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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from
------------------------------------------------
Commission File Number 0-17871
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EAGLE FOOD CENTERS, INC.
(Exact name of registrant as specified in the charter)
Delaware 36-3548019
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rt. 67 & Knoxville Rd., Milan, Illinois 61264
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (309) 787-7700
---------------
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 whether the registrant has filed all documents and
reports required to be filed by Sections 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
------ ------
The number of shares of the Registrant's Common Stock, par value four cents
($0.04) per share, outstanding at September 13, 2002 was 3,110,935.
Page 1 of 18 pages
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
EAGLE FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED TWO QUARTERS ENDED
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(as adjusted, (as adjusted,
see notes) see notes)
Sales $ 162,189 $ 168,789 $ 323,898 $ 330,905
Cost of goods sold (117,825) (121,366) (235,148) (237,814)
----------- ----------- ----------- -----------
Gross margin 44,364 47,423 88,750 93,091
Operating expenses:
Selling, general and administrative (42,699) (41,281) (83,079) (80,627)
Store closing and asset impairment (606) - (606) -
Reorganization items, net - 273 - 273
Depreciation and amortization (4,406) (4,540) (8,961) (9,063)
----------- ----------- ----------- -----------
Operating income (loss) (3,347) 1,875 (3,896) 3,674
Interest expense, net (3,031) (3,251) (6,139) (6,451)
Gain on extinguishment of debt 311 214 789 768
----------- ----------- ----------- -----------
Net loss $ (6,067) $ (1,162) $ (9,246) $ (2,009)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (1.95) $ (0.36) $ (2.97) $ (0.63)
=========== =========== =========== ===========
Weighted average basic shares
outstanding 3,110,945 3,196,847 3,114,799 3,197,432
See notes to the unaudited consolidated financial statements.
2
EAGLE FOOD CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AUGUST 3, 2002 FEBRUARY 2, 2002
-------------- ----------------
(as adjusted,
see notes)
ASSETS
Current assets:
Cash and cash equivalents $ 309 $ 4,667
Restricted assets 7,532 7,901
Accounts receivable, net of allowance for doubtful accounts
of $1.3 million in fiscal 2002 and $1.2 million in fiscal 2001 7,362 9,553
Inventories 52,435 65,016
Prepaid expenses and other 2,729 2,870
--------- ---------
Total current assets 70,367 90,007
Property and equipment, net 102,553 107,307
Other assets:
Deferred software costs, net 4,745 6,740
Property held for resale, net 3,012 3,056
Other 1,092 1,352
--------- ---------
Total other assets 8,849 11,148
--------- ---------
Total assets $ 181,769 $ 208,462
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,423 $ 29,236
Payroll and associate benefits 13,290 12,441
Accrued liabilities 12,678 14,536
Reserve for closed stores 183 364
Accrued taxes 5,777 5,647
Current portion of long term debt 869 833
--------- ---------
Total current liabilities 54,220 63,057
Long term debt:
Senior notes, net 63,267 64,659
Capital lease obligations 32,681 33,037
Loan and security agreement 16,990 23,325
Other 379 466
--------- ---------
Total long term debt 113,317 121,487
Other liabilities:
Reserve for closed stores 1,156 1,302
Other deferred liabilities 7,869 7,995
--------- ---------
Total other liabilities 9,025 9,297
--------- ---------
Total liabilities 176,562 193,841
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized - -
Common stock, $.04 par value, 4,500,000 shares authorized,
3,357,605 shares issued 134 134
Capital in excess of par value 55,464 55,464
Common stock in treasury, at cost, 246,670 and 229,351 shares (2,383) (2,369)
Accumulated other comprehensive income(loss) (2,050) (1,896)
Accumulated deficit (45,958) (36,712)
--------- ---------
Total shareholders' equity 5,207 14,621
--------- ---------
Commitments and contingencies
Total liabilities and shareholders' equity $ 181,769 $ 208,462
========= =========
See notes to the unaudited consolidated financial statements.
3
EAGLE FOOD CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
TWO QUARTERS ENDED
AUGUST 3, 2002 AUGUST 4, 2001
-------------- --------------
(as adjusted,
see notes)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,246) $ (2,009)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Gain on extinguishment of debt (789) (768)
Depreciation and amortization 8,961 9,063
Store closing and asset impairment 606 (341)
Deferred charges and credits 306 394
(Gain) loss on disposal of assets (5) 43
Changes in assets and liabilities:
Receivables and other assets 2,470 (967)
Inventories 12,581 248
Accounts payable (7,813) (163)
Accrued and other liabilities (913) (3,867)
Principal payments on reserve for closed stores (325) (4,383)
-------- --------
Net cash flows from operating activities 5,833 (2,750)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of marketable securities, net 215 (574)
Additions to property and equipment (3,250) (2,439)
Cash proceeds from sale/leasebacks or dispositions
of property and equipment 402 43
-------- --------
Net cash flows from investing activities (2,633) (2,970)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - (52)
Principal payments on capital lease obligations (407) (459)
Principal payments on senior notes (802) (1,068)
Net revolving loans (6,335) 8,307
Purchase of treasury stock (14) (25)
-------- --------
Net cash flows from financing activities (7,558) 6,703
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,358) 983
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,667 263
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 309 $ 1,246
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,900 $ 6,123
Noncash investing and financing activities:
Unrealized loss on securities $ (154) $ (149)
See notes to the consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the summary of significant accounting policies set forth in the notes to
the audited financial statements contained in the Company's Form 10-K filed with
the Securities and Exchange Commission on May 3, 2002, except as described under
the notes entitled "New Accounting Standards" and "Inventories" below.
In the opinion of management, the accompanying unaudited financial statements
reflect fairly, under generally accepted accounting principles, the results of
operations and financial position for the interim periods presented. Operating
results for the twenty-six weeks ended August 3, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 1, 2003.
RECLASSIFICATIONS
Certain reclassifications were made to balances for the prior year to conform to
current year presentation.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No.143 requires a company
to record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. A corresponding asset is also
recorded, which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation is
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. The Company is
required to adopt SFAS No. 143 for fiscal years beginning after June 15, 2002.
The Company does not expect this statement to have a material effect on its
consolidated financial statements.
In August, 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supersedes SFAS No. 121 and the
accounting and reporting provision of APB Opinion No. 30 for the disposal of a
segment of a business. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. The Company implemented the statement on February
3, 2002. As of August 3, 2002, the Company recorded an asset impairment charge
of $646 thousand.
In April, 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44, AND 64,
5
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. Under
Statement No. 4, all gains and losses from extinguishment of debt were required
to be aggregated and, if material, classified as an extraordinary item. The
rescission of Statement No. 4 effects the Company since it eliminates the
exception to applying APB Opinion No. 30 to the Company's gains on
extinguishment of debt. As a result, the gains should be classified as
extraordinary only if they meet the criteria in APB Opinion No. 30. The Company
does not believe its debt extinguishment gains are both unusual in nature or
infrequent of occurrence, and thus do not meet the criteria to be classified as
an extraordinary item.
The provisions of Statement No. 145 related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. Early
application of the provisions related to the rescission of Statement No. 4 is
encouraged. Any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods that does not meet the criteria for
classification as an extraordinary item should be reclassified. The Company
implemented this statement on May 5, 2002. The effects of implementation are
illustrated as follows:
QUARTER ENDED TWO QUARTERS ENDED
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
------------ ------------ ----------- ---------
Gain on extinguishment of debt increase $ 311 $ 214 $ 789 $ 768
Extraordinary item - gain on
extinguishment of debt decrease $ 311 $ 214 $ 789 $ 768
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The provisions of this
Statement are effective for exit and disposal activities that are initiated
after December 31, 2002. The Company has not determined whether future
application of this statement will have an effect on its consolidated financial
statements.
The Company adopted the FASB Emerging Issues Task Force (EITF) Issue No. 00-14,
ACCOUNTING FOR CERTAIN SALES INCENTIVES, in the first quarter of fiscal 2002,
which requires the recording of certain customer discounts as a reduction in
sales. The adoption of this accounting standard did not have an effect on
reported operating income (loss) or net loss. In accordance with the adoption,
the impact on Sales, Cost of Goods Sold and Selling, General and Administrative
Expenses was as follows:
QUARTER ENDED TWO QUARTERS ENDED
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales Decrease $ 12,823 $ 16,689 $ 27,815 $ 31,012
Cost of Goods Sold Decrease $ 12,743 $ 16,585 $ 27,368 $ 30,859
Selling, General and
Administrative Decrease $ 80 $ 104 $ 447 $ 153
6
INVENTORIES
During the first quarter of fiscal 2002 (as documented in the 10-Q for the
quarter ended May 4, 2002), the Company implemented a change in accounting
principle from valuing substantially all inventories at the lower of cost or
market utilizing the last-in, first-out ("LIFO") method to valuing all
inventories at the lower of cost or market utilizing the first-in, first-out
("FIFO") method. This change was adopted because the FIFO method more clearly
follows the actual flow of inventory, due to its perishable nature, and more
closely matches actual costs and revenues. The February 2, 2002 Consolidated
Balance Sheet and quarter ended and two quarters ended August 4, 2001
Consolidated Statement of Operations and Consolidated Statement of Cash Flows
have been restated to apply the new method retroactively.
Due to the change in accounting principle, inventory previously reported as of
February 2, 2002 increased $8.4 million. The balance of accumulated deficit has
been restated by the same amount to reflect retroactive application of this new
accounting method. Also, as a result of this change, the effect on the net loss
previously reported for the second quarter and two quarters ended August 4, 2001
is presented in the following table. As a result of the implementation of
Statement No. 145 (as previously discussed), gains of $214 thousand and $768
thousand, respectively, for the quarter and two quarters ended August 4, 2001,
have been reclassified to gain on extinguishment of debt from extraordinary
item-gain on extinguishment of debt and reflected in the net loss below:
QUARTER ENDED TWO QUARTERS ENDED
AUGUST 4, 2001 AUGUST 4, 2001
--------------------------------------------- -------------------------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED - RECLASSIFIED AS RESTATED FOR REPORTED - RECLASSIFIED AS RESTATED FOR
FOR SFAS 145 LIFO TO FIFO FOR SFAS 145 LIFO TO FIFO
----------------------- ------------------- ------------------------ ----------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net loss $ (1,312) $ (1,162) $ (2,309) $ (2,009)
======================= =================== ======================== ================
Basic and diluted net loss per share $ (0.41) $ (0.36) $ (0.72) $ (0.63)
======================= =================== ======================== ================
Weighted average basic
shares outstanding 3,196,847 3,196,847 3,197,432 3,197,432
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in the Company's equity during
the period, except transactions with stockholders of the Company. Comprehensive
loss consisted of the following:
QUARTER ENDED TWO QUARTERS ENDED
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
---------------- ------------------ ----------------- ----------------
(as adjusted, (as adjusted,
see notes) see notes)
Net loss $ (6,067) $ (1,162) $ (9,246) $ (2,009)
Other comprehensive loss:
Unrealized loss on
marketable securities (90) (5) (154) (149)
---------------- ------------------ -----------------------------------
Comprehensive loss $ (6,157) $ (1,167) $ (9,400) $ (2,158)
================ ================== ===================================
LITIGATION
The Company is subject to various unresolved legal actions that arise in the
normal course of its business. It is not possible to predict with certainty the
outcome of these unresolved legal actions or
7
the range of the possible loss.
SUBSEQUENT EVENT
Nasdaq staff informed the Company, by letter dated February 14, 2002, that it
had not maintained a minimum closing bid price of $1.00 per share over 30
consecutive trading days as required for continued listing on the Nasdaq
SmallCap Market. Nasdaq staff gave the Company until August 13, 2002 to regain
compliance with the minimum closing bid price of $1.00 per share for at least
ten consecutive trading days. The Company would be granted an additional 180
days to achieve the minimum closing bid price requirement if Nasdaq staff
determines the Company meets the initial listing criteria for the Nasdaq
SmallCap Market, which are stockholder's equity of $5 million, market
capitalization of $50 million or net income of $750,000 (excluding extraordinary
or non-recurring items) in the most recently completed fiscal year or in two of
the last three most recently completed fiscal years. The Company was notified,
by letter dated August 14, 2002, that it had not regained compliance with the
minimum bid price of $1.00 per share. However, the Company was granted an
additional 180 days to achieve the minimum closing bid price based on meeting
the initial listing requirement of $5.0 million in stockholders' equity as of
May 4, 2002.
If the Company's common stock is not listed for trading on the Nasdaq SmallCap
Market, trading of the common stock would likely be on the OTC Bulletin Board or
similar quotation system. Inclusion of the Company's common stock on the OTC
Bulletin Board or similar quotation system could adversely affect the liquidity
of the Company's common stock and may impact the public's perception of the
Company. There can be no assurance that delisting would not have a material
adverse effect on liquidity or business operations.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the Company's second fiscal quarter ended August 3, 2002 were $162.2
million, a decrease of $6.6 million or 3.9% compared with the prior year. Sales
for the two quarters ended August 3, 2002 were $323.9 million, a decrease of
$7.0 million or 2.1% compared to the same period in fiscal 2001. These sales
declines, on both a total and same store basis, were due primarily to continued
new store openings by competitors and a challenging competitive environment.
Since the beginning of fiscal 2001, 20 stores have opened that are in direct
competition with the Company, including four store openings by competitors in
the first half of fiscal 2002. In addition, the Company expects six store
openings by competitors during the second half of fiscal 2002, including four
supercenters and two supermarkets. The Company operated 64 stores at the end of
the second quarter of fiscal 2002 and fiscal 2001.
The gross margin for the second quarter of fiscal 2002 was $44.4 million or
27.4% of sales compared to $47.4 million or 28.1% for the same quarter of fiscal
2001. For the two quarters ended August 3, 2002 and August 4, 2001, the gross
margin was $88.8 million or 27.4% and $93.1 million or 28.1%, respectively. The
gross margin decline of $3.1 million for the quarter and $4.3 million for the
two quarters ended August 3, 2002 were primarily due to a decline in sales and a
reduction in vendor funding. The gross margin rate decline for the quarter and
two quarters ended August 3, 2002 included the impact of the lower gross margin
rate in the eight Eagle Discount Foods stores. These eight stores have been
converted back to the Eagle Country Market format.
Selling, general and administrative expense for the second quarter of fiscal
2002 was $42.7 million or 26.3% of sales compared to $41.3 million or 24.5% of
sales in the same quarter of fiscal 2001. For the two quarters ended August 3,
2002, selling, general and administrative expense was $83.1 million or
8
25.6% of sales versus $80.6 million or 24.4% of sales for the same period in
fiscal 2001. The increase for the quarter is primarily due to additional health
and welfare costs of $1.9 million, with $1.5 million relating to the Company's
portion of a special assessment imposed on plan members of the United Food and
Commercial Workers Unions and Employers Midwest Health Benefits Fund. The
Company will seek relief in several areas, under collective bargaining
agreements, including health and welfare costs that have continued to rise at a
dramatic rate. The second quarter also included the following additional
expenses: $398 thousand to increase insurance reserves, $206 thousand in
additional expense for a lease settlement and $250 thousand to provide for
uncollectable accounts receivable. The first half of fiscal 2002 also included
increases of $276 thousand in severance costs, $137 thousand in advertising
expense and $242 thousand in store opening expense primarily relating to the
conversion of seven stores to the Eagle Discount Foods format. The eight Eagle
Discount Foods format stores have been converted back to the Eagle Country
Market format.
During the second quarter of fiscal 2002 the Company recorded an asset
impairment charge of $646 thousand, which was partially offset by favorable
changes in the reserve for closed stores of $40 thousand.
Depreciation and amortization expense for the quarter ended August 3, 2002 was
$4.4 million or 2.7% of sales compared to $4.5 million or 2.7% of sales in the
same quarter of fiscal 2001. For the two quarters ended August 3, 2002,
depreciation and amortization expense was $9.0 million or 2.8% of sales versus
$9.0 million or 2.7% of sales for the same period in fiscal 2001. Net interest
expense decreased to $3.0 million or 1.9% of sales in the second quarter of
fiscal 2002 compared to $3.3 million or 1.9% of sales in the same quarter of
fiscal 2001. For the two quarters ended August 3, 2002, net interest expense
decreased to $6.1 million or 1.9% of sales compared to $6.5 million or 1.9% of
sales in the same period of fiscal 2001 due primarily to lower interest on the
senior notes due to redemptions that have taken place, partially offset by
increased interest expense on Loan and Security Agreement ("Revolver")
borrowings.
Gain on extinguishment of debt of $311 thousand and $789 thousand were recorded
in the quarter and two quarters ended August 3, 2002 relating to the repurchase
of senior notes. Senior notes with a face value of $550 thousand were purchased
during the second quarter of fiscal 2002 for $239 thousand plus accrued
interest. For the two quarters ended August 3, 2002, senior notes with a face
value of $1.6 million were purchased for $802 million plus accrued interest.
Gain on extinguishment of debt of $214 thousand and $768 thousand were recorded
in the quarter and two quarters ended August 4, 2001 relating to the repurchase
of Senior Notes. Senior Notes with a face value of $500 thousand were purchased
during the second quarter of fiscal 2001 for $286 thousand plus accrued
interest. For the two quarters ended August 4, 2001, Senior Notes with a face
value of $1.8 million were purchased for $1.1 million plus accrued interest.
The net loss for the second quarter of fiscal 2002 was $6.1 million or $1.95 per
share compared to a net loss of $1.2 million or $.36 per share in the same
quarter of fiscal 2001. The loss for the quarter included $3.0 million in
expenses, relating to the second quarter of fiscal 2002, that don't occur on a
regular quarterly basis. These expenses included $1.5 million for a health and
welfare special assessment, $646 thousand for asset impairment, $398 thousand to
increase insurance reserves, $206 thousand in additional expense for a lease
settlement and $250 thousand to provide for uncollectable accounts receivable.
For the two quarters ended August 3, 2002, the net loss was $9.2 million or
$2.97 per share compared to a net loss of $2.0 million or $.63 per share for the
comparable period of fiscal 2001. No tax benefit was recognized in fiscal 2002
or 2001 as the Company is in a net operating loss carryforward position.
Valuation allowances have been established for the entire
9
amount of net deferred tax assets due to the uncertainty of future
recoverability.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operating activities was $5.8 million for the two quarters
ended August 3, 2002 compared to cash used of $2.8 million in the comparable
period of fiscal 2001. The net loss and non-cash charges used $167 thousand of
cash. Working capital changes generated $6.0 million, due primarily to decreases
in accounts receivable and inventories, partially offset by decreases in
accounts payable, accrued and other liabilities, and reserve for closed stores.
Working capital at August 3, 2002 was $16.1 million and the ratio of current
assets to current liabilities was 1.30 to 1 compared to $27.0 million and 1.43
to 1 on February 2, 2002. The reduction in working capital was used primarily to
reduce long term debt and fund the Company's capital spending program.
Additions to property and equipment for the first two quarters of fiscal 2002
were $3.3 million compared to $2.4 million in the first half of fiscal 2001. The
Company completed two major remodels during the first half of fiscal 2002 and
currently has two major remodels in process.
The Company repurchased $1.6 million of its senior notes during the first half
of fiscal 2002 at a cost of $802 thousand, recording a gain on extinguishment of
debt of $789 thousand. Payments related to lease rejection costs were $325
thousand during the first two quarters of fiscal 2002. The repurchase of the
senior notes and the lease rejection payments were primarily funded from cash on
hand, cash flows from operations and loans against the Revolver.
On August 3, 2002 the Company had $17.0 million in loans against the Revolver,
no letters of credit outstanding and additional Revolver availability of $19.0
million. The Revolver has a financial covenant requiring the Company to maintain
a minimum net worth, as defined by the Revolver, of $3.0 million. The defined
net worth of the Company exceeded the minimum amount by approximately $2.5
million on August 3, 2002. If necessary, the Company expects to obtain an
amendment to lower the minimum net worth requirement under the Revolver. If the
Company's net worth should fall below the minimum net worth, as amended, or if
the Company is unable to obtain an amendment, the lender may exercise its rights
under the Revolver and the Company's ability to borrow under the Revolver could
be adversely affected.
Cash on hand, operating cash flows and other sources of funds, including loans
against the Revolver, are expected to be adequate to meet the Company's
liquidity requirements for the coming twelve months. This expectation is subject
to the impact of competitive stores and pricing, work rules and labor and
benefit costs under collective bargaining agreements, supply constraints or
difficulties, the Company's compliance with net worth requirements and the
continued availability of capital under the Revolver, and other risks and
uncertainties outlined under "Safe Harbor Statements Under the Private
Securities Litigation Reform Act of 1995".
CHANGES IN CRITICAL ACCOUNTING POLICIES
The Company implemented a change in accounting principle, effective February 3,
2002, from valuing substantially all inventories at the lower of cost or market
utilizing the last-in, first-out ("LIFO") method to valuing all inventories at
the lower of cost or market utilizing the first-in, first-out ("FIFO") method.
This change was adopted because the FIFO method more clearly follows the actual
flow of inventory, due to its perishable nature, and more closely matches actual
costs and revenues. Financial statements have been restated to apply the change
in accounting principle retroactively, resulting in a decrease in the loss
reported of $150 thousand for the second quarter of fiscal 2001 and $300
thousand for the first half of fiscal 2001. In addition, the inventory
previously reported as of
10
February 2, 2002 increased $8.4 million. The new accounting policy for
inventories is as follows:
INVENTORY- Inventories are stated at the lower of cost or market. Cost is
determined through use of the first-in, first-out ("FIFO") method, for all
inventories, applied to inventory values determined primarily by the retail
inventory method ("RIM") for store inventories and the weighted average method
for warehouse inventories.
Under RIM the valuation of inventories are at cost and the resulting gross
margins are calculated by applying a cost-to-retail ratio to sales. Inherent in
the RIM calculations are certain management judgments and estimates, including
shrinkage, which could impact the ending inventory valuation at cost, as well as
the resulting gross margins. RIM is an averaging method that has been widely
used in the retail industry due to its practicality.
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements under Management's Discussion and Analysis of Financial
Condition and Results of Operations and the other statements in this Form
10-Q which are not historical facts are forward looking statements. These
forward looking statements involve risks and uncertainties that could render
them materially different, including, but not limited to, continued
acceptance of the Company's products in the marketplace, the effect of
economic conditions, the impact of competitive stores and pricing,
availability and costs of inventory, employee costs and availability, the
rate of technology change, the cost and uncertain outcomes of pending and
unforeseen litigation, the availability and cost of capital including the
continued availability of capital under the Revolver, supply constraints or
difficulties, the effect of the Company's accounting policies, the effect of
regulatory and legal developments and other risks detailed in the Company's
Securities and Exchange Commission filings or in material incorporated
therein by reference.
11
PART II : OTHER INFORMATION:
ITEM 1 : LEGAL PROCEEDINGS Not Applicable
ITEM 2 : CHANGE IN SECURITIES AND USE OF PROCEEDS Not Applicable
ITEM 3 : DEFAULTS UPON SENIOR SECURITIES Not Applicable
ITEM 4 : SUBMITTED MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2002 Annual Meeting of Shareholders on June 19, 2002,
the following matters were submitted to a vote of Security Holders.
In the matter of the election of the Board of Directors for a one year
term, the Shareholders voting results were as follows:
Votes For Votes Withheld
--------------- -----------------
Robert J. Kelly 2,719,169 92,746
S. Patric Plumley 2,734,814 77,101
Peter B. Foreman 2,741,830 70,085
Steven M. Friedman 2,732,064 79,851
Alain M. Oberrotman 2,718,727 93,188
Jerry I. Reitman 2,741,830 70,085
William J. Snyder 2,754,122 57,793
In the matter of ratification of the appointment of KPMG LLP as
independent auditors, 2,782,320 votes were cast in favor of approval,
21,988 votes were cast against and holders of 7,607 shares abstained.
In the matter of the shareholder proposal with respect to urging the
sale of the Company, 269,653 votes were cast in favor of approval,
1,742,765 votes were cast against, 783,251 were broker non-votes and
holders of 16,246 shares abstained.
All votes were in the majority regarding the election of directors and
ratification of independent auditors. The directors were declared
elected and the appointment of auditor proposal declared approved. The
shareholder proposal urging the sale of the Company failed to be
approved by the shareholders.
12
ITEM 5 : OTHER Not Applicable
ITEM 6 : EXHIBITS AND REPORTS ON FORM 8K
Exhibit 10.15 Employment agreement dated May 9, 2002 between the Company and
Ward Dunn, Vice President of Sales and Marketing.
No reports were filed on Form 8K.
13
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:
EAGLE FOOD CENTERS, INC.
Dated: September 17, 2002 /s/ Robert J. Kelly
---------------------------------
Robert J. Kelly
Chairman, Chief Executive Officer and
President
Dated: September 17, 2002 /s/ S. Patric Plumley
-----------------------------
S. Patric Plumley
Senior Vice President -Chief Financial
Officer and Secretary
14
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert J. Kelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Food
Centers, Inc. (Eagle Food Centers);
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of Eagle Food Centers as of, and for, the
periods presented in this quarterly report.
Date: September 17, 2002 /s/ Robert J. Kelly
-------------------------------------
Robert J. Kelly
Chairman, Chief Executive Officer and
President
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of Eagle Food Centers,
Inc. I, Robert J. Kelly, Chief Executive Officer of Eagle Food Centers, Inc.,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) To the best of my knowledge, the report fully
complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly
presents, in all material respects, the financial condition
and results of operations of Eagle Food Centers, Inc.
Date: September 17, 2002 /s/ Robert J. Kelly
--------------------------------------
Robert J. Kelly
Chairman, Chief Executive Officer and
President
16
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, S. Patric Plumley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle
Food Centers, Inc. (Eagle Food Centers);
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of Eagle Food Centers as of, and for, the
periods presented in this quarterly report.
Date: September 17, 2002 /s/ S. Patric Plumley
-------------------------------------
S. Patric Plumley
Senior Vice President-Chief Financial
Officer and Secretary
17
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of Eagle Food Centers,
Inc. I, S. Patric Plumley, Chief Financial Officer of Eagle Food Centers, Inc.,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) To the best of my knowledge, the report fully
complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly
presents, in all material respects, the financial condition
and results of operations of Eagle Food Centers, Inc.
Date: September 17, 2002 /s/ S. Patric Plumley
-------------------------------------
S. Patric Plumley
Senior Vice President-Chief Financial
Officer and Secretary
18