**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.**

**FORM 10-Q/A**

**Quarterly Report Pursuant to Section 13or 15 (d) of the Securities andExchange Act of 1934**
| **For the quarterly period ended March 27, 2004.** | **Commission  file number 1-13843** |
|---------------------------------------------------------|-------------------------------------|

 

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DUANE READE INC.

(Exact name of registrantas specified in its charter)

| **DELAWARE**                                                    | **04-3164702**            |
|-----------------------------------------------------------------|---------------------------|
| (State or other  jurisdiction of incorporation or organization) | (IRS Employer ID  Number) |

 

|            | **DRI I Inc.***                     | **Delaware**  | **04-3166107** |
|------------|-------------------------------------|---------------|----------------|
| ** ** | **Duane Reade***                    | **New  York** | **11-2731721** |
| ** ** | **Duane Reade International, Inc*** | **Delaware**  | **22-3672347** |
| ** ** | **Duane Reade Realty, Inc***        | **Delaware**  | **13-4074383** |

 

*                    Guarantorswith respect to the Company’s 2.1478% Senior Convertible Notes due 2022
| **440 Ninth Avenue  New York, New York**                   | **10001**  |
|------------------------------------------------------------|------------|
| (Address of  principal executive offices)                  | (Zip Code) |
| **(212) 273-5700**                                         |
| (Registrant’s  telephone number, including area code) |

 

Securities registeredpursuant to Section 12(b) of the Act:

| Title of each class                     | ** ** | **Name of each exchange on which registered** |
|-----------------------------------------|------------|-----------------------------------------------|
| Common Stock,  $.01 par value per share |       | New York Stock  Exchange                      |

 

Securities registered pursuant to Section 12 (g) ofthe Act:

**None.**

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes xNo o

Indicate by check markwhether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2):  Yes x  No o

The number of shares of the Common Stock outstandingas of May 5, 2004:  **24,471,431**

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This Form 10-Q/A amends the Company’s quarterly report on Form 10-Q for the quarterly period ended March 27, 2004, asfiled on May 6, 2004, to include adjustments to its previously filedconsolidated financial statements related to (i) lease accounting under the provisions of FASB Technical Bulletin No. 85-3 (FTB 85-3), (ii) certain inventory resale activity under theprovisions of EmergingIssues Task Force release 99-19 (EITF99-19) and (iii) the classification of outstanding borrowings underthe revolving loan facility as current liabilities, rather than as long-termdebt as previously reported, because cash receipts controlled by the lendersare used to reduce outstanding debt, and theCompany does not meet the criteria of Statement of Financial AccountingStandards No. 6 “Classification of Short Term Obligations Expectedto be Refinanced” (FAS 6), to reclassify the debt as long-term, as well as to reflect certain previouslyunrecorded and immaterial audit adjustments related to the periods affected. This Form 10-Q/A further amends the Company’squarterly report on Form 10-Q for the fiscal quarter ended March 27,2004 to include adjustments to its previously filed consolidated statement ofcash flows for the first quarter of 2004 and 2003 to reflect the reporting of revolving loanborrowings and repayments separately on a gross basis as required underStatement of Financial Accounting Standard No. 95 “Statement of Cash Flows” (FAS 95). It also amends the previously filed Form 10-Q to include in Part 1, Item 4, “Controls and Procedures,” the revisedconclusion of the principal executive officer and principal financial officerregarding the effectiveness of the Company’s disclosure controls and proceduresas of March 27, 2004. No attempt has been made in this Form 10-Q/A to modify or update other disclosures aspresented in the Form 10-Q except to conform to changes as required byapplicable law.

**INDEX**
| PART I—FINANCIAL  INFORMATION |                                                                                                                                    | 5      |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                    | ITEM 1.—FINANCIAL STATEMENTS                                                                                                       |   | 5 |
|                                    | Consolidated Statements of Operations (Unaudited)—  For the 13 Weeks Ended March 27, 2004 and March 29, 2003 (restated)  |   | 5 |
|                                    | Consolidated Balance Sheets (Unaudited)—As of March 27, 2004 and  December 27, 2003 (restated)                           |   | 6 |
|                                    | Consolidated Statements of Cash  Flows (Unaudited)—  For the 13 Weeks Ended March 27, 2004 and March 29, 2003 (restated) |   | 7 |
|                                    | Notes to Consolidated Financial  Statements (Unaudited)                                                                                 |   | 8 |
|                                    | ITEM 2.—MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                |   | 21 |
|                                    | ITEM 3.—MARKET RISK                                                                                                                |   | 29 |
|                                    | ITEM 4.—CONTROLS AND PROCEDURES                                                                                                    |   | 30 |
| PART II—OTHER INFORMATION     |                                                                                                                                    | 31     |
| SIGNATURES                              |                                                                                                                                    | 38     |

 

This and other ofour public filings or public statements contain forward-looking statementswithin the meaning of Section 27A of the Securities Act, Section 21Eof the Securities Exchange Act of 1934 and the Private Securities LitigationReform Act of 1995, that involve a number of risks and uncertainties. Thesestatements relate to future events or our future financial performance withrespect to our financial condition, results of operations, business plans andstrategies, operating efficiencies or synergies, competitive positions, growthopportunities for existing products such as private label merchandise, plansand objectives of management, capital expenditures, growth and maturation ofour stores and other matters. These statements involve known and unknown risks,uncertainties and other factors that may cause our or our industry’s actualresults, levels of activity, performance or achievements to be materiallydifferent from those expressed or implied by any forward-looking statements. Insome cases, you can 

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identifyforward-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 termsor other comparable terminology. These statements are only predictions and suchexpectations may prove to be incorrect. Some of the things that could cause ouractual results to differ substantially from our expectations are:

·       theoutcome of the legal proceedings that have been instituted against us andothers following announcement of our merger agreement with Duane ReadeAcquisition Corp. and Duane Reade Shareholders, LLC;

·       theactual terms of certain financings that will be obtained for the merger;

·       costs,fees, expenses and charges related to the merger;

·       failureto consummate the merger;

·       thecompetitive environment in the drugstore industry in general and in themetropolitan New York area;

·       theability to open and operate new stores on a profitable basis and to increasesales in existing stores;

·       thecontinued efforts of health maintenance organizations, managed careorganizations, pharmacy benefit management companies and other third partypayers to reduce prescription reimbursement rates;

·       thecontinued efforts of federal, state and municipal government agencies to reduceMedicaid reimbursement rates, modify Medicare benefits and/or reduceprescription drug costs;

·       thestrength of the economy in general and the economic conditions in themetropolitan New York area, in particular, including changes in consumerpurchasing power and/or spending patterns;

·       changesin cost of goods and services;

·       trendsin the healthcare industry, including continued conversion of variousprescription drugs to over-the-counter medications and the increasing marketshare on the part of internet-based and mail-order-based providers;

·       changesin federal and state laws and regulations, including the potential impact ofchanges in regulations surrounding the importation of pharmaceuticals fromforeign countries;

·       liabilityand other claims asserted against us including the items discussed under Part II,Item 1-Legal Proceedings;

·       changesin our operating strategy or development plans;

·       ourability to attract, hire and retain qualified personnel, including our abilityto attract qualified pharmacists;

·       oursignificant indebtedness;

·       interestrate fluctuations and changes in capital market conditions or other eventsaffecting our ability to obtain necessary financing on favorable terms to fundthe anticipated growth of our business;

·       labordisturbances, including any resulting from the suspension or termination of ourcollective bargaining agreements;

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·       thecontinued impact of, or new occurrences of, terrorist attacks in the New Yorkmetropolitan area and any actions that may be taken by federal, state ormunicipal authorities in response to or in anticipation of such occurrences;

·       changesin our acquisition and capital expenditure plans;

·       ourability to continue to secure suitable new store locations under acceptablelease terms;

·       ourability to successfully implement and manage new computer systems andtechnologies;

·       ourability to limit fraud and shrink;

·       demographicchanges; and

·       otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission (the “SEC”).

We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this filing. We do not, nor does anyother person, assume responsibility for the accuracy and completeness of thosestatements.

We caution you that the areas of risk described abovemay not be exhaustive. We operate in a continually changing businessenvironment, and new risks emerge from time to time. Management cannot predictsuch new risks, nor can it assess the impact, if any, of such risks on ourbusinesses or the extent to which any risk or combination of risks, may causeactual results to differ materially from those projected in any forward-lookingstatements. In light of these risks, uncertainties and assumptions, you shouldkeep in mind that any forward-looking statement made in this filing might notoccur.

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**PART I—FINANCIALINFORMATION**

**ITEM 1.     FINANCIAL STATEMENTS**

**Duane Reade Inc.Consolidated Statements of Operations (Unaudited)(In thousands, except per share amounts)**
| ** **                                           | ** ** | **Restated**                                   | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                           | ** ** | **For the 13 Weeks Ended** | ** ** |
| ** **                                           | ** ** | **March 27,**                             | ** ** | **March 29,** | ** ** |
| ** **                                           | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
| Net sales                                            |       | $                                              | 383,310    |   | $ | 355,994 |   |
| Cost of sales                                        |       | 306,808                                        |       | 285,414 |   |
| Gross profit                                         |       | 76,502                                         |       | 70,580 |   |
| Selling,  general & administrative expenses |       | 58,643                                         |       | 53,873 |   |
| Labor contingency  expense                           |       | 1,100                                          |       | — |   |
| Transaction  expense                                 |       | 1,102                                          |       | — |   |
| Depreciation and  amortization                       |       | 9,066                                          |       | 7,558 |   |
| Store pre-opening  expenses                          |       | 157                                            |       | 416 |   |
|                                                 |       | 70,068                                         |       | 61,847 |   |
| Operating income                                     |       | 6,434                                          |       | 8,733 |   |
| Interest expense,  net                               |       | 3,437                                          |       | 3,517 |   |
| Debt  extinguishment                                 |       | —                                         |       | 105 |   |
| Income before  income taxes                          |       | 2,997                                          |       | 5,111 |   |
| Income tax  provision                                |       | 1,245                                          |       | 1,950 |   |
| Net income                                           |       | $                                              | 1,752      |   | $ | 3,161 |   |
| Per common share—basic                          |       |                                           |       |   |   |
| Net income                                           |       | $                                              | 0.07       |   | $ | 0.13 |   |
| Weighted average common shares outstanding           |       | 24,409                                         |       | 24,038 |   |
| Per common share—diluted                        |       |                                           |       |   |   |
| Net income                                           |       | $                                              | 0.07       |   | $ | 0.13 |   |
| Weighted average  common shares outstanding          |       | 24,651                                         |       | 24,368 |   |

 

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

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**Duane Reade Inc.Consolidated Balance Sheets(Unaudited)(In thousands, except share and per share data)**
| ** **                                                                                                                      | ** ** | **Restated**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                      | ** ** | **March 27,** | ** ** | **December 27,** | ** ** |
| ** **                                                                                                                      | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ASSETS                                                                                                                          |       |               |       |   |   |   |   |   |   |
| Current Assets                                                                                                                  |       |               |       |   |   |   |   |   |   |
| Cash                                                                                                                            |       |               | $          | 1,285 |   |   |   | $ | 1,252 |   |   |
| Receivables, net                                                                                                                |       |               | 58,209     |   |   |   | 53,430 |   |   |
| Inventories, net                                                                                                                |       |               | 249,400    |   |   |   | 258,139 |   |   |
| Deferred income taxes                                                                                                           |       |               | 10,103     |   |   |   | 10,811 |   |   |
| Prepaid expenses and other current assets                                                                                       |       |               | 17,751     |   |   |   | 20,263 |   |   |
| TOTAL CURRENT ASSETS                                                                                                            |       |               | 336,748    |   |   |   | 343,895 |   |   |
| Property and equipment, net                                                                                                     |       |               | 191,055    |   |   |   | 189,469 |   |   |
| Goodwill, net                                                                                                                   |       |               | 161,625    |   |   |   | 161,318 |   |   |
| Deferred income taxes                                                                                                           |       |               | 13,393     |   |   |   | 13,854 |   |   |
| Other assets                                                                                                                    |       |               | 99,651     |   |   |   | 88,836 |   |   |
| TOTAL ASSETS                                                                                                                    |       |               | $          | 802,472 |   |   |   | $ | 797,372 |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                       |       |               |       |   |   |   |   |   |   |
| Current liabilities                                                                                                             |       |               |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                |       |               | $          | 76,837 |   |   |   | $ | 85,528 |   |   |
| Accrued interest                                                                                                                |       |               | 3,582      |   |   |   | 1,633 |   |   |
| Other accrued expenses                                                                                                          |       |               | 32,477     |   |   |   | 30,086 |   |   |
| Current portion of debt                                                                                                         |       |               | 75,438     |   |   |   | 70,353 |   |   |
| Current portion of capital lease obligations                                                                                    |       |               | 431        |   |   |   | 422 |   |   |
| TOTAL CURRENT LIABILITIES                                                                                                       |       |               | 188,765    |   |   |   | 188,022 |   |   |
| Long-term debt                                                                                                                  |       |               | 201,032    |   |   |   | 201,032 |   |   |
| Capital lease obligations, less current portion                                                                                 |       |               | 992        |   |   |   | 1,103 |   |   |
| Deferred income taxes                                                                                                           |       |               | —     |   |   |   | — |   |   |
| Other non-current liabilities                                                                                                   |       |               | 82,612     |   |   |   | 79,954 |   |   |
| TOTAL LIABILITIES                                                                                                               |       |               | 473,401    |   |   |   | 470,111 |   |   |
| Commitments and  Contingencies (Note 11)                                                                                        |       |               |       |   |   |   |   |   |   |
| Stockholders’ equity                                                                                                       |       |               |       |   |   |   |   |   |   |
| Preferred stock, $0.01 par; authorized 5,000,000  shares; issued and outstanding: none                                          |       |               | —     |   |   |   | — |   |   |
| Series A preferred stock, $0.01 par;  authorized 75,000 shares; issued and outstanding: none                               |       |               | —     |   |   |   | — |   |   |
| Common stock, $0.01 par; authorized 75,000,000  shares; issued and outstanding; 24,410,306 and 24,403,550 shares,  respectively |       |               | 244        |   |   |   | 244 |   |   |
| Paid-in capital                                                                                                                 |       |               | 331,974    |   |   |   | 331,917 |   |   |
| Retained deficit                                                                                                                |       |               | (3,147     | ) |   |   | (4,900 | ) |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                 |       |               | 329,071    |   |   |   | 327,261 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                |       |               | $          | 802,472 |   |   |   | $ | 797,372 |   |   |

 

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

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**Duane Reade Inc.Consolidated Statements of Cash Flows (Unaudited)(In thousands)**
| ** **                                                                         | ** ** | **Restated**                                   | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | **For the 13 Weeks Ended** | ** ** |
| ** **                                                                         | ** ** | **March 27,**                             | ** ** | **March 29,** | ** ** |
| ** **                                                                         | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
| Cash flows provided by operating activities:                                       |       |                                           |       |   |   |
| Net income                                                                         |       | $                                              | 1,752      |   | $ | 3,161 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                           |       |   |   |
| Depreciation and  amortization                                                     |       | 9,544                                          |       | 8,065 |   |
| Deferred income taxes                                                              |       | 1,169                                          |       | 1,950 |   |
| Debt extinguishment                                                                |       | —                                         |       | — |   |
| Non-cash rent expense                                                              |       | 1,902                                          |       | 2,460 |   |
| Changes in operating assets and liabilities (net  of the effect of acquisitions):  |       |                                           |       |   |   |
| Receivables                                                                        |       | (4,779                                         | )          | (150 | ) |
| Inventories                                                                        |       | 9,512                                          |       | (11,759 | ) |
| Accounts payable                                                                   |       | (8,690                                         | )          | 3,124 |   |
| Prepaid and accrued  expenses                                                      |       | 6,303                                          |       | 474 |   |
| Other assets and  liabilities, net                                                 |       | (4,520                                         | )          | (3,578 | ) |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                         |       | 12,193                                         |       | 3,747 |   |
| Cash flows used in investing activities:                                           |       |                                           |       |   |   |
| Capital expenditures                                                               |       | (7,862                                         | )          | (14,250 | ) |
| Lease acquisition,  customer file and other costs                                  |       | (9,257                                         | )          | (6,659 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       | (17,119                                        | )          | (20,909 | ) |
| Cash flows from financing activities:                                              |       |                                           |       |   |   |
| Repayment of term notes                                                            |       | —                                         |       | (991 | ) |
| Retirement of senior  subordinated notes                                           |       | —                                         |       | (1,621 | ) |
| Borrowings from revolving credit facility                                     |       | 391,344                                        |       | 83,000 |   |
| Repayments of revolving credit facility                                            |       | (386,259                                       | )          | (66,000 | ) |
| Proceeds from exercise of  stock options                                           |       | 56                                             |       | — |   |
| Deferred financing costs                                                           |       | (80                                            | )          | — |   |
| Repayments of capital  lease obligations                                           |       | (102                                           | )          | (158 | ) |
| NET CASH PROVIDED BY  FINANCING ACTIVITIES                                         |       | 4,959                                          |       | 14,230 |   |
| Net increase (decrease)  in cash                                                   |       | 33                                             |       | (2,932 | ) |
| Cash at beginning of period                                                        |       | 1,252                                          |       | 4,183 |   |
| Cash at end of period                                                              |       | $                                              | 1,285      |   | $ | 1,251 |   |

 

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

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**Notes to ConsolidatedFinancial Statements**(Unaudited, dollars in thousands, except per share data)

**1.**   Basis of Presentation

The Unaudited ConsolidatedInterim Financial Statements included herein reflect all adjustmentswhich, in the opinion of management, are necessary to present fairly theresults of operations, financial position and cash flows of Duane Reade Inc.(the “Company”), and have been prepared, in all material respects, inaccordance with the same accounting principles followed in the preparation ofthe Company’s annual consolidated financial statements for the year ended December 27,2003. These Unaudited Consolidated Interim Financial Statements should be readin conjunction with the Company’s financial statements included in its AnnualReport on Form 10-K for the year ended December 27, 2003 and relatedamendments. The Unaudited Consolidated Interim Financial Statements include theaccounts of the Company and its subsidiaries. All significant intercompanytransactions and balances have been eliminated. Cost of sales includes allstore occupancy-related costs and expenses, consisting of lease andsublease-related income and expenses, other recurring real estate-relatedincome and expenses primarily from sales and terminations of leases related tostore closings and relocations, sales of market-related data, store utilitycosts, warehouse expenses and distribution costs. The Company reflectspromotional allowances from vendors as a reduction of cost of sales oradvertising expense, depending on the nature of the allowance, when suchadvertising or promotions have been completed and the related allowances havebeen earned. Other recurring real estate-related income amounted to $0.8 million in the quarter ended March 27,2004 compared to $1.2 million in the quarter ended March 29,2003. There was no income realized from the sale of market related data in thefirst quarter of either 2004 or 2003. Earnings per share amounts are calculatedbased on the weighted average number of shares outstanding during the periodand may not add due to rounding. The results for the interim periods presentedare not necessarily indicative of the results expected for the full year.

The Company has no assetsor operations other than its investment in its subsidiary guarantors.Accordingly, the Unaudited Consolidated Interim Financial Statements presentthe combined assets and operations of the subsidiary guarantors. The guaranteesof the subsidiary guarantors, which relate to the Company’s obligations underits registered debt and credit agreement, are full and unconditional, joint andseveral.

2.   Restatements

TheCompany has restated its consolidated financial statements to conform certainaccounting practices to the following accounting requirements:

1.     Lease accounting under FASB Technical Bulletin No.85-3 (FTB 85-3)

2.     Gross versus net sales and cost of sales accountingunder Emerging Issues Task Force Release 99-19 (EITF 99-19)

3.     Balance sheet classification of outstanding loanborrowings under the revolving loan facility because cash receipts controlled by the lenders areused to reduce outstanding debt, and the Company does not meet the criteria underFASB No. 6 “Classification of Short-Term Obligations Expected to be Refinanced”(FAS 6) to reclassify the debt as long-term

4.     Reporting of revolving loan facility borrowings and repayments under FASB No. 95“Statement of Cash Flows” (FAS 95)

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2.   Restatements (Continued)

5.     Restatements to include certain previouslyunrecorded and immaterial audit adjustments related to the periods affected.

In connection with these restatements, the Companyobtained from the administrative agent under the amended asset-based revolvingloan facility, an acknowledgement confirming that these restatements do notconstitute an event of technical default, as defined in the document governingthe amended asset-based revolving loan facility.

Based upon a review of the Company’s leaseaccounting methods theCompany determined that its previous policy of commencing rent expense whena store opens (and not at the commencement of the lease) was inconsistent withFTB 85-3. For construction purposes, the Company often takes possession ofleased properties prior to opening. In accordance with FTB 85-3, the Company will record rent expense commencingon the date of possession. The Company is restatingits previously issued financial statements to reflect certain resales of retailinventory on a gross revenue and cost of sales basis in accordance with EITF99-19, rather than on a net basis as previously reported. TheCompany is restating its previously reported balance sheets for March 27, 2004and December 27, 2003 to reflect the classification of outstanding borrowingsunder the revolving loan facility as current liabilities rather than aslong-term debt, as previously reported. The change is being made because cashreceipts controlled by the lenders are used to reduce outstanding debt, and theCompany does not meet the criteria of FAS 6 to reclassify the debt aslong-term. This is not an indication that this credit facility is expected tobe retired within the next year. This facility expires in July 2008 and theCompany intends to continue to access it for its working capital needsthroughout the remaining term.  TheCompany has also restated its consolidated statement of cash flows for thefirst quarter of 2004 and 2003 to reflect the reporting of revolving loan facility borrowings and repayments separately on a grossbasis as required under FAS 95. The effect of these restatements on theconsolidated financial statements for the thirteen weeks ended March 27,2004 and March 29, 2003 is shown below. The Company has identified the source of therestatements from lease accounting (FTB 85-3), gross sales and cost of sales(EITF 99-19) and other previously unrecorded and immaterial adjustments(Other).

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2.   Restatements (Continued)

Duane Reade Inc.

**Consolidated Profit & Loss Restatement**

(inthousands)
|                                              | ** ** | ** **                 | ** ** | ****

**For the 13  Weeks  Ended** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | ** **                 | ** ** | **March 27,**                           | ** ** | **March 29,** | ** ** |
| ** **                                   | ** ** | ** **                 | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Sales                                        |       | as reported                |       | $                                       | 349,550    |   | $ | 333,622 |   |
|                                              |       | adjustment—EITF 99-19 |       | 33,760                                  |       | 22,372 |   |
|                                              |       | as restated                |       | $                                       | 383,310    |   | $ | 355,994 |   |
| Cost of Sales                                |       | as reported                |       | $                                       | 273,785    |   | $ | 263,433 |   |
|                                         |       | adjustment—EITF 99-19 |       | 33,760                                  |       | 22,372 |   |
|                                         |       | adjustment—FTB 85-3   |       | 308                                     |       | 639 |   |
|                                         |       | adjustment—Other      |       | (1,045                                  | )          | (1,030 | ) |
|                                         |       | as restated                |       | $                                       | 306,808    |   | $ | 285,414 |   |
| Gross Profit                                 |       | as reported                |       | $                                       | 75,765     |   | $ | 70,189 |   |
|                                              |       | adjustment—FTB 85-3   |       | (308                                    | )          | (639 | ) |
|                                              |       | adjustment—Other      |       | 1,045                                   |       | 1,030 |   |
|                                              |       | as restated                |       | $                                       | 76,502     |   | $ | 70,580 |   |
| Selling, general and administrative expenses |       | as reported                |       | $                                       | 58,643     |   | $ | 53,574 |   |
|                                         |       | adjustment—Other      |       | —                                  |       | 299 |   |
|                                         |       | as restated                |       | $                                       | 58,643     |   | $ | 53,873 |   |
| Earnings before tax                          |       | as reported                |       | $                                       | 2,260      |   | $ | 5,020 |   |
|                                              |       | adjustment                 |       | 737                                     |       | 91 |   |
|                                              |       | as restated                |       | $                                       | 2,997      |   | $ | 5,111 |   |
| Income tax provison                          |       | as reported                |       | $                                       | 904        |   | $ | 1,908 |   |
|                                         |       | adjustment                 |       | 341                                     |       | 42 |   |
|                                         |       | as restated                |       | $                                       | 1,245      |   | $ | 1,950 |   |
| Net income                                   |       | as reported                |       | $                                       | 1,356      |   | $ | 3,112 |   |
|                                              |       | adjustment                 |       | 396                                     |       | 49 |   |
|                                              |       | as restated                |       | $                                       | 1,752      |   | $ | 3,161 |   |
| Net income per common  share—basic      |       | as reported                |       | $                                       | 0.06       |   | $ | 0.13 |   |
|                                         |       | adjustment                 |       | 0.01                                    |       | — |   |
|                                         |       | as restated                |       | $                                       | 0.07       |   | $ | 0.13 |   |
| Net income per common share—diluted     |       | as reported                |       | $                                       | 0.06       |   | $ | 0.13 |   |
|                                              |       | adjustment                 |       | 0.01                                    |       | — |   |
|                                              |       | as restated                |       | $                                       | 0.07       |   | $ | 0.13 |   |

** **

10

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**2.**   Restatements(Continued)

 

Duane Reade Inc.

**Consolidated Balance Sheet Restatement**

(inthousands)
| ** **                                         | ** ** | **As at March 27, 2004** | ** ** | **As at December 27, 2003** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| **Caption affected by restatement** | ** ** | ** **                                   | ** ** | **As Reported**                            | ** ** | **Adjustment** | ** ** | ** As Restated ** | ** ** | ** As Reported ** | ** ** | ** Adjustment ** | ** ** | ** As Restated ** | ** ** |
| Receivables                                        |       |                                         | $          | 59,124                                          |       |   |   | $ | (915 | ) |   |   | $ | 58,209 |   |   |   | $ | 53,689 |   |   |   | $ | (259 | ) |   |   | $ | 53,430 |   |   |
| Inventory                                          |       |                                         | 250,029    |                                            |       |   | (629 | ) |   |   | 249,400 |   |   |   | 259,765 |   |   |   | (1,626 | ) |   |   | 258,139 |   |   |
| Current portion of deferred income taxes           |       |                                         | 7,923      |                                            |       |   | 2,180 |   |   |   | 10,103 |   |   |   | 8,150 |   |   |   | 2,661 |   |   |   | 10,811 |   |   |
| Prepaid & other current assets            |       |                                         | 17,751     |                                            |       |   | — |   |   |   | 17,751 |   |   |   | 19,504 |   |   |   | 759 |   |   |   | 20,263 |   |   |
| Total current assets                               |       |                                         | 336,112    |                                            |       |   | 636 |   |   |   | 336,748 |   |   |   | 342,360 |   |   |   | 1,535 |   |   |   | 343,895 |   |   |
| Deferred income taxes                              |       |                                         | 4,940      |                                            |       |   | 8,453 |   |   |   | 13,393 |   |   |   | 5,543 |   |   |   | 8,311 |   |   |   | 13,854 |   |   |
| Total assets                                       |       |                                         | $          | 793,383                                         |       |   |   | $ | 9,089 |   |   |   | $ | 802,472 |   |   |   | $ | 787,526 |   |   |   | $ | 9,846 |   |   |   | $ | 797,372 |   |   |
| Accounts payable                                   |       |                                         | $          | 76,837                                          |       |   |   | $ | — |   |   |   | $ | 76,837 |   |   |   | $ | 85,258 |   |   |   | $ | 270 |   |   |   | $ | 85,528 |   |   |
| Accrued expenses                                   |       |                                         | 30,981     |                                            |       |   | 1,496 |   |   |   | 32,477 |   |   |   | 27,489 |   |   |   | 2,597 |   |   |   | 30,086 |   |   |
| Current portion of debt                            |       |                                         | —     |                                            |       |   | 75,438 |   |   |   | 75,438 |   |   |   | — |   |   |   | 70,353 |   |   |   | 70,353 |   |   |
| Total current liabilities                          |       |                                         | 111,831    |                                            |       |   | 76,934 |   |   |   | 188,765 |   |   |   | 114,802 |   |   |   | 73,220 |   |   |   | 188,022 |   |   |
| Long-term debt                                     |       |                                         | 276,470    |                                            |       |   | (75,438 | ) |   |   | 201,032 |   |   |   | 271,385 |   |   |   | (70,353 | ) |   |   | 201,032 |   |   |
| Other noncurrent liabilities                       |       |                                         | 65,357     |                                            |       |   | 17,255 |   |   |   | 82,612 |   |   |   | 62,915 |   |   |   | 17,039 |   |   |   | 79,954 |   |   |
| Total liabilities                                  |       |                                         | $          | 454,650                                         |       |   |   | $ | 18,751 |   |   |   | $ | 473,401 |   |   |   | $ | 450,205 |   |   |   | $ | 19,906 |   |   |   | $ | 470,111 |   |   |
| Retained earnings                                  |       |                                         | $          | 6,515                                           |       |   |   | $ | (9,662 | ) |   |   | $ | (3,147 | ) |   |   | $ | 5,160 |   |   |   | $ | (10,060 | ) |   |   | $ | (4,900 | ) |   |
| Total stockholders’ equity                    |       |                                         | $          | 338,733                                         |       |   |   | $ | (9,662 | ) |   |   | $ | 329,071 |   |   |   | $ | 337,321 |   |   |   | $ | (10,060 | ) |   |   | $ | 327,261 |   |   |
| Total liabilities and stockholders’ equity    |       |                                         | $          | 793,383                                         |       |   |   | $ | 9,089 |   |   |   | $ | 802,472 |   |   |   | $ | 787,526 |   |   |   | $ | 9,846 |   |   |   | $ | 797,372 |   |   |
|                                                    |            |                                              |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theadjustments to other noncurrent liabilities and noncurrent deferred incometaxes relate to lease accounting under FTB 85-3.  The adjustments to debt relate to theclassification of the revolving loan balance as a current liability as discussed above. All otherbalance sheet adjustments relate to other previously unrecorded and immaterial adjustments.

11

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**2.**   Restatements (Continued)

**Duane Reade Inc.**

**Consolidated Cash Flow Restatement**

(inthousands)
| ** **                                                | ** ** | ** **  | ** ** | **For the 13 Weeks Ended** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|------------------------------------------------|------------|
| ** **                                                | ** ** | ** **  | ** ** | **March 27.**                             | ** ** | **March 29,** | ** ** |
| ** **                                                | ** ** | ** **  | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
| Net income                                                |       | as reported |       | $                                              | 1,356      |   | $ | 3,112 |   |
|                                                           |       | adjustment  |       | 396                                            |       | 49 |   |
|                                                           |       | as restated |       | $                                              | 1,752      |   | $ | 3,161 |   |
| Deferred income taxes                                     |       | as reported |       | $                                              | 830        |   | $ | 1,909 |   |
|                                                      |       | adjustment  |       | 339                                            |       | 41 |   |
|                                                      |       | as restated |       | $                                              | 1,169      |   | $ | 1,950 |   |
| Non-cash rent expense and other                           |       | as reported |       | $                                              | 1,594      |   | $ | 2,323 |   |
|                                                           |       | adjustment  |       | 308                                            |       | 137 |   |
|                                                           |       | as restated |       | $                                              | 1,902      |   | $ | 2,460 |   |
| Receivables                                               |       | as reported |       | $                                              | (5,435     | ) | $ | (150 | ) |
|                                                      |       | adjustment  |       | 656                                            |       | — |   |
|                                                      |       | as restated |       | $                                              | (4,779     | ) | $ | (150 | ) |
| Inventories                                               |       | as reported |       | $                                              | 10,509     |   | $ | (11,785 | ) |
|                                                           |       | adjustment  |       | (997                                           | )          | 26 |   |
|                                                           |       | as restated |       | $                                              | 9,512      |   | $ | (11,759 | ) |
| Accounts payable                                          |       | as reported |       | $                                              | (8,421     | ) | $ | 3,056 |   |
|                                                      |       | adjustment  |       | (269                                           | )          | 68 |   |
|                                                      |       | as restated |       | $                                              | (8,690     | ) | $ | 3,124 |   |
| Prepaid and accrued expenses                              |       | as reported |       | $                                              | 6,645      |   | $ | 693 |   |
|                                                           |       | adjustment  |       | (342                                           | )          | (219 | ) |
|                                                           |       | as restated |       | $                                              | 6,303      |   | $ | 474 |   |
| Other assets and  liabilities, net                        |       | as reported |       | $                                              | (4,428     | ) | $ | (3,476 | ) |
|                                                      |       | adjustment  |       | (92                                            | )          | (102 | ) |
|                                                      |       | as restated |       | $                                              | (4,520     | ) | $ | (3,578 | ) |
| Net borrowings  (repayments) on revolving credit facility |       | as reported |       | $                                              | 5,085      |   | $ | 17,000 |   |
|                                                      |       | adjustment  |       | (5,085                                         | )          | (17,000 | ) |
|                                                      |       | as restated |       | $                                              | —     |   | $ | — |   |
| Borrowings from  revolving credit facility                |       | as reported |       | $                                              | —     |   | $ | — |   |
|                                                      |       | adjustment  |       | 391,344                                        |       | 83,000 |   |
|                                                      |       | as restated |       | $                                              | 391,344    |   | $ | 83,000 |   |
| Repayments of revolving  credit facility                  |       | as reported |       | $                                              | —     |   | $ | — |   |
|                                                      |       | adjustment  |       | (386,259                                       | )          | (66,000 | ) |
|                                                      |       | as restated |       | $                                              | (386,259   | ) | $ | (66,000 | ) |

 

12

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**3.   Planned Merger with Oak Hill**

On December 23, 2003, the Company announced thatit had entered into a definitive merger agreement to be acquired by Duane ReadeAcquisition Corp. (“Duane Reade Acquisition”), an affiliate of Oak Hill CapitalPartners, L.P. (“Oak Hill”). Under the terms of the merger agreement, whichremains subject to the approval of the Company’s stockholders, suchstockholders would receive $17.00 per share in cash, without interest. Thepurchase price represents a 22.8% premium over the $13.84 per share averageclosing price of the Company’s common stock for the 30 trading days immediatelypreceding the announcement of the merger transaction. The aggregate value ofthe merger transaction exceeds $740 million, including the repayment ofindebtedness. The transaction was unanimously approved by the independentmembers of Duane Reade’s board of directors. The equity financing necessary forthe merger will be provided by Oak Hill and an affiliate equity fund, Oak HillCapital Management Partners, L.P. and any other investor who Oak Hill selectsto participate in the transaction as an equity co-investor. The debt financingnecessary for the merger will be provided by a syndicate of bankinginstitutions led by Banc of America Securities LLC. Mr. Anthony J. Cuti,the Company’s Chairman, President and CEO, the Company’s Senior Vice Presidentsand certain other members of management will, at the closing of thetransaction, have equity interests in the acquiring entity. The closing of thistransaction is subject to certain terms and conditions, including receipt ofstockholder approval and the proceeds from the financing to be provided bythird parties. The merger agreement is subject to a termination fee of $10.0million plus reimbursent of expenses of up to $2.0 million, all of which is tobe paid by the Company if the merger agreement is terminated under certaincircumstances.

**4.   NationalLabor Relations Board Recommendation**

The Company is a party to a National Labor RelationsBoard (“NLRB”) administrative proceeding regarding a dispute with the AlliedTrades Council over whether a negotiating impasse was reached between theCompany and the union in August of 2001. The Allied Trades Councilrepresents employees in 139 of the Company’s stores pursuant to a collectivebargaining agreement that expired on August 31, 2001. The employees havebeen working pursuant to the terms of the Company’s December 6, 2001implemented contract with the ATC, which expires on August 31, 2004. TheCompany believes an impasse did occur and as a result, the Company had theright to implement its latest contract proposal at that time which includedwage increases, health and welfare benefits, vacation and sick benefits and a401(k) retirement program. The Company discontinued making additionalpayments into the various funds associated with the union as it was providingmany of these benefits on a direct basis and because its past contributions tothese funds had caused these funds to be in a position of excessive overfunding.In addition, the Company had concerns that its past payments into these fundswere not being managed in a way to ensure they were being properly utilized forthe benefit of the Company’s employees. On February 18, 2004, anAdministrative Law Judge (“ALJ”) who had reviewed various matters related tothis proceeding issued a decision and related recommendation, which concludedthat the parties were not at impasse. The remedies recommended by the ALJincluded, among other things, a requirement for the Company to make itsemployees whole by reimbursing them for expenses ensuing from the failure tomake contributions to the union funds and to make such funds whole, plusinterest. If this recommendation is adopted by the full NLRB and enforced bythe circuit court of appeals, it could result in the Company being required tocontribute amounts that have yet to be determined into the union’s pensionbenefit, health and welfare and vacation funds. Any potential requiredcontributions resulting from a final judicial determination of this matterwould potentially be subject to offset by the amounts that the Company hadfunded since it implemented its final contract proposal for these same benefitsthat were paid for its Allied Trades Council employees. Because this is justthe first phase of a long and complicated administrative process likely to befollowed by a full judicial review of all of the facts and circumstances, thefinal outcome cannot be reliably determined at this time. The ALJ’srecommendation is not a binding order and has no force and effect of law.Rather, it is a recommendation to the full NLRB in Washington D.C., which willconduct a complete review at some point in the future and decide to uphold,reject or modify the 

13

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recommendation. The fullNLRB decision is also subject to judicial review by the circuit court ofappeals and a compliance hearing before any financial remedy can be determined.While there can be no definitive assurance, the Company has been advised by itsoutside labor counsel that it has numerous meritorious defenses and argumentsin response to the ALJ’s recommendation.

In light of the foregoing, while it is the Company’sbelief that the final financial outcome of this litigation cannot be determinedat this time, under the provisions of Statement of Financial AccountingStandard (“FAS”) No. 5 which addresses these contingencies, the Companyrecorded a pre-tax charge of $12.6 million for the year ended December 27,2003 and an additional pre-tax charge of $1.1 million in the quarter ended March 27,2004. These charges represent the current best estimate of the loss that wouldresult upon application of the ALJ’s recommendation. The Company notes thatsuch charges were based upon the facts available to it at the time. In theCompany’s opinion, such charges could be subject to significant modification inthe future, upon review by the full NLRB, the Federal Circuit Court of Appeals,completion of a compliance hearing and any appeals relating to the outcome ofthat hearing. These charges reflect the amount of contributions that theCompany did not make into the union benefit funds for the period from the August 31,2001 expiration of the contract through March 27, 2004, reduced by aportion of the benefits the Company paid directly to or for the benefit ofthese employees over the same period. It also includes an interest cost forthese net contributions from the date they would have been paid until March 27,2004. While this represents the Company’s current best estimate of the ALJ’srecommendation, the Company believes that the actual range of loss in thismatter could be from $0, if the ALJ’s recommendation is not followed toapproximately $28 million, if the ALJ’s recommendation is upheld and thereis no offset for any benefits paid over this period.

Until such time as furtherlegal developments warrant a change in the application of this accountingstandard, or until this matter is resolved, the Company will record additionalnon-cash pre-tax charges, which are calculated on the same basis as the chargerecorded in the 2003 financial statements. The Company currently estimates thatthe charge in 2004 will approximate $4.4 million.

**5.   Acquisitions**

Duringthe first quarters of fiscal 2004 and fiscal 2003, the Company acquiredpharmacy customer files, which were merged into existing stores, and theoperations, including certain lease-related assets, of a number of pharmacyestablishments, which were operated as new stores. The table below providesdetails of this acquisition activity for each of the periods presented (dollarsin millions).
| ** **                         | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **March 27,  2004**             | ** ** | **March 29,  2003** | ** ** |
| Customer  prescription files       |       |                                 | 4          |   |   |   | 4 |   |   |
| Pharmacy  establishments           |       |                                 | —     |   |   |   | 2 |   |   |
| Total  acquisitions                |       |                                 | 4          |   |   |   | 6 |   |   |
| Cash consideration                 |       |                                 | $          | 6.6 |   |   |   | $ | 5.6 |   |   |
| Purchase price allocation:         |       |                                 |       |   |   |   |   |   |   |
| Identifiable  intangibles          |       |                                 | $          | 5.7 |   |   |   | $ | 3.5 |   |   |
| Goodwill                           |       |                                 | 0.3        |   |   |   | 0.9 |   |   |
| Inventory                          |       |                                 | 0.8        |   |   |   | 0.9 |   |   |
| Property and  equipment            |       |                                 | —     |   |   |   | 0.5 |   |   |
| Other assets and  liabilities, net |       |                                 | (0.2       | ) |   |   | (0.2 | ) |   |
| Total                              |       |                                 | $          | 6.6 |   |   |   | $ | 5.6 |   |   |

 

14

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The acquired operationshave been included in the consolidated statement of operations from the date ofacquisition and did not have a material effect on sales, results of operationsor earnings per share of the Company for the periods presented.

**6.   Inventory**

At March 27, 2004,inventories, consisting solely of finished goods, would have been greater by $0.6 million if they had beenvalued on a lower of first-in, first-out (“FIFO”) cost or market basis insteadof a last-in, first-out (“LIFO”) basis.

**7.   Debt**

Debt is composed of the following(in thousands):
| ** **                                 | ** ** | ** ** | ** ** | **Restated**                 | ** ** | **Restated**                | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| **Description of Instrument**    | ** ** | ** ** | ** ** | **March 27, 2004** | ** ** | **Dec. 27, 2003** | ** ** |
| Asset-Based Revolving Loan Facility        |       |       | $          | 75,438                       |       |                        |       | $ | 70,353 |   |   |
| Total Current Debt                         |       |       | $          | 75,438                       |       |                        |       | $ | 70,353 |   |   |
| 2.1478% Senior  Convertible Notes due 2022 |       |       | $          | 201,032                      |       |                        |       | $ | 201,032 |   |   |
| Total Non-current Debt                     |       |       | $          | 201,032                      |       |                        |       | $ | 201,032 |   |   |
| **Total Debt**                             | ** ** | ** ** | **$**      | **276,470**                  |       | ** **                  | ** ** | **$** | **271,385** |   |   |

 

**2.1478% Senior Convertible Notes due April 16,2022:  **On April 16, 2002, the Company completed anoffering of $381.5 million aggregate principal amount of Senior ConvertibleNotes maturing on April 16, 2022 (the “Convertible Notes”). TheConvertible Notes were issued at a price of $572.76 per note (57.276% of theprincipal amount at maturity) and pay cash interest at the rate of 2.1478% peryear on the principal amount at maturity, payable semi-annually in arrears on April 16and October 16 of each year beginning on October 16, 2002, until April 16,2007. After that date, interest will accrue on the notes as amortization of theoriginal issue discount representing a yield to maturity of 3.75% per year,computed on a semi-annual bond equivalent basis. In December 2002, theCompany repurchased a total of $30.5 million principal value of the ConvertibleNotes at an average purchase price of $486.99 per $1,000 note, resulting in theremaining net outstanding balance of $201.0 million.

As more fully detailed in the Registration Statementon Form S-3 filed with the SEC on June 21, 2002, holders of theConvertible Notes may convert each $1,000 in principal amount of theirconvertible notes into 14.1265 shares of the Company’s common stock, subject toadjustment, only if (1) the sale price of the Company’s common stockreaches the “conversion trigger price,” as defined, of $44.60 per share, (2) thetrading price of the notes falls below 103% of the “average conversion value,”as defined, (3) the notes are called for redemption, or (4) specifiedcorporate transactions, including a consolidation, merger, or a transfer of allor substantially all of the Company’s assets have occurred. Upon conversion,the Company has the right to deliver, in lieu of its common stock, cash or acombination of cash and common stock in an amount as described in the indenture.These notes are not considered to be potential common shares, and are notincluded in the calculation of diluted earnings per share, as the Companyintends to settle any conversions in cash.

Holders of the Convertible Notes may require theCompany to purchase all or a portion of their notes on April 16, 2007 at aprice of $572.76 per note plus accrued cash interest, if any; on April 16,2012 at a price of $689.68 per note plus accrued cash interest, if any; and on April 16,2017 at a price of $830.47 per note plus accrued cash interest, if any. TheCompany may choose to pay the purchase price of such notes in cash or commonstock or a combination of cash and common stock. In addition, each holder mayrequire the Company to purchase for cash all or a portion of such holder’snotes at a price equal to the sum of the 

15

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issue price plus accruedoriginal issue discount and accrued cash interest, if any, to the date ofpurchase if the Company experiences a change of control. The Company’s plannedacquisition by Duane Reade Acquisition would result in a change of control. TheCompany expects substantially all holders will exercise this change of controlright if this transaction is consummated.

The Company may redeem for cash all or a portion ofthe convertible notes at any time after April 16, 2007, at a price equalto the sum of the issue price plus accrued original issue discount and accruedcash interest, if any, to the redemption date.

**Revolving credit facility:  **OnJuly 21, 2003, the Company completed the refinancing of the Fourth Amendedand Restated Credit Agreement entered into by the Company on July 10, 2001(the “Senior Credit Agreement”). The new credit facility (the “Credit Agreement”)is an asset-based revolving loan which uses a pre-determined percentage of thecurrent value of the Company’s inventory, customer prescription files andselected accounts receivable to calculate the availability of funds eligible tobe borrowed up to an aggregate principal amount of $200 million. Theobligations of the Company under the Credit Agreement are secured bysubstantially all of the assets of the Company. In addition, the CreditAgreement has been guaranteed by each of the Company’s corporate subsidiaries,and such guarantees are secured by substantially all assets of such guarantors.The Credit Agreement matures on July 20, 2008.

Under the Credit Agreement, approximately $103.5million was borrowed and used to repay in full the outstanding balances of TermA, Term B and revolver borrowings under the Senior Credit Agreement, as well asaccumulated interest to the repayment date and certain expenses associated withthe new financing. At March 27, 2004, there was $75.4 millionoutstanding under the revolving credit facility, and approximately $123.4million of remaining availability, net of $1.2 million reserved for standbyletters of credit. Obligations under this facility have been classified ascurrent liabilities because cash receipts controlled by the lenders areused to reduce outstanding debt, and the Company does not meet the criteria of FAS6 to reclassify the debt as long-term. The Company intends to continue to utilize thisfacility for its working capital needs though the date of its maturity in July2008. Borrowings under the Credit Agreement are principallyLIBOR-based. The margin on these borrowings is fixed at 1.75% for the firstyear, and is subject to a sliding scale adjustment thereafter, based onremaining levels of availability.

The Credit Agreementcontains a single fixed charge coverage requirement which only becomesapplicable when borrowings exceed 90 percent of the borrowing base, as definedin the Credit Agreement. Borrowings under the Credit Agreement have notexceeded 90 percent of the borrowing base and, as a result, the fixed chargecovenant did not become applicable during the period. There are no creditratings related triggers in the Credit Agreement or in the indenture related tothe Convertible Notes.

**8.   Net Income per CommonShare**

Net income per common share is based on the weightedaverage shares outstanding during each period in accordance with the provisionsof FAS No. 128 “Earnings Per Share.” Basic earnings per share is computedbased on the weighted average number of common shares outstanding during theperiod. Diluted earnings per share gives effect to all dilutive potentialcommon shares outstanding during the period. Dilutive potential common sharesinclude shares issuable upon exercise of the Company’s “in-the-money” stockoptions. Of the options to purchase 2,215,183 and 1,235,236 shares of commonstock outstanding at March 27, 2004 and March 29, 2003, respectively,options to purchase 126,485 shares at March 27, 2004 and 210,009 shares atMarch 29, 2003 were not included in the computation of diluted earningsper share because the exercise prices of such options were greater than theaverage market price of the common shares and therefore the impact of theseshares would be anti-dilutive. Dilutive potential common shares do not includeany potential shares that could be issued relative to the Company’s 2.1478%Convertible Notes (see Note 6 to these Unaudited Consolidated Interim FinancialStatements for a description of the relevant conversion terms of theConvertible Notes).

16

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Thefollowing table sets forth the computation of net income per common share forthe periods presented (in thousands, except per share amounts):
| ** **                                               | ** ** | **For the 13 Weeks Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                               | ** ** | ** March 27,   2004**           | ** ** | ** March 29,   2003** | ** ** |
| Net income (restated)                                    |       |                                           | $          | 1,752 |   |   |   | $ | 3,161 |   |   |
| Weighted average common  shares outstanding—basic   |       |                                           | 24,409     |   |   |   | 24,038 |   |   |
| Potential dilutive  shares                               |       |                                           | 242        |   |   |   | 330 |   |   |
| Weighted average common  shares outstanding—diluted |       |                                           | 24,651     |   |   |   | 24,368 |   |   |
| Net  income per common share—basic  (restated)      |       |                                           | $          | 0.07 |   |   |   | $ | 0.13 |   |   |
| Net income per common share—diluted (restated)      |       |                                           | $          | 0.07 |   |   |   | $ | 0.13 |   |   |

 

**9.   Income Taxes**

Income taxes are recordedbased on the estimated combined statutory tax rates expected to be applicablefor the full fiscal year less applicable employment related tax credits. Theeffective tax rate is lower than the combined statutory rates, primarilyreflecting the impact of these income tax credits. The effective tax rate of 41.5%recorded in the first quarter of 2004 gives effect to the New York State taxlegislation passed in May 2003 with retroactive application to January 1,2003. This legislation effectively eliminated certain royalty fee and relatedinterest expense deductions. The employment tax credits represent the economicbenefits earned by us for our participation in various Federal and state hiringincentive programs. These benefits are based on the number of qualifyingemployees hired and retained by us for a specified time period. Employeesqualify for these hiring programs primarily as a result of their enrollment invarious economic assistance programs.

****

**10.   RecentlyIssued Accounting Pronouncements**

In December 2002, FAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure” was issued. Thisstatement provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. The Company has not adopted such voluntary change to the fairvalue based method. In addition, this statement amends the disclosurerequirements of FAS No. 123 to require prominent disclosures about themethod of accounting for stock-based compensation and the effect of the methodused on reported results. As required, the Company adopted the disclosure-onlyprovisions of FAS No. 148 effective in 2002.

17

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TheCompany previously adopted FAS No. 123, “Accounting for Stock-BasedCompensation” and, as permitted under FAS No. 123, has elected thedisclosure-only provisions. The Company accounts for its stock-basedcompensation plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. There is no stock-based employee compensation cost reflectedin net income, as all options granted under those plans had an exercise priceequal to or greater than the market value of the underlying common stock on thedate of grant. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of FAS No. 123 to stock-based employee compensation (dollars inthousands):
| ** **                                                                                                                                             | ** ** | **For the 13 Weeks Ended**                         | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **   March 27,     2004** | ** ** | **   March 29,     2003** | ** ** |
| Net income, as  reported (restated)                                                                                                                    |       |                                                         | $          | 1,752 |   |   |   | $ | 3,161 |   |   |
| Adjust: Total  stock-based employee compensation (expense)/income determined under fair  value based method for all awards, net of related tax effects |       |                                                         | (1,136     | ) |   |   | 9,395 |   |   |
| Pro forma net  income (restated)                                                                                                                       |       |                                                         | $          | 616 |   |   |   | $ | 12,556 |   |   |
| Income per common share:                                                                                                                               |       |                                                         |       |   |   |   |   |   |   |
| Basic—as reported  (restated)                                                                                                                     |       |                                                         | $          | 0.07 |   |   |   | $ | 0.13 |   |   |
| Basic—pro forma (restated)                                                                                                                        |       |                                                         | $          | 0.03 |   |   |   | $ | 0.52 |   |   |
| Diluted—as reported  (restated)                                                                                                                   |       |                                                         | $          | 0.07 |   |   |   | $ | 0.13 |   |   |
| Diluted—pro forma (restated)                                                                                                                      |       |                                                         | $          | 0.02 |   |   |   | $ | 0.52 |   |   |

 

As described in previous SEC filings issued during2003, the Company cancelled 1,337,449 outstanding stock options during thefirst quarter of 2003 in connection with the Stock Option Exchange Offer. Thepro forma income shown in the table above for the three months ending March 29,2003 includes the reversal of pro forma expenses previously disclosed totaling$9.7 million, related to the granting of these original options. On October 1,2003, the Company issued 1,320,947 options at an exercise price of $16.55 pershare to replace those options exchanged in connection with the Stock OptionExchange Offer. As a result, beginning in the fourth quarter of 2003, theCompany has been incurring pro forma compensation expense which reflects thefair value of the replacement stock options granted.

The pro forma compensationincome (expense) for stock options has been estimated using the Black-Scholesoption pricing model with the following assumptions for each of the periodsshown: dividend yield of 0%, expected volatility of 50%, risk free interestrate of 6.6% and an expected term of 8 years. These pro forma disclosures maynot be representative of the effects on reported net income for future periodssince options vest over several years and options granted prior to 1995 are notconsidered.

**11.   Commitmentsand Contingencies**

The Company is party to legal actions arising in theordinary course of business. Based on information presently available tomanagement, the Company believes that it has adequate legal defenses orinsurance coverage for these actions and that the ultimate outcome of theseactions will not have a material adverse effect on the financial position,results of operation or cash flows of the Company. In addition, the Company isa party to the following legal actions and matters:

During 2002, the Company initiated a legal actionagainst its former property insurance carrier in Federal Court in the SouthernDistrict of New York, in an attempt to recover what the Company believes to bea fair and reasonable settlement for the business interruption portion of itsclaim originating from the September 11, 2001 World Trade Center terroristattack, during which the Company’s single highest volume and most profitablestore was completely destroyed. In September 2003, a trial on certainissues 

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was held regarding some ofthe matters at issue in the litigation, including whether the Company wouldhave obtained a renewal of its lease at the World Trade Center. The Company hasreceived a favorable ruling on this and other legal issues in the case and nowthe matter has moved into an appraisal process. The appraisal process involvestwo appraisers and an umpire (to resolve differences between the twoappraisers) who will determine the amount of insured loss the Company hassustained. The insurance carrier has appealed a number of the rulings by thetrial court. In light of both the early state of the appraisal process and theinherent uncertainty in litigation relating to the appeal, the amount ofadditional insurance proceeds, if any, the Company may collect under the termsof its insurance contract with the defendant cannot be reasonably predicted ordetermined at this time. In fiscal 2002, the Company received an advance ofapproximately $9.4 million toward its business interruption claim that wasrecognized as a separate component of income in the Company’s consolidated statementof income. In the event of an unfavorable outcome to the Company, this amountwould not be required to be returned to the insurance company.

The Company, Anthony J. Cuti, its Chairman, Presidentand Chief Executive Officer, John K. Henry, its Senior Vice President and ChiefFinancial Officer, and Gary Charboneau, its Senior Vice President of Sales andMarketing, have been named as defendants in connection with the consolidationof several class action complaints alleging violations of the federal securitieslaws that were filed from August 2002 through October 2002. Theaction, which is in the United States District Court for the Southern Districtof New York, is on behalf of shareholders who purchased Duane Reade Inc.’scommon stock between April 1, 2002 and July 24, 2002, inclusive. Thecomplaint, which seeks an unspecified amount of damages, alleges that thedefendants violated the federal securities laws by issuing materially false andmisleading statements during the class period. On December 1, 2003, thedistrict judge granted the Company’s motion to dismiss the plaintiff’s action,with prejudice. The plaintiffs have filed an appeal. The Company continues tobelieve that the plaintiffs’ actions are completely baseless and wholly withoutmerit, and intends to continue to vigorously defend itself.

The Company is a defendant in a class action suit inthe Federal Court for the Southern District of New York regarding allegedviolations of the Fair Labor Standards Act as to a group of individuals who provideddelivery services on a contract basis to the Company. In December 2002,the judge in the action issued a partial summary judgment in favor of asubclass of the plaintiffs and against the Company. In December 2003, theCompany settled the issue of the amount of its liability to the plaintiffswithout any admission of wrongdoing and in an amount consistent with theCompany’s previously established reserves. The amount of attorney’s fees owedto the plaintiffs’ attorneys remains an open issue in the case, and the Companyplans to vigorously defend claims by these attorneys for fees. It is notanticipated that the amount of attorneys fees that would be required to be paidin this matter would be material to the business and operations of the Company.

The Company is a party torelated 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 whereinthe funds claim that the Company did not make certain required contributions tothese funds from January 2000 through August 2001. The plaintiffshave recently filed a motion seeking summary judgment of $2.29 million ofclaims for alleged underfunding and related penalties and interest. Inaddition, at various times, the plaintiffs have stated that they believe theCompany may owe additional amounts. However, any additional amounts that theplaintiffs may claim are not known at this time. The Company has filed a motionopposing these claims. The Company believes that it has made sufficientcontributions to these funds and that it has meritorious defenses to the claimsbeing made by these funds. Accordingly, the Company intends to vigorouslydefend itself in these matters. At this time, it is not possible to determinethe ultimate outcome of this case or the actual amount of liability the Companymay face, if any.

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The Company is involved inan ongoing dispute with Cardinal Health, one of its former suppliers ofpharmaceutical products. Both parties have claims against the other involving,among other things, breach of contract, promissory estoppel and unjustenrichment. Duane Reade is seeking from Cardinal an unspecified amount ofdamages and punitive damages of at least $20 million. Cardinal is seekingapproximately $18 million in damages plus attorney’s fees and interest. Whilethere can be no definitive assurance, the Company believes it has counterclaimsthat offset the claims against it by Cardinal, as well as meritorious defensesto these claims, and plans to vigorously pursue its affirmative claims and tovigorously defend itself in this action. Non-party discovery in this case hasbeen concluded and it is expected to go to trial sometime in 2004.

The Company is involved inlitigation related to a dispute with the Allied Trades Council, a unionrepresenting employees in 139 of its stores. This litigation is more fullydescribed in Note 3 to these Unaudited Consolidated Interim FinancialStatements.

A New York State TaxAppeals Tribunal ruling in a matter involving another company may have anadverse impact upon the Company’s New York State Franchise Tax filings fromyears 1999 through 2002. This matter relates to the required combination ofaffiliated subsidiaries in recognizing royalty fee and related income forintangible property. The ruling of the Tribunal is subject to further legalappeal and interpretation in light of the Company’s own specific facts andcircumstances. The outcome of this matter, and the resulting amount ofadditional income tax expense, if any, cannot be determined by the Company atthis time.

***Litigation Relating to the Merger Transaction:  ***DuaneReade is aware of six purported class action complaints challenging the mergertransaction that have been filed in the Court of Chancery of the State ofDelaware, referred to as the “Delaware Complaints,” and three purported classaction complaints that have been filed in the Supreme Court of the State of NewYork. Two of the New York complaints have been dismissed without prejudice. Theother New York complaint (the “New York Complaint”) is pending, but has notbeen served on Duane Reade. The Delaware Complaints name Mr. Cuti andcertain other members of the Company’s board of directors and executiveofficers as well as Duane Reade as defendants. Four of the Delaware Complaintsname Oak Hill as a defendant. The New York Complaint names Mr. Cuti andcertain other members of the Company’s board of directors and executiveofficers as well as Duane Reade as defendants. One of the dismissed New Yorkcomplaints named Oak Hill as a defendant.

The Delaware Complaintswere consolidated on January 28, 2004, and on April 8, 2004 theplaintiffs in the Delaware actions filed a consolidated class action complaint(the “Consolidated Complaint”).

The Consolidated Complaintalleges that defendants failed to disclose material information in thepreliminary proxy statement, which was filed with the SEC on March 19,2004. Specifically, the Consolidated Complaint alleges that the defendantsfailed to disclose: (1) the precise nature of the “Current EmploymentAgreement Estimated Payments,” as that term is used in the preliminary proxy,and the reasons for these payments: (2) the materials and data purportedlyused by Bear Stearns in calculating the “Current Employment Agreement EstimatedPayments,” instead of the disclosure in the preliminary proxy statement thatthese calculations were “approximations based on various assumptions since theprecise amounts payable would require actuarial or other expert valuation,”even though Bear Stearns allegedly relied on these calculations; (3) themethodology, projections and other information used by Bear Stearns tocalculate the estimated present value of the company; (4) that the mergerconsideration represented an approximately 11.7% premium based upon the tradingprice of Duane Reade shares on December 22, 2003, instead of thedisclosure in the preliminary proxy that shareholders would be receiving a muchhigher premium of 22.0%. The Consolidated Complaint and the New York Complaintallege, among other things, that the defendants purportedly breached dutiesowed to Duane Reade’s stockholders in connection with the transaction byfailing to: (a) appropriately value Duane Reade as a merger candidate; (b) exposeDuane Reade to the marketplace in an effort to obtain the best transaction 

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reasonablyavailable, including to market Duane Reade to industry participants; and (c) adequatelyensure that no conflicts of interest exist between defendants’ own interestsand their fiduciary obligation to maximize stockholder value. Plaintiffs seek,among other things: an order that the complaints are properly maintainable as aclass action; a declaration that defendants have breached their fiduciaryduties and other duties; injunctive relief; an unspecified amount of monetarydamages; attorneys’ fees, costs and expenses; and such other and further reliefas the court may deem just and proper. Duane Reade believes these lawsuits arewithout merit and plans to defend these lawsuits vigorously.

**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**General**

Our business consists of a wide variety of health andbeauty care products, convenience oriented food and general merchandise itemsand a pharmacy operation managed to supply customers with their prescriptionneeds. We refer to the non-prescription portion of our business as front-endsales because most of these sales are processed through the front maincheck-out sections of our stores. This portion of our business consists ofover-the-counter medications, health and beauty care items, food and beverages,tobacco products, cosmetics, housewares, greeting cards, photofinishing, photosupplies, seasonal and general merchandise. Health and beauty care products,including over-the-counter items, represent our highest volume categorieswithin front-end sales. The front-end portion of our business represented 49.9% of our sales in the quarterended March 27, 2004 and is characterized by generally higher grossmargins that are approximately twice that of our pharmacy or back-end business.Our front-end business is generally a larger proportion of our total sales thanother major drug store chains, which average 35% to 45%, but similar to mostother drug store chains, represents a decreasing share of business year afteryear due to the faster rate of pharmacy sales growth. Our high percentage offront-end sales is driven by our convenient locations in high trafficresidential and commercial areas. Our pharmacy sales include all items we sellby prescription filled within our retail locations or in our central fillfacility and delivered to our stores or direct to customers. The pharmacyportion of our business is dominated by and dependent upon a number of thirdparty private and government-sponsored plans that contract with us as anauthorized provider of prescriptions.

Third party prescription plans represented 92.0% ofour prescription sales in the quarterended March 27, 2004. The pharmacy portion of our business is subject to anumber of federal, state and local regulations that govern the conduct of thisbusiness. Pharmacy sales have been among the fastest growing retail categoriesover the last several years due to a number of favorable demographic andindustry trends such as the aging of the population, expanding penetration ofthird party private and government-sponsored coverage and the increasing usageof prescription drugs to improve quality of life and in place of medicalprocedures. Along with the fast pace of growth in this area have come generallyhigher rates of product cost inflation, resulting in an increased focus on thepart of both government and private plans to control their costs of providingthese benefits. As a result, pharmacy gross margins have been under pressure.

During 2003, President Bush signed legislation thatwill expand Medicare coverage of senior citizens’ prescriptions. This newMedicare coverage is planned to take effect in 2006 and is expected to resultin decreased pharmacy margins resulting from lower reimbursement rates than ourcurrent margins on customer-paid cash prescriptions. In June 2004, atemporary senior citizen discount program furnished under this Medicarelegislation is expected to be implemented and will remain in effect until thefull Medicare program takes effect in 2006. This temporary program is alsoexpected to result in lower pharmacy margins than those realized from ourcustomer-paid cash prescription business.

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In fiscal 2003, New York State reduced Medicaidprescription reimbursement rates, adversely impacting our pharmacy grossmargins. Recent New York State budget proposals also include the possibility ofadditional reductions in Medicaid reimbursement rates.

While remaining one of the fastest growing retailcategories in 2003, the industry as a whole experienced substantially reducedrates of pharmacy same-store sales growth resulting from a decline in thedemand for hormonal replacement drugs, conversion of some high volumeprescription drugs to over-the-counter status, increased levels of requiredco-payments by insurers, increased utilization of lower priced genericmedications and reductions in coverage resulting from high unemployment rates.These trends continued to be operative throughout the first quarter of 2004.

We operate approximately 85% of our 243 stores in NewYork City and therefore our financial performance is heavily influenced by thelocal economy. We analyze a number of economic indicators specific to New YorkCity to gauge the health of this economy including unemployment rates, jobcreation, gross city product and bridge and tunnel commuter traffic patterns.We also analyze market share data, same-store sales trends, average store salesand sales per square foot data among other key performance indicators to monitorour overall performance.

The New York City economy continued to experiencehigher rates of unemployment than the national economy overall. March unemploymentdata for New York City indicated an unemployment rate of 7.9% compared to anational average of 5.7%. While the local economy still lags the nationaltrend, the city did not experience continued job losses during the quarter andhas begun to report a rising rate of tax revenues. These trends reflect animproved fiscal situation for the city overall that is consistent with theearly stages of an improving local economy.

In connection with the merger, the Company filed apreliminary proxy statement on March 19, 2004 and intends to fileadditional relevant materials with the SEC, including a definitive proxystatement, and the acquiring entities will file other relevant documents withthe SEC. BECAUSE THOSE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION, HOLDERS OFDUANE READE COMMON STOCK ARE URGED TO READ THEM, IF AND WHEN THEY BECOMEAVAILABLE. When filed with the SEC, they will be available for free (along withany other documents and reports filed by Duane Reade with the SEC) at itswebsite,*www.sec.gov*, and DuaneReade stockholders will receive information at an appropriate time on how toobtain the definitive proxy statement for free from Duane Reade. A specialmeeting of Duane Reade’s stockholders will be convened as soon as practicableafter the filing of definitive proxy materials with the SEC. We currentlyanticipate consummating the merger by the end of June 2004.

Duane Reade Shareholders, LLC, Duane Reade Holdings, Inc.and Duane Reade Acquisition were formed as the acquiring entities at thedirection of the equity sponsors, which currently include Oak Hill, Oak HillCapital Management Partners, L.P. and certain members of Duane Reade’smanagement. Andrew J. Nathanson and Tyler J. Wolfram are the initial directorsof each newly formed Delaware corporation. These entities and their directorsand officers may be deemed to be participants in the solicitation of proxies inconnection with the proposed transaction. As of the date of this report, Mr. Nathansonhas an indirect interest (through his participation in an investmentpartnership) of less than 1% in the outstanding shares of the common stock ofDuane Reade and none of the other forgoing participants has any direct orindirect interest, by security holdings or otherwise, in Duane Reade.

Duane Reade and itsdirectors and executive officers may be deemed to be participants in thesolicitation of proxies from its stockholders in connection with the proposedtransaction. Certain information regarding the participants and their interestin the solicitation is set forth in Duane Reade’s Amendment No.1 to its AnnualReport on Form 10-K filed with the SEC on April 26, 2004.Stockholders may obtain additional information regarding the interests of suchparticipants by reading the preliminary proxy statement and the definitiveproxy statement when it becomes available.

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Restatements

Theconsolidated financial statementsincluded herein reflect the following restatements:

(1)   On March 10,2005, as a result of changes in accounting practices required to conform to thelease accounting requirements under FASB Technical Bulletin No. 85-3(FTB 85-3) and the requirements for reporting certain revenues on a grossversus net basis under Emerging Issues Task Force release 99-19 (EITF 99-19), we filedan 8-K announcing a restatement of our previously reported financialstatements for the 2000 through 2003 fiscal years and the interim periods of2004 and 2003, up to and including the nine months ended September 25,2004. Wedetermined, based upon a review of our lease-related accounting methods, aswell as discussions with our independent auditors and Audit Committee, that ourprevious policy of commencing rent expense when a store opens (and not at thecommencement of the lease) was inconsistent with FTB 85-3. Forconstruction purposes, we often take possession of leased properties prior toopening. In accordance with FTB 85-3, we willrecord rent expense commencing on the date of possession. 

(2)   Werestated reported sales and cost of sales to reflect revenues from resales ofcertain retail inventory on a gross basis rather than on a net basis aspreviously reported. These transactions have experienced significant growthover the last few years and this change reflects the need to conform ouraccounting practice to the provisions of EITF 99-19. The restatementsrelating to the resales had no net effect on net income or cash flows fromoperations, as the amount of increase in net sales is equal to the amount ofincrease in cost of sales as theprofit margin on these sales had previously been recorded to cost of goods sold. Pharmacy same-store sales do not include suchresales. 

(3)   We have restated our previouslyreported balance sheets for March 27, 2004 and December 27, 2003 to reflect the classification ofoutstanding borrowings under the revolving loan facility as current liabilitiesrather than as long-term debt, as previously reported.  The change is being made because cashreceipts controlled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of FAS 6 to reclassify thedebt as long-term. This is not an indication that this credit facility isexpected to be retired within the next year. This facility expires in July 2008, and weintend to continue to access it for our working capital needs throughout itsremaining term.  

(4)   We have restated our consolidated statement of cashflows for the first quarter of 2004 and 2003 to reflect the reporting of revolving loan facility borrowings and repayments separately on a grossbasis as required under FAS 95.

Inaddition, we restated our financial results to include certain previouslyunrecorded and immaterial audit adjustments relating to the periods affected.These restatements are included in the discussion of our results of operationsbelow and within the Consolidated Financial Statements presented elsewhere inthis filing. See Note 2 to the Consolidated Financial Statements for a furtherdiscussion of these restatements.  In connection with these restatements, weobtained from the administrative agent under the amended asset-based revolvingloan facility, an acknowledgement confirming that these restatements do notconstitute an event of technical default, as defined in the document governingthe revolvingloan facility.

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**Results ofOperations**

For the firstquarter ended March 27, 2004, we achieved net sales of $383.3 million and net income of $1.8million or $0.07 per diluted share, comparedto net sales of $356.0 million and net income of $3.2 millionor $0.13 per diluted share in the first quarter of the previous year. Resales of pharmaceutical retail inventory were$33.8 million in the quarterended March 27, 2004, as compared to $22.4 million in the quarter ended March29, 2003. Although gross margins increased from 19.8% last year to 20.0% this year, the decline innet income is principally due to the following factors:

·       A$1.5 million increase in depreciation and amortization expense resulting fromthe depreciation of capital expenditures made in 2003 and 2004 as well asincreases in the amortization of identifiable intangibles resulting frompharmacy acquisitions completed since the first quarter of 2003;

·       Pre-taxlabor contingency expenses of $1.1 million related to a National LaborRelations Board Administrative Law Judge’s recommendation in a collectivebargaining agreement litigation related to funding of certain employee benefitfunds (see Note 3 to the Unaudited Consolidated Interim Financial Statements);

·       Pre-taxtransaction expenses of $1.1 million related to the proposed merger; and

·       Increasedlegal and litigation related expenses by $0.6 million associated with certainlabor issues, our attempt to recover the balance of our World Trade Centerbusiness interruption insurance claim and various other matters.

Thefollowing sets forth the results of operations for the periods indicated.
| ** **                                           | ** ** | **Restated**                                        | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **For the 13 Weeks Ended**                | ** ** |
| ** **                                           | ** ** | **March 27, 2004**                        | ** ** | **March 29, 2003** | ** ** |
| ** **                                           | ** ** | **Dollars**                                         | ** ** | **% of Sales** | ** ** | **Dollars** | ** ** | **% of Sales** | ** ** |
| ** **                                           | ** ** | **In thousands, except percentages** | ** ** |
| Net sales                                            |       | $                                                   | 383,310    |   |   | 100.0 | % |   | $ | 355,994 |   |   | 100.0 | % |   |
| Cost of sales                                        |       | 306,808                                             |       |   | 80.0 |   |   | 285,414 |   |   | 80.2 |   |   |
| Gross profit                                         |       | 76,502                                              |       |   | 20.0 |   |   | 70,580 |   |   | 19.8 |   |   |
| Selling, general & administrative  expenses |       | 58,643                                              |       |   | 15.3 |   |   | 53,873 |   |   | 15.1 |   |   |
| Labor contingency                                    |       | 1,100                                               |       |   | 0.3 |   |   | — |   |   | 0.0 |   |   |
| Transaction expense                                  |       | 1,102                                               |       |   | 0.3 |   |   | — |   |   | 0.0 |   |   |
| Depreciation and amortization                        |       | 9,066                                               |       |   | 2.4 |   |   | 7,558 |   |   | 2.1 |   |   |
| Store pre-opening expenses                           |       | 157                                                 |       |   | 0.0 |   |   | 416 |   |   | 0.1 |   |   |
|                                                 |       | 70,068                                              |       |   | 18.3 |   |   | 61,847 |   |   | 17.4 |   |   |
| Operating income                                     |       | 6,434                                               |       |   | 1.7 |   |   | 8,733 |   |   | 2.5 |   |   |
| Interest expense, net                                |       | 3,437                                               |       |   | 0.9 |   |   | 3,517 |   |   | 1.0 |   |   |
| Debt extinguishment                                  |       | —                                              |       |   | 0.0 |   |   | 105 |   |   | 0.0 |   |   |
| Income before income taxes                           |       | 2,997                                               |       |   | 0.8 |   |   | 5,111 |   |   | 1.4 |   |   |
| Income taxes                                         |       | 1,245                                               |       |   | 0.3 |   |   | 1,950 |   |   | 0.5 |   |   |
| Net income                                           |       | $                                                   | 1,752      |   |   | 0.5 | % |   | $ | 3,161 |   |   | 0.9 | % |   |

 

**Thirteen Weeks Ended March 27, 2004 versusThirteen Weeks Ended March 29, 2003**

Net sales were $383.3 million in the first quarterof 2004, an increase of 7.7% over net sales of $356.0 million for the firstquarter of 2003. Resale activity accountedfor 3.2% of this increase while normal retail sales to customersincreased by 4.5% over this period. Same-store sales increasedby 1.6% over the first quarter last year with the balance of the increasecoming from the full quarterly results of four net new stores opened in thefirst quarter last year and 11 net new stores opened since the end of last year’sfirst quarter.

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Pharmacy sales increasedfrom $166.2 million in the first quarterof 2003 to $192.2 million in the first quarterof 2004, an increase of 15.7%, and represented 50.1% of total sales, as comparedwith 46.7% of total sales in the firstquarter of 2003. Resale activity in 2004accounted for 6.9% of the pharmacy sales increase. Pharmacy same-store salesincreased by 6.6% over last year, and third-party reimbursed pharmacy salesrepresented 92.0% of total prescription sales compared to91.1% in the first quarter of 2003. Pharmacy same-store sales continued toexperience the general industry trend of reduced growth rates experiencedduring fiscal 2003. The major factors driving the slower sales growth rates inpharmacy were the trends toward increases in third party plan customerco-payments, reduced sales of hormonal replacement drugs, limitations onmaximum reimbursements for certain generic medications by third party plans andcontinued high rates of unemployment in our market areas that have reduced thenumber of customers covered by insured plans.

Front-end sales increased from $189.8 million in thefirst quarter of 2003 to $191.1 million in the first quarter of 2004, anincrease of 0.7%, and represented 49.9% of total sales, as comparedto 53.3% of total sales in the firstquarter of 2003. Front-end same store sales declined by 2.3%, largely due todeclining tobacco sales in metro New York City, which has experienced increasedrestrictions on smoking in public places along with higher taxes on tobaccoproducts. Excluding tobacco sales, front-end same-store sales decreased byapproximately 0.6%. We believe that the remaining decline in same-storefront-end sales is largely attributable to the continued high unemploymentrates in New York City that have restrained consumer demand.

During the first quarter of 2004, we opened three newstores and closed one store. At March 27, 2004, we operated 243 stores, ascompared to 232 stores at March 29, 2003.

Cost of sales as a percentage of net sales decreasedto 80.0% for the first quarter of2004 from 80.2% for the first quarter of2003, resulting in an increase in gross profit margin to 20.0%for the first quarter of 2004 from 19.8% for the first quarter of2003. This increase was primarily attributable to higher front-end sellingmargins and reduced shrink losses. These improvements were partially offset byhigher store occupancy costs primarily resulting from higher rent expenseattributable to new stores and store relocations. In addition, gross profit margins were negativelyimpacted by the increased resale activity, which generally has gross margins ofless than one percent of sales. Cost of sales also includes a $0.3 million LIFO provision in the current year, ascompared to a LIFO provision of $0.2 million in the prior year.

Selling, general and administrative expenses were$58.6 million, or 15.3% of net sales, and $53.9million, or 15.1% of net sales, in the firstquarters of 2004 and 2003, respectively. Themodest increase in the percentage of sales reflects the impact of increasedresale activity, which had the effect of reducing our operating expense ratiosto sales. Because resale activity does not incur any significant selling, generaland administrative costs, we believe it is more informative to discuss suchcosts as a percentage of sales, excluding such resale activity. Excluding theimpact of the resale activity, SG&A expenses for the first quarter of 2004and 2003 were 16.8% and 16.1% of net sales, respectively.  The increase in these expenses asa percentage of sales is primarily attributable to the higher legal andlitigation related expenses discussed above, increased promotional andadvertising expenses, severance costs associated with certain administrativestaff reductions and higher insurance costs.

Depreciation and amortization of intangibles in thefirst quarters of 2004 and 2003 were $9.1 million and $7.6 million,respectively. This increase resulted from the depreciation of capitalexpenditures made in 2003 and 2004 as well as increases in the amortization ofidentifiable intangibles resulting from pharmacy acquisitions completed sincethe first quarter of 2003.

We incurred store pre-opening expenses of $0.2 millionduring the first quarter of 2004 related to the opening of three new stores. Duringthe comparable period last year, we incurred pre-opening expenses of $0.4million related to the opening of seven new stores.

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Net interest expense decreased 2.3% to $3.4 million inthe first quarter of 2004 from $3.5 million in the first quarter of 2003. Thisdecline was primarily attributable to the lower average interest rates on ouroutstanding revolving credit borrowings in the current year, as compared to theinterest rates incurred on our revolving credit and term loan borrowings in theprior year.

In the first quarter of 2003, we recorded a debtextinguishment charge of $0.1 million, reflecting the payment of earlytermination premiums related to the retirement of the $1.6 million outstandingbalance of the 9.25% senior notes and the write-off of the remaining deferredfinancing costs associated with those notes.

In the first quarter of2004, we recorded an income tax provision of $1.2 million, reflecting anestimated annual effective tax rate of 41.5%, inclusive of the anticipatedbenefits of employment tax credits. In the comparable period last year, theincome tax provision of $2.0 million reflected an estimatedeffective tax rate of 38.2%, inclusive of the anticipatedbenefits of employment tax credits. The increase in the effective tax ratereflects New York State legislation passed in May 2003 which eliminatedcertain tax deductions attributable to royalty companies. The employment taxcredits represent the economic benefits earned by us for our participation invarious Federal and state hiring incentive programs.

**Liquidity and Capital Resources**

Working capital was $148.0 million as of March 27,2004 and 155.9 million as of December 27, 2003. Working capital reflects theclassification of outstandingborrowings under our revolving loan facility of $75.4 million at March 27, 2004 and $70.4million at December 27, 2003 as current liabilities. This currentclassification is required becausecash receipts controlled by the lenders are used to reduce outstanding debt, and we did not meet the criteria of FAS 6 to reclassify thedebt as long-term  but isnot 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 itfor our working capital needs throughout its remaining term.

For the first quarter of2004, net cash provided by operating activities was $12.2 million, as comparedto $3.7 million in the first quarter of 2003. The increase was principally dueto reduced merchandise purchases during this year’s first quarter and the collectionof certain property insurance recoveries.

Net cash used in investingactivities was $17.1 million during the first quarter of 2004, compared to$20.9 million during the first quarter of 2003. In the first quarter of 2004,capital expenditures, primarily related to new store openings and theremodeling of existing locations, amounted to $7.9 million, while leaseacquisition, pharmacy customer file and other costs accounted for $9.2 millionof cash used in investing activities. In the first quarter of 2003, we spent$14.2 million on capital expenditures and $6.7 million on lease acquisition,pharmacy customer file and other costs.

Net cash provided byfinancing activities was $5.0 million for the first quarter of 2004, comparedto $14.2 million for the first quarter of 2003. The decrease primarily reflectsthe improved level of cash flow generated by operations.

Our capital requirementsprimarily result from opening and stocking new stores, remodeling andrenovating existing retail locations, purchasing pharmacy files and thecontinuing development of management information systems. We believe that thereare significant opportunities to open additional stores, and currently plan toopen approximately 12 - 14 additional new stores during the remainder of thisyear (a total of 15 - 17 for all of 2004), and 10-12 new stores in fiscal2005. We expect to spend approximately $40.0 million in 2004 on capitalexpenditures, primarily for new, renovated and replacement stores, and anadditional $14 to $16 million for lease acquisition, pharmacy customer file andother costs. We also require working capital to support inventory for ourexisting and new stores. Historically, we have been able to lease most of ourstore locations.

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Leases for 10 of ourstores that generated 4.1% of our net sales for fiscal 2003 are scheduled toexpire before the end of 2005. One of these leases has a renewal option. Webelieve that we will be able to renew the expiring leases on economicallyfavorable terms or, alternatively, find other economically attractive locationsto lease.

As of March 27, 2004,approximately 5,600 of our approximately 6,100 employees were represented byvarious labor unions and were covered by collective bargaining agreements.Pursuant to the terms of the collective bargaining agreements covering theseemployees, we are required, in some instances, to pay specified annualincreases in salary and benefits contributions relating to the memberemployees. We do not believe that these increases will have a material impacton our liquidity or results of operations. Our collective bargaining agreementwith Local 340A New York Joint Board, UNITE AFL-CIO (“UNITE”), who representsapproximately 700 of our employees in 113 stores, expired on March 31,2004. The terms of the expired contract have been extended by the mutualconsent of UNITE and Duane Reade through May 31, 2004 while we continue tonegotiate the terms of a new agreement.

Under an employmentagreement with our Chairman and CEO originally entered into in 1997 andsubsequently amended in 2000 and 2001, and then amended and restated in 2002,we are required to fund premiums for a split dollar life insurance policy thatwill provide certain post-retirement benefits. During fiscal 2002 and fiscal2003, the premiums amounted to $4.0 million and $5.0 million,respectively, and are scheduled to remain at $5.0 million per year through2010. The premiums have been established at a level anticipated to besufficient to cover the full amount of the projected retirement benefits, aswell as to return the full cost of the premiums plus a 3% rate of interest tous. Recent Sarbanes-Oxley legislation has resulted in the need for additionalguidance concerning the permissibility of split dollar life insurance policiesfor executives. While we believe this split dollar policy is permitted undercurrent interpretations of the legislation, there can be no assurance thatfurther interpretations or guidance to be provided by the SEC concerning thislegislation will concur.

Our planned acquisition byDuane Reade Acquisition will be financed as an all cash transaction whereby ourstockholders will receive $17.00 per share outstanding, without interest, onthe date of the closing, which is expected to occur during the second calendarquarter of 2004. The total transaction value, including the repayment ofindebtedness and transaction-related expenses is approximately$742 million, which will be funded through new equity investments ofapproximately $242 million and debt of approximately $500 million.Upon closing, we expect to have approximately $90 million of borrowingavailability under an amendment to our revolving credit facility (the “CreditAgreement”) and no debt amortization requirements or significant maturitiesuntil July 2008.

Our debt structure has twoprimary components, senior convertible notes (“Convertible Notes”) and theCredit Agreement. The Convertible Notes were issued on April 16, 2002 at adiscounted value equivalent to 57.276% of face value. The Convertible Notes paycash interest semiannually at a rate of 2.1478% of face value for the firstfive years and thereafter accrue original issue discount at a semi-annual bondequivalent rate of 3.75% yield to maturity on April 16, 2022. TheConvertible Notes are convertible into shares of our common stock upon theoccurrence of certain specified events. Holders of the Convertible Notes mayrequire us to purchase all or a portion of the Convertible Notes on each of the5, 10 and 15-year anniversaries of the issuance date at pre-specifiedprices. We may redeem for cash all or a portion of the Convertible Notes at anytime after April 16, 2007 at a price equal to the sum of the issue priceplus accrued original issue discount and accrued cash interest, if any, to theredemption date. The Credit Agreement, which we entered into on July 21,2003, is an asset-based revolving loan which uses a pre-determined percentageof the current value of our inventory, customer prescription files and selectedaccounts receivable to calculate the availability of funds eligible to beborrowed, up to an aggregate principal amount of $200 million. Borrowings underthis facility are principally LIBOR-based, with the margin fixed at 1.75% forthe first year and subject to a sliding scale adjustment thereafter, based onremaining levels of availability. This facility matures on July 20, 2008.

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We believe that, based oncurrent levels of operations and anticipated growth, cash flow from operations,together with other available sources of funds, including revolving loanborrowings under our Credit Agreement, will be adequate for at least the nexttwo years to make required payments of principal and interest on ourindebtedness, to fund anticipated capital expenditures and to satisfy ourworking capital requirements. We base this belief on our existing levels ofcash flow from operations of approximately $40 million annually and significantadditional borrowing capacity under our Credit Agreement which amounted to over$120 million at March 27, 2004. Our ability to meet our debt serviceobligations and reduce our total debt will depend upon our future performancewhich, in turn, will be subject to general economic, financial, business,competitive, legislative, regulatory and other conditions, many of which arebeyond our control. In addition, we cannot assure you that our operatingresults, cash flow and capital resources will be sufficient for repayment ofour indebtedness in the future. Such risks that could adversely affect ourability to meet our debt service obligations include but are not limited toreductions in third party prescription reimbursement rates, further declines inthe New York City economy, increases in competitive activity, additionalbusiness adverse legislative changes or a major disruption of business in ourmarkets from a terrorist event or natural disaster. Our borrowings under ourCredit Agreement bear interest at floating rates. Therefore, our financialcondition will be affected by changes in prevailing interest rates. As of March 27,2004, we had $75.4 million of borrowings outstanding under our asset-basedrevolving credit agreement and there was $123.4 million of remainingavailability, net of $1.2 million reserved for outstanding Standby Letters ofCredit. Obligations under thisfacility have been classified as current liabilities because cash receiptscontrolled by the lenders are used to reduce outstanding debt, and we do not meet the criteria of FAS 6 to reclassify thedebt as long-term. We intend to continue to utilize this facility for our working capital needs throughthe date of its maturity in July 2008.

The Credit Agreementcontains a single fixed charge coverage requirement which only becomesapplicable when borrowings exceed 90 percent of the borrowing base, as definedin the Credit Agreement. Borrowings under the Credit Agreement have notexceeded 90 percent of the borrowing base and, as a result, the fixed chargecovenant did not become applicable during the period. There are no credit ratingsrelated triggers in the Credit Agreement or in the indenture related to theConvertible Notes.

There have been nomaterial changes in the Contractual Obligations and Commitments disclosed inour Annual Report on Form 10-K, and related amendments, for the yearended December 27, 2003, except that we paid the annual $5.0 millionpremium due in connection with the CEO Split Dollar Life Insurance Policy. Theremaining fixed premium obligation under the terms of this policy amounts to$30.0 million.

We are party tomulti-year, merchandise supply agreements in the normal course of business. Thelargest of these agreements is with AmerisourceBergen, our primarypharmaceutical supplier. Generally, these agreements provide for certain volumecommitments and may be terminated by us, subject in some cases to specifiedtermination payments, none of which would constitute a material adverse effecton our financial position, results of operations or cash flows. It is theopinion of management that if any of these agreements were terminated or if anycontracting party was to experience events precluding fulfillment of itsobligations, we would be able to find a suitable alternative supplier.

In addition to Mr. Cuti’spost-retirement benefits discussed above, in the event of a change of controlor our failure to renew Mr. Cuti’s current employment agreement thatexpires on December 31, 2004, we will be required to pay severancebenefits equal to five times the “earnings amount” of approximately$4.1 million (based upon the sum of Mr. Cuti’s current annual salary,maximum incentive bonus and a supplemental non-compete payment).

At March 27, 2004 werecorded a litigation-related non-current liability of $13.7 million inconnection with a National Labor Relations Board Administrative Law Judgerecommendation in a litigation-related matter with the Allied Trades Council, aunion representing employees in 139 of our stores. Because this recommendationis only the initial phase of a complex administrative and judicial process, theultimate outcome, financial impact and related timing of any future cashdisbursement relating to this matter can 

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not bedetermined at this time. This matter is more fully described in Note 3 tothe Unaudited Consolidated Interim Financial Statements.

We are not a party to anyagreements with, or commitments to, any special purpose entities that wouldconstitute material off-balance sheet financing other than the operating leasecommitments detailed in the Contractual Obligations and Commitments table presentedin our Annual Report on Form 10-K for the year ended December 27,2003 and related amendments.

**Critical Accounting Policies**

Our discussion of resultsof operations and financial condition relies on our consolidated financialstatements that are prepared based on certain critical accounting policies thatrequire management to make judgements and estimates that are subject to varyingdegrees of uncertainty. We believe that investors need to be aware of thesepolicies and how they impact our financial reporting to gain a more completeunderstanding of our consolidated financial statements as a whole, as well asour related discussion and analysis presented herein. While we believe thatthese accounting policies are grounded on sound measurement criteria, actualfuture events can and often do result in outcomes that can be materiallydifferent from these estimates or forecasts. The accounting policies andrelated risks described in our Annual Report on Form 10-K for theyear ended December 27, 2003 and related amendments are those that dependmost heavily on these judgments and estimates. At March 27, 2004, therehave been no material changes to any of the Critical Accounting Policiescontained therein.

**Seasonality**

In general, sales ofdrugstore items such as prescription drugs, over-the-counter drugs and healthand beauty care products exhibit limited seasonality in the aggregate, but dovary by product category. Quarterly results are primarily affected by thetiming of new store openings and the sale of seasonal products, with theChristmas holiday season generating a higher proportion of sales and earningsthan other periods.

**Recently IssuedAccounting Pronouncements**

In December 2002,SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”was issued. This statement provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. We have not adopted such voluntary change to the fairvalue based method. In addition, this statement amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures about themethod of accounting for stock-based compensation and the effect of the methodused on reported results. As required, we adopted the disclosure-onlyprovisions of FAS No. 148 effective in 2002.

**ITEM 3.**                MARKET RISK

Our financial results are subject to risk frominterest rate fluctuations on debt, which carries variable interest rates.Variable rate debt outstanding under our Credit Agreement was approximately$75.4 million at March 27, 2004. At March 27, 2004, the weightedaverage combined interest rate in effect on all borrowings under the CreditAgreement was 2.85%. A 0.50% change in interest rates applied to the $75.4million balance of floating rate debt would affect pre-tax annual results ofoperations by approximately $0.4 million. In addition, we also have $201.0million of Convertible Notes outstanding at March 27, 2004. TheConvertible Notes bear interest payable semi-annually at a fixed rate of 3.75%,and are therefore not subject to risk from interest rate fluctuations.

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

ITEM 4.CONTROLS AND PROCEDURES

(a)   *Evaluation of DisclosureControls and Procedures*.   An evaluation was carried out under the supervisionand with the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as ofthe end of the period covered by this quarterly report. Based upon thatevaluation, the Company’s management, including the Chief Executive Officer andChief Financial Officer, have each concluded that the design and operation ofthese disclosure controls and procedures were not effective as of the end ofthe period covered by this report based on the identification of materialweaknesses in the Company’s internal control over financial reporting describedin the Company’s Annual Report on Form 10-K/A filed on May 16, 2005.  This conclusion has been changed from thedisclosure in the Company’s original Form 10-Q filing. For a discussion of the reasons and matters on which these conclusionswere based, as well as the subsequent actions taken by the Company tostrengthen its controls and procedures in these areas, see Item 9A of theCompany’s Annual Report on Form 10-K/A for the fiscal year ended December 25,2004, filed on May 16, 2005.

(b)      *Changes in InternalControls over Financial Reporting*.   No changes in our internal control over financialreporting ( as defined in Rule 13a-15(f) or 15d-15(f) under the SecuritiesExchange Act of 1934) occurred during our last fiscal quarter covered by thisquarterly report that have materially affected, or are reasonably assured tomaterially affect, our internal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

**ITEM1.**                Legal Proceedings

We are party to legal actions arising in the ordinarycourse of business. Based on information presently available to us, we believethat we have adequate legal defenses or insurance coverage for these actionsand that the ultimate outcome of these actions will not have a materiallyadverse effect on the financial position, results of operations or cash flowsof our company. In addition, we are a party to the following legal actions andmatters:

During 2002, we initiated a legal action against ourformer property insurance carrier, in an attempt to recover what we believe tobe a fair and reasonable settlement for the business interruption portion ofour claim originating from the September 11, 2001 World Trade Centerterrorist attack, during which our single highest volume and most profitablestore was completely destroyed. In September 2003, a trial on certainissues 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 WorldTrade Center. We have received a favorable ruling on this and other legalissues in the case and now the matter has moved into an appraisal process. Theappraisal process involves two appraisers and an umpire (to resolve differencesbetween the two appraisers) who will determine the amount of insured loss wehave sustained. The insurance carrier has appealed a number of rulings by thetrial court. In light of both the early stage of the appraisal process and theinherent uncertainty in litigation relating to our appeal, the amount ofadditional insurance proceeds, if any, that we may collect under the terms ofour insurance contract with the defendant cannot be reasonable predicted ordetermined at this time. In fiscal 2002, we received an advance ofapproximately $9.4 million toward the business interruption claim that wasrecognized as a separate component of income in the consolidated statement ofincome. In the event of an unfavorable outcome to us, this amount would not berequired to be returned to the insurance company.

Duane Reade Inc., Anthony J. Cuti, our Chairman,President and Chief Executive Officer, John K. Henry, our Senior Vice Presidentand Chief Financial Officer and Gary Charboneau, our Senior Vice President ofSales and Marketing have been named as defendants in connection with theconsolidation of several class action complaints alleging violations of thefederal securities laws that were filed from August 2002 through October 2002.The action, which is in the United States District Court for the SouthernDistrict of New York, is on behalf of shareholders who purchased our commonstock between April 1, 2002 and July 24, 2002, inclusive. Thecomplaint, which seeks an unspecified amount of damages, alleges that thedefendants violated the federal securities laws by issuing materially false andmisleading statements during the class period. On December 1, 2003, thedistrict judge granted our motion to dismiss the plaintiffs’ action, withprejudice. The plaintiffs have filed an appeal. We continue to believe that theplaintiff’s actions are completely baseless and wholly without merit, andintend to continue to vigorously defend ourselves.

We are a defendant in a class action suit in theFederal Court for the Southern District of New York regarding allegedviolations of the Fair Labor Standards Act as to a group of individuals whoprovided delivery services on a contract basis to us. In December 2002,the judge in the action issued a partial summary judgment in favor of asubclass of the plaintiffs and against us. In December 2003, we settledthe issue of the amount of our liability to the plaintiffs without anyadmission of wrongdoing and in an amount consistent with our previouslyestablished reserves. The amount of attorney’s fees owed to the plaintiffs’attorneys remains an open issue in the case and we plan to vigorously defendclaims by these attorneys for fees. It is not anticipated that the amount of attorneysfees that would be required to be paid in this matter would be material to ourbusiness and operations.

We are a party to a National Labor Relations Board(NLRB) administrative proceeding regarding a dispute with the Allied TradesCouncil over whether a negotiating impasse was reached between us and the unionin August of 2001. The Allied Trades Council represents employees in 139of our stores in a 

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collective bargainingagreement that expired on August 31, 2001. Our employees have been workingpursuant to the terms of our December 6, 2001 implemented contract withthe ATC, which expires on August 31, 2004. We believe an impasse did infact occur and as a result, we had the right to implement our latest contractproposal at that time which included wage increases, health and welfarebenefits, vacation and sick benefits and a 401k retirement program. Wediscontinued making additional payments into the various funds associated withthe union as we were providing many of these benefits on a direct basis andbecause our past contributions to these funds had caused these funds to be in aposition of excessive overfunding. In addition, we had concerns that our pastpayments into these funds were not being managed in a way to ensure they werebeing properly utilized for the benefit of our employees. On February 18,2004, an Administrative Law Judge (“ALJ”) who had reviewed various mattersrelated to this proceeding issued a decision and related recommendation, whichconcluded that the parties were not at impasse. The remedies recommended by theALJ included, among other things, a requirement for us to make our employeeswhole by reimbursing them for expenses ensuing from the failure to makecontributions to the union funds and to make such funds whole, plus interest.If this recommendation is adopted by the full NLRB and enforced by the circuitcourt of appeals, it could result in our being required to contribute amountsthat have yet to be determined into the union’s pension benefit, health andwelfare and vacation funds. Any potential required contributions resulting froma final judicial determination of this matter would potentially be subject tooffset by the amounts that we had funded since we implemented our finalcontract proposal for these same benefits that were paid for our Allied TradesCouncil employees. Because this is just the first phase of a long andcomplicated administrative process likely to be followed by a full judicialreview of all of the facts and circumstances, the final outcome cannot bereliably determined at this time. The ALJ’s recommendation is not a bindingorder and has no force and effect of law. Rather, it is a recommendation to thefull NLRB in Washington D.C., which will conduct a complete review at somepoint in the future and decide to uphold, reject or modify the recommendation.The full NLRB decision is also subject to judicial review by the circuit courtof appeals and a compliance hearing before any financial remedy can bedetermined. While there can be no definitive assurance, we have been advised byour outside labor counsel that we have numerous meritorious defenses andarguments in response to the ALJ’s recommendation.

In light of the foregoing, while it is our belief thatthe final financial outcome of this litigation cannot be determined, under theprovisions of Statement of Financial Accounting Standard (“FAS”) No. 5which addresses these contingencies, we recorded a pre-tax charge of$12.6 million for the year ended December 27, 2003 and an additionalpre-tax charge of $1.1 million in the quarter ended March 27, 2004. Thesecharges represent our current best estimate of the loss that would result uponapplication of the ALJ’s recommendation. We note that such charges were basedupon the facts available to us at the time. In our opinion, such charges couldbe subject to significant modification in the future, upon review by the fullNLRB, the Federal Circuit Court of Appeals, completion of a compliance hearingand any appeals relating to the outcome of that hearing. These charges reflectthe amount of contributions that we did not make into the union benefit fundsfor the period from the August 31, 2001 expiration of the contract throughMarch 27, 2004, reduced by a portion of the benefits we paid directly toor for the benefit of these employees over the same period. It also includes aninterest cost for these net contributions from the date they would have beenpaid until March 27, 2004. While this represents our best estimate of theALJ’s recommendation, we believe that the actual range of loss in this mattercould be from $0, if the ALJ’s recommendation is not followed, to approximately$28 million, if the ALJ’s recommendation is upheld and there is no offsetfor any benefits paid over this period.

Until such time as further legal developments warranta change in the application of this accounting standard, or until this matteris resolved, we will record additional non-cash pre-tax charges, which arecalculated on the same basis as the charges recorded in the 2003 financialstatements. We currently estimate that the charge in 2004 will approximate $4.4million.

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We are a party to related lawsuits, Irving Kroop, etal v. Duane Reade, NY, NY et al, 00 Civ. 9841, et al., instituted by thetrustees of several union benefit funds wherein the funds claim that we did notmake certain required contributions to these funds from January 2000through August 2001. The plaintiffs have recently filed a motion seekingsummary judgment of $2.29 million of claims for alleged underfunding andrelated penalties and interest. In addition, at various times, the plaintiffshave stated that they believe we may owe additional amounts. However, anyadditional amounts that the plaintiffs may claim are not known at this time. Wehave filed a motion opposing these claims. We believe that we have madesufficient contributions to these funds and that we have meritorious defensesto the claims being made by these funds. Accordingly, we intend to vigorouslydefend ourselves in these matters. At this time, it is not possible todetermine the ultimate outcome of this case or the actual amount of liabilitywe may face, if any.

We are involved in an ongoing dispute with CardinalHealth, one of our former suppliers of pharmaceutical products. Both partieshave claims against the other involving, among other things, breach ofcontract, promissory estoppel and unjust enrichment. Duane Reade is seekingfrom Cardinal an unspecified amount of damages and punitive damages of at least$20 million. Cardinal is seeking approximately $18 million in damages plusattorney’s fees and interest. While there can be no definitive assurance, webelieve we have counterclaims that offset the claims against us by Cardinal, aswell as meritorious defenses to these claims, and plan to vigorously pursue ouraffirmative claims and to vigorously defend ourself in this action. Non-partydiscovery in the case has concluded and it is expected to go to trial sometimein 2004.

A New York State TaxAppeals Tribunal ruling in a matter involving another company may have anadverse impact upon our New York State Franchise Tax filings from years 1999through 2002. This matter relates to the required combination of affiliatedsubsidiaries in recognizing royalty fee and related income for intangible property.The ruling of the Tribunal is subject to further legal appeal andinterpretation in light of our own specific facts and circumstances. Theoutcome of this matter, and the resulting amount of additional income taxexpense, if any, cannot be determined by us at this time.

***Litigation Relating to the Merger Transaction***

We are aware of six purported class action complaintschallenging the merger transaction that have been filed in the Court ofChancery of the State of Delaware, referred to as the “Delaware Complaints,”and three purported class action complaints that have been filed in the SupremeCourt of the State of New York. Two of the New York complaints have beendismissed without prejudice. The other New York complaint (the “New YorkComplaint”) is pending, but has not been served on Duane Reade. The DelawareComplaints name Mr. Cuti and certain other members of our board ofdirectors and executive officers as well as us as defendants. Four of theDelaware Complaint names Oak Hill as a defendant. The New York Complaint names Mr. Cutiand certain other members of our board of directors and executive officers aswell as us as defendants. One of the dismissed New York complaints named OakHill as a defendant.

The Delaware Complaints were consolidated on January 28,2004, and on April 8, 2004 the plaintiffs in the Delaware actions filed aconsolidated class action complaint (the “Consolidated Complaint”).

The Consolidated Complaintalleges that defendants failed to disclose material information in the preliminaryproxy statement, which was filed with the SEC on March 19, 2004. Specifically,the Consolidated Complaint alleges that the defendants failed to disclose: (1) theprecise nature of the “Current Employment Agreement Estimated Payments,” asthat term is used in the preliminary proxy, and the reasons for these payments:(2) the materials and data purportedly used by Bear Stearns in calculatingthe “Current Employment Agreement Estimated Payments,” instead of thedisclosure in the preliminary proxy statement that these calculations were “approximationsbased on various assumptions since the 

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preciseamounts payable would require actuarial or other expert valuation,” even thoughBear Stearns allegedly relied on these calculations; (3) the methodology,projections and other information used by Bear Stearns to calculate theestimated present value of the company; (4) that the merger considerationrepresented an approximately 11.7% premium based upon the trading price ofDuane Reade shares on December 22, 2003, instead of the disclosure in thepreliminary proxy that shareholders would be receiving a much higher premium of22.0%. The Consolidated Complaint and the New York Complaint allege, amongother things, that the defendants purportedly breached duties owed to DuaneReade’s stockholders in connection with the transaction by failing to: (a) appropriatelyvalue Duane Reade as a merger candidate; (b) expose Duane Reade to themarketplace in an effort to obtain the best transaction reasonably available,including to market Duane Reade to industry participants; and (c) adequatelyensure that no conflicts of interest exist between defendants’ own interestsand their fiduciary obligation to maximize stockholder value. Plaintiffs seek,among other things: an order that the complaints are properly maintainable as aclass action; a declaration that defendants have breached their fiduciaryduties and other duties; injunctive relief; an unspecified amount of monetarydamages; attorneys’ fees, costs and expenses; and such other and further reliefas the court may deem just and proper. We believe these lawsuits are withoutmerit and plan to defend these lawsuits vigorously.

**ITEM 2.**                Changesin Securities and Use of Proceeds

Not applicable

**ITEM 3.**                DefaultsUpon Senior Securities

Not applicable

**ITEM 4.**                Submissionof Matters to a Vote of Security Holders

Not applicable

**ITEM 5.**                OtherInformation

Not applicable

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**ITEM 6.**                Exhibits,Financial Statement Schedules and Reports on Form 8-K

(a)           The following documentsare filed as a part of this report:

(i)            Financial Statements

(ii)        Exhibits:
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            | ** ** | **Description** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1              |       | Agreement and Plan of Merger, dated as of  December 22, 2003, by and among Duane Reade Inc., Rex Corner Holdings,  LLC and Rex Corner Acquisition Corp. (incorporated by reference to  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on  December 23, 2003).                                                 |
| 3.1(i)           |       | Amended and Restated Certificate of Incorporation of  the Company (incorporated by reference to Exhibit 3.1(i) to the  Company’s Registration Statement No. 333-41239 (the “Common Stock  S-1”)).                                                                                                                       |
| 3.1(ii)          |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation (incorporated by reference to Exhibit 3.1  to Amendment No. 1 to the Company’s Registration Statement on  Form S-3 dated July 22, 2001).                                                                                                      |
| 3.1(iii)         |       | Amended and Restated Bylaws of the Company  (incorporated by reference to Exhibit 3.1(ii) to the Common Stock  S-1).                                                                                                                                                                                                                        |
| 3.2(i)           |       | Certificate of Incorporation of DRI I Inc.  (incorporated by reference to Exhibit 3.2(i) to the S-1  Registration Statement No. 333-43313 with respect to the Company’s 91¤4%  Senior Subordinated Notes due 2008 (the “Notes S-1”)).                                                                              |
| 3.2(ii)          |       | By-laws of DRI I Inc. (incorporated by reference to  Exhibit 3.2(ii) of the Notes S-1).                                                                                                                                                                                                                                                     |
| 3.3              |       | Second Amended and Restated Partnership Agreement of  Duane Reade (incorporated by reference to Exhibit 3.3 of the Notes S-1).                                                                                                                                                                                                                   |
| 3.4(i)           |       | Certificate of Incorporation of Duane Reade  International, Inc. (incorporated by reference to  Exhibit 3.4(i) to the Company’s Annual Report on Form 10—K for  the year ended December 25, 1999 (the “1999 10-K”)).                                                                                     |
| 3.4(ii)          |       | By-laws of Duane Reade International, Inc.  (incorporated by reference to Exhibit 3.4(ii) to the 1999 10-K).                                                                                                                                                                                                                           |
| 3.5(i)           |       | Certificate of Incorporation of Duane Reade  Realty, Inc. (incorporated by reference to Exhibit 3.5(i) to  the 1999 10-K).                                                                                                                                                                                                             |
| 3.5(ii)          |       | By-laws of Duane Reade Realty, Inc.  (incorporated by reference to Exhibit 3.5(ii) to the 1999 10-K).                                                                                                                                                                                                                                  |
| 4.1              |       | Form of Indenture (incorporated by reference to  Exhibit 4.1 of the Notes S-1).                                                                                                                                                                                                                                                             |
| 4.2              |       | Second Supplemental Indenture, dated as of  May 20, 2002, between Duane Reade Inc., the Subsidiary Guarantors, and  State Street Bank, as trustee (incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the period ended September 28,  2002).                                                           |
| 4.3              |       | Indenture, dated as of April 16, 2002, between  Duane Reade Inc., as issuer, the guarantors named therein and State Street  Bank and Trust Company, as trustee (incorporated by reference to  Exhibit 4.2 to the Company’s Registration Statement on Form S-3  dated June 21, 2002 (the “Convertible Notes S-3”)). |
| 4.4              |       | Form of Senior Convertible Notes due 2022  (incorporated by reference to Exhibit 4.2 to the Convertible Notes S-3).                                                                                                                                                                                                                         |
| 10.1             |       | Duane Reade Inc. 1997 Equity Participation Plan  (incorporated by reference to Exhibit 10.1 to the Common Stock S-1).                                                                                                                                                                                                                            |
| 10.2             |       | Duane Reade Inc. Holding Corp. 1992 Stock Incentive  Plan (incorporated by reference to Exhibit 10.2 to the Common Stock  S-1).                                                                                                                                                                                                                  |
| 10.3             |       | Employment Agreement, dated as of February 22,  1993, as amended, between the Company and Gary Charboneau (incorporated by  reference to Exhibit 10.4 to the Common Stock S-1).                                                                                                                                                             |

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| 10.4  |   | Employment Agreement, dated as of April 10,  1995, as amended, between Duane Reade and Jerry M. Ray (incorporated by  reference to Exhibit 10.5 to the Common Stock S-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5  |   | Employment Letter Agreement, dated as of  October 9, 1996, between Duane Reade and Joseph Lacko (incorporated by  reference to Exhibit 10.6 to the Common Stock S-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6  |   | Agreement, dated as of November 22, 1996, as  amended, between Duane Reade and Drug, Chemical, Cosmetic, Plastics and  Affiliated Industries Warehouse Employees Local 815 (incorporated by  reference to Exhibit 10.8 to the Common Stock S-1).                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7  |   | Agreement, dated December 6, 2001, between  Duane Reade and Allied Trades Council (incorporated by reference to  Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the  year ended December 29, 2001 (the “2001 10-K”)).                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8  |   | Employment Letter, dated June 10, 1999, between  the Company and John K. Henry (incorporated by reference to  Exhibit 10.18 to the 1999 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9  |   | Agreement, dated April 1, 2001, between Duane  Reade and Local 340A New York Joint Board, UNITE AFL-CIO (incorporated by  reference to Exhibit 10.19 to the 2001 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10 |   | First Amendment to Stockholders and Registration  Rights Agreement, dated as of January 16, 2002, by and among Duane Reade  Inc. and the stockholders party thereto (incorporated by reference to Exhibit 4.9 to the Convertible  Notes S-3).                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.11 |   | Preferability Letter, dated as of May 13, 2002,  issued by PricewaterhouseCoopers LLP, with respect to the Company’s change in  accounting method of inventory valuation (incorporated by reference to the  Company’s Quarterly Report on Form 10-Q for the period ended  March 30, 2002).                                                                                                                                                                                                                                                                                                                                    |
| 10.12 |   | Amended and Restated Employment Agreement, dated  August 12, 2002, between the Company and Anthony J. Cuti (incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for the  period ended June 29, 2002).                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13 |   | Shareholder Rights Agreement, dated as of  September 12, 2002, between the Company and EquiServe Trust Company,  N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the  Company’s Current Report on Form 8-K, dated September 12, 2002).                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14 |   | Third Amendment to the 1997 Equity Participation  Plan, dated May 8, 2003 (incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the period ended June 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15 |   | Employment Letter, dated June 24, 2003, between  the Company and Timothy R. LaBeau (incorporated by reference to the  Company’s Quarterly Report on Form 10-Q for the period ended  June 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16 |   | Credit Agreement, dated as of July 21, 2003,  among Duane Reade, as the Borrower, Duane Reade Inc. and corporate  subsidiaries as the Facility Guarantors, Various Financial Institutions set  forth therein, as the Lenders, Fleet National Bank as the Administrative  Agent and Issuing Bank, Fleet Retail Finance Inc. as the Collateral Agent,  General Electric Capital Corporation as the Syndication Agent for the Lenders  and Congress Financial Corporation as the Documentation Agent for the Lenders  (incorporated by reference to the Company’s Quarterly Report on  Form 10-Q for the period ended June 28, 2003). |
| 10.17 |   | Facility Guarantee, dated as of July 21, 2003,  among the Facility Guarantors, Fleet Retail Finance Inc., Fleet National Bank  and the Lenders (incorporated by reference to the Company’s Quarterly Report  on Form 10-Q for the period ended June 28, 2003).                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18 |   | Intellectual Property Security Agreement, dated as  of July 21, 2003, between Duane Reade, the Facility Guarantors and Fleet  Retail Finance Inc., as Collateral Agent (incorporated by reference to the  Company’s Quarterly Report on Form 10-Q for the period ended  June 28, 2003).                                                                                                                                                                                                                                                                                                                                            |

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| 10.19 |   | Security Agreement, dated as of July 21, 2003,  among Duane Reade, the Facility Guarantors, and Fleet Retail Finance Inc., as  Collateral Agent (incorporated by reference to the Company’s Quarterly Report  on Form 10-Q for the period ended June 28, 2003).                                                                         |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20 |   | Ownership Interest Pledge Agreement, dated as of  July 21, 2003, among Duane Reade Inc. and DRI I Inc., and Fleet Retail  Finance Inc., as Collateral Agent (incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the period ended June 28, 2003).                                                             |
| 10.21 |   | Amendment No. 1 to Shareholder Rights  Agreement, dated as of December 19, 2003, between the Company and  EquiServe Trust Company, N.A., as Rights Agent Council (incorporated by  reference to Exhibit 10.21 to the Company’s Annual Report on  Form 10-K for the year ended December 27, 2003 (the “2003 10-K”)). |
| 14.1  |   | Code of Business Conduct and Ethics (incorporated by  reference to Exhibit 14.1 to the 2003 10-K).                                                                                                                                                                                                                                                     |
| 21.1  |   | Subsidiaries of the Company (incorporated by  reference to Exhibit 21.1 to the 1999 10-K).                                                                                                                                                                                                                                                             |
| 23.1  |   | Consent of Independent Accountants (incorporated by  reference to Exhibit 23.1 to the 2003 10-K).                                                                                                                                                                                                                                                      |
| 23.2  |   | Consent of Independent Accountants (incorporated by  reference to Exhibit 23.2 to the 2003 10-K).                                                                                                                                                                                                                                                      |
| 31.1* |   | Sarbanes-Oxley Section 302 Certification of the  Company’s Chief Executive Officer (“CEO”).                                                                                                                                                                                                                                             |
| 31.2* |   | Sarbanes-Oxley Section 302 Certification of the  Company’s Chief Financial Officer (“CFO”).                                                                                                                                                                                                                                             |
| 32.0* |   | Sarbanes-Oxley Section 906 Certifications of  the Company’s CEO and CFO.                                                                                                                                                                                                                                                                          |

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*                    filedherewith

(b)          Reports on Form 8-K:

On March 12, 2004, the Company filed a CurrentReport on Form 8-K which contained, as an exhibit, a press releaseproviding information with respect to a revision to the Company’s previouslyannounced financial results for the 13 weeks ended December 27, 2003.

On April 21, 2004, the Company filed a CurrentReport on Form 8-K which contained, as an exhibit, a press releaseproviding information with respect to the Company’s financial results for the13 weeks ended March 27, 2004.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| Dated:     | May 16, 2005 |                       |               |                              |
|------------|-------------------|----------------------------|--------------------|-----------------------------------|
| ** ** |              | **DUANE READE, INC.** |               |
|       |              | (Registrant)               |               |
|       |              | By:                        | /s/ JOHN  K. HENRY |                              |
|       |              |                       | Name:              | John  K. Henry                    |   |
|       |              |                       | Title:             | *Senior Vice President and Chief* |   |
|       |              |                       |               | *Financial  Officer*              |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities indicated on May 16, 2005.
| ** **          | **SIGNATURES** | ** **                                          | ** ** | ** ** | **TITLES** | ** ** |
|---------------------|----------------|-----------------------------------------------------|------------|------------|------------|------------|
| /s/ ANTHONY J. CUTI |           | President and  Chief Executive Officer and Director |
| Anthony J. Cuti     |           | (Principal Executive  Officer)                      |
| /s/ JOHN K. HENRY   |           | Senior Vice  President and Chief Financial Officer  |
| John K. Henry       |           | (Principal Accounting and Financial Officer)        |

 

38

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| Dated:     | May 16, 2005 |           |               |                              |
|------------|-------------------|----------------|--------------------|-----------------------------------|
| ** ** |              | **DRI I INC.** |               |
|       |              | By:            | /s/ JOHN  K. HENRY |                              |
|       |              |           | Name:              | John  K. Henry                    |   |
|       |              |           | Title:             | *Senior Vice President and Chief* |   |
|       |              |           |               | *Financial  Officer*              |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed on May 16, 2005by:
|                     | **SIGNATURES** | ** **                                          | ** ** | ** ** | **TITLES** | ** ** |
|---------------------|----------------|-----------------------------------------------------|------------|------------|------------|------------|
| /s/ ANTHONY J. CUTI |           | President and  Chief Executive Officer and Director |
| Anthony J. Cuti     |           | (Principal Executive  Officer)                      |
| /s/ JOHN K. HENRY   |           | Senior Vice  President and Chief Financial Officer  |
| John K. Henry       |           | (Principal Accounting and Financial Officer)        |

 

39

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| Dated: |              | May 16, 2005                 |   |              |   |                                 |
|--------|-------------------|-----------------------------------|--------|-------------------|--------|--------------------------------------|
|   |              |                              |   | **DUANE READE**   |
| By:    |              | DRI I INC., a general partner     |   | By:               |   | DUANE READE  INC., a general partner |
| By:    | /s/ JOHN K. HENRY |                              | By:    | /s/ JOHN K. HENRY |
| Name:  |              | John K. Henry                     |   | Name:             |   | John K. Henry                        |
| Title: |              | *Senior Vice President and Chief* |   | Title:            |   | *Senior Vice President and Chief*    |
|   |              | *Financial Officer*               |   |              |   | *Financial Officer*                  |
|        |                   |                                   |        |                   |        |                                      |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below on May 16, 2005by the following persons in the capacities indicated with respect to DuaneReade Inc. and DRI I Inc., the general partners of Duane Reade, on behalf ofDuane Reade (except as otherwise indicated):
|                     | **SIGNATURES** | ** **                                          | ** ** | ** ** | **TITLES** | ** ** |
|---------------------|----------------|-----------------------------------------------------|------------|------------|------------|------------|
| /s/ ANTHONY J. CUTI |           | President and  Chief Executive Officer and Director |
| Anthony J. Cuti     |           | (Principal Executive  Officer)                      |
| /s/ JOHN K. HENRY   |           | Senior Vice  President and Chief Financial Officer  |
| John K. Henry       |           | (Principal Accounting and Financial Officer)        |

 

40

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| Dated:     | May 16, 2005 |                               |               |                              |
|------------|-------------------|------------------------------------|--------------------|-----------------------------------|
| ** ** |              | **DUANE READE  REALTY, INC.** |               |
|       |              | By:                                | /s/ JOHN  K. HENRY |                              |
|       |              |                               | Name:              | John  K. Henry                    |   |
|       |              |                               | Title:             | *Senior Vice President and Chief* |   |
|       |              |                               | * *           | *Financial  Officer*              |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed on May 16, 2005by:
|                     | **SIGNATURES** | ** **                                          | ** ** | ** ** | **TITLES** | ** ** |
|---------------------|----------------|-----------------------------------------------------|------------|------------|------------|------------|
| /s/ ANTHONY J. CUTI |           | President and  Chief Executive Officer and Director |
| Anthony J. Cuti     |           | (Principal Executive  Officer)                      |
| /s/ JOHN K. HENRY   |           | Senior Vice  President and Chief Financial Officer  |
| John K. Henry       |           | (Principal Accounting and Financial Officer)        |

 

41

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| Dated:     | May 16, 2005 |                                 |               |                              |
|------------|-------------------|--------------------------------------|--------------------|-----------------------------------|
| ** ** |              | **DUANE READE  INTERNATIONAL, INC.** |               |
|       |              | By:                                  | /s/ JOHN  K. HENRY |                              |
|       |              |                                 | Name:              | John  K. Henry                    |   |
|       |              |                                 | Title:             | *Senior Vice President and Chief* |   |
|       |              |                                 | * *           | *Financial  Officer*              |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed on May 16, 2005by:
| ** **           | **SIGNATURES** | ** **                                          | ** ** | ** ** | **TITLES** | ** ** |
|----------------------|----------------|-----------------------------------------------------|------------|------------|------------|------------|
| /s/ GARY  CHARBONEAU |           | President and  Chief Executive Officer and Director |
| Gary Charboneau      |           | (Principal Executive  Officer)                      |
| /s/ JOHN  K. HENRY   |           | Senior Vice  President and Chief Financial Officer  |
| John K. Henry        |           | (Principal Accounting and Financial Officer)        |

 

42

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