<PAGE>

                                                                EXHIBIT 13.03

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SAKS HOLDINGS, INC.:

We have audited the accompanying consolidated balance sheets of Saks Holdings,
Inc. as of February 1, 1997 and February 3, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three fiscal years in the period ended February 1, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Saks
Holdings, Inc. as of February 1, 1997 and February 3, 1996, and the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ended February 1, 1997, in conformity with generally accepted
accounting principles.


/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.
New York, New York
March 4, 1997


                                       29

<PAGE>

   
<TABLE>
<CAPTION>


CONSOLIDATED BALANCE SHEETS
                                                       February 1,   February 3,
(Dollars and shares in thousands)                          1997         1996
--------------------------------------------------------------------------------
<S>                                                      <C>         <C>
Assets
Current assets:
  Cash and cash equivalents                            $    52,955  $     6,627
  Accounts receivable, net                                  42,195       37,426
  Inventories                                              435,666      339,723
  Other current assets                                      69,791       61,538
--------------------------------------------------------------------------------
    Total current assets                                   600,607      445,314
Property and equipment:
  Land                                                     186,277      188,157
  Buildings and building improvements                      439,451      409,693
  Furniture, fixtures and equipment                        232,258      229,276
  Beneficial leasehold interests                            54,161       54,161
  Construction in progress                                  49,439        5,088
  Leased property under capital leases                     118,493      107,008
--------------------------------------------------------------------------------
                                                         1,080,079      993,383
  Less accumulated depreciation and amortization          (255,999)    (225,119)
--------------------------------------------------------------------------------
                                                           824,080      768,264
Goodwill, net                                               90,417       93,123
Other intangibles, net                                       7,519        8,533
Other noncurrent assets                                     50,240       50,953
--------------------------------------------------------------------------------
    Total assets                                       $ 1,572,863  $ 1,366,187
================================================================================
Liabilities
Current liabilities:
  Accounts payable, trade                              $   146,462  $   120,858
  Accrued liabilities                                      139,681      117,853
  Taxes other than income taxes                             13,616       21,456
  Current portion of long-term debt and capital
    lease obligations                                        5,437       31,235
--------------------------------------------------------------------------------
    Total current liabilities                              305,196      291,402
Long-term debt                                             591,841      840,239
Obligations under capital leases                           111,189      104,468
Other noncurrent liabilities                                35,967       46,903
--------------------------------------------------------------------------------
    Total liabilities                                    1,044,193    1,283,012
--------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock, par value $.01 per share, 10,000
  shares authorized, no shares issued and outstanding         --           --
Common stock, par value $.01 per share, 150,000
  shares authorized, 63,274 and 44,987 shares issued
  as of February 1, 1997 and February 3, 1996; 63,250
  and 44,958 shares outstanding as of 
  February 1, 1997 and February 3, 1996                        633          450
Additional paid-in capital                               1,343,536      922,424
Accumulated deficit                                       (814,973)    (839,117)
Treasury stock, at cost                                       (526)        (582)
--------------------------------------------------------------------------------
    Total shareholders' equity                             528,670       83,175
--------------------------------------------------------------------------------
    Total liabilities and shareholders' equity         $ 1,572,863  $ 1,366,187
================================================================================
</TABLE>

    

The accompanying Notes are an integral part of the consolidated financial
statements.

   
                                      30 
    

<PAGE>
   

CONSOLIDATED STATEMENTS OF OPERATIONS
    

<TABLE>
<CAPTION>
                                                                              Fiscal        Fiscal        Fiscal
(Dollars and shares in thousands, except per share amounts)                     1996          1995          1994
----------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>           <C>        
Net sales                                                                $ 1,944,862   $ 1,686,787   $ 1,418,163
Cost of sales, including buying and occupancy costs                       (1,347,653)   (1,168,490)     (979,650)
----------------------------------------------------------------------------------------------------------------
  Gross margin                                                               597,209       518,297       438,513
Selling, general and administrative expenses                                (486,829)     (438,624)     (370,441)
Management fees                                                               (1,000)       (7,000)       (2,000)
Impairment and special charges                                                    --       (36,415)           --
----------------------------------------------------------------------------------------------------------------
  Operating income                                                           109,380        36,258        66,072
Interest, net                                                                (72,215)      (94,362)      (76,155)
----------------------------------------------------------------------------------------------------------------
  Income (loss) before income taxes and extraordinary charge                  37,165       (58,104)      (10,083)
Income taxes                                                                    (275)           --            --
----------------------------------------------------------------------------------------------------------------
  Income (loss) before extraordinary charge                                   36,890       (58,104)      (10,083)
Extraordinary charge-loss on early extinguishment of debt, net of taxes      (12,746)       (5,991)         (535)
----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                      $    24,144   $   (64,095)  $   (10,618)
================================================================================================================
Net income (loss) per share before extraordinary charge                  $      0.63   $     (1.29)  $     (0.22)
================================================================================================================
Net income (loss) per share                                              $      0.41   $     (1.43)  $     (0.24)
================================================================================================================
Weighted-average number of shares outstanding                                 58,840        44,955        45,010
================================================================================================================
</TABLE>

The accompanying Notes are an integral part of the consolidated financial
statements.


                                       31

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                       Capital Stock
                                     ------------------   Additional                Treasury          Total
                                          Shares    Par      Paid-in   Accumulated    Stock,   Shareholders'
(Dollars and shares in thousands)    Outstanding  Value      Capital       Deficit   at Cost          Equity
------------------------------------------------------------------------------------------------------------
<S>                                       <C>      <C>   <C>             <C>         <C>           <C>      
Balance at January 29, 1994               45,027   $450  $   923,208     $(764,404)  $  (195)      $ 159,059
Purchase of treasury stock                   (70)    --           --            --    (1,393)         (1,393)
Reissuance of treasury stock                   3     --           --            --        62              62
Employee stock subscriptions receivable       --     --          (62)           --        --             (62)
Surrender of unvested stock grants            (3)    --           76            --       (76)             --
Earned compensation                           --     --          146            --        --             146
1994 net (loss)                               --     --           --       (10,618)       --         (10,618)
------------------------------------------------------------------------------------------------------------
  Balance at January 28, 1995             44,957    450      923,368      (775,022)   (1,602)        147,194
------------------------------------------------------------------------------------------------------------
Purchase of treasury stock                    (1)    --           --            --       (26)            (26)
Reissuance of treasury stock                   2     --           --            --        46              46
Conversion of stock                           --     --       (1,000)           --     1,000              --
Earned compensation                           --     --           56            --        --              56
1995 net (loss)                               --     --           --       (64,095)       --         (64,095)
------------------------------------------------------------------------------------------------------------
  Balance at February 3, 1996             44,958    450      922,424      (839,117)     (582)         83,175
------------------------------------------------------------------------------------------------------------
Issuance of common stock, net                                                                     
  of offering expenses                    18,063    181      416,789            --        --         416,970
Exercise of options                          224      2        4,323            --        --           4,325
Purchase of treasury stock                    (5)    --           --            --      (148)           (148)
Reissuance of treasury stock                  10     --           --            --       204             204
1996 net income                               --     --           --        24,144        --          24,144
------------------------------------------------------------------------------------------------------------
  Balance at February 1, 1997             63,250   $633  $ 1,343,536     $(814,973)  $  (526)      $ 528,670
============================================================================================================
</TABLE>

The accompanying Notes are an integral part of the consolidated financial
statements.

   
                                      32 
    

<PAGE>
   

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Fiscal      Fiscal      Fiscal
(Dollars in thousands)                                                        1996        1995        1994
----------------------------------------------------------------------------------------------------------
<S>                                                                      <C>         <C>         <C>       
Cash flows from operating activities:
  Net income (loss)                                                      $  24,144   $ (64,095)  $ (10,618)
  Adjustments to reconcile net income (loss) to cash
    provided by (used in) operating activities:
      Extraordinary charge                                                  12,746       5,991         535
      Impairment and special charges                                            --      36,415          --
      Depreciation and amortization                                         66,975      66,766      67,974
      Amortization of deferred financing costs                               7,197      10,009      12,731
      Other items, net                                                        (477)     (1,583)     (8,597)
----------------------------------------------------------------------------------------------------------
      Net cash provided by operating activities before
        changes in operating assets and liabilities                        110,585      53,503      62,025
----------------------------------------------------------------------------------------------------------
Change in operating assets and liabilities:
  Accounts receivable                                                      (36,801)    (62,583)    (67,705)
  Proceeds from sale of accounts receivable                                912,854     805,158     739,851
  Origination of accounts receivable                                      (882,745)   (751,478)   (673,202)
  Inventories                                                              (98,854)    (70,974)    (18,006)
  Accounts payable                                                          30,604      27,269      21,265
  Accrued liabilities                                                       (3,807)     18,627     (11,340)
  Taxes other than income taxes                                             (7,840)    (10,105)      1,108
  Other assets and liabilities                                             (19,512)    (16,248)      9,122
----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                          4,484      (6,831)     63,118
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Proceeds from sale and sale-leaseback of assets                           30,269      12,806      31,150
  Capital expenditures                                                    (157,486)    (87,028)    (71,713)
  Construction allowances received from third parties                       23,590       4,449      15,990
  Proceeds from sale of subordinated certificates                               --      13,427      13,500
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                     (103,627)    (56,346)    (11,073)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from initial public offering                                    417,769          --          --
  Proceeds from issuance of 5-1/2% Convertible Subordinated Notes          276,000          --          --
  Payment under revolving credit facility, net                            (198,101)    (13,566)       (832)
  Proceeds from term loans                                                      --     125,000          --
  Prepayment/payment of term loans                                        (283,602)    (19,826)    (16,573)
  Payment of 9% Subordinated Notes                                         (50,000)         --          --
  Payment of REMIC Certificates                                             (4,159)         --          --
  Proceeds from REMIC Certificates                                              --     335,000          --
  Payment of Euronotes                                                          --    (335,000)    (26,000)
  Financing costs                                                          (11,919)    (27,064)       (571)
  Payment of capital lease obligations                                      (4,100)     (3,739)     (2,483)
  Other                                                                      3,583        (629)     (1,447)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                        145,471      60,176     (47,906)
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                        46,328      (3,001)      4,139
Cash and cash equivalents, beginning of period                               6,627       9,628       5,489
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                 $  52,955   $   6,627   $   9,628
==========================================================================================================
Supplemental cash flow information:
  Interest paid                                                          $  53,733   $  69,504   $  54,416
==========================================================================================================
Supplemental disclosure of non-cash investing and financing activities:
  Capital leases                                                         $  11,485   $  13,626   $  28,867
==========================================================================================================
</TABLE>

    

The accompanying Notes are an integral part of the consolidated financial
statements.

                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

   
1. BASIS OF PRESENTATION
    

Saks Holdings, Inc. ("Saks Holdings"), through its wholly owned subsidiary Saks
& Company, which does business as Saks Fifth Avenue, OFF 5TH and Folio ("Saks",
and together with Saks Holdings, the "Company") is a premier fashion retailer,
offering the finest quality and latest style in women's and men's apparel. The
consolidated financial statements include the accounts of Saks Holdings and its
direct and indirect subsidiaries. Saks Holdings' primary asset is its investment
in Saks. All significant intercompany balances and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts in the fiscal 1995 and fiscal 1994 financial statements have
been reclassified to conform with the fiscal 1996 presentation.

   
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    

   
FISCAL YEAR
    

The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
1996 and fiscal 1994 contain 52 weeks and ended on February 1, 1997 and January
28, 1995, respectively. Fiscal 1995 contains 53 weeks and ended on February 3,
1996.

   
NET SALES
    

Net sales include sales of merchandise and services and sales of leased
departments, net of returns and exclusive of sales tax. Sales of leased
departments were $81,778, $70,940 and $56,416 in fiscal 1996, fiscal 1995 and
fiscal 1994, respectively. Comparable sales changes represent the percentage
increase (decrease) in net sales of stores (excluding major store expansions)
open in both reporting periods for the portion of such periods open, and Folio
net sales.

   
SAKSFIRST PROGRAM
    

The Company maintains a customer loyalty program which rewards customers who
spend more than two thousand dollars annually on their Saks credit card. The
rewards range from 2% to 6% of the customers' spending and are in the form of
gift checks redeemable at Saks. The cost associated with future redemptions is
recorded as a charge to cost of goods sold in the period in which the rewards
are earned.

   
CASH AND CASH EQUIVALENTS
    

Cash and cash equivalents consist of deposits with banks and financial
institutions that are unrestricted as to withdrawal or use, and have maturities,
when purchased, of three months or less. Cash equivalents are stated at cost
which approximates market. Restricted cash is included in other current assets
in the accompanying consolidated balance sheets. Restricted cash consists of
$1.9 million and $1.5 million, respectively, payable under the Company's
accounts receivable securitization program in fiscal 1996 and fiscal 1995.
Additionally, restricted cash in fiscal 1995 includes a $4.2 million real estate
financing prepayment related to the sale of a closed store location.

   
ACCOUNTS RECEIVABLE
    

The Company provides credit to its customers and performs ongoing credit
evaluations of its customers. Concentration of credit risk is limited because of
the large number of customers and their dispersion throughout the United States
and other countries.

     The Company maintains an allowance for potential credit losses and recourse
obligations which, when realized, has been within the range of management's
expectations. 

<TABLE>
<CAPTION>

                                           Fiscal        Fiscal        Fiscal
                                           1996          1995          1994
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>

Allowance for uncollectible
 accounts - beginning of period            $ 11,160      $  9,313      $ 10,892
Bad debt provision                           20,961        20,628        11,400
Write-offs, net of recoveries               (19,038)      (18,781)      (12,979)
                                            -------       -------       -------
Allowance for uncollectible 
 accounts - end of period                  $ 13,083      $ 11,160      $  9,313
================================================================================
</TABLE>

   
                                      34 
    

<PAGE>

The Company has an ongoing program to sell certain of its proprietary credit
card receivables (see Note 4). Accounts repurchased as a result of the recourse
provision are included in accounts receivable until they are collected or
written off. The Company also includes its retained interest in the trust, which
is not material, as a component of accounts receivable due to the similarity of
the underlying collateral with the Company's retained receivables. The portion
of the allowance for recourse obligations is not material and has therefore not
been reclassified to liabilities.

     In accordance with industry practice, installments on deferred payment
accounts receivable maturing in more than one year have been included in current
assets to the extent that they have not been sold as part of the Company's
accounts receivable securitization.

   
MERCHANDISE INVENTORIES
    

Merchandise inventories are stated at the lower of cost or market, as determined
by the retail method. Consignment merchandise on hand of $72,684 and $72,720 at
February 1, 1997 and February 3, 1996, respectively, is not reflected in the
consolidated balance sheets.

   
ADVERTISING
    

Direct response advertising relates primarily to the production and distribution
of the Company's catalogs and is amortized within a three-month period following
mailing. All other advertising costs are expensed in the period incurred.
Advertising expenses were $52,900, $42,956 and $30,566 in fiscal 1996, fiscal
1995 and fiscal 1994, respectively. Direct response advertising amounts included
in other current assets in the consolidated balance sheets at February 1, 1997
and February 3, 1996 were $3,837 and $6,972, respectively.

   
STORE PRE-OPENING COSTS
    

Costs associated with the opening of a new store are deferred and amortized over
the 12-month period following the store opening. Pre-opening costs included in
other current assets in the consolidated balance sheets at February 1, 1997 and
February 3, 1996 were $7,339 and $1,698, respectively. Amortization of
pre-opening costs was $4,828, $882 and $1,798 in fiscal 1996, fiscal 1995 and
fiscal 1994, respectively.

   
PROPERTY AND EQUIPMENT
    

Property and equipment is recorded at cost. Property and equipment is
depreciated using the straight-line method over estimated useful lives.

     Leasehold improvements included in buildings and building improvements are
amortized over the shorter of their estimated useful lives or their related
lease terms. Beneficial leasehold interests are amortized on a straight-line
basis over 15 years.

     The Company capitalizes both internally developed and purchased computer
software. The cost of such computer software is amortized using the
straight-line method over a five-year period (see Note 3). Capitalized software
costs included in the consolidated balance sheets at February 1, 1997 and
February 3, 1996 were $14,364 and $8,062, respectively, net of accumulated
amortization.

     During fiscal 1996, fiscal 1995 and fiscal 1994, the Company capitalized
interest cost of $1,973, $1,555 and $1,401, respectively, to property and
equipment.

   
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
    

In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 prescribes the accounting for the
impairment of long-lived assets, such as property, plant and equipment and
intangible assets, as well as the accounting for long-lived assets that are held
for disposal. The statement requires that such assets be reviewed only when
events or circumstances indicate that an impairment might exist. The adoption of
this Statement in fiscal 1996 did not have a material effect on the results of
operations or financial position of the Company.

   
DEFERRED FINANCING COSTS
    

Financing costs are amortized over the life of the related debt. Such costs are
included in other noncurrent assets in the consolidated balance sheets and
amortization is included in interest expense in the consolidated statements of
operations.

   
                                    35 
    

<PAGE>

   
DERIVATIVES POLICY
    

The Company uses financial derivatives only to reduce risk in conjunction with
specific business transactions.

     The Company purchases interest rate cap agreements to limit its exposure to
adverse movements in interest rates related to the real estate financing and the
accounts receivable securitizations. In addition, the Company entered into
interest rate swap agreements to limit its exposure to interest rate
fluctuations related to accounts receivable securitizations (see Note 4). The
financial institutions associated with these agreements are considered to be
major, well-known institutions. The premiums paid were capitalized and are being
amortized over the term of the related agreements.

   
GOODWILL
    

Goodwill is allocated to individual stores on the basis of their projected cash
flows at their acquisition date. Goodwill is amortized over 40 years using the
straight-line method. Accumulated amortization at February 1, 1997 and February
3, 1996 totaled $18,080 and $15,374, respectively.

   
OTHER INTANGIBLES
    

Other intangibles include customer lists acquired which are amortized using the
straight-line method over their estimated useful life of 14 years. Accumulated
amortization at February 1, 1997 and February 3, 1996 totaled $6,693 and $5,679,
respectively.

   
INCOME TAXES
    

The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse (see Note
9).

   
EARNINGS PER SHARE
    

Earnings per share amounts are computed using the weighted-average number of
common and common equivalent shares outstanding during the year. Common
equivalent shares relate to employee stock plans.

   
STOCK OPTIONS GRANTED TO EMPLOYEES
    

The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under Opinion No.
25, compensation expense, if any, is measured as the excess of the market price
of the stock over the exercise price on the measurement date. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which
encourages companies to recognize expense for stock-based awards based on their
estimated value on the date of grant. SFAS No. 123, which is first effective for
fiscal year 1996, does not require companies to change their existing accounting
for stock-based awards. The Company continues to account for stock-based
compensation plans using the intrinsic value method, and has supplementally
disclosed pro forma information required by SFAS No. 123 (see Note 7).

   
OTHER RECENT ACCOUNTING PRONOUNCEMENTS
    

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128
applies to all entities with publicly held common stock and requires a dual
presentation of basic and diluted earnings per share by entities with complex
capital structures. This statement will be adopted in the Company's fiscal 1997
financial statements and, based on current circumstances, is not expected to
have a material effect on the current earnings per share computation or
disclosure.

                                    36 

<PAGE>

3. IMPAIRMENT AND SPECIAL CHARGES

In fiscal 1995, the Company recorded special charges totaling $36,415. The
charges recorded consist of exit costs of its Yonkers distribution center, the
integration costs of former I. Magnin locations and write-down of capitalized
EDP software and amounted to $19,015, $8,900 and $8,500, respectively.

     Exit costs include the write-down of the Yonkers distribution center to its
net realizable value. The write-down was necessary as a result of the Company's
decision to exit this facility in early 1997 and relocate distribution
activities to a facility currently under construction in Aberdeen, Maryland.
This write-down and the costs associated with exiting this facility totaled
$19,015. The costs of exiting the Yonkers facility include the Company's
estimate of the severance costs related to vacating the facility and certain
occupancy costs during the period prior to the sale of the facility. The closing
of this facility will involve the termination of approximately 500 associates.
The liability for these costs at February 1, 1997 of $7,208 is included in
accrued liabilities in the consolidated balance sheets. Amounts paid and charged
against the liability during fiscal 1996 totaled $1,042. Amounts paid and
charged against the liability and other adjustments to the liability during
fiscal 1995 were not material. The anticipated costs of relocating the
distribution activities to the Aberdeen distribution facility have not been
accrued and are not expected to materially impact future results. Additionally,
Saks will receive incentive payments from various government agencies which are
expected to approximate these costs.

     Integration costs consist of costs to integrate the former I. Magnin store
locations into the Company's west coast locations. These costs include customer
acquisition costs, training and travel costs and remerchandising and other
costs.

     The Company began implementation of a new core retail information
processing system in fiscal 1995. As a result, certain of its capitalized
software became obsolete and was written off.

   
4. ACCOUNTS RECEIVABLE SECURITIZATION
    

Saks has entered into agreements to securitize most of its proprietary credit
card receivables. The securitization of receivables involves the transfer of
receivables with limited recourse through a subsidiary to a trust in exchange
for cash and subordinated certificates representing undivided interests in the
pool of receivables, and the subsequent sale by the trust of certificates of
beneficial interests, also representing undivided interests in the receivables,
to investors. Saks is obligated to repurchase receivables related to customer
credits such as merchandise returns and other receivable defects. Saks has no
obligation to reimburse the trust or the purchasers of beneficial interests for
credit losses; however, the subordinated certificates and deposits with the
trust and the discount on the sale of receivables are available to cover such
losses.

     Saks continues to service all receivables for the trust for a servicing fee
which totaled $7.9 million, $7.7 million and $6.5 million in fiscal 1996, fiscal
1995 and fiscal 1994, respectively. This fee approximates the fees paid by Saks
to third parties to provide certain credit card processing and related credit
card services. Due to the short-term life of the underlying receivables the
servicing asset is not significant.

     In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." The principal provisions
of SFAS No. 125, as it relates to Saks, require that the carrying amount of the
financial assets retained, comprised of servicing rights and certain cash flows,
be recorded at their fair values. In accordance with SFAS No. 125, Saks adopted
the provisions of this statement on January 1, 1997. The effect of adopting SFAS
No. 125 was not material to the Company's results of operations or financial
position. Prior to the adoption of SFAS No. 125, the Company recorded finance
charge income and servicing revenues net of securitization costs when earned.
Net finance charge income included with selling, general and administrative
expenses in the consolidated statements of operations totaled $43.0 million,
$37.1 million and $34.4 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively.

     In April 1996, the trust sold two series of certificates of beneficial
interests with subordinated structures. This issuance was in conjunction with
the previously existing trust entering its wind-down period, which was completed
in fiscal 1996. The first series is a term series with a maximum capacity of
$413 million. The second series is a variable series with a maximum capacity of
$118 million. Each series of beneficial interest bears interest at fixed spreads
over the one-month LIBOR and matures in April 1999. Saks retained interest in
the trust and outstanding securitized receivables sold to third parties were
$23.6 million and $428.4 million at February 1, 1997 and $11.2 million and
$398.3 million at February 3, 1996, respectively.

   
                              37 
    

<PAGE>

   
5. LONG-TERM DEBT
    

Long-term debt consists of the following:

   
<TABLE>
<CAPTION>

                                                        February 1,  February 3,
                                                              1997          1996
--------------------------------------------------------------------------------
<S>                                                       <C>           <C>

Credit Facility
     Term Loans:
       Tranche A                                          $   --        $ 59,475
       Tranche B                                              --         224,127
       Revolving Credit                                       --         198,100
--------------------------------------------------------------------------------
                                                              --         481,702
Real Estate Financing-REMIC Certificates                   315,841       335,000
5-1/2% Convertible Subordinated Notes                      276,000            --
9% Subordinated Notes                                         --          50,000
--------------------------------------------------------------------------------
                                                           591,841       866,702
Less current portion of long-term debt                        --          26,463
--------------------------------------------------------------------------------
                                                          $591,841      $840,239
================================================================================
</TABLE>
    

CREDIT FACILITY

In October 1996, the Company amended and restated the Credit Facility. The
revolving credit commitments were increased to $350 million and the maturity of
the revolving credit commitments was extended to October 30, 2001. Borrowings
under the Credit Facility bear interest at variable rates as defined in the
agreement. The borrowing availability is reduced by any standby or commercial
letters of credit. As of February 1, 1997 and February 3, 1996, the Company has
approximately $5,834 and $6,694, respectively, of outstanding letters of credit.

     In May 1996, the Company completed an initial public offering with net
proceeds of approximately $418 million. The net proceeds from the offering were
primarily used to prepay term loan borrowings under the Credit Facility and
repay outstanding balances on the revolving credit portion of the Credit
Facility. The Company recorded an extraordinary charge of $3.3 million
associated with the accelerated write-off of deferred financing costs related to
these prepayments.

     As of February 1, 1997, total available credit under the credit agreements
was $344,166. During fiscal 1996 and fiscal 1995, the weighted-average interest
rate was approximately 8.3% and 9.0%, respectively, for all borrowings under the
credit agreements.

     The Credit Facility contains restrictive covenants, which include
limitations on capital expenditures and payment of dividends, specified maximum
levels of consolidated indebtedness to total capitalization, as well as
maintenance of specified ratios, including an interest coverage ratio, as
defined.

     Amounts outstanding under the Credit Facility are collateralized by the
assets of Saks and its subsidiaries, except for the real estate properties
included in the real estate financing described below, the accounts receivable
described in Note 4, inventories and the capital stock of Saks' real estate
subsidiaries and subsidiaries established to effect the accounts receivable
sale.

REAL ESTATE FINANCING

In May 1995, the Company, through a subsidiary trust, completed a real estate
financing, aggregating $335,000, through the issuance of mortgage loans
collateralized by intercompany leases. Mortgage certificates in the principal
amount of $175,000 bear interest at variable rates based on three-month LIBOR,
payable quarterly. The remaining $160,000 in certificates, which are
subordinated to the other certificates, bear interest at annual fixed rates
ranging from 8.98% to 12.36%, payable semiannually. All of the mortgage
certificates are scheduled to mature in May 2002. The debt related to individual
properties is prepayable at premiums ranging from stated value to 150% of stated
value. The various properties and leases collateralizing the mortgage
certificates are cross guaranteed. Saks guarantees the obligations under all
intercompany leases. In conjunction with the May 1995 transaction, the Company
recorded an extraordinary charge related to the early extinguishment of debt of
$5,991.

     In January 1996, the Company sold one of its stores and prepaid the
mortgage loan associated with this property, aggregating $4,159. The proceeds
were used to prepay the related mortgage certificate in February 1996. In
January 1997, the Company acquired $15,000 of certificates with an annual fixed
interest rate of 12.36%, effectively prepaying the mortgage certificates. The
Company recorded an extraordinary charge of $3.0 million associated with the
repurchase premium and accelerated write-off of deferred financing costs related
to this repurchase. In February 1997, the Company entered into an agreement to
acquire an additional $15,000 of certificates with an annual fixed interest rate
of 12.36%. During the first quarter of fiscal 1997, the Company will record an
extraordinary charge of $3.4 million.

     The sale of the Yonkers distribution center (see Notes 3 and 13) would
require the prepayment of mortgage certificates totaling $9,074.

CONVERTIBLE SUBORDINATED NOTES

In September 1996, Saks Holdings issued $276 million aggregate principal amount
of 5-1/2% Convertible Subordinated Notes (the "Notes") for net cash proceeds
after offering expenses and financing costs of $267.5 million.

     The Notes are due on September 15, 2006 and are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion rate
of 24.0601 shares of common stock for each one thousand dollar

   
                                     38 
    

<PAGE>

principal amount of Notes, which is equivalent to a conversion price of
approximately $41.563 per share. If all of the Notes are converted, a total of
6,641 shares of common stock will be issued. The Notes are redeemable at the
Company's option at any time on or after September 15, 1999 at redemption rates
ranging from 100.55% to 103.85%. The Notes are unsecured obligations
subordinated in right of payment to all existing and future senior indebtedness
of the Company and are effectively subordinated in right of payment to all
indebtedness and other liabilities of its subsidiaries. The Notes contain no
sinking fund requirements.

     The net proceeds from the issuance of the Notes were primarily used to
prepay term loan borrowings under the Credit Facility and repay outstanding
balances on the revolving credit portion of the Credit Facility. During fiscal
1996, the Company prepaid its $50 million 9% Subordinated Notes. During fiscal
1996, the Company recorded extraordinary charges of $6.5 million associated with
the accelerated write-off of deferred financing costs related to the prepayments
under the Credit Facility and 9% Subordinated Notes.

     As of February 1, 1997, approximately $5.3 million in letters of credit
were outstanding under a $10 million letter-of-credit facility.

     As of February 1, 1997, all of the Company's outstanding long-term debt,
excluding capital leases (see Note 10) is due after fiscal 2001.

6. SHAREHOLDERS' EQUITY

CAPITALIZATION

In May 1996, the Company completed an initial public offering of Common Stock.
The Company sold approximately 18,062 shares of Common Stock at an initial
public offering price of $25 per share. The net proceeds from the offering were
$418 million. Effective with the initial public offering, all issued and
outstanding shares of Class A, Class B, Class C and Class D Stock automatically
converted into shares of Common Stock on a one-for-one basis. As of February 1,
1997, the Company has issued 63,274 shares of Common Stock, of which 63,250 are
outstanding and 24 are in treasury.

     The following is a summary of the capitalization of the Company at February
3, 1996:

Class A Stock:

37,500 shares authorized, issued and outstanding.

Class B Stock:

2,250 shares authorized, issued and outstanding.

Class C Stock:

25,050 shares authorized; 5,187 shares issued and 5,158 shares outstanding at
February 3, 1996. Additionally, treasury stock aggregated 29 shares as of
February 3, 1996.

Class D Stock:

100 shares authorized; 50 shares issued and outstanding at February 3, 1996.

Common Stock:

150,000 shares authorized; none issued and outstanding.

PREFERRED STOCK

The Board of Directors is authorized, subject to certain limitations prescribed
by law, to issue up to 10,000 shares of preferred stock in one or more classes
or series and to fix the designations, powers, preferences, rights,
qualifications, limitations or restrictions of any such class or series.

SHARES RESERVED FOR FUTURE ISSUANCE

   
The Company has 6,011 shares reserved for issuance upon the exercise of options
under the stock incentive plans (see Note 7) and 6,641 shares reserved for
issuance upon the conversion of the 5-1/2 % Convertible Subordinated Notes.
    


7. STOCK INCENTIVE PLANS

In October 1990, Saks Holdings adopted a Senior Management Stock Incentive Plan
(the "Old Incentive Plan"), and in February 1996, Saks Holdings adopted a 1996
Management Stock Incentive Plan (the "New Incentive Plan" and together with the
Old Incentive Plan, the "Incentive Plans"), for members of senior management and
certain other officers and employees of the Company. As of February 1, 1997,
there were options to purchase 18.7 shares of Common Stock outstanding under the
Old Incentive Plan, all of which vested upon the closing of the initial public
offering, and options to purchase 2,890 shares of Common Stock outstanding under
the New Incentive Plan. No additional options will be granted under the Old
Incentive Plan. The maximum number of shares of Common Stock issuable pursuant
to the Incentive Plans is 6,011, subject to adjustment to reflect stock splits,
stock dividends and similar stock transactions.

     In accordance with an exchange approved on January 19, 1996 by the Board of
Directors of the Company, on February 28, 1996, Options to acquire 1,414 shares
of Common Stock issued under the Old Incentive Plan were surrendered to the
Company in exchange for the issuance of Options to purchase an identical number
of shares with an exercise price of $16 per share to reflect the fair market
value of the underlying shares at that time. The individual Stock Option
Agreements pursuant to which Options were exchanged provide that Options vest,
to the extent of one-third of the shares underlying the Options granted, as of
the closing of an initial public offering, one-third on the first anniversary
thereof and one-third on the second anniversary thereof, and expire upon the
tenth anniversary of such Stock Option Agreement.

   
                                    39 
    

<PAGE>

As discussed in Note 2, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related Interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of the Company's employee stock options equaled
the market price of the underlying stock on the date of grant, no compensation
expense was recognized.

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.60%
and 5.51%; dividend yields of 0% and 0%; volatility of the Company's Common
Stock of 33% and 0.1%; and an expected life of the options ranging from two to
four years for 1996 grants and five years for 1995 grants. All options granted
prior to the Company's initial public offering were valued using the Minimum
Value option pricing model with the same weighted-average assumptions discussed
above, with the exception of volatility, for which minimal value was utilized.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation expense for the options been determined consistent with the
provisions of SFAS No. 123, the Company's net income (loss) for fiscal 1996 and
1995 would have been $18,542 and $(64,112), respectively. The Company's pro
forma earnings (loss) per share for fiscal 1996 and fiscal 1995 would have been
$.32 and $(1.43), respectively.

A summary of the Company's stock option activity, and related information, is as
follows:

<TABLE>
<CAPTION>
                                  Fiscal 1996        Fiscal 1995      Fiscal 1994
                                  -----------        -----------      -----------
                                       Weighted-         Weighted-       Weighted-
                                        Average           Average         Average
                                       Exercise          Exercise        Exercise
                                 Options  Price   Options   Price  Options  Price
--------------------------------------------------------------------------------
<S>                              <C>     <C>      <C>     <C>      <C>     <C>   
Outstanding - beginning of year  1,455   $20.00   1,307   $20.00   1,486   $20.00
Granted                          1,718    22.88     253    20.00     147    20.00
Exercised                         (224)   19.29    --       --      --       --
Forfeited                          (40)   20.71    (105)   20.00    (326)   20.00
----------------------------------------------------------------------------------
Outstanding - end of year        2,909   $19.80   1,455   $20.00   1,307   $20.00
==================================================================================
Exercisable at end of year         964   $19.55     871   $20.00     596   $20.00

Weighted-average fair value 
of options granted during 
the year                        $ 4.49           $ 4.82              N/A
----------------------------------------------------------------------------------
</TABLE>

Exercise prices and weighted-average contractual lives for options outstanding
as of February 1, 1997 were as follows:
<TABLE>
<CAPTION>

                     Options Outstanding                     Options Exercisable
                     -------------------                     -------------------
                                      Weighted-  Weighted-            Weighted-
 Range of                               Average    Average              Average
 Exercise               Number        Remaining   Exercise      Number Exercise
   Prices          Outstanding Contractual Life      Price Exercisable    Price
--------------  ------------------------------  -----------------------  -------
<S>                 <C>                <C>         <C>          <C>    <C>      
          $16.00    1,722              9.1         $16.00       574    $16.00   
          $20.00       19              7.0         $20.00        19    $20.00
          $25.00    1,115              9.3         $25.00       371    $25.00
 $30.13 - $35.75       53              9.7         $33.88         -       -
--------------------------------------------------------------------------------
                    2,909                                       964
</TABLE>

   
                                      40 
    

<PAGE>

8. POSTEMPLOYMENT BENEFITS

The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. Benefits are based upon years of service
and compensation prior to retirement. As a result of the Company's special
retirement initiative in fiscal 1993 and funding limitations, the plan refunded
the Company $4,574 in fiscal 1994. The Company contributed $18,440 in fiscal
1996 and did not make any contributions in fiscal 1995 or fiscal 1994. The
Company's policy is to fund the plan to satisfy the requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Pension Plan assets consist
primarily of common stock funds, U.S. Government and agencies obligations,
corporate debt securities, bonds and real estate interests.

Net periodic pension expense consisted of the following components:

   
<TABLE>
<CAPTION>


                                       Fiscal           Fiscal           Fiscal
                                        1996             1995             1994
--------------------------------------------------------------------------------
<S>                                 <C>               <C>               <C>
Service cost                         $ 4,729           $3,527           $ 4,250
Interest cost                          6,629            5,778             6,226
Loss (return) on plan assets          (5,587)          (9,095)            3,085
Net amortization (deferral)                2            4,906            (8,600)
--------------------------------------------------------------------------------
Net pension expense                  $ 5,773           $5,116           $ 4,961
================================================================================
</TABLE>
    

The following table sets forth the Pension Plan's funded status and the present
value of benefit obligations:

<TABLE>
<CAPTION>

                                               February 1,    February 3,
                                                 1997            1996
--------------------------------------------------------------------------------
<S>                                       <C>                  <C>
Accumulated benefit obligation:              
  Vested                                 $    (79,876) $       (77,266)
  Nonvested                                    (4,636)          (4,838)
                                              (84,512)         (82,104)
--------------------------------------------------------------------------------
Effect of projected salary increases           (4,867)          (4,562)
--------------------------------------------------------------------------------
Projected benefit obligation                  (89,379)         (86,666)
Plan assets at fair value                      73,800           53,058
--------------------------------------------------------------------------------
Excess of projected benefit obligation       
  over plan assets                            (15,579)         (33,608)
Unrecognized net (gain) loss                   (1,027)           4,415
Unrecognized prior service cost                    24              (56)
Accrued pension cost                     $    (16,582)    $    (29,249)
================================================================================
</TABLE>

The Company also maintains an unfunded supplemental retirement plan which
provides for benefits in addition to those provided by the Pension Plan.
Expenses related to the supplemental plan were $784, $502 and $487 in fiscal
1996, fiscal 1995 and fiscal 1994, respectively. Payments from the supplemental
plan were $233, $279 and $336 during fiscal 1996, fiscal 1995 and fiscal 1994,
respectively. The accrued liability for this plan at February 1, 1997 and
February 3, 1996 was $7,811 and $7,260, respectively, and is included in other
noncurrent liabilities in the accompanying consolidated balance sheets.
     The actuarial present value of the projected benefit obligations for both
the Pension Plan and supplemental plan was determined using a weighted-average
discount rate of 8% at February 1, 1997 and 7.35% at February 3, 1996. The
projected benefit obligation was determined using an assumed rate of increase in
future compensation of 3.0% at February 1, 1997 and February 3, 1996. The
assumed long-term rate of return on plan assets was 9.5% for fiscal 1996 and
9.0% for fiscal 1995. A 1% change in the assumed discount rate would change the
accumulated benefit obligation for the Pension Plan and the supplemental plan by
approximately $9 million and $.5 million, respectively, at February 1, 1997.
     The Company also maintains a 401(k) Plan which covers substantially all of
its employees. The plan is a defined contribution plan and is subject to the
provisions of ERISA. The assets of the plan can be invested in a fixed income
fund, nine other mutual funds, or a Saks Holdings, Inc. Stock Fund. Eligible
employees may contribute up to 16% of their compensation, as defined. The
Company contributes a percentage of employees' elective contributions in the
form of a matching contribution. The match rate in each fiscal year was 25%. The
Company's expense related to contributions to this plan totaled $2,327, $2,098
and $1,912, for fiscal 1996, fiscal 1995 and fiscal 1994, respectively.

9. INCOME TAXES

At February 1, 1997, the Company has net operating loss carryforwards of
approximately $761,494 for income tax purposes that expire, unless utilized, in
fiscal years 2005 through 2011.
     The Company recorded certain assets and liabilities at the date of their
acquisition for financial reporting purposes which are not similarly recognized
under income tax regulations, aggregating a tax benefit of $34,525. Subsequent
realization of this tax benefit will be accounted for as a reduction of
goodwill.

   
                                       41
    


<PAGE>

The Company uses the liability method to account for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are summarized below:

   

<TABLE>
<CAPTION>

                                                      February 1,    February 3,
                                                            1997     1996
--------------------------------------------------------------------------------

<S>                                                   <C>            <C>
Deferred tax assets
     Operating loss carryforward                       $ 303,101      $ 289,609
     Accrued expenses and reserves                        16,555         17,722
     Employee benefits                                     7,122         14,532
     Depreciation, amortization
       and basis differences                              14,748         15,575
     Allowance for doubtful accounts                       5,207          4,442
     Deferred lease payments                               3,732          3,133
     Other                                                 4,360          4,084
--------------------------------------------------------------------------------
          Total deferred tax assets                      354,825        349,097

Deferred tax liabilities
     Deferred financing costs                             (5,590)        (4,038)
     Pre-opening costs                                    (2,921)          --
--------------------------------------------------------------------------------
          Total deferred tax liabilities                  (8,511)        (4,038)
--------------------------------------------------------------------------------
     Net deferred tax asset                              346,314        345,059
     Less valuation allowance                           (346,314)      (345,059)
--------------------------------------------------------------------------------
          Net deferred taxes                           $    --        $    --
================================================================================
</TABLE>

    

The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:

   
<TABLE>
<CAPTION>

                                                    Fiscal    Fiscal    Fiscal
                                                      1996      1995      1994
--------------------------------------------------------------------------------
<S>                                                   <C>      <C>        <C>
Statutory federal income tax rate                     35.0%     35.0%     35.0%
State and local income taxes,
  net of federal tax benefit                           4.8       4.8       4.8
--------------------------------------------------------------------------------
                                                      39.8      39.8      39.8

Generation of net operating
  loss carryforward                                  (39.1)    (39.8)    (39.8)
--------------------------------------------------------------------------------
Net effective income tax rate                          0.7%      0.0%      0.0%
================================================================================
</TABLE>

    

The fiscal 1996 income tax provision consists principally of a current federal
provision relating to alternative minimum taxes, as well as a deferred tax
benefit of $1.3 million principally related to tax losses, which has been fully
reserved.

   
10. LEASES
    

The Company leases certain land and buildings under various noncancelable
capital and operating leases. The Company's capital leases have remaining terms
of up to 67 years. Operating leases consist of land leases and land and building
leases with remaining terms ranging primarily from five to 30 years. All of
these leases are subject to renewal options.

     Substantially all leases provide for contingent rentals based upon sales
and require the Company to pay taxes, insurance and occupancy costs. Certain
rentals are based solely on a percentage of sales.

     The Company also leases certain equipment under operating leases expiring
during the next five fiscal years.

     The Company's rent expense consisted of the following:

<TABLE>
<CAPTION>

                                                  Fiscal      Fiscal      Fiscal
                                                    1996        1995        1994
--------------------------------------------------------------------------------
<S>                                             <C>          <C>        <C>
Land and building rent:                                                  
     Fixed minimum                               $15,957     $11,401     $ 8,787
     Contingent rentals                            7,580       5,454       4,516
--------------------------------------------------------------------------------
          Total land and building rent            23,537      16,855      13,303
Equipment and other                                4,636       3,956       4,540
--------------------------------------------------------------------------------
          Total rent expense                     $28,173     $20,811     $17,843
================================================================================
</TABLE>

Future minimum payments under capital leases and noncancelable operating leases
consist of the following at February 1, 1997:

<TABLE>
<CAPTION>

Fiscal Years                                          Capital     Operating
--------------------------------------------------------------------------------
<S>                                             <C>                 <C>
1997                                                  $15,602       $32,053
1998                                                   13,870        30,462
1999                                                   13,355        29,718
2000                                                   13,767        29,706
2001                                                   13,568        30,468
Thereafter                                            207,939       335,089
--------------------------------------------------------------------------------
     Total minimum payments                          $278,101      $487,496
================================================================================
Less executory costs                                      531
-------------------------------------------------------------
     Net minimum lease payments                       277,570
-------------------------------------------------------------
Less interest                                         160,944
-------------------------------------------------------------
     Present value of net
       minimum lease payments                        $116,626
=============================================================
Current obligations under capital leases             $  5,437

Noncurrent obligations under capital leases           111,189
-------------------------------------------------------------
                                                     $116,626
=============================================================
</TABLE>

   
                              42 
    

<PAGE>

Property and equipment includes the following amounts for leases that have been
capitalized at February 1, 1997 and February 3, 1996. Amortization of assets
under capital leases is included in depreciation expense.

   
<TABLE>
<CAPTION>

                                                  February 1,       February 3,
                                                         1997              1996
--------------------------------------------------------------------------------
<S>                                                   <C>            <C>

Building and equipment                               $118,493          $107,008

Less accumulated amortization                         (28,056)          (20,403)
--------------------------------------------------------------------------------
                                                     $ 90,437          $ 86,605
================================================================================
</TABLE>

    

The Company leases certain selling space within its stores to other specialty
retailers under contingent rental agreements. Rental income related to these
agreements was $11,486, $10,209 and $9,038 in fiscal 1996, fiscal 1995 and
fiscal 1994, respectively.

During fiscal 1996, fiscal 1995 and fiscal 1994, the Company consummated the
sale and sale-leaseback of certain property and equipment with proceeds of
$30,269, $12,806 and $31,150, respectively.

   
11. FINANCIAL INSTRUMENTS
    

The Company has entered into interest rate cap agreements to reduce the impact
of increases in interest rates on the REMIC Financing and Credit Facility. The
Company is also an indirect beneficiary of interest rate cap agreements relating
to the Accounts Receivable Securitization. At February 1, 1997, there were six
interest rate cap agreements outstanding. Accordingly, the Company is entitled
to receive from various financial institutions the amount, if any, by which the
Company's interest payments on its debt exceed the stated interest rates or
strike rates. Payments received as a result of the caps in the Company's debt
are recorded as a reduction of interest expense.

    The following is a summary of the interest rate cap agreements related to 
real estate financing as of February 1, 1997:

   
<TABLE>
<CAPTION>

Notional             Strike              Effective            Expiration
 Amount               Rate                 Date                  Date
--------------------------------------------------------------------------------
<S>                  <C>            <C>            <C>
$175,000                7.25%            05/09/95              02/12/97

  87,500                9.70             02/12/97              05/13/02

  87,500                9.70             02/12/97              05/13/02
--------------------------------------------------------------------------------
</TABLE>

    

The combined carrying value and fair value of the Company's interest rate cap
agreements were $2,319 and $870 at February 1, 1997 and $2,242 and $1,828 at
February 3, 1996, respectively.

During fiscal 1996, the Company entered into three financial fixed-rate swap
agreements. The Company is obligated to pay a fixed rate of interest, and will
receive a floating rate based on LIBOR. The Company utilizes interest rate swaps
solely as a risk management tool with an objective of managing the level of
interest rate risk relating to its accounts receivable securitization.

   
    The following is a summary of the interest rate swap agreements as of 
February 1, 1997:
    

   
<TABLE>
<CAPTION>

Notional                Swap             Effective            Expiration
 Amount                 Rate               Date                  Date
--------------------------------------------------------------------------------
<S>                     <C>               <C>                  <C>
$250,000                6.02%            02/20/97              02/20/98

 250,000                6.41             02/20/98              02/20/99

 250,000                6.55             02/20/99              04/20/99
--------------------------------------------------------------------------------
</TABLE>

    

At February 1, 1997, the combined carrying value and fair value of the Company's
financial fixed-rate swap agreements were $0 and $(1,134), respectively.

     The fair value of the Company's other financial instruments, which consist
primarily of cash and cash equivalents, accounts receivable, accounts payable
and long-term debt, approximate their carrying amounts reported in the
consolidated balance sheets.

   
12. RELATED PARTY TRANSACTIONS
    

The Company received various consulting and advisory services from an affiliate
of Investcorp, a shareholder, under an agreement which expired in July 1996. The
fees paid or payable for such services were $1 million, $7 million and $2
million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. In
conjunction with the initial public offering, the Company committed to register
securities and absorb the cost in connection with certain secondary offerings
initiated by Investcorp.

   
                                      43
    

<PAGE>



13. CONTINGENCIES

The Company is from time to time involved in routine litigation incidental to
the course of its business. Management does not believe that the disposition of
such litigation will have a material adverse effect on the financial position or
results of operations of the Company.

     Management has entered into an agreement to sell its current distribution
facility, located in Yonkers, New York. The sale is subject to the successful
rezoning of the property. If rezoned, proceeds associated with the sale would
fall within a range of $20 to $25 million. A sale of the distribution center in
this price range could result in a gain on sale of $8 to $13 million. Management
is unable to determine at this time if this transaction will be completed.



14. QUARTERLY RESULTS (UNAUDITED)
(In thousands, except for per share amounts)

   
<TABLE>
<CAPTION>
                                                                           Fiscal 1996
                                        --------------------------------------------------------------------------------
                                                      First         Second         Third         Fourth
                                                      Quarter       Quarter       Quarter        Quarter       Full Year
------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>            <C>            <C>          <C>            
Net sales                                          $ 464,479      $ 403,766      $ 476,271     $ 600,346     $ 1,944,862
Cost of goods sold                                   323,172        298,001        319,623       406,857       1,347,653
Net income (loss) before 
     extraordinary charge                             (2,952)       (22,655)        15,810        46,687          36,890
Net income (loss)                                     (2,952)       (25,995)         9,355        43,736          24,144
Net income (loss) per share
    before extraordinary charge                        (0.07)         (0.38)          0.25          0.73            0.63
Net income (loss) per share                            (0.07)         (0.44)          0.15          0.68            0.41
------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                           Fiscal 1995
                                        --------------------------------------------------------------------------------
                                                      First         Second         Third         Fourth
                                                      Quarter       Quarter       Quarter        Quarter       Full Year
------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>            <C>            <C>          <C>            
Net sales                                          $ 384,564      $ 353,229      $ 407,990      $541,004     $ 1,686,787
Cost of goods sold                                   262,446        262,945        275,035       368,064       1,168,490
Net income (loss) before
    extraordinary charge                             (16,553)       (34,133)       (35,319)       27,901         (58,104)
Net income (loss)                                    (16,553)       (39,817)       (35,319)       27,594         (64,095)
Net income (loss) per share
    before extraordinary charge                        (0.37)         (0.76)         (0.79)         0.62           (1.29)
Net income (loss) per share                            (0.37)         (0.89)         (0.79)         0.61           (1.43)
------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       44