PATHMARK STORES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
FEBRUARY 2, 2002 1-5287

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PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 22-2879612
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 MILIK STREET 07008
CARTERET, NEW JERSEY (Zip Code)
(Address of principal executive office)

(732) 499-3000
(Registrant's telephone number, including area code)
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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
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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 /_/

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes /X/ No /_/

As of April 19, 2002, 30,067,407 shares of the Common Stock were
outstanding. The aggregate market value of the Common Stock as of April 19, 2002
(based upon the last reported sale price of the Common Stock by the Nasdaq
National Market), excluding outstanding shares deemed beneficially owned by
directors and officers, was $690,429,707.

Documents incorporated by reference: Part III of this Annual Report on
Form 10-K incorporates by reference information to the extent specific sections
are referred to herein from the Proxy Statement for its Annual Meeting to be
held on June 13, 2002 (the "2002 Proxy Statement").

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FORWARD-LOOKING INFORMATION

This report and the documents incorporated by reference into this report
contain both historical and "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements appear in a number of places in this report and include statements
regarding our intent, belief and current expectations with respect to, among
other things, capital expenditures and technology initiates, the ability to
borrow funds under our credit facilities, the ability to successfully implement
our operating strategies, including trends affecting our business, financial
condition and results of operations. The words "may", "will", "believe",
"expect", "anticipate", "intend", project" and other similar expressions
generally identify forward-looking statements. While these forward-looking
statements and the related assumptions are made in good faith and reflect our
current judgment regarding the direction of our business, actual results will
almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions or other future performance suggested herein. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond our control and reflect future business decisions which are subject
to change. Some of these assumptions inevitably will not materialize, and
unanticipated events will occur which will affect our results. Some important
factors (but not necessarily all factors) that could affect our revenues, growth
strategies, future profitability and operating results, or that otherwise could
cause actual results to differ materially from those expressed in or implied by
any forward-looking statement, include the following:

o changes in business and economic conditions and other adverse conditions
in our markets;
o unanticipated environmental damages; o increased competition;
o increased labor costs and labor disruptions; o reliance on third-party
suppliers;
o our ability to successfully implement our renovation and expansion
strategies; and
o natural disasters.

For a discussion of these factors, see "Item 1 - Business - Factors
Affecting Our Business and Prospects."

2

PART I

ITEM 1. BUSINESS*

GENERAL

Pathmark Stores, Inc. was incorporated in Delaware in 1987 and is the
successor by merger to a business established in 1966. In October 1987, our
predecessor companies were acquired in a leveraged buyout pursuant to which
substantial indebtedness was incurred. While our core supermarkets operations
remained sound following this leveraged buyout, the additional indebtedness and
associated interest expense ultimately led us and our then parent companies to
file a prepackaged plan of reorganization in the U.S. Bankruptcy Court in
Delaware on July 12, 2000. On September 7, 2000, the Court entered an order
confirming our plan of reorganization, which became effective on September 19,
2000, at which time we formally exited Chapter 11. As part of the plan of
reorganization, approximately $1 billion of our subordinated debt was cancelled,
with the holders receiving 100% of our common stock. Our principal executive
office is located at 200 Milik Street, Carteret, NJ 07008 (telephone: (732)
499-3000). Unless the context indicates otherwise, the terms "Company",
"Pathmark", "we" and "our" as used in this report, mean Pathmark Stores, Inc.
and its consolidated subsidiaries.

We are a leading full-service supermarket chain in the Northeast, operating
141 stores in the densely populated New York-New Jersey and Philadelphia
metropolitan areas. We pioneered the development of the large
supermarket/drugstore format in the Northeast, opening our first store of this
kind in 1977. Today, our stores average approximately 52,100 square feet in size
and are approximately 17% larger than the average U.S. supermarket. In addition,
our stores continue to be among the most productive in our industry. During
fiscal 2001, we generated sales per store and sales per selling square foot of
$28.8 million and $738, respectively, compared to industry averages of
approximately $17.4 million and $535, respectively. During fiscal 2001, we
opened five new stores, closed two stores and completed 34 renovations.

Our stores provide "one-stop" shopping with a wide assortment of foods and
general merchandise and typically provide a variety of conveniences including a
customer service center, a pharmacy, expanded produce and health and beauty care
departments, service seafood and delicatessen departments and an in-store bank.
Our stores are generally well situated in high traffic urban and suburban
locations where we have established a loyal customer base and where we believe
we are well positioned against new competitive entrants. We provide value to our
customers through strong customer service, a convenient shopping experience,
modern stores, a wide assortment of merchandise that caters to our diverse
customer base, competitive prices, a strong private label program and effective
in-store execution.

We believe we are the largest supermarket chain operating under a single
banner ("Pathmark") in our market area in terms of annual sales, which provides
us with economies of scale with respect to branding and advertising. We focus
our operations on this market area, where we believe we can maintain and build
upon our strong market presence and achieve additional operating economies. All
of our stores are located within 100 miles of our corporate office in Carteret,
New Jersey and of our company-operated and outsourced distribution facilities.
The proximity of these distribution facilities to our stores enables us to
maintain better in-stock conditions, short lead times and lower distribution
costs. We intend to further strengthen our position within our market area by
selectively expanding our store base. During fiscal 2002, we expect to open six
new stores and have identified an additional 40 potential locations for our
future stores within a 100 mile radius of our corporate office.

OUR STRENGTHS

STRONG REGIONAL FRANCHISE. Operating in the New York-New Jersey and
Philadelphia metropolitan areas for over 35 years, we have successfully
developed a leading supermarket franchise with strong brand name recognition and
customer loyalty. We believe we are the largest supermarket chain operating
under a single banner in our market area in terms of annual sales. Our market
area includes some of the most densely populated regions of the United States,
representing approximately 10% of the U.S. population and encompassing two of
the five largest U.S. metropolitan areas by population, namely New York and
Philadelphia. We believe that the high population density in our markets coupled
with the geographic concentration of our stores provide substantial
opportunities for economies of scale.

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* Unless otherwise indicated, all information in Item 1 is given as of February
2, 2002.

3

HIGHLY PRODUCTIVE, MODERN-FORMAT STORE BASE. Our stores are among the most
productive in the industry. During fiscal 2001, we generated sales per store and
sales per selling square foot of $28.8 million and $738, respectively, compared
to industry averages of approximately $17.4 million and $535, respectively. Our
stores average approximately 52,100 square feet in size and are approximately
17% larger than the average U.S. supermarket. We design our stores to provide
customers with "one-stop" shopping with a wide assortment of foods and general
merchandise, as well as a host of additional conveniences, including 130
in-store full service pharmacies and, in approximately 67% of our stores, a wide
array of financial services offered by in-store banks. We are a leading filler
of prescriptions among our supermarket competitors in the New York-New Jersey
and Philadelphia metropolitan areas and, through our agreements with Fleet Bank
and New York Community Bank, we believe we are also the leading provider of
in-store banking services in our market area.

PRIME REAL ESTATE LOCATIONS. Our many years of operation in our market area
have allowed us to establish a store presence in high traffic urban and suburban
locations. We believe that this gives us a strong position against new
competitive entrants as our store portfolio would be difficult to replicate.

STRONG AND DIFFERENTIATED MERCHANDISING. We believe that our merchandising
and marketing programs allow us to differentiate our product and service
offering to our customers. We also believe that our large stores and the
experience of our category managers and store operators allow us to respond to
the varying product demands of our customers with effective merchandising, which
is important given the diverse ethnic makeup of the communities in which we
operate. In addition, we offer over 3,000 private label products under the
"Pathmark" name, which we believe provides substantial value to our customers
and increases overall customer loyalty. Given our leading position in our market
area, our high customer count and our established marketing expertise, we are
also able to offer vendors significant opportunities to market their products
effectively in a desirable market area. As a result, we believe we are
well-positioned to realize purchasing and cooperative marketing benefits from
vendors.

EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. Our senior management team has
significant experience, with our top five executives having worked in the
industry for an average of 30 years. The current management team is led by our
Chairman and CEO, James Donald, who joined us in October 1996 from Safeway where
he previously was President of Safeway's Eastern division. Through Mr. Donald's
leadership, management has successfully implemented numerous operational
initiatives which have served to increase our overall competitiveness and market
share. Our management team and associates also own and hold options to purchase
our common stock, with stock-based incentives reaching down to the assistant
store manager level. In addition, a significant portion of management's total
compensation is incentive-based.

OUR STRATEGY

Our goals are to increase sales, market penetration, profitability and
return on investment in our existing markets. To achieve these goals, we intend
to:

CONTINUE TO RENOVATE OUR STORES AND EXPAND OUR STORE BASE. We believe that
keeping stores fresh and up-to-date is critically important, and our goal is to
renovate each store at least every five years. The store renovation program for
fiscal 2001 included 34 renovations, the largest number we have renovated in any
one year. At the end of fiscal 2001, approximately 80% of our stores were either
new or have been renovated over the last five years. In addition to continually
renovating our stores, we intend to further strengthen our position in our
market area by selectively expanding our store base. During fiscal 2002, we
expect to open six new stores, two of which will replace existing stores and
complete 19 renovations. In addition, we have identified an additional 40
potential locations for our future stores within a 100 mile radius of our
corporate office. By opening stores in our current market area, we believe we
can increase our existing strong market presence and achieve additional
operating economies.

PROVIDE SUPERIOR CUSTOMER SERVICE AND STORE-LEVEL EXECUTION. We believe we
differentiate ourselves by, among other things, our focus on customer service.
To ensure the implementation of our high customer service standards, we rely on
a store evaluation program whereby "mystery shoppers" visit our stores and rate
them based on a variety of customer service attributes. One of our top
priorities is to continue our strong execution in the area of food safety,
which, through our surveys, we have found to be a top criterion by which
customers choose a supermarket. We intend to continue to develop and improve
store-level execution through programs that emphasize proactive, interpersonal
communication between store associates and customers.

4

EXPAND PROFIT THROUGH IMPROVED GROSS PROFIT. We intend to continue to focus
on improving our profitability by capitalizing on our large store format, which
affords us the flexibility to more effectively merchandise a broader array of
products and services, as well as higher margin products. An integral part of
our merchandising and marketing effort is to promote increased customer traffic
for our stores through our various convenience service departments, such as
in-store pharmacies and banks. Furthermore, we plan to leverage the Pathmark
Advantage Card loyalty program, which facilitates more effective category
management and offers us the opportunity to more efficiently target sales
promotions while strengthening our customer base. We also intend to increase our
focus on, and merchandising of, our private label products as they generally
provide higher margins than comparable branded products. Gross profit
improvement initiatives will also include a focus on inventory control,
disciplined ordering and shrink reduction.

REDUCE OPERATING EXPENSES. We consistently evaluate our business in an
effort to reduce operating expenses without affecting our overall objective of
providing a high level of customer service. Currently, we have a number of
initiatives in place to accomplish this goal. For example, our labor initiative
is intended to increase associate productivity through increased uses of
technology, such as more efficient point-of-sale equipment. We also have a
program called "Best Ball," which is designed to identify the best operating
practices in use by certain stores and implement these best practices throughout
our chain. These operating practices include maximizing efficient use of
supplies and minimizing workers' compensation and customer accident claims.

UPGRADE AND ENHANCE TECHNOLOGY. We believe in upgrading and improving our
technology to enhance operating efficiency and customer service. We implemented
a new financial system in the fourth quarter of fiscal 2001, which we expect
will enhance our operational reporting and analytical tools. Similarly, our Wide
Area Network was recently upgraded to take advantage of more reliable and faster
frame relay technology, which we expect will improve communications with stores.
Beginning in early 2002, we will begin to roll out IBM's latest point-of-sale
technology, which we believe will improve cashier productivity and customer
service. In addition, after testing "self-checkout" equipment in five of our
stores and realizing strong customer acceptance and repeat usage, we expanded
this feature to 21 stores and plan to expand self-checkout to a significant
number of additional stores, with the intent of both improving our customer
shopping experience and lowering store-level operating costs. We are also
planning to implement a new time and attendance system, which will enable us to
more effectively track store-level labor costs. We plan to continue evaluating a
new category management system, which should assist in maximizing SKU level
profitability and improve in-store merchandising. Many of our various systems
initiatives were incorporated as part of a five-year extension of our existing
IBM outsourcing agreement, which provides our data center and information
systems functions, as well as business applications and systems development.

STORES

We operate 141 full-service supermarkets in the New York-New Jersey and
Philadelphia metropolitan areas. Our market area includes some of the most
densely populated regions of the United States, representing approximately 10%
of the U.S. population. We pioneered the development of the large
supermarket/drugstore format in the Northeast, opening our first such store in
1977. Today, our stores average approximately 52,100 square feet in size and are
approximately 17% larger than the average U.S. supermarket.

Below is a summary of the range of our store sizes as of February 2, 2002:

5

Our stores provide "one-stop" shopping with a wide assortment of foods and
general merchandise and typically provide a variety of conveniences including a
customer service center, a pharmacy, expanded produce and health and beauty care
departments and service seafood and delicatessen departments. In addition,
approximately 67% of our stores also include in-store banks offering a wide
array of financial services, which are principally operated by Fleet Bank or New
York Community Bank.

Our stores are generally well situated in high traffic urban and suburban
locations where we have established a loyal customer base and where we believe
we are well positioned against new competitive entrants. Given the valuable
locations of our stores coupled with a format that offers our customers a
convenient, "one-stop" shopping experience, our stores are among the most
productive in our industry. For fiscal 2001, we generated sales per store and
sales per selling square foot of $28.8 million and $738, respectively, compared
to industry averages of approximately $17.4 million and $535, respectively.

112 of our stores are in the greater New York-New Jersey metropolitan area
and 29 of our stores are in the greater Philadelphia metropolitan area.

STORE RENOVATION AND EXPANSION

We believe that keeping stores fresh and up-to-date is critically important,
and our goal is to renovate each store at least every five years. The store
renovation program for fiscal 2001 included 34 renovations, the largest number
we have renovated in any one year. By the end of fiscal 2001, approximately 80%
of our stores were either new or renovated over the last five years. In addition
to continually renovating our stores, we intend to further strengthen our
position in our market area by selectively expanding our store base. During
fiscal 2002, we expect to open six new stores, two of which will replace
existing stores, and complete 19 renovations. In addition, we have identified an
additional 40 potential locations for our future stores within a 100 mile radius
of our corporate office.

In March 2001, we purchased six former Grand Union stores for $15.2 million,
excluding merchandise inventory. We have re-opened five of these stores as
Pathmark stores and expect the sixth to be re-opened in the first half of fiscal
2002 after an extensive renovation and enlargement of the store.

We continuously evaluate our stores for necessary renovations. Renovations,
which we define as requiring capital expenditures in excess of $350,000, are
completed to increase customer traffic and sales, respond to existing customer
demand, compete effectively against new competitors in close proximity to a
particular store and update a particular format to our current prototype. In
certain circumstances, we may decide to replace a store instead of conducting a
major renovation due to population shifts, availability of a more attractive
site or cost considerations.

We spent $131 million on capital expenditures, including property acquired
under capital leases and technology investments, in fiscal 2001. We expect to
spend $135 million on capital expenditures in fiscal 2002.

The following table sets forth, for the periods indicated, our store
development and renovation activities:

On March 1, 2002, we signed a joinder agreement with The Stop & Shop
Supermarket Company ("Stop and Shop") to acquire nine Big V Shop-Rite
supermarkets ("Big V") in conjunction with Stop & Shop's proposal to acquire
substantially all of the Big V supermarkets pursuant to a plan of reorganization
to be filed by Stop & Shop and certain creditors of Big V with the Bankruptcy
Court in the Big V bankruptcy case. Big V is already the subject of a competing
plan previously filed by Wakefern Food Corp. and Big V.

6

Our acquisition of these stores is subject to a number of conditions,
including the satisfaction of the closing conditions of Stop & Shop's asset
purchase and sale agreement, the confirmation of the Stop & Shop plan of
reorganization by the Bankruptcy Court and the approval of the applicable
antitrust authorities. Because of the nature of the bankruptcy process and the
existence of a competing plan of reorganization for Big V, there can be no
assurances that we will be successful in acquiring the nine stores.

MERCHANDISING

Our merchandising strategy is designed to offer a "one-stop" shopping
experience that leverages our large store format and strong category management
to provide a differentiated product and service offering for our customers,
while allowing us to merchandise our higher margin products more effectively. In
addition, we believe our focus on perishables, ethnic merchandising and private
label has allowed increased customer loyalty, while providing higher margins and
profitability.

PERISHABLES. We believe that the quality of perishable items, particularly
produce, is an important factor for consumers when choosing where to shop. This
past year we brought our focus on produce to the "next level." Produce managers,
general and assistant store managers and even members of senior management
underwent produce training designed to educate them on all aspects of running a
high quality and profitable produce department. Also, in fiscal 2001, we
introduced into our advertisements "Produce Pete," a local television
personality who has a television show on weekend mornings devoted to tips on
shopping for fresh fruits and vegetables. We also continue to focus on our fresh
seafood department which has shown steady growth. In addition, we have
redesigned our bakery departments and our bakery offerings in a manner we
believe is designed to improve profitability by reducing shrink, lowering
operating costs and improving the departmental product mix.

ETHNIC MERCHANDISING. Being located in the New York-New Jersey and
Philadelphia metropolitan areas, we serve a highly diverse customer base, very
often within the neighborhood of a given store. We effectively vary our product
offerings across our store base in order to satisfy the various food preferences
of our customers. We have a Director of Ethnic Merchandising whose sole focus is
to more fully develop and refine our strategy of catering to our diverse
customer base. We believe that our large stores and the experience of our
category managers and store operators allow us to respond to the varying product
demands of our customers with effective merchandising, which is especially
important given the diversity of the communities in which we operate.

PRIVATE LABEL. We have a large variety of private label products under the
"Pathmark" name. Over 3,000 Pathmark private label products are currently
available, which we believe provide substantial value to our customers. New,
updated packaging for our entire line of private label products was
substantially completed in fiscal 2000, which has helped to strengthen our brand
positioning. As a result, private label product sales have increased.

ADVERTISING AND PROMOTION

As part of our marketing strategy, we emphasize value through competitive
pricing and weekly sales and promotions, supported by extensive advertising. Our
advertising expenditures are concentrated on print advertising, including
advertisements and circulars in local and area newspapers, with a particular
emphasis on ethnic media, ad flyers distributed in stores and on radio.

We also plan to continue to increase our focus on the Pathmark Advantage
Card program to enhance our understanding of customer purchasing patterns and
develop targeted sales promotions to our customer base. In addition, we have a
website (www.pathmark.com) which offers promotional discounts and assorted
on-line services.

Given our leading position in our market area, our large customer count and
our established marketing expertise, we also are able to offer vendors
significant opportunities to market their products effectively in a desirable
market area. As a result, we believe we are well-positioned to realize
purchasing and cooperative marketing benefits from our vendors.

7

PURCHASING AND DISTRIBUTION

We have outsourced a major portion of our distribution and trucking
functions. This approach allows us to focus on our customers and stores. We have
a long-term agreement expiring in February 2013 with C&S Wholesale Grocers, Inc.
("C&S"), the nation's third largest grocery wholesale company in terms of sales,
to supply us with substantially all of our products other than general
merchandise, pharmacy, health and beauty care and tobacco products. This
agreement may be terminated for cause or certain events of bankruptcy by either
party. Under our arrangement with C&S, we negotiate prices, discounts and
promotions directly with vendors.

AmeriSource-Bergen Corp., one of the nation's leading pharmaceutical
wholesalers, supplies all of our pharmacy products. In addition, we have an
agreement with a third-party trucking company to transport our products from our
outsourced and internally operated warehouse and distribution facilities to our
stores. While we have an excellent relationship with our current distribution
partners, should we need to find alternative distribution partners for any
reason, we believe that alternative sources of supply would be available to us
at market terms.

Our general merchandise, health and beauty care and tobacco products are
internally supplied from our 290,000 square foot leased distribution center in
Edison, New Jersey. We believe that our outsourced and internally provided
warehouse and distribution facilities contain sufficient capacity for the
continued expansion of our store base for the foreseeable future. All of our
stores are within 100 miles of these distribution facilities.

MANAGEMENT INFORMATION SYSTEMS

We implemented a new financial system in the fourth quarter of fiscal 2001
which we expect will enhance our operational reporting and analytical tools.
Similarly, our Wide Area Network was recently upgraded to take advantage of more
reliable and faster frame relay technology which we expect will improve
communications with stores. Beginning in early 2002, we will begin to roll out
IBM's latest point-of-sale technology, which we believe will improve cashier
productivity and customer service.

In addition, after testing "self-checkout" equipment in five of our stores
and realizing strong customer acceptance and repeat usage, we expanded this
feature to 21 stores and plan to expand self-checkout to a significant number of
additional stores, with the intent of both improving our customer experience and
lowering store-level operating costs. We are also planning to implement a new
time and attendance system, with a view to allowing us to more effectively track
store-level labor costs. We plan to continue evaluating a new category
management system for installation in 2003, which should assist in maximizing
SKU level profitability and improve in-store merchandising.

Many of our various systems initiatives were incorporated as part of a
five-year extension of our existing IBM outsourcing agreement in April 2001.
Pursuant to this agreement, IBM operates our data center operations and
mainframe processing and information system functions and is providing business
applications and systems designed to enhance our efficiency and customer
service. The charges under this agreement are based upon the services requested
at predetermined rates. We believe that this arrangement allows us to focus our
management resources on our customers and stores.

COMPETITION

The supermarket business is highly competitive. Our earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product acquisition and distribution and cost-effective store
operations. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service. We compete against
national, regional and local supermarkets, club stores, drug stores, convenience
stores, discount merchandisers and other local retailers in our market area. Our
principal competitors include ShopRite, A&P/Waldbaum's, Stop & Shop and Acme.

TRADE NAMES, SERVICE MARKS AND TRADEMARKS

We have registered a variety of trade names, service marks and trademarks
with the United States Patent and Trademark Office, including "Pathmark." We
consider our Pathmark service marks to be of material importance to our business
and actively defend and enforce such service marks.

8

REGULATION

Our business requires us to hold various licenses and to register certain of
our facilities with state and federal health, drug and alcoholic beverage
regulatory agencies. By virtue of these licenses and registration requirements,
we are obligated to observe certain rules and regulations, and a violation of
such rules and regulations could result in a suspension or revocation of our
licenses or registrations. In addition, most of our licenses require periodic
renewals. We have experienced no material difficulties with respect to
obtaining, effecting or retaining our licenses and registrations.

PATHMARK IN THE COMMUNITY

We are recognized as a long-standing, valuable member of the communities
which we serve. This recognition is based upon our associates' involvement in
important community outreach efforts, as well as our support, both financial and
in kind, of numerous nonprofit charitable organizations. Our participation in
providing assistance to those affected by the tragic events of September 11th is
an example of this commitment.

ASSOCIATES

As of February 2, 2002, we employed approximately 27,000 people, of whom
approximately 19,000 were employed on a part-time basis. Approximately 90% of
our associates are covered by 15 collective bargaining agreements (typically
having three or four year terms) negotiated with 13 different local unions.
During fiscal 2002, six contracts, covering approximately 9,700 associates, will
expire. We do not anticipate any difficulty in renegotiating these contracts. We
believe that our relationship with our associates is generally satisfactory.

FACTORS AFFECTING OUR BUSINESS AND PROSPECTS

OUR INDUSTRY IS INTENSELY COMPETITIVE AND THE COMPETITION WE ENCOUNTER MAY
HAVE A NEGATIVE IMPACT ON THE PRICES WE MAY CHARGE FOR OUR PRODUCTS, OUR
REVENUES AND PROFITABILITY. The supermarket business is highly competitive and
is characterized by high inventory turnover and narrow profit margins. As a
result, our results of operations are sensitive to, and may be materially
adversely impacted by, among other things, competitive pricing, promotional
pressures and additional store openings. We compete with national and regional
supermarkets, club stores, drug stores, convenience stores, discount
merchandisers and other local retailers in the market areas we serve.
Competition with these outlets is based on price, store location, advertising
and promotion, product mix, quality and service. Some of these competitors may
have greater financial resources, lower merchandise acquisition cost and lower
operating expenses than we do, and we may be unable to compete successfully in
the future.

We are mainly concentrated in the metropolitan areas of New York-New Jersey
and Philadelphia. As a result, we are vulnerable to economic downturns in that
region, in addition to those that may affect the country as a whole, as well as
natural and other catastrophic events that may impact that region. These events
may adversely affect our sales which may lead to lower earnings, or even losses,
and may also adversely affect our future growth and expansion. For example, the
economic recession in 2001, combined with the terrorist events of September 11,
2001, have adversely affected the New York region and the regional economy.
Further, since we are concentrated in densely populated metropolitan areas,
opportunities for future store expansion may be limited, which may adversely
affect our business and results of operations.

OUR RENOVATION AND EXPANSION PLANS MAY NOT BE SUCCESSFUL, WHICH MAY
ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. A key to our business
strategy has been, and will continue to be, the renovation and expansion of
total selling square footage. Although we expect cash flows generated from
operations, supplemented by the unused borrowing capacity under our bank credit
facility and the availability of capital lease financing, will be sufficient to
fund our capital renovation and expansion programs, sufficient funds may not be
available. In addition, the greater financial resources of some of our
competitors for real estate sites could adversely affect our ability to open new
stores. The inability to renovate our existing stores, add new stores or
increase the selling area of existing stores could adversely affect our
business, our results of operations and our ability to compete successfully.

9

WE RELY ON C&S FOR SUPPLY OF A MAJORITY OF OUR PRODUCTS. Pursuant to the
terms of a long-term supply agreement, we have outsourced to C&S, supply of
substantially all of the products we sell other than general merchandise,
pharmacy, health and beauty care and tobacco products. During fiscal 2001, the
products supplied from C&S accounted for approximately 61% of all of our
supermarket inventory purchases. Although we have not experienced difficulty in
supply of these products to date, supply interruptions by C&S may occur in the
future. Any significant interruption in this supply stream, including as a
result of disruptions at C&S or if the C&S agreement were terminated for any
reason, could have a material adverse effect on our business and results of
operations.

WE ARE AFFECTED BY INCREASING LABOR COSTS AND A COMPETITIVE LABOR MARKET AND
ARE SUBJECT TO THE RISK OF UNIONIZED LABOR DISRUPTIONS. Our continued success
depends on our ability to attract and retain qualified personnel. We compete
with other businesses in our markets with respect to attracting and retaining
qualified employees. A shortage of qualified employees may require us to enhance
our wage and benefits package in order to compete effectively in the hiring and
retention of qualified employees. Our labor costs may continue to increase, and
such increases may not be recovered. If we fail to attract and retain qualified
employees, to control our labor costs or to recover any increased labor costs
through increased prices, our business and results of operations may be
materially adversely affected. In addition, approximately 90% of our associates
are covered by collective bargaining agreements with local labor unions.
Although we do not anticipate any difficulty renegotiating these contracts as
they expire, a labor-related work stoppage by these unionized employees could
adversely affect our business and results of operations.

WE FACE THE RISK OF BEING HELD LIABLE FOR ENVIRONMENTAL DAMAGES THAT MAY
OCCUR. Our operations subject us to various laws and regulations relating to the
protection of the environment, including those governing the management and
disposal of hazardous materials and the cleanup of contaminated sites. Under
some environmental laws, such as the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund
law, and similar state statutes, responsibility for the entire cost of cleanup
of a contaminated site can be imposed upon any current or former site owners or
operators, or upon any party who sent waste to the site, regardless of the
lawfulness of the original activities that led to the contamination. From time
to time we have been named as one of many potentially responsible parties at
Superfund sites, although our share of liability has typically been DE MINIMIS.
We believe we are currently in substantial compliance with applicable
environmental requirements. However, future developments such as more aggressive
enforcement policies, new laws or discovery of unknown conditions may require
expenditures that may have a material adverse effect on our business and
financial condition.

ITEM 2. PROPERTIES*

As of February 2, 2002, we operated 141 supermarkets located in New York,
New Jersey, Pennsylvania and Delaware as follows:

Our 141 supermarkets have total square footage of approximately 7.3 million
square feet with an aggregate selling area of approximately 5.4 million square
feet. Fifteen of these stores are owned and the remaining 126 are leased. These
supermarkets are either freestanding stores or are located in shopping centers.
Thirty-eight leases will expire through fiscal 2006 and there are options to
renew 37 of them. A new store is under construction to replace the 38th store.

We lease our corporate headquarters in Carteret, New Jersey in premises
totaling approximately 150,000 square feet in size.

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

* Unless otherwise indicated, all information in Item 2 is given as of February
2, 2002.

10

All of the facilities owned by us are subject to mortgages. We plan to
acquire leasehold or fee interests in any property on which new stores or other
facilities are opened and will consider entering into sale/leaseback or mortgage
transactions with respect to owned properties if we believe such transactions
are financially advantageous.

We continue to operate a 290,000 square foot leased general merchandise,
health and beauty care products and tobacco distribution center in Edison, New
Jersey, which opened in 1980.

ITEM 3. LEGAL PROCEEDINGS*

AHOLD LITIGATION. On December 16, 1999, Koninkljke Ahold N.V. ("Ahold")
filed a complaint in the Supreme Court, State of New York, County of New York
(the "Supreme Court"), against us seeking a declaratory judgment that Ahold had
used its "best efforts" under a merger agreement pursuant to which Ahold was
going to acquire us (the "Merger Agreement"). On January 18, 2000, we filed our
answer and counterclaims, denying Ahold's assertion that it used its best
efforts to consummate the Merger Agreement. Additionally, we asserted
counterclaims against Ahold for (i) breach of contract by failure to use best
efforts; (ii) breach of the covenant of good faith and fair dealing; and (iii)
unfair competition. We have requested compensatory damages in an unspecified
amount.

On February 7, 2000, Ahold answered our counterclaims and denied the
allegations contained therein and filed an amended complaint seeking
declarations that (i) the "best efforts" clause in the Merger Agreement is
unenforceable; (ii) the "best efforts" clause is enforceable and Ahold did not
breach that clause; and (iii) Ahold properly terminated the Merger Agreement.
Additionally, Ahold alleged that we breached the "best efforts" clause of the
Merger Agreement and has requested compensatory damages in an unspecified
amount. We filed our amended answer, amended complaint and amended counterclaims
on February 27, 2000.

In April 2000, we filed a motion seeking partial summary judgment in its
favor on Ahold's claim for a declaratory judgment that the "best efforts"
provisions in the Merger Agreement are unenforceable. Ahold opposed the motion
and cross moved for summary judgment on the same claim. In December 2000, the
Supreme Court entered an order granting Ahold's motion for partial summary
judgment regarding our counterclaim alleging that Ahold had failed to comply
with the "best efforts" provision of the Merger Agreement, which order was
affirmed on appeal in January 2002. Notwithstanding this appellate decision, we
have two viable counterclaims against Ahold that we intend to pursue.

OTHER. We are subject to claims and suits against us in the ordinary course
of our business. While the outcome of these claims cannot be predicted with
certainty, we do not believe that the outcome of any of these legal matters will
have a material adverse effect on our consolidated results of operations,
financial position or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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* Unless otherwise indicated, all information in Item 3 is given as of February
2, 2002.

11

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name, age as of April 15, 2002, principal
occupation or employment at the present time and during the last five years, and
the name of any corporation or other organization in which such occupation or
employment is or was conducted, of our executive officers, all of whom are
citizens of the United States and serve at the discretion of our Board of
Directors. Our executive officers listed below were elected to office for an
indefinite period of time. No family relationship exists between any of our
executive officer and any of our other executive officer or director.

- ---------------
(1) Member of the Board of Directors.

12

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET FOR COMMON STOCK. The common stock and warrants are currently trading
on the Nasdaq National Market under the ticker symbols "PTMK" and "PTMKW",
respectively. The following table represents the high and low closing sales
prices for the common stock for each quarter since the common stock began to be
publicly traded, as reported by the Nasdaq National Market.

HOLDERS OF RECORD. As of April 19, 2002, there were 38 holders of record of
our common stock.

DIVIDENDS. We paid no cash dividends to our stockholders and do not
currently anticipate paying cash dividends during fiscal 2002. We are prohibited
from paying cash dividends to holders of our common stock under our credit
agreement dated as of September 19, 2000 with JPMorgan Chase Bank, as agent and
the lenders party thereto. We are restricted from paying cash dividends to
holders of our common stock under the indenture governing our $200 million 8.75%
senior subordinated notes due 2012.

13

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present selected historical consolidated financial and
other data. The periods prior to our exit from Chapter 11 have been designated
"Predecessor Company" and the periods subsequent to that date have been
designated "Successor Company." The statement of operations data for the 52
weeks ended February 2, 2002, the 20 weeks ended February 3, 2001, the 33 weeks
ended September 16, 2000 and the 52 weeks ended January 29, 2000 and the balance
sheet data as of February 2, 2002 and February 3, 2001 are derived from our
audited consolidated financial statements included elsewhere in this report. The
statement of operations data for the fiscal years ended January 30, 1999 and
January 31, 1998 and the balance sheet data as of January 29, 2000, January 30,
1999 and January 31, 1998 are derived from our audited consolidated financial
statements, not included in this report. Certain data of the Successor Company
and Predecessor Company have been combined for the 53 weeks ended February 3,
2001 for comparative purposes with the other fiscal years presented.

The following table (dollars in millions, except per share amounts) should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
included elsewhere in this report:

See notes on the following pages.

14

NOTES TO SUMMARY OF HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

(a) We completed our plan of reorganization and formally exited Chapter 11 on
September 19, 2000, the "Plan Effective Date." As a result, we 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 had been deemed created for financial reporting purposes. The periods
presented prior to the Plan Effective Date have been designated "Predecessor
Company" and the periods subsequent to the Plan Effective Date have been
designated "Successor Company" with September 16, 2000, the Saturday nearest
the Plan 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
and balance sheets of the Successor Company and the Predecessor Company are
not comparable.

Pursuant to the plan of reorganization, our direct and indirect parent
companies merged with us and we became the surviving entity. These mergers
are being accounted for at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly the historical financial
information of the Predecessor Company presented herein reflects the
financial position and results of operations of the combined entity.

(b) Reorganization income of $7.4 million for the 20 weeks ended February 3,
2001 is comprised of a gain related to the difference between the settled
lessor claims for rejected leases and the liability previously recorded for
such claims. Reorganization expenses of $0.9 million for the 33 weeks ended
September 16, 2000 are comprised of $19.1 million of fees directly
attributable to the plan of reorganization, net of a gain of $18.2 million
related to the difference between the estimated lessor claims for rejected
leases and the liabilities previously recorded for such leases.

See notes on the following pages.

15

NOTES TO SUMMARY OF HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA -
(CONTINUED)

(c) The excess reorganization value of $798.0 million, resulting from
Fresh-Start Reporting, is being amortized over three years. With the
adoption of SFAS No. 142 in fiscal 2002, our excess reorganization value
account will no longer be amortized subsequent to fiscal 2001 but rather
will be evaluated for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset might be impaired.

(d) As a result of our Chapter 11 filing on July 12, 2000, the "Petition Date,"
no principal or interest payments were made on or after the Petition Date on
our subordinated debt. Accordingly, no interest expense for such
subordinated debt has been accrued on or after the Petition Date.

(e) In fiscal 2001, the extraordinary item of $3.3 million, net of an income tax
benefit of $2.3 million, represents costs incurred resulting from the early
extinguishment of debt, including the write-off of deferred financing costs,
related to the pay down of a portion of our credit agreement from certain of
the proceeds of the $200 million senior subordinated notes issued on January
29, 2002. In the 33 weeks ended September 16, 2000, the extraordinary item
of $313.7 million, net of an income tax provision of $46.6 million,
represents the cancellation of debt related to the exchange of bond
indebtedness and accrued interest for common stock and warrants; such income
was reduced by the write-off of deferred financing costs related to the
former bank credit facility and bond indebtedness subject to exchange. Since
the realization of such income occurred under the Bankruptcy Code, we did
not recognize income from the cancellation of debt for tax purposes, but
elected to reduce, at the beginning of fiscal 2001, the basis of our
depreciable property and, with the remaining income from the cancellation of
debt, to reduce our net operating loss tax carryforwards. The tax provision
related to the extraordinary item in fiscal 2000 was based on the deferred
tax impact of the tax attribute reductions, net of the valuation allowance
reversal related to certain deferred tax assets. In fiscal 1997, the
extraordinary item of $7.5 million, net of an income tax benefit of $5.5
million, represents early extinguishment of debt.

(f) The weighted average shares outstanding for net loss per share - basic and
diluted of the Successor Company for all periods presented were 30.0 million
shares. All stock options, warrants and restricted stock were excluded from
the computation of our net loss per share - diluted because their effect
would have been anti-dilutive. Net earnings (loss) per share data is not
presented for the Predecessor Company due to the significant change in our
capital structure.

(g) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges consist of interest expense, including
capitalized interest, amortization of debt issuance costs and a portion of
operating lease rental expense deemed to be representative of the interest
factor. Deficiency in earnings available to cover fixed charges for fiscal
2001, the 20 week period ended February 3, 2001, the 33 week period ended
September 16, 2000, fiscal 1999, fiscal 1998 and fiscal 1997 was $220.2
million, $62.8 million, $38.0 million, $29.8 million, $28.0 million and
$47.3 million, respectively.

16

NOTES TO SUMMARY OF HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA -
(CONTINUED)

(h) EBITDA represents earnings from operations before interest, income taxes,
depreciation, amortization, the gain (loss) on sale of real estate,
reorganization income and the LIFO charge (credit). While EBITDA 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. Our
measurement of EBITDA, as presented below (in millions), may not be
comparable to similarly titled measures reported by other companies:

(1) Includes amortization of video tapes of $2.2 million, $3.3 million,
$3.1 million and $3.4 million in fiscal 2000, fiscal 1999, fiscal 1998
and fiscal 1997, respectively; in fiscal 2000, we discontinued our
video tape rental business.

(i) Total debt used is as of period end.

(j) Ratio is not meaningful due to the reorganization.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002
("FISCAL 2001"), FEBRUARY 3, 2001 ("FISCAL 2000") AND JANUARY 29, 2000 ("FISCAL
1999"), WHICH ARE INCLUDED ELSEWHERE IN THIS REPORT. THE RESULTS OF THE
PREDECESSOR COMPANY AND SUCCESSOR COMPANY HAVE BEEN COMBINED FOR THE 53 WEEKS
ENDED FEBRUARY 3, 2001 SINCE SEPARATE DISCUSSIONS ARE NOT MEANINGFUL IN TERMS OF
THEIR OPERATING RESULTS OR COMPARISONS TO THE OTHER PERIODS.

GENERAL

We are a leading supermarket chain in the Northeast, operating 141
supermarkets in the densely populated New York-New Jersey and Philadelphia
metropolitan areas. These metropolitan areas contain over 10% of the population
in the United States. All of our supermarkets are located within 100 miles of
our corporate office in Carteret, New Jersey.

We formally exited from Chapter 11 effective September 19, 2000, which we
refer to as the "Plan Effective Date". For financial reporting purposes, we
accounted for the consummation of the plan of reorganization effective September
16, 2000, the Saturday nearest the Plan Effective Date. Fresh-Start Reporting
resulted in significant changes to the valuation of certain of our assets and
liabilities, and to our stockholders' equity. With the adoption of Fresh-Start
Reporting, a new entity was deemed created for financial reporting purposes. The
periods prior to the Plan Effective Date have been designated "Predecessor
Company" and the periods subsequent to the Plan Effective Date have been
designated "Successor Company". For separate presentations of the results of the
Predecessor Company and Successor Company for these periods, see our
consolidated financial statements included elsewhere in this report.

RESULTS OF OPERATIONS

The following table sets forth selected consolidated statements of
operations data (in millions):

FISCAL 2001 COMPARED TO FISCAL 2000

SALES. Sales in fiscal 2001 were $3.96 billion compared to $3.84 billion in
fiscal 2000, an increase of 3.2%. Total sales, excluding the extra week in
fiscal 2000, increased 5.1% in fiscal 2001. The sales increase in fiscal 2001
was primarily due to higher same store sales (stores opened the entire year in
both fiscal 2001 and fiscal 2000, including replacement stores and enlargements
and excluding the extra week in fiscal 2000) of 2.5% and new stores. Sales also
benefited from our various post-restructuring initiatives and increased
promotional spending, such as double coupons. During fiscal 2001, we opened five
new stores, closed two stores and renovated 34 stores. We operated 141 and 138
stores at the end of fiscal 2001 and fiscal 2000, respectively.

18

GROSS PROFIT. Gross profit represents the remaining amount of sales after
deducting cost of goods, which includes the costs of inventory sold and the
related purchase and distribution costs, net of vendor allowances and rebates.
Gross profit in fiscal 2001 was $1.11 billion or 27.9% of sales compared to
$1.08 billion or 28.1% of sales for fiscal 2000. The increase in gross profit of
$26.9 million for fiscal 2001 compared to fiscal 2000 was due to higher sales,
partially offset by higher promotional expenses and shrink. The decrease in
gross profit percentage in fiscal 2001 was primarily due to the impact of our
promotional initiatives to generate sales and higher shrink.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A in fiscal 2001
increased $31.4 million or 3.5% compared to fiscal 2000. This increase in SG&A
was primarily due to higher expenses related to store labor and related benefits
and occupancy as well as preopening expenses of $2.5 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 a lawsuit related to price
fixing of prescription drugs. Included in fiscal 2000 were gains on the sale of
certain real estate of $1.8 million. As a percentage of sales, SG&A was 23.2%
and 23.1% in fiscal 2001 and fiscal 2000, respectively.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $76.7
million in fiscal 2001 was $2.9 million higher than the $73.8 million in fiscal
2000. The increase in depreciation and amortization expense in fiscal 2001
compared to fiscal 2000 was primarily due to the impact of our stepped up
capital program and technology initiatives. Depreciation and amortization
includes video tape amortization of $2.2 million in fiscal 2000. There is no
video tape amortization in fiscal 2001 since we discontinued our video tape
rental business in fiscal 2000.

REORGANIZATION INCOME. Reorganization income of $6.5 million in fiscal 2000
was comprised of a gain of $25.6 million related to the difference between the
estimated lessor claims for rejected leases and the liabilities previously
recorded for such leases, net of $19.1 million of fees directly attributable to
the plan of reorganization.

AMORTIZATION OF EXCESS REORGANIZATION VALUE. Excess reorganization value of
$798.0 million is being amortized over three years. Amortization expense was
$265.5 million and $98.5 million for fiscal 2001 and for fiscal 2000,
respectively. The increase in amortization expense in fiscal 2001 compared to
fiscal 2000 was due to a full year of amortization in fiscal 2001. With the
adoption of SFAS No. 142, our excess reorganization value will no longer be
amortized subsequent to fiscal 2001 but rather will be evaluated for impairment
annually, or more frequently if events or change in circumstances indicate that
the asset might be impaired.

OPERATING EARNINGS (LOSS). Fiscal 2001 operating loss was $154.9 million
compared to fiscal 2000 operating earnings of $26.0 million. The decrease in
operating earnings in fiscal 2001 compared to fiscal 2000 was primarily due to
the amortization of the excess reorganization value in fiscal 2001.

INTEREST EXPENSE, NET. Interest expense was $65.3 million in fiscal 2001
compared to $126.8 million in fiscal 2000. The decrease in interest expense in
fiscal 2001 compared to fiscal 2000 was primarily due to the cancellation of
$1.0 billion in subordinated debt under the plan of reorganization and favorable
LIBOR borrowing rates under our credit agreement.

INCOME TAX PROVISION. The income tax provision was $18.5 million and $14.8
million in fiscal 2001 and fiscal 2000, respectively. Refer to Note 18 of the
consolidated financial statements for information related to our income taxes.
During fiscal 2001, we made income tax payments of $1.0 million and received
income tax refunds of $15,000. During fiscal 2000, we made income tax payments
of $0.2 million and received income tax refunds of $0.5 million.

EXTRAORDINARY ITEM. In fiscal 2001, the extraordinary item of $3.3 million,
net of an income tax benefit of $2.3 million, represents costs incurred
resulting from the early extinguishment of debt, including the write-off of
deferred financing costs, related to the pay down of a portion of the credit
agreement from certain of the proceeds of the $200 million senior subordinated
notes issued on January 29, 2002. In fiscal 2000, the extraordinary item of
$313.7 million, net of an income tax provision of $46.6 million, represents
income from the cancellation of debt related to the exchange of bond
indebtedness and accrued interest for common stock and warrants; such income was
reduced by the write-off of deferred financing costs related to the former bank
credit facility and bond indebtedness subject to exchange.

19

SUMMARY OF OPERATIONS. Net loss in fiscal 2001 was $242.0 million compared
to net earnings of $198.1 million for fiscal 2000. This increase in net loss was
primarily due to the increase in the amortization of excess reorganization value
in fiscal 2001 and the extraordinary item of $313.7 million in fiscal 2000.
Excluding the amortization of excess reorganization value and the extraordinary
item, net earnings were $26.8 million in fiscal 2001. Excluding the
extraordinary item, the reorganization income and the amortization of excess
reorganization value, net loss was $20.5 million in fiscal 2000.

FISCAL 2000 COMPARED TO FISCAL 1999

SALES. Sales in fiscal 2000 were $3.84 billion compared to $3.70 billion in
fiscal 1999, an increase of 3.9%. Same store sales (stores opened the entire
year in both fiscal 2000 and fiscal 1999, including replacement stores and
enlargements and excluding the extra week in fiscal 2000) increased 0.3% in
fiscal 2000. Total sales, excluding the extra week, increased 1.9% in fiscal
2000. Sales in fiscal 2000 compared to fiscal 1999 were also impacted by new
store openings in fiscal 2000. During fiscal 2000, we opened four new stores,
including one replacement store, and renovated 19 stores. We operated 138 and
135 stores at the end of fiscal 2000 and fiscal 1999, respectively.

GROSS PROFIT. Gross profit in fiscal 2000 was $1.08 billion or 28.1% of
sales compared to $1.06 billion or 28.6% of sales for fiscal 1999. The increase
in gross profit of $22.1 million for fiscal 2000 compared to fiscal 1999 was due
to higher sales, partially offset by higher promotional expenses and shrink.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A in fiscal 2000 increased
$38.7 million or 4.6% compared to fiscal 1999. The increase in SG&A for fiscal
2000 compared to fiscal 1999 was primarily due to higher expenses related to
store labor and related benefits and higher operating costs in general,
primarily due to the additional week in fiscal 2000. Included in fiscal 2000 and
fiscal 1999 were gains on the sale of certain real estate of $1.8 million and
$0.4 million, respectively. As a percentage of sales, SG&A was 23.1% in fiscal
2000, up from 23.0% in fiscal 1999.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $73.8
million in fiscal 2000 was $1.3 million lower than the $75.1 million in fiscal
1999. The decrease in depreciation and amortization expense in fiscal 2000
compared to fiscal 1999 was 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 $2.2 million and $3.3
million in fiscal 2000 and fiscal 1999, respectively.

REORGANIZATION INCOME. Reorganization income of $6.5 million for fiscal 2000
was comprised of a gain of $25.6 million related to the difference between the
estimated lessor claims for rejected leases and the liabilities previously
recorded for such leases, net of $19.1 million of fees directly attributable to
the plan of reorganization.

AMORTIZATION OF EXCESS REORGANIZATION VALUE: Excess reorganization value of
$798.0 million is being amortized over three years. Amortization expense for
fiscal 2000 commenced on the Plan Effective Date and was $98.5 million.

OPERATING EARNINGS. Operating earnings were $26.0 million in fiscal year
2000 compared to $133.3 million in fiscal 1999. The decrease in operating
earnings in fiscal 2000 compared to fiscal 1999 was primarily due to the
amortization of the excess reorganization value.

INTEREST EXPENSE, NET. Interest expense was $126.8 million in fiscal 2000
compared to $163.1 million in fiscal 1999. The decrease in interest expense in
fiscal 2000 compared to fiscal 1999 was primarily due to the cancellation of
subordinated debt under the plan of reorganization.

INCOME TAX PROVISION. The income tax provision was $14.8 million and $2.1
million in fiscal 2000 and fiscal 1999, respectively. Refer to Note 18 of the
consolidated financial statements for information related to our income taxes.
During fiscal 2000, we made income tax payments of $0.2 million and received
income tax refunds of $0.5 million. During fiscal 1999, we made income tax
payments of $0.5 million and received income tax refunds of $1.9 million.

20

EXTRAORDINARY ITEM. In fiscal 2000, the extraordinary item of $313.7
million, net of an income tax provision of $46.6 million, represents income from
the cancellation of debt related to the exchange of bond indebtedness and
accrued interest for common stock and warrants; such income was reduced by the
write-off of deferred financing costs related to the former bank credit facility
and bond indebtedness subject to exchange. Since the realization of such income
occurred under the Bankruptcy Code, we did not recognize income from the
cancellation of debt for tax purposes, but elected to reduce, at the beginning
of fiscal 2001, the basis of our depreciable property and, with the remaining
income from the cancellation of debt, to reduce our net operating loss tax
carryforwards. The income tax provision related to the extraordinary item was
based on the deferred tax impact of the tax attribute reductions, net of the
valuation allowance reversal related to certain deferred tax assets.

SUMMARY OF OPERATIONS. Our net earnings was $198.1 million in fiscal 2000
compared to a net loss of $31.9 million in fiscal 1999. The increase in net
earnings in fiscal 2000 compared to fiscal 1999 was primarily due to the
extraordinary item and the reorganization income, partially offset by the
amortization of the excess reorganization value. Excluding the extraordinary
item, the reorganization income and the amortization of excess reorganization
value, net loss was $20.5 million in fiscal 2000.

EBITDA

EBITDA represents earnings from operations before interest, income taxes,
depreciation, amortization, the gain (loss) on sale of real estate,
reorganization income and the LIFO charge (credit). While EBITDA 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. Our measurement of
EBITDA, as presented below (in millions), may not be comparable to similarly
titled measures reported by other companies:

- --------
(1) Includes amortization of video tapes of $2.2 million and $3.3 million in
fiscal 2000 and fiscal 1999, respectively; in fiscal 2000, we discontinued
our video tape rental business.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the substantial debt reduction resulting from the plan of
reorganization in fiscal 2000, our debt service and liquidity have improved
significantly compared to the Predecessor Company's financial condition.

CASH FLOWS. The following table sets forth certain consolidated statements
of cash flow data (in millions):

21

The increase in cash provided by operating activities in fiscal 2001
compared to fiscal 2000 was primarily due to the reduction in cash interest paid
and the increase in cash provided by operating assets and liabilities. The
increase in cash flow from operating activities in fiscal 2000 compared to
fiscal 1999 was primarily due to the reduction in cash interest paid due to the
impact of the plan of reorganization. The increase in cash used for investing
activities in fiscal 2001 compared to fiscal 2000 was primarily due to our
planned increase in capital expenditures, including technology investments. The
decrease in cash flow from investing activities in fiscal 2000 compared to
fiscal 1999 was primarily due to a decrease in expenditures for property and
equipment and an increase in proceeds from property sales or disposals. The
increase in cash used for financing activities in fiscal 2001 compared to fiscal
2000 was primarily due to debt and lease paydown in fiscal 2001 compared to the
impact of the plan of reorganization in fiscal 2000. The increase in cash flow
from financing activities in fiscal 2000 compared to fiscal 1999 was primarily
due to the impact of the plan of reorganization.

DEBT SERVICE AND LIQUIDITY. On January 29, 2002, we issued $200.0 million
aggregate principal amount of unregistered 8 3/4% Senior Subordinated Notes due
2012 ("Senior Subordinated Notes"), which pay cash interest on a semiannual
basis. The Senior Subordinated Notes are unconditionally guaranteed as to
payment of principal and interest by the subsidiary guarantors and contain
customary covenants. The proceeds from the issuance of the Senior Subordinated
Notes were used to repay a portion of our outstanding loans under our bank
credit facility and to repay in the first quarter of fiscal 2002 a portion of
our outstanding industrial revenue bonds. We recently completed an exchange
offer pursuant to which all of the Senior Subordinated Notes were exchanged for
$200 million aggregate principal amount of our registered 8 3/4% Senior
Subordinated Notes, due 2012, (referred to as the exchange notes). The exchange
notes will be governed by the indenture and supplemental indenture relating to
the Senior Subordinated Notes. The form and terms of the exchange notes are
identical in all material respects to the form and terms of the Senior
Subordinated Notes, except that the exchange notes have been registered under
the Securities Act, and therefore contain no restrictive legends.

On the Plan Effective Date, we entered into a credit agreement, which
included 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"). Amounts borrowed under the Credit Agreement bear
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 8.0% during fiscal 2001. We are required to
repay a portion of our 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, we can borrow an amount up to $175.0
million, including a maximum of $125.0 million in letters of credit. We used a
portion of the net proceeds of the offering of the Senior Subordinated Notes to
prepay all of our outstanding indebtedness under Term Loan A which, at January
29, 2002, amounted to $112.5 million, and to prepay $80.5 million of our
indebtedness under Term Loan B.

As of February 2, 2002 and April 16, 2002, no borrowings have been made
under the working capital facility. Letters of credit of $41.6 million and $40.2
million were outstanding as of February 2, 2002 and April 16, 2002,
respectively. Our liquidity also included cash equivalents of $12.9 million and
$8.1 million as of February 2, 2002 and April 16, 2002, respectively.

Borrowings under the Credit Agreement are secured by substantially all of
our assets, other than certain specific assets secured by third-party mortgages.
The Credit Agreement contains customary covenants and other terms. We were in
compliance with all of these covenants as of February 2, 2002 and, based on
management's operating projections for fiscal 2002, we believe that we will
continue to be in compliance with such covenants. We were also in compliance
with all provisions of the indentures relating to the terms of the Senior
Subordinated Notes and of our mortgage indebtedness.

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The following table presents significant contractual obligations as of
February 2, 2002 (in millions):

The $41.6 million in letters of credit outstanding as of February 2, 2002
expire in fiscal 2002.

In addition, we outsourced a major portion of our distribution, trucking and
information system functions through long-term agreements as follows:

o In April 2001, we entered into a new five-year outsourcing agreement
with International Business Machines Corporation ("IBM") to continue to
provide a wide range of information systems services. Under the
agreement, IBM provides data center operations, mainframe processing,
business applications and systems development to enhance our customer
service and efficiency. The charges under this agreement are based upon
the services requested at predetermined rates. We may terminate the
agreement upon 90 days notice with a payment of a specified termination
charge.

o We have a 15-year supply agreement with C&S, expiring in 2013, pursuant
to which C&S supplies substantially all of our grocery, frozen and
perishable merchandise requirements. Under our arrangement with C&S, we
negotiate prices, discounts and promotions with vendors. During fiscal
2001, the products supplied from C&S accounted for approximately 61% of
all of our supermarket inventory purchases. This agreement may be
terminated for cause or certain events of bankruptcy by either party.

o We also have a ten-year agreement, expiring in 2007, with a local
trucking company to provide us with trucking services We may terminate
the agreement with a payment of a specified termination charge.

CAPITAL EXPENDITURES. Capital expenditures, including property acquired
under capital leases and technology investments, were $130.5 million for fiscal
2001 compared to $66.9 million for fiscal 2000 and $87.6 million for fiscal
1999. During fiscal 2001, we purchased six former Grand Union stores and opened
five of them as Pathmark stores; in addition, we renovated 34 stores and closed
two under-performing stores. During fiscal 2000, we opened four new stores,
including one replacement store and renovated 19 stores. In 2002, our capital
expenditure plan is to invest $135.0 million in new stores and major renovations
and technology investments. During fiscal 2002, we expect to open six additional
stores, including the sixth former Grand Union store, and complete 19 store
renovations.

We believe that cash flows generated from operations, supplemented by the
unused borrowing capacity under the working capital facility, our cash
equivalents and the availability of capital lease financing will be sufficient
to provide for our debt service requirements, working capital needs and capital
expenditure program for the foreseeable future. There can be no assurance,
however, that our business will continue to generate cash flow at or above
current levels or that we will maintain our ability to borrow under the Credit
Agreement.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. The following accounting policies are considered critical because
changes to certain judgments and assumptions inherent in these policies could
affect our financial statements.

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SELF-INSURED CLAIMS LIABILITIES. We are self insured for claims relating to
customer, associate and vehicle accidents, as well as associate medical and
disability benefits, and we maintain third-party excess insurance coverage for
such claims. It is our accounting policy to record a self-insured liability, as
determined actuarially on a consistent basis, based on the facts and
circumstances of each individual claim filed and an estimate of claims incurred
but not yet reported. All claims and their related liabilities are reviewed and
monitored on an ongoing basis. Any actuarial projection of losses concerning
such claims is subject to variability primarily due to external factors
affecting future inflation rates, litigation trends, benefit levels and claim
settlement patterns. The total self-insured liabilities for such claims and
benefits approximates $94.6 million at February 2, 2002.

IMPAIRMENT OF INTANGIBLES AND LONG-LIVED ASSETS. It is our accounting policy
to assess the carrying value of our intangibles and long-lived assets for
possible impairment based on groups of assets to determine if the carrying value
of such assets are recoverable from their related undiscounted cash flows. We
estimated future cash flows based on several economic and business assumptions
and have concluded that there is no impairment of such assets at February 2,
2002. However, our estimates project cash flow several years into the future and
could be affected by variable factors such as inflation and economic conditions.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," which 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 now accounted for using the
purchase method. The adoption of SFAS No. 141 did not have any effect on our
consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which 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 our fiscal year 2002. Our excess reorganization value account will no
longer be amortized subsequent to fiscal 2001 but rather will be evaluated for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. We do not expect that the adoption of
this statement will have an effect on the impairment of our excess
reorganization value account but will eliminate the amortization of excess
reorganization value in fiscal 2002, which was $265.5 million in fiscal 2001.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Such associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and depreciated over the useful life of the related asset. The
provisions of SFAS No. 143 are required to be adopted effective with our first
quarter of fiscal year 2003. We have not determined the impact, if any, that the
adoption of this statement will have on our financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and APB Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 addresses the
financial accounting and reporting for the impairment of long-lived assets and
also broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of SFAS No. 144 are required to be adopted
effective with our first fiscal quarter of fiscal 2002. We have not determined
the impact, if any, that the adoption of this statement will have on our
financial position or results of operations.

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In November 2001, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products." EITF Issue No.
01-09 codifies and reconciles the consensuses on all or specific issues of EITF
Issues No. 00-14, "Accounting for Certain Sales Incentives," No. 00-22,
"Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales
Incentives Offers, and Offers for Free Products or Services to be Delivered in
the Future," and No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," which address
various aspects of the accounting for consideration given by a vendor to a
customer or a reseller of the vendor's products. We don't expect that the
adoption of the EITF Issue No. 01-09 will have a material impact on our
financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates. Our exposure
to interest rate movements results from our use of floating rate debt to fund
our working capital, capital expenditures, and other operational and investment
requirements. At February 2, 2002, we had fixed-rate debt outstanding of $230.5
million and floating rate debt of $218.0 million. Such floating rate debt was
incurred under our bank credit facility, bearing interest at LIBOR + 4.00% per
annum at February 2, 2002.

To manage our interest rate risk, in July 2001, we entered into a three-year
interest rate zero-cost collar, consisting of a cap with a strike of 10% and a
floor with a strike of 8.39%, with a major international financial institution,
on a notional amount of $150 million of our term loan. We do not hold or issue
derivative financial instruments for speculative or trading purposes but rather
to hedge against the risk of rising interest rates. This derivative is recorded
on the balance sheet at fair value and at inception was designated, and
continues to qualify, as a cash-flow hedge of our forecasted variable interest
rate payments due on the term loan. We have formally documented our
risk-management objectives and strategy for undertaking any hedge transaction.
We are continuously evaluating the risk to our remaining long-term debt and will
implement additional interest rate hedging arrangements when deemed appropriate.
A hypothetical one percentage point increase in interest rates at February 2,
2002 would increase interest expense incurred under the bank credit facility for
fiscal 2002 by approximately $0.7 million.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

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PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)