<Page>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
FOR THE FISCAL QUARTER ENDED COMMISSION FILE NUMBER
AUGUST 4, 2001 1-5287
-----------------------
PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 MILIK STREET
CARTERET, NEW JERSEY 07008
(Address of principal executive offices) (Zip Code)
(732) 499-3000
(Registrant's telephone number, including area code)
-----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
Warrants to purchase Common Stock
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of September 4, 2001, 30,098,510 shares of the Common Stock were
issued and outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------ ------------ ------------- -------------
13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
------------ ------------ ------------- -------------
Sales......................................................... $ 997,690 $ 929,597 $ 1,974,887 $ 1,848,793
Cost of sales (exclusive of depreciation and amortization
shown separately below).................................... (720,542) (667,228) (1,425,079) (1,328,772)
------------ ------------ ------------- -------------
Gross profit.................................................. 277,148 262,369 549,808 520,021
Selling, general and administrative expenses.................. (232,548) (215,751) (460,682) (428,466)
Depreciation and amortization................................. (19,590) (19,626) (38,193) (38,554)
Reorganization expenses....................................... -- (4,753) -- (9,887)
Amortization of excess reorganization value................... (66,378) -- (132,756) --
------------ ------------ ------------- -------------
Operating earnings (loss)..................................... (41,368) 22,239 (81,823) 43,114
Interest expense, net......................................... (16,243) (45,699) (33,823) (87,833)
------------ ------------ ------------- -------------
Loss before income taxes...................................... (57,611) (23,460) (115,646) (44,719)
Income tax provision.......................................... (3,542) (32) (6,904) (65)
------------ ------------ ------------- -------------
Net loss...................................................... (61,153) (23,492) (122,550) (44,784)
Less: noncash preferred stock accretion
and dividend requirements.................................. -- (4,600) -- (14,570)
------------ ------------ ------------- -------------
Net loss attributable to common stock......................... $ (61,153) $ (28,092) $ (122,550) $ (59,354)
============ ============ ============= =============
Weighted average shares outstanding - basic and diluted....... 30,000 30,000
============ =============
Net loss per share - basic and diluted........................ $ (2.04) $ (4.09)
============ =============
</Table>
See notes to consolidated financial statements (unaudited).
2
<Page>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
AUGUST 4, FEBRUARY 3,
2001 2001
------------- --------------
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 66,394 $ 84,601
Accounts receivable, net...................................................... 19,577 18,466
Merchandise inventories....................................................... 181,662 176,284
Prepaid expenses.............................................................. 20,336 21,539
Due from suppliers............................................................ 57,284 58,413
Other current assets.......................................................... 8,733 7,379
------------- --------------
Total current assets...................................................... 353,986 366,682
Property and equipment, net...................................................... 539,004 532,141
Excess reorganization value, net................................................. 566,758 699,514
Other noncurrent assets.......................................................... 131,231 127,104
------------- --------------
$ 1,590,979 $ 1,725,441
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................................. $ 89,236 $ 79,499
Accrued payroll and payroll taxes............................................. 49,599 48,203
Current maturities of long-term debt.......................................... 14,108 11,174
Current portion of lease obligations.......................................... 16,866 18,337
Accrued interest payable...................................................... 7,125 10,464
Accrued expenses and other current liabilities................................ 97,159 101,124
------------- --------------
Total current liabilities................................................. 274,093 268,801
------------- --------------
Long-term debt................................................................... 434,145 441,162
------------- --------------
Long-term lease obligations...................................................... 168,750 177,192
------------- --------------
Deferred income taxes............................................................ 80,876 74,948
------------- --------------
Other noncurrent liabilities..................................................... 166,527 174,365
------------- --------------
Commitments and contingencies
Stockholders' equity
Preferred stock............................................................... -- --
Authorized: 5,000,000 shares; issued and outstanding: none issued
Common stock $0.01 par value.................................................. 301 301
Authorized: 100,000,000 shares; issued and outstanding: 30,098,510 shares
Common stock warrants......................................................... 59,982 59,982
Paid-in capital............................................................... 606,987 606,987
Accumulated deficit........................................................... (200,041) (77,491)
Accumulated other comprehensive loss.......................................... (438) --
Unamortized value of restricted common stock grants........................... (203) (806)
------------- --------------
Total stockholders' equity................................................ 466,588 588,973
------------- --------------
$ 1,590,979 $ 1,725,441
============= ==============
</Table>
See notes to consolidated financial statements (unaudited).
3
<Page>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ -----------
26 WEEKS 26 WEEKS
ENDED ENDED
AUGUST 4, JULY 29,
2001 2000
------------ -----------
Operating Activities
Net loss............................................................... $ (122,550) $ (44,784)
Adjustments to reconcile the net loss to the net cash
provided by (used for) operating activities:
Depreciation and amortization....................................... 38,577 41,026
Amortization of excess reorganization value......................... 132,756 --
Amortization of deferred financing costs............................ 1,124 2,566
Deferred income tax provision....................................... 6,044 --
Gain on sale or disposal of property and equipment.................. -- (1,883)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable............................................... (1,111) (276)
Merchandise inventories........................................... (5,378) 2,889
Due from suppliers................................................ 1,129 7,641
Other current assets.............................................. (670) (5,372)
Noncurrent assets................................................. (6,679) (12,638)
Accounts payable.................................................. 9,737 (3,255)
Accrued interest payable.......................................... (3,392) 54,229
Accrued expenses and other current liabilities.................... (2,590) 3,521
Other noncurrent liabilities...................................... (7,416) (12,610)
------------ -----------
Cash provided by operating activities.......................... 39,581 31,054
------------ -----------
Investing Activities
Property and equipment expenditures.................................... (46,471) (18,660)
Proceeds from disposition of property and equipment.................... -- 9,799
------------ -----------
Cash used for investing activities............................. (46,471) (8,861)
------------ -----------
Financing Activities
Repayments of the term loan............................................ (3,625) (5,229)
Repayments of the working capital facility............................. -- (4,800)
Borrowings under the DIP facility...................................... -- 10,300
Increase in other debt................................................. 157 606
Repayment of other debt................................................ (615) (1,295)
Decrease in lease obligations.......................................... (7,234) (9,446)
Decrease in book overdrafts............................................ -- (9,182)
Deferred financing costs............................................... -- (3,769)
------------ -----------
Cash used for financing activities............................. (11,317) (22,815)
------------ -----------
Decrease in cash and cash equivalents...................................... (18,207) (622)
Cash and cash equivalents at beginning of period........................... 84,601 16,196
------------ -----------
Cash and cash equivalents at end of period................................. $ 66,394 $ 15,574
============ ===========
Supplemental Disclosures of Cash Flow Information
Interest paid.......................................................... $ 37,441 $ 31,217
============ ===========
Income taxes paid...................................................... $ 550 $ 64
============ ===========
Noncash Investing and Financing Activities
Capital lease obligations.............................................. $ -- $ 19,139
============ ===========
</Table>
See notes to consolidated financial statements (unaudited).
4
<Page>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. PLAN OF REORGANIZATION
Pathmark Stores, Inc. (the "Company") completed its plan of reorganization
(the "Plan of Reorganization") and formally exited Chapter 11 on September 19,
2000 (the "Effective Date"). As a result, the Company adopted fresh-start
reporting in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("Fresh-Start Reporting"). In connection with the
adoption of Fresh-Start Reporting, a new entity was deemed created for financial
reporting purposes. The periods presented prior to the Effective Date have been
designed "Predecessor Company" and the periods subsequent to the Effective Date
have been designated "Successor Company' with the Saturday nearest the Effective
Date utilized for the accounting closing date related to the Predecessor Company
financial statements. As a result of the implementation of Fresh-Start Reporting
and the substantial debt reduction from the completion of the Plan of
Reorganization, the results of operations of the Predecessor Company and
Successor Company are not comparable.
NOTE 2. BUSINESS AND BASIS OF PRESENTATION
BUSINESS:
The Company operated 141 supermarkets as of August 4, 2001, primarily in
the New York-New Jersey and Philadelphia metropolitan areas. During fiscal 2001,
the Company has opened five stores and on August 4, 2001, closed two
under-performing stores.
BASIS OF PRESENTATION:
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). In the opinion of management, the
consolidated financial statements included herein reflect all adjustments which
are of a normal and recurring nature and are necessary to present fairly the
results of operations and financial position of the Company. This report should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K dated February 3, 2001.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
NET LOSS PER SHARE:
Weighted average outstanding shares, for net loss per share - basic and
diluted, were 30.0 million shares for the 13 weeks and the 26 weeks ended
August 4, 2001. Excluded from the calculation of net loss per share - basic
were 98,510 shares of restricted common stock as such shares have not vested.
All stock options, warrants and restricted common stock were excluded from
the computation of the Company's net loss per share - diluted because their
effect would have been anti-dilutive. Net loss per share data is not
presented for the Predecessor Company due to the significant change in the
Company's capital structure.
NOTE 3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following (in thousands):
<Table>
<Caption>
AUGUST 4, FEBRUARY 3,
2001 2001
----------- -----------
Cash................................................... $ 18,854 $ 17,559
Cash equivalents....................................... 47,540 67,042
----------- -----------
Cash and cash equivalents.............................. $ 66,394 $ 84,601
=========== ===========
</Table>
5
<Page>
NOTE 4. LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
<Table>
<Caption>
AUGUST 4, FEBRUARY 3,
2001 2001
----------- -----------
Term loan.............................................. $ 417,750 $ 421,375
Industrial revenue bonds............................... 8,080 8,128
Other debt (primarily mortgages)....................... 22,423 22,833
----------- -----------
Total debt............................................. 448,253 452,336
Less: current maturities............................... (14,108) (11,174)
----------- -----------
Long-term portion...................................... $ 434,145 $ 441,162
=========== ===========
</Table>
In September 2000, the Company entered into a credit agreement with a
group of lenders led by The Chase Manhattan Bank. The credit agreement
includes a $425.0 million term loan consisting of $125.0 million of Term Loan
A and $300.0 million of Term Loan B and a $175.0 million working capital
facility. The credit agreement bears interest at floating rates, ranging from
LIBOR plus 3% on Term Loan A and the working capital facility to LIBOR plus
4% on Term Loan B. The weighted average interest rate for the term loan was
8.8% during the 26 weeks ended August 4, 2001. The Company is required to
repay a portion of its borrowing under the term loan each year, so as to
retire such indebtedness in its entirety by July 15, 2007. Under the working
capital facility, which expires on July 15, 2005, the Company can borrow an
amount up to $175.0 million, including a maximum of $125.0 million in letters
of credit. As of August 4, 2001, no borrowings were made under the working
capital facility and $42.0 million in letters of credit were outstanding.
Borrowings under the credit agreement are secured by substantially all of
the Company's assets, other than certain specific assets secured by mortgages.
The credit agreement restricts, among other things, the payment of cash
dividends and the redemption of common stock. Other provisions of the credit
agreement limit the amount of obligations under leases and capital expenditures
in excess of specified amounts. The Company is also required to meet certain
financial covenants including minimum interest and rental coverage and minimum
cash flow. The Company was in compliance with such covenants as of August 4,
2001 and, based on management's operating projections for the remainder of
fiscal 2001, the Company believes that it will continue to be in compliance with
such covenants.
NOTE 5. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND COMPREHENSIVE LOSS
On February 4, 2001, the Company adopted the Financial Accounting Standards
Board (the "FASB") Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair
value. SFAS No. 133 defines requirements for designation and documentation of
hedging relationships, as well as ongoing effectiveness assessments, which must
be met in order to qualify for hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value are recorded in earnings immediately.
If the derivative is designated in a fair-value hedge, the changes in the fair
value of the derivative and the hedged item are recorded in earnings. If the
derivative is designated in a cash-flow hedge, effective changes in the fair
value of the derivative are recorded in other comprehensive loss currently and
in the income statement when the hedged item affects earnings. Changes in the
fair value of the derivative attributable to hedge ineffectiveness are recorded
in earnings immediately.
As part of its overall strategy to manage the level of exposure to
interest rate risk, in July 2001, the Company entered into a three-year
interest rate hedging arrangement on $150 million (the "Hedged Amount") of
its Term Loan B. Under this hedging arrangement, interest rates on the Hedged
Amount float within a range between a minimum of 8.39% and a maximum of 10%.
This derivative is recognized on the balance sheet at fair value and at
inception was designated, and continues to qualify, as a cash-flow hedge of
the Company's forecasted variable interest rate payments. The Company has
formally documented its risk-management objectives and strategy for
undertaking any hedge transaction. The impact of this cash-flow hedge during
the 13 weeks and 26 weeks ended August 4, 2001 on "Comprehensive Loss" is as
follows (in thousands):
<Table>
<Caption>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
----------- ----------- ----------- -----------
13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net loss.............................................. $ (61,153) $ (23,492) $ (122,550) $ (44,784)
Other comprehensive loss
Change in derivative fair value, net of tax........ (438) -- (438) --
----------- ----------- ----------- -----------
Comprehensive loss.................................... $ (61,591) $ (23,492) $ (122,988) $ (44,784)
=========== =========== =========== ===========
</Table>
6
<Page>
NOTE 6. INTEREST EXPENSE, NET
Interest expense, net is comprised of the following (in thousands):
<Table>
<Caption>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
----------- ----------- ----------- -----------
13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Term loan..................................................... $ 8,517 $ 5,518 $ 18,464 $ 10,698
Working capital facility...................................... -- 2,594 -- 4,863
DIP facility.................................................. -- 44 -- 44
Subordinated debt............................................. -- 28,271 -- 53,843
Amortization of deferred financing costs...................... 563 1,458 1,124 2,566
Lease obligations............................................. 5,132 5,462 10,351 10,829
Interest income............................................... (613) (139) (1,451) (260)
Other......................................................... 2,644 2,491 5,335 5,250
----------- ----------- ----------- -----------
Interest expense, net......................................... $ 16,243 $ 45,699 $ 33,823 $ 87,833
=========== =========== =========== ===========
</Table>
NOTE 7. GRAND UNION STORES
On March 3, 2001, the Company purchased six former Grand Union stores in New
York and New Jersey for $15.2 million, excluding merchandise inventory. Five
stores opened as Pathmark supermarkets in March 2001 and the sixth store will
open as a Pathmark supermarket later in fiscal 2001.
NOTE 8. OUTSOURCING AGREEMENT
In April 2001, the Company entered into a new five-year outsourcing
agreement with International Business Machines Corporation to continue to
provide a wide range of information systems services.
7
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES:
Sales in the second quarter of fiscal 2001 were $997.7 million compared to
$929.6 million in fiscal 2000, an increase of 7.3%. For the six-month period of
fiscal 2001, sales were $2.0 billion compared to $1.8 billion in fiscal 2000, an
increase of 6.8%. The sales increases in the second quarter and the six-month
period of fiscal 2001 were primarily due to higher same store sales of 3.5% and
3.3%, respectively, and new stores. Sales benefited from the Company's various
post restructuring initiatives, such as double coupons and increased promotional
spending. The Company operated 141 and 137 supermarkets at the end of the second
quarters of fiscal 2001 and fiscal 2000, respectively.
GROSS PROFIT:
Gross profit in the second quarter of fiscal 2001 was $277.1 million or
27.8% of sales compared to $262.4 million or 28.2% of sales in fiscal 2000.
For the six-month period of fiscal 2001, gross profit was $549.8 million or
27.8% of sales compared to $520.0 million or 28.1% in fiscal 2000. The
increase in gross profit dollars in the second quarter and the six-month
period of fiscal 2001 was primarily due to higher sales, partially offset by
higher promotional expenses and shrink. The decrease in gross profit
percentages in the second quarter and the six-month period of fiscal 2001 was
primarily due to the impact of our promotional initiatives to generate sales
and higher shrink as a percentage of sales. The cost of goods sold comparisons
were affected by pretax LIFO charges of $0.5 million and $0.4 million in the
second quarters of fiscal 2001 and fiscal 2000, respectively, and by pretax
LIFO charges of $1.0 million and $0.8 million in the six-month periods of
fiscal 2001 and fiscal 2000, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the second quarter of fiscal 2001 increased $16.8 million
compared to fiscal 2000 and $32.2 million in the six-month period of fiscal
2001 compared to fiscal 2000. The increase in SG&A in the second quarter of
fiscal 2001 was primarily due to higher expenses related to store labor and
related benefits, utilities and advertising as well as a charge of $1.8
million related to the closing of two under-performing stores on August 4,
2001, partially offset by income of $2.0 million resulting from the partial
settlement of a lawsuit related to price fixing of prescription drugs. The
increase in SG&A in the six-month period of fiscal 2001 was primarily due to
higher expenses related to store labor and related benefits, utilities and
advertising as well as pre-opening expenses of $2.2 million related to the
six former Grand Union stores and a charge of $1.8 million related to the
closing of two under-performing stores on August 4, 2001, partially offset by
income of $3.3 million resulting from the partial settlement of the above
mentioned lawsuit. The six-month period of fiscal 2000 included a gain on the
sale of certain real estate of $1.8 million. As a percentage of sales, SG&A
was 23.3% in the second quarter and the six-month period of fiscal 2001
compared to 23.2% in the second quarter and the six-month period of fiscal
2000. Excluding the above mentioned pre-opening expenses, the store closing
charges, the prescription drug settlements and the real estate gain, SG&A as
a percentage of sales was 23.3% in the second quarter and the six-month
period of fiscal 2001 compared to 23.2% in the second quarter and the
six-month period of fiscal 2000.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization was $19.6 million in the second quarters of
fiscal 2001 and fiscal 2000. For the six-month period of fiscal 2001,
depreciation and amortization was $38.2 million compared to $38.6 million in
fiscal 2000, primarily due to the impact of lower capital expenditures in fiscal
2000. Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $0.2 million in the second quarter and $2.2
million in the six-month period of fiscal 2000. There is no video tape
amortization in fiscal 2001 since the Company is no longer in the video tape
rental business.
REORGANIZATION EXPENSES:
Reorganization expenses in the second quarter and the six-month period of
fiscal 2000 were $4.8 million and $9.9 million, respectively. They are comprised
of accruals for employee retention bonuses and professional fees related to
legal, accounting and consulting services directly attributable to the Plan of
Reorganization.
8
<Page>
AMORTIZATION OF EXCESS REORGANIZATION VALUE:
Excess reorganization value of $798.0 million is being amortized over
three years. Amortization expense in the second quarter and the six-month period
of fiscal 2001 was $66.4 million and $132.7 million, respectively.
OPERATING EARNINGS (LOSS):
The operating loss in the second quarter of fiscal 2001 was $41.4 million
compared to operating earnings of $22.2 million in fiscal 2000. For the
six-month period of fiscal 2001, the operating loss was $81.8 million compared
to operating earnings of $43.1 million in fiscal 2000. The decrease in operating
earnings in the second quarter and the six-month period of fiscal 2001 was due
to the amortization of the excess reorganization value in fiscal 2001, partially
offset by the reorganization expenses in fiscal 2000.
INTEREST EXPENSE, NET:
Interest expense was $16.2 million in the second quarter of fiscal 2001
compared to $45.7 million in fiscal 2000 and $33.8 million for the six-month
period of fiscal 2001 compared to $87.8 million in fiscal 2000. The decrease in
interest expense in the second quarter and the six-month period of fiscal 2001
compared to fiscal 2000 was primarily due to the cancellation of subordinated
debt under the Plan of Reorganization.
INCOME TAX PROVISION:
The income tax provision of $3.5 million and $6.9 million in the second
quarter and the six-month period of fiscal 2001, respectively, was based on an
effective income tax rate of 40.3% expected to be applicable for the full fiscal
year, excluding the nondeductible amortization of excess reorganization value.
No income tax benefit was recognized in the second quarter and the six-month
period of fiscal 2000 since the Company recorded a valuation allowance related
to such income tax benefit. During the six-month period of fiscal 2001, the
Company made income tax payments of $0.5 million and received income tax refunds
of $8,000. During the six-month period of fiscal 2000, the Company made income
tax payments of $64,000 and received income tax refunds of $0.4 million.
SUMMARY OF OPERATIONS:
The Company's net loss in the second quarter of fiscal 2001 was $61.2
million compared to $23.5 million in fiscal 2000. For the six-month period of
fiscal 2001, the net loss was $122.5 million compared to $44.8 million in fiscal
2000. The increase in the net loss in the second quarter and the six-month
period of fiscal 2001 compared to fiscal 2000 was primarily due to the
amortization of excess reorganization value of $66.4 million in the second
quarter of fiscal 2001 and $132.7 million in the six-month period of fiscal
2001, respectively. Excluding the amortization of excess reorganization value,
the Company's net earnings was $5.2 million in the second quarter and $10.2
million in the six-month period of fiscal 2001.
EBITDA-FIFO:
EBITDA-FIFO was $45.3 million and $47.3 million in the second quarters of
fiscal 2001 and fiscal 2000, respectively, and $90.5 million and $93.0 million
in the six-month periods of fiscal 2001 and fiscal 2000, respectively.
EBITDA-FIFO represents net earnings before interest, income taxes, depreciation,
amortization, the gain on the sale of real estate and the LIFO charge. While
EBITDA-FIFO is a widely accepted financial indicator of a company's ability to
service and/or incur debt, it should not be construed as an alternative to, or a
better indicator of, operating earnings or of cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles. EBITDA-FIFO may not be comparable to similarly titled measures
reported by other companies.
9
<Page>
FINANCIAL CONDITION
DEBT SERVICE AND LIQUIDITY:
As a result of the substantial debt reduction resulting from the Plan of
Reorganization, the Company's debt service and liquidity have improved
significantly compared to the Predecessor Company's financial condition.
On the Effective Date, the Company entered into a credit agreement with
a group of lenders led by The Chase Manhattan Bank. The credit agreement
includes a $425.0 million term loan consisting of $125.0 million of Term Loan
A and $300.0 million of Term Loan B and a $175.0 million working capital
facility. The credit agreement bears interest at floating rates, ranging from
LIBOR plus 3% on Term Loan A and the working capital facility to LIBOR plus
4% on Term Loan B. As part of its overall strategy to manage the level of
exposure to interest rate risk, in July 2001, the Company entered into a
three-year interest rate hedging arrangement on $150 million of its Term Loan
B. Under this hedging arrangement, interest rates on the Hedged Amount float
within a range between a minimum of 8.39% and a maximum of 10%. This
derivative is recognized on the balance sheet at fair value and at inception
was designated, and continues to qualify, as a cash-flow hedge of the
Company's forecasted variable interest rate payments. The Company is
continuously evaluating the risk to its remaining long-term debt and will
implement additional interest rate hedging arrangements when deemed
appropriate. Including the hedging arrangement, the weighted average interest
rate for the term loan was 8.8% during the 26 weeks ended August 4, 2001. The
Company is required to repay a portion of its borrowing under the term loan
each year, so as to retire such indebtedness in its entirety by July 15,
2007. Under the working capital facility, which expires on July 15, 2005, the
Company can borrow an amount up to $175.0 million, including a maximum of
$125.0 million in letters of credit. As of August 4, 2001 and September 4,
2001, no borrowings were made under the working capital facility. Outstanding
letters of credit were $42.0 million and $41.5 million as of August 4, 2001
and September 4, 2001, respectively.
CREDIT AGREEMENT AND COVENANTS:
Borrowings under the credit agreement are secured by substantially all of
the Company's assets, other than certain specific assets secured by mortgages.
The credit agreement restricts, among other things, the payment of cash
dividends and the redemption of common stock. Other provisions of the credit
agreement limit the amount of obligations under leases and capital expenditures
in excess of specified amounts. The Company is also required to meet certain
financial covenants including minimum interest and rental coverage and minimum
cash flow. The Company was in compliance with all covenants as of August 4, 2001
and, based on management's operating projections for the remainder of fiscal
2001, the Company believes that it will continue to be in compliance with such
covenants. The Company's liquidity also included marketable securities of $47.5
million and $35.8 million as of August 4, 2001 and September 4, 2001,
respectively.
CAPITAL EXPENDITURES:
Capital expenditures in the second quarter of fiscal 2001, including
property acquired under capital leases, were $15.9 million compared to $16.0
million in fiscal 2000 and $46.5 million for the six-month period of fiscal
2001 compared to $37.8 million in fiscal 2000. During the six-month period of
fiscal 2001, the Company purchased six former Grand Union stores. It opened
five of them as Pathmark supermarkets, renovated nine stores and closed two
under-performing stores. During the remainder of fiscal 2001, the Company
expects to open four additional stores (including one former Grand Union
store and one replacement store) and complete 26 additional store
renovations. Capital expenditures for the remainder of fiscal 2001, including
property to be acquired under capital leases, are expected to be
approximately $100 million. Management believes that cash flows generated
from operations, supplemented by the unused borrowing capacity under the
working capital facility, its cash equivalents and the availability of
capital lease financing, will be sufficient to provide for the Company's
capital expenditure program.
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<Page>
CASH FLOWS:
Cash provided by operating activities was $39.6 million in the
six-month period of fiscal 2001 compared to $31.1 million in fiscal 2000. The
increase in cash provided by operating activities was primarily due to the
change in owned inventory and other assets and liabilities. Cash used for
investing activities was $46.5 million in the six-month period of fiscal 2001
compared to $8.9 million in fiscal 2000. The increase in cash used for
investing activities was primarily due to an increase in expenditures for
property and equipment. Cash used for financing activities was $11.3 million
in the six-month period of fiscal 2001 compared to $22.8 million in fiscal
2000. Cash used for financing activities was lower in fiscal 2001 compared to
fiscal 2000 primarily due to the impact of the Plan of Reorganization.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "BUSINESS COMBINATIONS". This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board (the "APB") Opinion No. 16, "BUSINESS
COMBINATIONS", and SFAS No. 38, "ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF
PURCHASED ENTERPRISES". All business combinations initiated after June 30, 2001
are to be accounted for using the purchase method. The adoption of SFAS No. 141
did not have any effect on the Company's consolidated financial statements, but
will impact the accounting for future business combinations.
In June 2001, the FASB issued SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS". This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"INTANGIBLE ASSETS". It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The provisions of SFAS No. 142 are required to be adopted
effective with the Company's fiscal year 2002. The Company's Excess
Reorganization Value will no longer be amortized subsequent to fiscal 2001 but
rather will be evaluated for impairment. The Company is evaluating the impact
that the adoption of this statement will have on its financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. As used in this statement, a legal
obligation is an obligation that a party is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral contract or by
legal construction of a contract under the doctrine of promissory estoppel. The
provisions of SFAS No. 143 are required to be adopted effective with the
Company's fiscal year 2003. The Company has not determined the impact, if any,
that the adoption of this statement will have on its financial position or
results of operations.
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<Page>
FORWARD-LOOKING INFORMATION
This report and documents incorporated herein by reference contain certain
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) about the future performance of the Company which
are based on management's assumptions and beliefs in light of the information
currently available to it. The Company assumes no obligation to update the
information contained herein. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements including, but not limited to, competitive
practices, including store openings and renovations, and pricing and promotional
activity in the food industry generally and particularly in the Company's
principal markets; the Company's relationships with its associates and the terms
of future collective bargaining agreements; the costs of other legal and
administrative cases and proceedings; the nature and extent of continued
consolidation in the food industry; availability and terms of financing; supply
or quality control problems with the Company's vendors and changes in economic
conditions which affect the spending patterns of the Company's customers. Such
forward-looking statements can be identified by the use of words like
"anticipates", "believes", "estimates", "expects", "may", "plans", "should",
"will", or similar expressions, as well as discussions of strategy. A more
detailed description of some of the risk factors is set forth in the Company's
Annual Report on Form 10-K dated February 3, 2001.
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<Page>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on June 14,
2001.
(b) Results of votes of security holders.
<Table>
<Caption>
(1) Election of Directors For Withheld
--------------------- --- ---------
William J. Begley 26,309,063 91,497
James L. Donald 24,915,600 1,484,960
Daniel H. Fitzgerald 26,309,063 91,497
Eugene M. Freedman 26,308,470 92,090
Robert G. Miller 26,309,063 91,497
Frank G. Vitrano 24,847,913 1,552,647
Steven L. Volla 26,309,028 91,532
</Table>
(2) Approval of the 2001 Executive Incentive Plan:
<Table>
<Caption>
For Against Abstain
--- ------- -------
23,632,794 136,182 12,159
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: None.
(b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the
fiscal quarter ended August 4, 2001.
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<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATHMARK STORES, INC.
BY /s/ FRANK G. VITRANO
----------------------------------------
(FRANK G. VITRANO)
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
BY /s/ JOSEPH W. ADELHARDT
----------------------------------------------
(JOSEPH W. ADELHARDT)
SENIOR VICE PRESIDENT AND CONTROLLER,
CHIEF ACCOUNTING OFFICER
DATE: September 14, 2001
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