the extent applicable). Awards are generally to be settled (or paid) in shares of our common stock or, in connection with a drag-along event, using the same form of consideration received by our common stockholders in connection with such a transaction, by treating one share of SVP phantom stock as a share of our common stock. Awards of SVP phantom stock will settle in whole or in part, depending upon the extent to which the senior vice president has vested in his award, on a drag-along event, tag-along event, initial public offering of our common stock or five years following the Acquisition. Awards of SVP phantom stock will also settle, to the extent vested, following the senior vice president's death or termination of employment without "Cause" or for "Good Reason" as each term is defined in the new SVP employment letter. Upon termination of employment under certain limited circumstances, the SVP phantom stock awards may be settled in cash at fair market value, treating each share of SVP phantom stock as one share of our common stock. Shares of our common stock received by the senior vice presidents through the settlement of a SVP phantom stock award are subject to the stockholders and registration rights agreement which is more fully described in "Certain Relationships and Related

Transactions—Agreements Relating to Duane Reade Holdings—Stockholders and Registration Rights Agreement." In addition, SVP phantom stock awards participate in dividends to the same extent as the holders of our common stock. SVP phantom stock awards also contain a sunset provision that provides that these awards, to the extent not yet settled, may be settled in shares of our common stock no earlier than July 30, 2009.

Compensation Of Directors

We do not compensate directors who are our employees or affiliates of Oak Hill for their service as directors. We expect that any independent directors will receive customary fees for their service as directors.

Contracts with Executive Officers

Mr. Cuti's Profits Interest

Mr. Cuti's employment agreement provides for the award to Mr. Cuti of a profits interest in Duane Reade Shareholders that, based on the amount of the initial equity investments by the investor group led by Oak Hill and by management and given a sufficient appreciation in the value of Duane Reade Shareholders following the Acquisition, could result in his possession of an approximately 7.9% equity interest in Duane Reade Shareholders (on a fully diluted basis), which, as of the effective date of the Acquisition, would be equivalent to approximately 7.1% of the aggregate ownership interest in us on a consolidated basis. The profits interest will have no value unless the value of Duane Reade Shareholders appreciates. In connection with a realization event (such as a sale), if the fair market value of Duane Reade Shareholders appreciates, Mr. Cuti will generally be allocated the first $20 million of such appreciation and will share in distributions of additional amounts in accordance with his pro rata interest. The profits interest vests over a five year period, subject, generally, to Mr. Cuti's continued employment with us. Vesting of the profits interest will accelerate upon the occurrence of a change of control or an underwritten offering of common stock by Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders that results in a public offering of at least 20% of such entity's common stock or generates gross proceeds of at least $100 million. The profits interest is subject to customary drag-along, tag-along and registration rights as well as preemptive rights in specific circumstances. The profits interest is intended to meet certain IRS guidelines, but in the event that Mr. Cuti incurs any income taxes as a result of the grant of the profits interest, we will indemnify him against such taxes.

Mr. Cuti's Employment Agreement

On December 22, 2003, Mr. Cuti entered into an employment agreement revising the terms and conditions of his prior employment agreement to reflect those that currently apply to Mr. Cuti's employment with us. Following the execution of that employment agreement, we negotiated certain modifications to the terms and conditions of Mr. Cuti's employment, and on March 16, 2004, we entered into a new employment agreement, which was subsequently amended on June 18, 2004. The term of Mr. Cuti's employment under the new employment agreement is five years, during which time he will serve as our and Duane Reade Inc.'s chairman of the board (except if prohibited by legal requirements), president and chief executive officer. The new employment agreement contemplates an initial base salary of $1 million per annum and an annual bonus opportunity ranging from 0% to 175% of base salary based upon our success in achieving annual financial performance targets.

Under the terms of his prior employment agreement, Mr. Cuti participated in a supplemental executive retirement plan, or SERP, and Duane Reade Inc. agreed to satisfy its obligation to him under the SERP through the purchase of an insurance contract. The insurance contract provided benefits to Mr. Cuti's beneficiaries upon his death, as well as retirement benefits upon the earlier of him reaching age 65 or three years after his termination date. As of June 3, 2004, under the terms of his prior employment agreement, Duane Reade Inc. was obligated to make annual premium payments under the insurance contract of approximately $5 million for each of the next six years (totaling a minimum of approximately $30.0 million

as of June 3, 2004), subject to an accelerated payment equal to the present value of such amount upon the termination of Mr. Cuti's employment with Duane Reade Inc. for any reason, the non-renewal of his prior employment agreement, the renewal of his prior employment agreement in accordance with its terms, the sale of Duane Reade Inc., Mr. Cuti's attainment of age 65, or Duane Reade Inc.'s failure to timely pay the annual insurance premiums owed under the insurance contract. The new employment agreement provided Duane Reade Inc. with an election to terminate the SERP obligations and the insurance contract arrangements. Upon the consummation of the Acquisition, Duane Reade Inc. exercised this election. The new employment agreement provides that Mr. Cuti will waive his entitlement to the SERP and release Duane Reade Inc. from all of the obligations to make premium payments (totaling a minimum of approximately $30.0 million as of June 3, 2004 as described above) under the insurance contract in exchange for, among other things, payments to Mr. Cuti totaling $24.5 million, which are referred to as the "Prepayment Amount." The Prepayment Amount is being paid in installments, with the final $4.0 million installment to be paid on June 30, 2005. Following the Acquisition we paid $1.5 million to Mr. Cuti, which is a portion of the first installment of the Prepayment Amount. In January 2005, we made a payment of $19.0 million of the Prepayment Amount to Mr. Cuti.

We may satisfy all or a portion of the Prepayment Amount of $4.0 million using the cash surrender value of the insurance contract that we will receive at the time that we elect to terminate the insurance contract agreement (approximately $14.3 million as of May 31, 2005).

The new employment agreement provides for the relinquishment by Mr. Cuti of certain long-term incentives to which he is entitled under his prior employment agreement and lower severance payments (as described below) than those provided for in his prior employment agreement. The new employment agreement provides for new long-term incentives to Mr. Cuti, including the profits interest in Duane Reade Shareholders described above under "—Mr. Cuti's Profits Interest Following the Acquisition," options to purchase 4% of the common stock of Duane Reade Holdings (on a fully diluted basis), and payments of $0.9 million on each of the first through fifth anniversaries of the effective date of the Acquisition, subject, generally, to his continued employment. In connection with the completion of the Acquisition, Mr. Cuti received a payment of $4,962,286 and forfeited all of his outstanding options, valued at approximately $2.7 million based on the Acquisition consideration of $16.50 per share, and the right to receive a payment of $1.0 million under an existing price guarantee of stock options granted in May 1999.

The stock options and profits interest awards vest over five years subject, generally, to Mr. Cuti's continued employment with us, and with respect to the profits interest subject to acceleration upon the occurrence of specific events, including a "change of control" (as described below). The new employment agreement defines a "change of control" to include in specific circumstances, among other things:

•: the acquisition by a third party of securities representing more than 50% of Duane Reade Inc.'s voting stock or the right to appoint a majority of the members of Duane Reade Inc.'s board of directors;
•: the adoption of a plan of liquidation or the consummation of an agreement for the sale of all or substantially all of Duane Reade Inc.'s assets; or
•: prior to an underwritten offering of common stock by Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders that results in a public offering of at least 20% of such common stock or generates gross proceeds of at least $100 million, the failure by Oak Hill to retain and exercise the power to designate a majority of the members of our board of directors appointable by the investor group led by Oak Hill.

In addition, upon a change of control, the vesting of stock options will occur to the extent necessary for the Chairman to participate in a transfer giving rise to tag-along or drag-along rights.

All equity interests held by Mr. Cuti in Duane Reade Shareholders and Duane Reade Holdings are subject to customary drag-along, tag-along and registration rights as well as preemptive rights in specific circumstances. The tag-along and drag-along rights will, under certain circumstances, either afford Mr. Cuti the opportunity to or require him to participate, respectively, in a sale of all or a portion of the equity in

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Duane Reade Shareholders or Duane Reade Holdings. In addition, upon the occurrence of specified events, including the fifth anniversary of the effective date of the Acquisition, Mr. Cuti will have the right to require us to purchase for cash over a two year period all or a portion of the equity interests held by Mr. Cuti in Duane Reade Shareholders and Duane Reade Holdings as he may designate, at fair market value as determined in accordance with a formula and the procedures set forth in the new employment agreement. Mr. Cuti's repurchase rights will be suspended at any time when the exercise of such repurchase rights would result in a breach or default under the credit or other financing agreements of Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders. Mr. Cuti's repurchase right will terminate upon or in connection with an underwritten offering of common stock by Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders that results in a public offering of at least 20% of such entity's common stock or generates gross proceeds of at least $100 million.

The new employment agreement also provides for the participation by Mr. Cuti in all benefit plans generally available to our senior executives, the continuation of the fringe benefits provided to Mr. Cuti under his prior employment agreement, retiree medical benefits for Mr. Cuti and his spouse, severance benefits and, following our election to terminate the SERP obligations and the insurance contract arrangements and payment of the Prepayment Amount, the payment of premiums of up to $88,000 per year for term life insurance coverage. The new employment agreement provides indemnification for income taxes incurred by Mr. Cuti for certain payments to him that are not paid in cash or marketable property. We will also pay the remaining premiums in an aggregate amount of approximately $1.0 million owed on a life insurance policy owned by us pursuant to Mr. Cuti's SERP/split dollar life insurance retention arrangement which was established for Mr. Cuti in 1998 as part of his long-term compensation program. We will transfer full ownership of that policy to Mr. Cuti subject, generally, to his continued employment with us for two years following the effective date of the Acquisition (the cash surrender value of the life insurance policy was approximately $3.7 million as of May 31, 2005).

The new employment agreement provides that we may terminate Mr. Cuti's employment with Duane Reade Inc. and Duane Reade Holdings with or without "cause," as defined in the new employment agreement, which includes:

•: a finding by the board of directors of the company that Mr. Cuti has committed an act of fraud or embezzlement against Duane Reade Holdings or Duane Reade Inc. or any of our subsidiaries;
•: Mr. Cuti's conviction of a felony; or
•: any material willful breach of the new employment agreement by Mr. Cuti.

The new employment agreement also provides that Mr. Cuti may terminate his employment with Duane Reade Inc. and Duane Reade Holdings for "good reason," as defined in the new employment agreement, which includes:

•: a reduction in the Mr. Cuti's base salary without his consent;
•: except as a result of any legal requirement, removal of Mr. Cuti from the positions of president, chief executive officer or chairman of the board of directors of Duane Reade Inc. or Duane Reade Holdings without his consent or the assignment to Mr. Cuti of duties that are materially and adversely inconsistent with such positions without his consent;
•: except as a result of any legal requirement, the creation within Duane Reade Inc. or Duane Reade Holdings of any position equal to or superior to that of Mr. Cuti's position or which does not report to Mr. Cuti;
•: except as a result of any legal requirement, the failure of Mr. Cuti to be elected chairman of the board of directors of Duane Reade Inc. or Duane Reade Holdings;
•: the relocation of the offices in which Mr. Cuti is principally employed to a location outside of the borough of Manhattan without his consent;

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•: any material breach of the new employment agreement by Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders which includes our failure to have Andrew J. Nathanson, a Managing Partner of Oak Hill, or an independent director appointed to the board of directors of Duane Reade Inc. in accordance with the terms of the new employment agreement; or
•: if Duane Reade Inc. becomes a direct or indirect subsidiary of an acquiring company, the failure to appoint Mr. Cuti to the position of chief executive officer of the acquiring company.

Upon the termination of Mr. Cuti's employment by Duane Reade Inc. without cause or upon his resignation for good reason, he will be entitled to receive the following severance payments: (1) a payment equal to three times the sum of his most recent base salary and the highest bonus actually paid to him during the term of the new employment agreement (or 125% of base salary, if terminated during the first year of the term), plus (2) acceleration of the remaining unpaid $0.9 million cash payments. One quarter of this severance amount must be paid within 10 days of the termination of his employment and the remainder must be paid in substantially equal installments over the 24-month period following termination. In addition, the unvested portion of his profits interest and stock options will immediately vest upon his termination without cause or upon his resignation for good reason, and he will generally be entitled to continued health, dental, disability, life insurance and similar benefits at our expense during the 24-month period following his termination. Neither non-renewal of the new employment agreement nor a change of control of Duane Reade Inc. will independently trigger an obligation by Duane Reade Inc. to pay severance benefits to Mr. Cuti.

The new employment agreement provides for a tax gross-up for any amounts due or paid to Mr. Cuti under the new employment agreement, his prior employment agreement or any plan, program or arrangement of Duane Reade Inc., Duane Reade Holdings or Duane Reade Shareholders or their respective subsidiaries that is considered an "excess parachute payment" under the Internal Revenue Code.

Mr. Cuti has agreed not to disclose or otherwise inappropriately use for his personal benefit, any of our confidential or proprietary information. Mr. Cuti has further agreed not to compete with Duane Reade Inc. during the term of the new employment agreement and for three years thereafter, regardless of the grounds for the termination of his employment. If Mr. Cuti violates the non-competition provisions of the new employment agreement, he will be required to repay to Duane Reade Inc. a portion of the payments he is entitled to receive under the new employment agreement, in addition to any actual damages he may owe to us in excess of the amounts he repaid to Duane Reade Inc. If, however, an arbitrator determines that severance payments are owed to Mr. Cuti and such payments are not made to him within 15 days of the arbitrator's ruling, the non-competition provision of the new employment agreement will lapse.

Under the new employment agreement, Duane Reade Inc. has also agreed to indemnify Mr. Cuti for all costs, charges and expenses incurred by him by reason of him being or having served as a director, officer, employee or agent of Duane Reade Inc., Duane Reade Holdings or any of its subsidiaries. The new employment agreement also requires Duane Reade Inc. to maintain a directors and officers liability insurance policy for so long as Mr. Cuti is employed by Duane Reade Inc. and for three years thereafter. The policy must be consistent with the level of coverage and premiums of similarly situated companies.

In summary, the total compensation payable to, or for the benefit of, Mr. Cuti under the new employment agreement is:

•: an annual base salary of $1 million;
•: an annual bonus opportunity of between 0% and 175% of base salary, with a target of $1.25 million;
•: $0.9 million annual retention payments paid on each of the first five anniversaries of the effective date of the Acquisition subject generally to continued employment;
•: a cash payment with respect to stock options of approximately $5.0 million;
•: a grant of new options to purchase shares of our common stock representing 4.0% of our common stock (on a fully diluted basis);

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•: an award of a profits interest that, based on the initial equity investments by the investor group led by Oak Hill and by management, could be equal to approximately a 7.9% equity interest in Duane Reade Shareholders (on a fully diluted basis, which, as of the effective date of the Acquisition, would be equivalent to approximately 7.1% of the aggregate ownership in us on a consolidated basis);
•: continued premium payments on the 1998 SERP/split dollar life insurance policy (approximately $1.0 million) and, subject generally to his continued employment, the transfer two years following the Acquisition of that policy to Mr. Cuti (the cash surrender value of which on May 31, 2005 was approximately $3.7 million);
•: payment of the Prepayment Amount (generally in three installments) totaling $24.5 million and annual premium payments for life insurance not to exceed $88,000 following payment of the last installment of the Prepayment Amount in June 2005;
•: severance protection (subject to a tax gross-up in respect of any "excess parachute payments," as described above) if Duane Reade Inc. terminates Mr. Cuti's employment without cause or he resigns for good reason equal to the sum of (a) three times his base salary and highest bonus actually paid to him during the term of the new employment agreement (or 125% of base salary, if he is terminated during the first year of the term) plus (b) accelerated payment of the remaining unpaid $0.9 million annual retention payments;
•: retiree medical benefits for Mr. Cuti and his spouse following his retirement;
•: certain perquisites including club memberships and reimbursement of certain professional services worth in the aggregate approximately $75,000 annually.

Senior Vice President Arrangements

On March 16, 2004 each of Messrs. Charboneau, Henry, Ray and LaBeau, the senior vice presidents, entered into letter agreements with Duane Reade Acquisition, which set forth the terms of their continuing employment with Duane Reade Inc. The letter agreements are referred to as "SVP employment letters" in this prospectus. The SVP employment letters provide for annual base salaries that are equal to those received by the senior vice presidents as of March 16, 2004, with provision for some of the senior vice presidents, along with other members of management except Mr. Cuti, to be granted base salary increases after completion of the Acquisition. These senior vice presidents and other members of management were granted salary increases effective August 1, 2004. The SVP employment letters also provide for additional compensation in the form of bonuses that range from 0% to 150% of their respective base salaries subject to the satisfaction of performance targets.

Under retention agreements with the senior vice presidents prior to the Acquisition and other arrangements that were approved, subject to the completion of the Acquisition, the senior vice presidents were entitled to receive a lump sum payment equal to their prior 12 months' salary plus their maximum annual target bonus for the preceding calendar year (whether or not such bonus was earned or paid) immediately upon completion of the Acquisition. The amount of retention payments under the retention arrangements that the senior vice presidents received was approximately $3.6 million. At the effective time of the Acquisition, the existing employment, retention and severance arrangements between Duane Reade Inc. and the senior vice presidents were replaced by the SVP employment letters.

In addition, three of the senior vice presidents were entitled to payments under the 1998 SERP/split-dollar life insurance retention arrangement adopted by Duane Reade Inc. on their behalf and converted by its board of directors in 2003 into corporate-owned insurance policies. The SERP/split-dollar life insurance arrangement required us to transfer ownership of life insurance polices with an aggregate cash surrender value of approximately $3.1 million, as at July 30, 2004 to Messrs. Charboneau, Henry and Ray upon the completion of the Acquisition. For information on the dollar value of the premiums paid by Duane Reade Inc. with respect to the term portion of split dollar life insurance policies purchased on the lives of each of the named executive officers, see "—Executive Compensation—Summary Compensation Table."

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On May 7, 1999, Duane Reade Inc. granted stock options to certain members of management pursuant to its Deferred Compensation Stock Grant Program that included a guaranteed payment if Duane Reade Inc. stock was trading below a specified price on May 7, 2003. In January 2000, Mr. Cuti and certain senior vice presidents agreed to condition their entitlements to these guaranteed payments upon the occurrence of a change of control or termination without cause. Upon completion of the Acquisition, Messrs. Charboneau and Ray were entitled to payments of $0.9 million in the aggregate under this stock option grant.

In connection with the Acquisition, the senior vice presidents agreed to relinquish, in the aggregate, approximately $4.2 million of the payments that they were entitled to receive in connection with the Acquisition under their current retention agreements, the SERP/split-dollar life insurance arrangement, the Deferred Compensation Stock Grant Program and with respect to their Eligible Options. These payments to which the senior vice presidents were entitled are referred to as "SVP payments" in this prospectus. In exchange for these relinquished SVP payments and for their future service, the senior vice presidents received, among other things, awards of the SVP phantom stock representing in the aggregate approximately 1.5% of the shares of our common stock (on a fully diluted basis). See "—Executive Compensation—Senior Vice President Phantom Stock." The senior vice presidents were also granted new options under the New Option Plan. For more information on the New Option Plan, see "—Executive Compensation—Management Stock Option Plan."

Under the SVP employment letters, the senior vice presidents may receive a severance payment to be paid over 24 months equal to the sum of twice their respective prior 12 months' base salaries plus their respective annual target bonuses for the preceding calendar year (whether or not such bonuses were earned or paid) in the event that their employment is terminated under certain circumstances within one year following completion of the Acquisition. If their employment is terminated under certain circumstances at any time after the first anniversary of the effective date of the Acquisition, the senior vice presidents will be entitled to a severance payment to be paid over 12 months equal to their prior 12 months' base salary. The senior vice presidents will be subject to restrictive covenants prohibiting them from competing with us in the New York greater metropolitan area and from soliciting our employees, generally during the period in which they are entitled to severance payments. The SVP employment letters also provide for the new options under the New Option Plan, the SVP phantom stock awards and the partial relinquishment of the SVP payments, as well as for other customary matters such as benefits.

The total compensation payable to Mr. Charboneau pursuant to his SVP employment letter is:

•: an annual base salary of $450,000;
•: an annual bonus opportunity of between 0% and 150% of base salary, with a target of 100% of base salary;
•: a grant at the Acquisition of new options to acquire 8,500 shares of our common stock, representing less than 1% of our common stock;
•: a grant at the Acquisition of 1,000,000 shares of SVP phantom stock (representing less than 1% of our common stock); and
•: if Duane Reade Inc. terminates Mr. Charboneau's employment under certain circumstances, severance equal to his prior 12 months' base salary, if his employment is terminated after the first anniversary of the Acquisition, or if it is terminated before the first anniversary of the Acquisition, the sum of twice his base salary plus target annual bonus.

The total compensation payable to Mr. Henry pursuant to his SVP employment letter is:

•: an annual base salary of $350,000;
•: an annual bonus opportunity of between 0% and 150% of base salary, with a target of 100% of base salary;

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•: a grant at the Acquisition of new options to acquire 30,600 shares of our common stock, representing approximately 1.1% of our common stock;
•: a grant at the Acquisition of 742,217 shares of SVP Phantom Stock (representing less than 1% of our common stock); and
•: if Duane Reade Inc. terminates Mr. Henry's employment under certain circumstances, severance equal to his prior 12 months' base salary, if his employment is terminated after the first anniversary of the Acquisition, or if it is terminated before the first anniversary of the Acquisition, the sum of twice his base salary plus target annual bonus.

Effective August 1, 2004, Mr. Henry's annual base salary was increased to $430,000.

The total compensation payable to Mr. Ray pursuant to his SVP employment letter is

•: an annual base salary of $350,000;
•: an annual bonus opportunity of between 0% and 150% of base salary, with a target of 100% of base salary;
•: a grant at the Acquisition of new options to acquire 13,600 shares of our common stock, representing less than 1% of our common stock;
•: a grant at the Acquisition of 1,631,628 shares of SVP Phantom Stock (representing less than 1% of our common stock); and
•: if Duane Reade Inc. terminates Mr. Ray's employment under certain circumstances, severance equal to his prior 12 months' base salary, if his employment is terminated after the first anniversary of the Acquisition, or if it is terminated before the first anniversary of the Acquisition, the sum of twice his base salary plus target annual bonus.

Effective August 1, 2004, Mr. Ray's annual base salary was increased to $430,000.

The total compensation payable to Mr. LaBeau pursuant to his SVP employment letter is:

•: an annual base salary of $385,000;
•: an annual bonus opportunity of between 0% and 150% of base salary, with a target of 100% of base salary;
•: a grant at the Acquisition of new options to acquire 8,500 shares of our common stock, representing less than 1% of our common stock;
•: a grant at the Acquisition of 824,750 shares of SVP Phantom Stock representing less than 1% of our common stock; and
•: if Duane Reade Inc. terminates Mr. LaBeau's employment under certain circumstances, severance equal to his prior 12 months' base salary, if his employment is terminated after the first anniversary of the Acquisition, or if it is terminated before the first anniversary of the Acquisition, the sum of twice his base salary plus target annual bonus; and
•: a grossed-up relocation allowance (worth approximately $125,000).

Vice President Arrangements

As a result of the Acquisition, each of Duane Reade Inc.'s vice presidents received a lump sum payment equal to his or her maximum annual target bonus for the preceding calendar year (whether or not such bonus was earned or paid). Such lump sum payments to the vice presidents totaled approximately $0.6 million. Further, the vice presidents may receive a lump sum payment equal to his or her prior 12 months' salary plus his or her annual target bonus for the preceding calendar year (whether or not such bonus was earned or paid) in the event that his or her employment is terminated under certain circumstances within one year of a change of control, pursuant to his or her retention agreement and other arrangements that have been approved. The Acquisition constituted a change of control under these agreements.

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PRINCIPAL STOCKHOLDERS

All of Duane Reade Inc.'s issued and outstanding common stock is held by Duane Reade Holdings, whose principal address is 201 Main Street, Fort Worth, Texas 76102, and is beneficially owned by Oak Hill Capital Partners, L.P., whose principal address is 201 Main Street, Fort Worth, Texas 76102.

The table below sets forth certain information regarding the beneficial ownership of the common stock of Duane Reade Holdings, which constitutes the only class of capital stock of Duane Reade Holdings by:

•: each of our current directors and executive officers individually;
•: each person who is known to be the beneficial owner of more than 5% of any class or series of capital stock; and
•: all directors and executive officers as a group based on data as of the date of the Acquisition.

For purposes of this table, a person is deemed to have "beneficial ownership" of any shares that the 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 below, any shares that a person has the right to acquire within 60 days after the date of this prospectus are deemed to be outstanding, but not for the purposes of calculating the percentage ownership of any other person.

Shares of Common Stock Beneficially Owned

Name of Beneficial Owner	Number of Shares Beneficially Owned	Percent of Outstanding Shares
Duane Reade Shareholders, LLC(1)	2,594,977	100	%
Anthony J. Cuti(2)	—	—
Gary Charboneau(3)	—	—
John K. Henry(4)	—	—
Jerry M. Ray(5)	—	—
Timothy R. LaBeau(6)	—	—
Michael S. Green	—	—
John P. Malfettone	—	—
Andrew J. Nathanson	—	—
Denis J. Nayden	—	—
Tyler J. Wolfram	—	—
All Officers & Directors (ten persons)	—	—

(1): Oak Hill, together with the equity co-investors, owns on a fully diluted basis 100% of the outstanding membership interests in Duane Reade Shareholders.
(2): Mr. Cuti owns unexercisable options to acquire 115,277 shares of common stock of Duane Reade Holdings, representing 4.0% of the common stock of Duane Reade Holdings (on a fully diluted basis) and a profits interest in Duane Reade Shareholders.
(3): Mr. Charboneau owns unexercisable options to acquire 8,500 shares of common stock of Duane Reade Holdings, representing less than 1% of Duane Reade Holdings common stock.
(4): Mr. Henry owns unexercisable options to acquire 30,600 shares of common stock of Duane Reade Holdings, representing approximately 1.1% of Duane Reade Holdings common stock.
(5): Mr. Ray owns unexercisable options to acquire 13,600 shares of the common stock of Duane Reade Holdings, representing less than 1% of Duane Reade Holdings common stock.
(6): Mr. LaBeau owns unexercisable options to acquire 8,500 shares of the common stock of Duane Reade Holdings, representing less than 1% of Duane Reade Holdings common stock.

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Limited Liability Company Operating Agreement of Duane Reade Shareholders

Mr. Cuti and members of the investor group entered into an amended and restated limited liability company operating agreement for Duane Reade Shareholders. The amended and restated limited liability company operating agreement sets forth, among other things, the distribution and allocation of the profits and losses of the members of Duane Reade Shareholders, certain membership interest transfer restrictions, including drag-along rights and tag-along rights, and corporate governance provisions regarding the nomination of the managers and officers of Duane Reade Shareholders. The corporate governance provisions generally reflect the percentage ownership of Duane Reade Shareholders by the investor group and Mr. Cuti. The limited liability company operating agreement also provides that certain members of the investor group led by Oak Hill have the ability to cause Duane Reade Shareholders to take certain actions in order for it to register common equity securities of Duane Reade Shareholders under the Securities Act, and that the other equity holders of Duane Reade Shareholders may participate in such registration.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with Oak Hill

Oak Hill Capital Partners, L.P. and certain related entities beneficially own 100% of our common equity. Two Managing Directors at Oak Hill (Mr. Nathanson and Mr. Nayden), a Partner at Oak Hill (Mr. Wolfram), a Chief Operating Officer at Oak Hill (Mr. Malfettone) and a Principal at Oak Hill (Mr. Green) serve as our directors. Those individuals all serve as directors of Duane Reade Inc. as well. We entered the following agreements with affiliates of Oak Hill:

Management Services Agreement

Under a management services agreement between Oak Hill Capital Management, Inc. (an affiliate of Oak Hill Capital Partners, L.P.) and Duane Reade Acquisition, Oak Hill Capital Management, Inc. received a fee of $8.0 million at the closing of the Acquisition, and Oak Hill Capital Management, Inc. agreed to provide financial advisory and management services to us as Duane Reade Inc.'s Board of Directors may reasonably request following the Acquisition. In consideration of these services, Oak Hill Capital Management, Inc. will receive an annual fee of $1.25 million, paid quarterly.

Tax Sharing Agreement

Duane Reade Holdings is the common parent of an affiliated group of corporations that includes Duane Reade Inc. and its subsidiaries. Duane Reade Holdings elected to file consolidated federal income tax returns on behalf of the group. Accordingly, Duane Reade Holdings, Duane Reade Inc. and its subsidiaries entered into a tax sharing agreement, under which Duane Reade Inc. and its subsidiaries will make payments to Duane Reade Holdings. These payments will not be in excess of Duane Reade Inc.'s and its subsidiaries' tax liabilities, if these tax liabilities had been computed on a stand-alone basis.

DRI Investment Group, LLC Transactions

On February 28, 2002, Messrs. Cuti, Charboneau and Ray entered into arrangements to provide for the transfer of a portion of their stock options with respect to Duane Reade Inc. common stock to DRI Investment Group, LLC, in exchange for a private annuity payable to each of them annually by DRI Investment Group. The stock options held by DRI Investment Group and the shares of common stock underlying these options were subject to the same terms of exercise under our 1997 Equity Participation Plan as if they were held directly by the executives and, in addition to the restrictions on transfer described below, are subject to the same transfer restrictions imposed by Duane Reade Inc. on all other options and shares of common stock held directly by Duane Reade Inc. executive officers.

The members of DRI Investment Group are Cuti Family Investments LLC, a limited liability company formed by Mr. Cuti and his family and managed by Mr. Cuti, Charboneau Family Investments LLC, a limited liability company formed by Mr. Charboneau and his family and managed by Mr. Charboneau, and Ray Family Investments LLC, a limited liability company formed by Mr. Ray and his family and managed by Mr. Ray. Each of Messrs. Cuti, Charboneau and Ray, through the members of DRI Investment Group, share the power to determine the disposition of the options transferred by him to DRI Investment Group with the others.

DRI Investment Group, in consideration for the transfer of the stock options by Messrs. Cuti, Charboneau and Ray, is required to pay each of them an annual annuity commencing on such executive's 60th birthday and continuing on each anniversary of such date until the executive's death. In each case the annuity was calculated to reflect the fair market value of the options transferred to DRI Investment Group on the date of transfer. As of March 27, 2003, Mr. Cuti had transferred options to purchase 842,833 shares of common stock to DRI Investment Group, Mr. Charboneau had transferred options to purchase 123,488 shares of common stock, and Mr. Ray had transferred options to purchase 130,515 shares of common stock.

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In connection with the establishment of the DRI Investment Group arrangements, Duane Reade Inc. agreed to waive the transfer restrictions imposed under our 1992 Stock Option Plan and 1997 Equity Participation Plan on the stock options transferred by Messrs. Cuti, Charboneau and Ray to DRI Investment Group.

In order to provide DRI Investment Group with the funds initially required to meet its annuity payment obligations and meet its operating expenses, Duane Reade Inc. agreed to make advances to DRI Investment Group from time to time in an aggregate amount that may not exceed $200,000. For each of these advances, DRI Investment Group delivered to Duane Reade Inc. a promissory note dated February 28, 2002. This loan pre-dated the July 30, 2002 effective date of the Sarbanes-Oxley legislation and is therefore grandfathered under the provisions that prohibit loans to executives. On August 12, 2004, the $196,293 outstanding balance of principal and interest on this loan was repaid in its entirety.

In connection with the Acquisition, Messrs. Cuti, Charboneau and Ray represented that prior to the completion of the Acquisition they each had sole ownership of any unexercised stock options granted to them by us and that all required taxes had been paid or will be paid with respect to any transfers of rights with respect to their unexercised stock options or with respect to the exercise of their stock options.

Interests of Certain Persons in the Acquisition

Merger Consideration

The following table indicates, with respect to each of our executive officers, (1) the number of shares of Duane Reade Inc. common stock owned by such director or executive officer immediately prior to the completion of the Acquisition, (2) the number of shares subject to "in the money" options held by such director or executive officer (whether or not vested), (3) the weighted average exercise price of those stock options for each listed individual and (4) the total amount of proceeds realized by each named individual:

Name of Owner	Position	Number of Shares Owned	Number of Options Owned		Weighted Average Strike Price		Amount received in the Acquisition
Anthony J. Cuti	Chairman, Chief Executive Officer and President	100	325,900	(1)	$	8.33	$	1,650
Gary Charboneau	Senior Vice President—Sales and Marketing	3,000	18,972		$	8.33	$	204,501
Jerry M. Ray	Senior Vice President—Store and Pharmacy Operations	8,690	127,770		$	8.01	$	1,163,349	(2)
John K. Henry	Senior Vice President and Chief Financial Officer	—	—			—		—
Timothy R. LaBeau	Senior Vice President—Merchandising	—	75,000	(3)	$	15.77		—	(3)

(1): All of these options were forfeited in connection with the Acquisition.
(2): Excludes an additional $64,390, to which Mr. Ray would have otherwise been entitled and which was forfeited in connection with his management rollover contribution.
(3): All of these options were forfeited in connection with Mr. LaBeau's management rollover contribution.

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In the Acquisition, shares of Duane Reade Inc. common stock held by Duane Reade Inc. executive officers were treated under the merger agreement in the same manner as all other shares of Duane Reade Inc. common stock.

In the Acquisition, "in the money" options held by members of Duane Reade Inc.'s management that were not relinquished as described in "Management—Contracts with Executive Officers" were treated in the same way as in the money options held by others are treated. Whether or not then exercised or vested, in the money options that were not relinquished were cancelled, and the applicable management members received an amount in cash equal to the per share consideration in the Acquisition minus the applicable exercise price per share of the option, multiplied by the number of shares of Duane Reade Inc. common stock subject to the option that was not surrendered (subject to any applicable withholding tax).

Senior Vice President Retention Agreements

We currently have retention agreements with the senior vice presidents. See "Management—Contracts with Executive Officers—Senior Vice President Arrangements."

Indemnification and Insurance

The merger agreement provided that Duane Reade Inc., as the surviving corporation in the Acquisition, must maintain all rights to indemnification and exculpation provided in its certificate of incorporation and bylaws as of the date of the merger agreement. Duane Reade Shareholders has agreed to indemnify and hold harmless, and provide advancement of expenses to Duane Reade Inc.'s current and former directors, officers and employees to the same extent such persons were indemnified on the date of the merger agreement.

The merger agreement also provides that, until July 30, 2010, Duane Reade Inc., as the surviving corporation in the Acquisition, must either maintain its policies of director and officer liability insurance or obtain comparable policies, as long as the annual premium payments do not exceed approximately $2.6 million. These insurance policies were purchased effective with the completion of the Acquisition.

Management Members' Equity Participation

Members of our management own options to acquire shares representing in the aggregate approximately 8.5% of the outstanding common stock of Duane Reade Holdings on a fully diluted basis. The senior vice presidents own phantom stock representing in the aggregate approximately 1.5% of the outstanding common equity of our Company on a fully diluted basis. See "Management—Contracts with Executive Officers."

Senior Convertible Notes

On September 11, 2002, Messrs. Cuti, Charboneau and Ray purchased approximately $2.1 million principal amount at maturity of the senior convertible notes for approximately $1.2 million. On April 23, 2004, these notes were sold for aggregate proceeds of approximately $1.1 million.

Agreements Relating to Duane Reade Holdings

The following agreements, each containing customary terms, were entered into with respect to the equity and governance arrangements for Duane Reade Holdings:

Stockholders and Registration Rights Agreement

A stockholders and registration rights agreement was entered into among certain members of management and Duane Reade Shareholders. The stockholders and registration rights agreement contains, among other things, certain restrictions on the ability of the parties thereto to freely transfer the securities of Duane Reade Holdings held by such parties. In addition, the stockholders and registration rights agreement provides that the holders of a majority of the membership interests in Duane Reade Shareholders may, under certain circumstances, compel a

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sale of all or a portion of the equity in Duane Reade Holdings to a third party (commonly known as drag-along rights) and, alternatively, that stockholders of Duane Reade Holdings may participate in certain sales of stock by holders of a majority of the common stock of Duane Reade Holdings to third parties (commonly known as tag-along rights). The stockholders and registration rights agreement also contains certain corporate governance provisions regarding the nomination of directors and officers of Duane Reade Holdings by the parties thereto. The stockholders and registration rights agreement also provides that Duane Reade Shareholders will have the ability to cause Duane Reade Holdings to register common equity securities of Duane Reade Holdings under the Securities Act, and provide for procedures by which certain of the equity holders of Duane Reade Holdings and Duane Reade Shareholders may participate in such registrations.

Preemptive Rights Agreement

A preemptive rights agreement was entered into among certain Oak Hill entities, Duane Reade Shareholders, Duane Reade Holdings, Duane Reade Inc. and Messrs. Cuti, Charboneau, LaBeau, Henry and Ray. The preemptive rights agreement contains, among other things, certain preemptive rights for management, providing that certain equity securities issued by Duane Reade Shareholders or any of its subsidiaries to the members of Duane Reade Shareholders (other than Mr. Cuti) must dilute the interests of all of the parties to the preemptive rights agreement on a proportionate basis. In connection with any such issuance of equity securities, each of Messrs. Cuti, Charboneau, LaBeau, Henry and Ray have the right to purchase from the issuing entity a percentage of equity securities being issued equal to their percentage interest (including phantom stock interest) in Duane Reade Holdings as of such time (and, in the case of Mr. Cuti, taking into account his interest in Duane Reade Shareholders as of such time).

Transportation Services International

Duane Reade Inc. is a party to a consulting agreement with Transportation Services International, an entity operated by Mr. Cuti's brother, Joseph Cuti. Transportation Services International provides various trucking, logistical and warehousing consulting services to Duane Reade Inc. The agreement with Transportation Services International is terminable by either party. Payments to Transportation Services International by Duane Reade Inc. totaled approximately $0.1 million annually in each of the 2004, 2003 and 2002 fiscal years.

Credit Suisse First Boston/Donaldson, Lufkin and Jenrette Relationships

DLJ Merchant Banking Partners II, Inc. is the managing general partner of DLJ Merchant Banking Partners II, L.P. Mr. Jaffe, a director through July 30, 2004, was a managing director of DLJ Merchant Banking Partners II, Inc., and until March 2001 was a managing director of Credit Suisse First Boston, which acquired Donaldson, Lufkin and Jenrette in November 2000. Mr. Pradelli, a director through July 30, 2004 was a senior vice president of Donaldson, Lufkin and Jenrette and until November 2001 was a director of Credit Suisse First Boston.

Credit Suisse First Boston acted as joint book-running manager in the offering of the initial notes and received customary fees in connection with that offering.

Separate Purchases

Of the $195.0 million aggregate principal amount of senior subordinated notes sold on July 30, 2004, $5.0 million aggregate principal amount of the senior subordinated notes was purchased on behalf of accounts affiliated with Oak Hill Advisors, Inc. at a discount from the applicable offering price. The purchase on behalf of the Oak Hill Advisors accounts of the senior subordinated notes was conditioned upon and closed subsequent to the closing of the resale by the initial purchasers of the senior subordinated notes purchased by the initial purchasers. The Oak Hill accounts acquire and actively manage a diverse portfolio of investments.

Of the $160.0 million aggregate principal amount of the initial notes sold on December 20, 2004, $10.0 million aggregate principal amount of the initial notes was purchased on behalf of accounts affiliated with Oak Hill Advisors at a discount from the applicable offering price. The purchase on behalf of the Oak Hill Advisors accounts of the initial notes offered was conditioned upon and closed subsequent to the closing of the resale by the initial purchasers of the initial notes purchased by the initial purchasers.

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DESCRIPTION OF OTHER INDEBTEDNESS

Amended asset-based revolving loan facility

Duane Reade GP is the borrower under an asset-based revolving loan facility, which was amended on July 22, 2004. The borrowing capacity of the amended asset-based revolving loan facility is an aggregate principal amount of $250.0 million, subject to an adjusted borrowing base calculation based upon specified advance rates against the value of our selected inventory, pharmacy prescription files and selected accounts receivable. The amended asset-based revolving loan facility includes a $50 million sub-limit for the issuance of letters of credit. Obligations under the revolving loan facility are collateralized by a first priority security interest in inventory, receivables, pharmacy prescription files, deposit accounts and certain other current assets. Under the amended asset-based revolving loan facility, Duane Reade GP is the borrower. The amended facility is guaranteed by us, Duane Reade Inc. and each of Duane Reade Inc.'s domestic subsidiaries other than Duane Reade GP.

Revolving loans under the amended asset-based revolving loan facility, at our option, bear interest at either:

•: a rate equal to LIBOR (the London Interbank Offered Rate) plus a margin of from 1.50% to 2.00%, determined based on levels of borrowing availability reset each fiscal quarter; or
•: a rate equal to the prime rate of Fleet Retail Group Inc. plus a margin of from 0.00% to 0.50%, determined based on levels of borrowing availability reset each fiscal quarter.

Borrowings under the amended asset-based revolving loan facility continue to be primarily LIBOR-based.

The amended asset-based revolving loan facility contains various covenants that limit or restrict, among other things, subject to certain exceptions, capital expenditures, 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. Any time excess availability under the facility is less than 10% of the borrowing base, the amended asset-based revolving loan facility has a minimum fixed charge coverage ratio requirement. The minimum fixed charge coverage ratio is 1.00:1. At March 26, 2005, there was $179.8 million outstanding under the amended asset-based revolving loan facility, and approximately $62.6 million of remaining availability, net of $4.2 million reserved for standby letters of credit. This availability balance reflects the January 2005 borrowing of $19.0 million in connection with the termination of Mr. Cuti's SERP benefit discussed above under "Management—Contracts with Executive Officer—Mr. Cuti's Employment Agreement." There are no credit ratings related triggers in the agreement governing the amended asset-based revolving loan facility that would impact cost of borrowing, annual amortization of principal or related indebtedness maturities.

Senior Subordinated Notes

Senior Subordinated Notes. On July 30, 2004, upon completion of the Acquisition, Duane Reade Inc. and Duane Reade GP co-issued $195 million of 9³/4% senior subordinated notes due 2011. The senior subordinated notes mature on August 1, 2011 and bear interest at 9.75% per annum payable in semi-annual installments on February 1 and August 1, commencing February 1, 2005. The senior subordinated notes are uncollateralized obligations and subordinated in right of payment to all of our existing and future unsubordinated indebtedness, including borrowings under the amended asset-based revolving loan facility and the senior secured notes. The senior subordinated notes will rank equally with any future senior subordinated indebtedness and senior to any future subordinated indebtedness. The senior subordinated notes are guaranteed on an uncollateralized, senior subordinated basis by all of Duane Reade Inc.'s existing direct and indirect domestic subsidiaries other than Duane Reade GP, which is a co-obligor under the senior subordinated notes. On March 25, 2005, Duane Reade Holdings became a guarantor of the senior subordinated notes on the same basis as the other guarantors. We may redeem the senior subordinated notes,

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in whole or in part, at any time on or after August 1, 2008, at a redemption price of 104.875% declining to par on August 1, 2010, plus accrued and unpaid interest. In addition, we, Duane Reade Shareholders or Duane Reade Holdings, at our option, can redeem up to 35% of the senior subordinated notes before August 1, 2007 with the net cash proceeds from certain equity offerings. Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase all of the senior subordinated notes at 101% of the outstanding principal amount of the senior subordinated notes plus accrued and unpaid interest to the date of repurchase. The indenture governing the senior subordinated notes contains certain affirmative and negative covenants that limit the ability of Duane Reade Inc., Duane Reade GP and their restricted subsidiaries to incur additional indebtedness, pay dividends, make repayments on indebtedness that is subordinated to the senior subordinated notes and to make certain other restricted payments, incur certain liens, use proceeds from sales of assets, enter into business combination transactions (including mergers, consolidations and asset sales), enter into transactions with affiliates and permit restrictions on the payment of dividends by restricted subsidiaries. There are no credit ratings related triggers in the senior subordinated notes that would impact the cost of borrowing, annual amortization of principal or related indebtedness maturity.

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THE EXCHANGE OFFER

Suspension and Recommencement of the Exchange Offer

On February 3, 2005, we commenced the exchange offer to which this prospectus relates.

•: our predecessor company's 2000, 2001, 2002 and 2003 fiscal years,
•: all of our predecessor company's 2003 fiscal quarters,
•: our predecessor company's first two fiscal quarters of 2004,
•: our predecessor company's fiscal periods from December 28, 2003 to July 30, 2004 and from June 27, 2004 to July 30, 2004, and
•: our period from July 31, 2004 to December 25, 2004.

Terms of the Exchange Offer

We are offering to exchange the exchange notes for a like aggregate principal amount of the initial notes.

The exchange notes that will be issued in this exchange offer will be substantially identical to the initial notes except that, unlike the initial notes, the exchange notes will have no transfer restrictions or registration rights, except for certain holders, as described under the caption "Plan of Distribution." You should read the description of the exchange notes in the section in this prospectus entitled "Description of the Notes."

We reserve the right in our sole discretion to purchase or make offers for any initial notes that remain outstanding following the expiration or termination of this exchange offer and, to the extent permitted by applicable law, to purchase initial notes in the open market or privately negotiated transactions, one or more additional tender or exchange offers or otherwise. The terms and prices of these purchases or offers could differ significantly from the terms of this exchange offer. In addition, nothing in this exchange offer will prevent us from exercising our right to discharge our obligations on the initial notes by depositing certain securities with the trustee and otherwise.

Expiration Date; Extensions; Amendments; Termination

This exchange offer will expire at 5:00 p.m., New York City time, on , 2005, unless we extend it in our reasonable discretion. The expiration date of this exchange offer will be at least 20 business days after the commencement of the exchange offer in accordance with Rule 14e-1(a) under the Securities Exchange Act of 1934.

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We expressly reserve the right to delay acceptance of any initial notes, extend or terminate this exchange offer and not accept any initial notes that we have not previously accepted if any of the conditions described below under "—Conditions to the Exchange Offer" have not been satisfied or waived by us. We will notify the exchange agent of any extension by oral notice promptly confirmed in writing or by written notice. We will also notify the holders of the initial notes by mailing an announcement or by a press release or other public announcement communicated before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date unless applicable laws require us to do otherwise.

We also expressly reserve the right to amend the terms of this exchange offer in any manner. If we make any material change, we will promptly disclose this change in a manner reasonably calculated to inform the holders of the initial notes of the change including providing public announcement or giving oral or written notice to these holders. A material change in the terms of this exchange offer could include a change in the timing of the exchange offer, a change in the exchange agent and other similar changes in the terms of this exchange offer. If we make any material change to this exchange offer, we will disclose this change by means of a post-effective amendment to the registration statement which includes this prospectus and will distribute an amended or supplemented prospectus to each registered holder of initial notes. In addition, we will extend this exchange offer for an additional five to ten business days as required by the Exchange Act, depending on the significance of the amendment, if the exchange offer would otherwise expire during that period. We will promptly notify the exchange agent by oral notice, promptly confirmed in writing, or written notice of any delay in acceptance, extension, termination or amendment of this exchange offer.

Procedures for Tendering Initial Notes

Proper Execution and Delivery of Letters of Transmittal

To tender your initial notes in this exchange offer, you must use one of the three alternative procedures described below:

(1) Regular delivery procedure: Complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal. Have the signatures on the letter of transmittal guaranteed if required by the letter of transmittal. Mail or otherwise deliver the letter of transmittal or the facsimile together with the certificates representing the initial notes being tendered and any other required documents to the exchange agent on or before 5:00 p.m., New York City time, on the expiration date.

(2) Book-entry delivery procedure: Send a timely confirmation of a book-entry transfer of your initial notes, if this procedure is available, into the exchange agent's account at The Depository Trust Company in accordance with the procedures for book-entry transfer described under "—Book-Entry Delivery Procedure" below, on or before 5:00 p.m., New York City time, on the expiration date.

(3) Guaranteed delivery procedure: If time will not permit you to complete your tender by using the procedures described in (1) or (2) above before the expiration date and this procedure is available, comply with the guaranteed delivery procedures described under "—Guaranteed Delivery Procedure" below.

The method of delivery of the initial notes, the letter of transmittal and all other required documents is at your election and risk. Instead of delivery by mail, we recommend that you use an overnight or hand-delivery service. If you choose the mail, we recommend that you use registered mail, properly insured, with return receipt requested. In all cases, you should allow sufficient time to assure timely delivery. You should not send any letters of transmittal or initial notes to us. You must deliver all documents to the exchange agent at its address provided below. You may also request your broker, dealer, commercial bank, trust company or nominee to tender your initial notes on your behalf.

Only a holder of initial notes may tender initial notes in this exchange offer. A holder is any person in whose name initial notes are registered on our books or any other person who has obtained a properly completed bond power from the registered holder.

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If you are the beneficial owner of initial notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your notes, you must contact that registered holder promptly and instruct that registered holder to tender your notes on your behalf. If you wish to tender your initial notes on your own behalf, you must, before completing and executing the letter of transmittal and delivering your initial notes, either make appropriate arrangements to register the ownership of these notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time.

You must have any signatures on a letter of transmittal or a notice of withdrawal guaranteed by:

(1) a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc.,

(2) a commercial bank or trust company having an office or correspondent in the United States, or

(3) an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act, unless the initial notes are tendered:

(1) by a registered holder or by a participant in The Depository Trust Company whose name appears on a security position listing as the owner, who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal and only if the exchange notes are being issued directly to this registered holder or deposited into this participant's account at The Depository Trust Company, or

(2) for the account of a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934.

If the letter of transmittal or any bond powers are signed by:

(1) the recordholder(s) of the initial notes tendered: the signature must correspond with the name(s) written on the face of the initial notes without alteration, enlargement or any change whatsoever.

(2) a participant in The Depository Trust Company: the signature must correspond with the name as it appears on the security position listing as the holder of the initial notes.

(3) a person other than the registered holder of any initial notes: these initial notes must be endorsed or accompanied by bond powers and a proxy that authorize this person to tender the initial notes on behalf of the registered holder, in satisfactory form to us as determined in our sole discretion, in each case, as the name of the registered holder or holders appears on the initial notes.

(4) trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity: these persons should so indicate when signing. Unless waived by us, evidence satisfactory to us of their authority to so act must also be submitted with the letter of transmittal.

To effectively tender notes through The Depository Trust Company, the financial institution that is a participant in The Depository Trust Company will electronically transmit its acceptance through the Automatic Tender Offer Program. The Depository Trust Company will then edit and verify the acceptance and send an agent's message to the exchange agent for its acceptance. An agent's message is a message transmitted by The Depository Trust Company to the exchange agent stating that The Depository Trust Company has received an express acknowledgment from the participant in The Depository Trust Company tendering the notes that this participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce this agreement against this participant.

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Book-Entry Delivery Procedure

Any financial institution that is a participant in The Depository Trust Company's systems may make book-entry deliveries of initial notes by causing The Depository Trust Company to transfer these initial notes into the exchange agent's account at The Depository Trust Company in accordance with The Depository Trust Company's procedures for transfer. To effectively tender notes through The Depository Trust Company, the financial institution that is a participant in The Depository Trust Company will electronically transmit its acceptance through the Automatic Tender Offer Program. The Depository Trust Company will then edit and verify the acceptance and send an agent's message to the exchange agent for its acceptance. An agent's message is a message transmitted by The Depository Trust Company to the exchange agent stating that The Depository Trust Company has received an express acknowledgment from the participant in The Depository Trust Company tendering the notes that this participation has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce this agreement against this participant. The exchange agent will make a request to establish an account for the initial notes at The Depository Trust Company for purposes of the exchange offer within two business days after the date of this prospectus.

A delivery of initial notes through a book-entry transfer into the exchange agent's account at The Depository Trust Company will only be effective if an agent's message or the letter of transmittal or a facsimile of the letter of transmittal with any required signature guarantees and any other required documents is transmitted to and received by the exchange agent at the address indicated below under "—Exchange Agent" on or before the expiration date unless the guaranteed delivery procedures described below are complied with. Delivery of documents to The Depository Trust Company does not constitute delivery to the exchange agent.

Guaranteed Delivery Procedure

If you are a registered holder of initial notes and desire to tender your notes, and (1) these notes are not immediately available, (2) time will not permit your notes or other required documents to reach the exchange agent before the expiration date or (3) the procedures for book-entry transfer cannot be completed on a timely basis and an agent's message delivered, you may still tender in this exchange offer if:

(1) you tender through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act,

(2) on or before the expiration date, the exchange agent receives a properly completed and duly executed letter of transmittal or facsimile of the letter of transmittal, and a notice of guaranteed delivery, substantially in the form provided by us, with your name and address as holder of the initial notes and the amount of notes tendered, stating that the tender is being made by that letter and notice and guaranteeing that within three New York Stock Exchange trading days after the expiration date the certificates for all the initial notes tendered, in proper form for transfer, or a book-entry confirmation with an agent's message, as the case may be, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent, and

(3) the certificates for all your tendered initial notes in proper form for transfer or a book-entry confirmation as the case may be, and all other documents required by the letter of transmittal are received by the exchange agent within three New York Stock Exchange trading days after the expiration date.

Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes

Your tender of initial notes will constitute an agreement between you and us governed by the terms and conditions provided in this prospectus and in the related letter of transmittal.

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We will be deemed to have received your tender as of the date when your duly signed letter of transmittal accompanied by your initial notes tendered, or a timely confirmation of a book-entry transfer of these notes into the exchange agent's account at The Depository Trust Company with an agent's message, or a notice of guaranteed delivery from an eligible institution is received by the exchange agent.

All questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tenders will be determined by us in our sole discretion. Our determination will be final and binding.

We reserve the absolute right to reject any and all initial notes not properly tendered or any initial notes which, if accepted, would, in our opinion or our counsel's opinion, be unlawful. We also reserve the absolute right to waive any conditions of this exchange offer or irregularities or defects in tender as to particular notes. Our interpretation of the terms and conditions of this exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of initial notes must be cured within such time as we shall determine. We, the exchange agent or any other person will be under no duty to give notification of defects or irregularities with respect to tenders of initial notes. We and the exchange agent or any other person will incur no liability for any failure to give notification of these defects or irregularities. Tenders of initial notes will not be deemed to have been made until such irregularities have been cured or waived. The exchange agent will return without cost to their holders any initial notes that are not properly tendered and as to which the defects or irregularities have not been cured or waived as promptly as practicable following the expiration date.

If all the conditions to the exchange offer are satisfied or waived on the expiration date, we will accept all initial notes properly tendered and will issue the exchange notes promptly thereafter. Please refer to the section of this prospectus entitled "—Conditions to the Exchange Offer" below. For purposes of this exchange offer, initial notes will be deemed to have been accepted as validly tendered for exchange when, as and if we give oral or written notice of acceptance to the exchange agent.

We will issue the exchange notes in exchange for the initial notes tendered pursuant to a notice of guaranteed delivery by an eligible institution only against delivery to the exchange agent of the letter of transmittal, the tendered initial notes and any other required documents, or the receipt by the exchange agent of a timely confirmation of a book-entry transfer of initial notes into the exchange agent's account at The Depository Trust Company with an agent's message, in each case, in form satisfactory to us and the exchange agent.

If any tendered initial notes are not accepted for any reason provided by the terms and conditions of this exchange offer or if initial notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged initial notes will be returned without expense to the tendering holder, or, in the case of initial notes tendered by book-entry transfer procedures described above, will be credited to an account maintained with the book-entry transfer facility, as promptly as practicable after withdrawal, rejection of tender or the expiration or termination of the exchange offer.

By tendering into this exchange offer, you will irrevocably appoint our designees as your attorney-in-fact and proxy with full power of substitution and resubstitution to the full extent of your rights on the notes tendered. This proxy will be considered coupled with an interest in the tendered notes. This appointment will be effective only when, and to the extent that we accept your notes in this exchange offer. All prior proxies on these notes will then be revoked and you will not be entitled to give any subsequent proxy. Any proxy that you may give subsequently will not be deemed effective. Our designees will be empowered to exercise all voting and other rights of the holders as they may deem proper at any meeting of note holders or otherwise. The initial notes will be validly tendered only if we are able to exercise full voting rights on the notes, including voting at any meeting of the note holders, and full rights to consent to any action taken by the note holders.

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Withdrawal of Tenders

Except as otherwise provided in this prospectus, you may withdraw tenders of initial notes at any time before 5:00 p.m., New York City time, on the expiration date.

For a withdrawal to be effective, you must send a written or facsimile transmission notice of withdrawal to the exchange agent before 5:00 p.m., New York City time, on the expiration date at the address provided below under "—Exchange Agent" and before acceptance of your tendered notes for exchange by us.

Any notice of withdrawal must:

(1) specify the name of the person having tendered the initial notes to be withdrawn,

(2) identify the notes to be withdrawn, including, if applicable, the registration number or numbers and total principal amount of these notes,

(3) be signed by the person having tendered the initial notes to be withdrawn in the same manner as the original signature on the letter of transmittal by which these notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to permit the trustee for the initial notes to register the transfer of these notes into the name of the person having made the original tender and withdrawing the tender,

(4) specify the name in which any of these initial notes are to be registered, if this name is different from that of the person having tendered the initial notes to be withdrawn, and

(5) if applicable because the initial notes have been tendered through the book-entry procedure, specify the name and number of the participant's account at The Depository Trust Company to be credited, if different than that of the person having tendered the initial notes to be withdrawn.

We will determine all questions as to the validity, form and eligibility, including time of receipt, of all notices of withdrawal and our determination will be final and binding on all parties. Initial notes that are withdrawn will be deemed not to have been validly tendered for exchange in this exchange offer.

The exchange agent will return without cost to their holders all initial notes that have been tendered for exchange and are not exchanged for any reason, as promptly as practicable after withdrawal, rejection of tender or expiration or termination of this exchange offer.

You may retender properly withdrawn initial notes in this exchange offer by following one of the procedures described under "—Procedures for Tendering Initial Notes" above at any time on or before the expiration date.

Conditions to the Exchange Offer

We will complete this exchange offer only if:

(1) there is no change in the laws and regulations which, in our judgment, would reasonably be expected to impair our ability to proceed with this exchange offer,

(2) there is no change in the current interpretation of the staff of the Commission which permits resales of the exchange notes,

(3) there is no stop order issued by the Commission or any state securities authority suspending the effectiveness of the registration statement which includes this prospectus or the qualification of the indenture for our exchange notes under the Trust Indenture Act of 1939 and there are no proceedings initiated or, to our knowledge, threatened for that purpose,

(4) there is no action or proceeding instituted or threatened in any court or before any governmental agency or body that in our judgment would reasonably be expected to prohibit, prevent or otherwise impair our ability to proceed with this exchange offer, and

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(5) we obtain all governmental approvals that we deem in our sole discretion necessary to complete this exchange offer.

These conditions are for our sole benefit. We may assert any one of these conditions regardless of the circumstances giving rise to it and may also waive any one of them, in whole or in part, at any time and from time to time, if we determine in our reasonable discretion that it has not been satisfied, subject to applicable law. We will not be deemed to have waived our rights to assert or waive these conditions if we fail at any time to exercise any of them. Each of these rights will be deemed an ongoing right which we may assert at any time and from time to time.

If we determine that we may terminate this exchange offer because any of these conditions is not satisfied, we may:

(1) refuse to accept and return to their holders any initial notes that have been tendered,

(2) extend the exchange offer and retain all notes tendered before the expiration date, subject to the rights of the holders of these notes to withdraw their tenders, or

(3) waive any condition that has not been satisfied and accept all properly tendered notes that have not been withdrawn or otherwise amend the terms of this exchange offer in any respect as provided under the section in this prospectus entitled "—Expiration Date; Extensions; Amendments; Termination."

Accounting Treatment

We will record the exchange notes at the same carrying value as the initial notes as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. We will amortize the costs of the exchange offer and the unamortized expenses related to the issuance of the exchange notes over the term of the exchange notes.

Exchange Agent

We have appointed U.S. Bank National Association as exchange agent for this exchange offer. You should direct all questions and requests for assistance on the procedures for tendering and all requests for additional copies of this prospectus or the letter of transmittal to the exchange agent as follows:

	By registered, certified or regular mail:
	U.S. Bank National Association 60 Livingston Avenue St. Paul, MN 55107 Attention: Specialized Finance
	By hand/overnight delivery:
	U.S. Bank National Association 60 Livingston Avenue St. Paul, MN 55107 Attention: Specialized Finance
	Facsimile Transmission: (651) 495-8158
	Confirm Facsimile Transmission by Telephone: (800) 934-6802

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Fees and Expenses

We will bear the expenses of soliciting tenders in this exchange offer, including fees and expenses of the exchange agent and trustee and accounting, legal, printing and related fees and expenses.

We will not make any payments to brokers, dealers or other persons soliciting acceptances of this exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket expenses in connection with this exchange offer. We will also pay brokerage houses and other custodians, nominees and fiduciaries their reasonable out-of-pocket expenses for forwarding copies of the prospectus, letters of transmittal and related documents to the beneficial owners of the initial notes and for handling or forwarding tenders for exchange to their customers.

We will pay all transfer taxes, if any, applicable to the exchange of initial notes in accordance with this exchange offer. However, tendering holders will pay the amount of any transfer taxes, whether imposed on the registered holder or any other persons, if:

(1) certificates representing exchange notes or initial notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the notes tendered,

(2) tendered initial notes are registered in the name of any person other than the person signing the letter of transmittal, or

(3) a transfer tax is payable for any reason other than the exchange of the initial notes in this exchange offer.

If you do not submit satisfactory evidence of the payment of any of these taxes or of any exemption from this payment with the letter of transmittal, we will bill you directly the amount of these transfer taxes.

Your Failure to Participate in the Exchange Offer Will Have Adverse Consequences

The initial notes were not registered under the Securities Act or under the securities laws of any state and you may not resell them, offer them for resale or otherwise transfer them unless they are subsequently registered or resold under an exemption from the registration requirements of the Securities Act and applicable state securities laws. If you do not exchange your initial notes for exchange notes in accordance with this exchange offer, or if you do not properly tender your initial notes in this exchange offer, you will not be able to resell, offer to resell or otherwise transfer the initial notes unless they are registered under the Securities Act or unless you resell them, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. In addition, you will not necessarily be able to obligate us to register the initial notes under the Securities Act.

Delivery of Prospectus

Each broker-dealer that receives exchange notes for its own account in exchange for initial notes, where such initial notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See "Plan of Distribution."

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DESCRIPTION OF NOTES

You can find the definitions of certain terms used in this description under the caption "Certain Definitions." In this description, references to the "Company" refer only to Duane Reade Inc. and not to any of the subsidiaries of the Company, and references to "Holdings" refer only to the Company's direct parent Duane Reade Holdings, Inc. and not to any of its subsidiaries.

General

The Company and Duane Reade, a New York general partnership ("Duane Reade GP"), issued the initial notes and will issue the exchange notes under an indenture (the "Indenture") among themselves, the guarantors named therein (the "Guarantors") and U.S. Bank National Association, as trustee (the "Trustee") in a private transaction that is not subject to the registration requirements of the Securities Act. When we refer to the "Notes" in this "Description of Notes," we mean the initial notes and the exchange notes. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").

The following is a summary of the material provisions of the Indenture. It does not restate the Indenture in its entirety. We urge you to read the Indenture because it, and not this description, defines your rights as Holders of the Notes. A copy of the form of the Indenture will be made available to prospective purchasers of the Notes upon request. Certain defined terms used in this description but not defined below under "Certain Definitions" have the meanings assigned to them in the Indenture.

Brief Description of the Notes and the Guarantees

The Notes

The Notes:

•: will be general senior secured obligations of the Company and Duane Reade GP;
•: will rank equally in right of payment with all existing and any future Senior Indebtedness of the Company and Duane Reade GP;
•: will be secured, together with Term Loans, if any, and obligations under Interest Rate Agreements and certain other swap agreements permitted under the Indenture (such obligations, the "Hedging Obligations") (on an equal and ratable basis), by a first priority lien on substantially all of the assets of the Company and Duane Reade GP other than those assets in which the lenders under the Revolving Credit Agreement (the "Revolving Credit Lenders") have a first priority security interest (as defined below, the "Primary Collateral");
•: will be secured, together with Term Loans, if any, and the Hedging Obligations (on an equal and ratable basis), by a second priority lien on all collateral owned by the Company and Duane Reade GP that is pledged on a first priority basis to the Revolving Credit Lenders (as defined below, the "Secondary Collateral");
•: will rank senior in right of payment to any future Subordinated Indebtedness of the Company and Duane Reade GP; and
•: will be guaranteed by the Guarantors on a senior secured basis.