-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/kZIRklbRegq+nXzJ4jD+/HwCSXKet4I8YlDioE9Sy881twYf2n49VmUbosgVsZ Ez0nRl5kLi3zEvnuy6RX/g== 0000912057-02-035761.txt : 20020917 0000912057-02-035761.hdr.sgml : 20020917 20020917152948 ACCESSION NUMBER: 0000912057-02-035761 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020803 FILED AS OF DATE: 20020917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE FOOD CENTERS INC CENTRAL INDEX KEY: 0000030908 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 363548019 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17871 FILM NUMBER: 02765953 BUSINESS ADDRESS: STREET 1: RTE 67 KNOXVILLE RD CITY: MILAN STATE: IL ZIP: 61264 BUSINESS PHONE: 3097877730 MAIL ADDRESS: STREET 1: PO BOX 6700 CITY: ROCK ISLAND STATE: IL ZIP: 61204-6700 10-Q 1 a2089383z10-q.txt FORM 10-Q 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 -------- 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 EX-10.15 3 a2089383zex-10_15.txt EXHIBIT 10.15 Exhibit 10.15 EMPLOYMENT CONTRACT AGREEMENT made as of the 9th day of May 2002 between EAGLE FOOD CENTERS, INC., a Delaware corporation with principal offices presently located at Route 67 and Knoxville Road, Milan, Illinois 61264 (hereinafter referred to as the "Corporation"), and WARD DUNN, (hereinafter referred to as "Employee"). W I T N E S S E T H : WHEREAS, the Corporation desires that Employee shall be employed by the Corporation as its Vice President of Sales and Marketing and Employee is desirous of such employment, upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. The Corporation shall employ Employee, and Employee shall serve the Corporation, as its Vice President of Sales and Marketing, upon the terms and conditions hereinafter set forth. 2. TERM. The employment of Employee by the Corporation hereunder shall commence as of the date hereof and, unless sooner terminated pursuant to Paragraphs 9 through 11 hereof, and shall continue for a period of two (2) years (the "Term). 3. OFFICE; DUTIES; EXTENT OF SERVICES. (a) During the Term, Employee shall serve as Vice President, Sales and Marketing, faithfully and to the best of his ability, under the direction and supervision of the Chief Executive Officer of the Corporation (the "CEO"). Employee shall transmit or shall cause to be transmitted necessary instructions and advice to all subordinate employees of the Corporation and all other proper persons. b) Employee agrees that he shall devote his best efforts, energies and skills to the discharge of his duties and responsibilities hereunder. To this end, Employee agrees that he shall devote his full business time and attention to the business and affairs of the Corporation and he shall not, without the prior written approval of the CEO, directly or indirectly, engage or participate in, or become an officer or director of, or become employed by, or render advisory or other services in connection with, any other business enterprise. 4. SALARY AND BONUS ARRANGEMENTS. (a) During the Term, the Corporation shall pay to Employee a salary for his services at the rate of $190,000 per annum (the "Base Salary"), payable in accordance with the normal payroll practices and procedures of the Corporation. Annual salary adjustments (cost of living adjustments or otherwise) shall be in accordance with the terms and conditions of the Corporation's compensation plan. The Employee acknowledges that, upon reporting to work to commence his work duties, he received a signing bonus in the amount of $35,000.00. If Employee's employment hereunder is terminated within six (6) months after the date hereof by the Corporation for "cause" (as hereinafter defined), or if Employee abandons such employment, such $35,000.00 bonus payment shall be returned to the Corporation. 19 (b) During the Term, Employee shall be eligible to receive bonus compensation at the end of each fiscal year of the Corporation in an amount to be determined by the Board of Directors in its sole discretion. The Corporation and Employee shall use reasonable efforts to agree on mutually acceptable performance targets for such bonus compensation. Bonus compensation shall be at a targeted rate of 40% of the Base Salary during any year of Employee's employment hereunder and may be up to 80% of the Base Salary. Payout of the bonus compensation shall be in accordance with the terms and conditions of the Corporation's compensation plan. (c) In the event the Corporation shall terminate Employee's employment hereunder other than for "cause" pursuant to paragraph 11(a) herein, Employee shall receive payment in a lump sum equal to twelve (12) months of compensation based upon Employee's base salary upon the date of termination of his employment, regardless of term. Normal deductions and withholdings shall be deducted from such payment. In addition, Employee shall receive: 1) Continued health and dental insurance coverage at the same benefit levels as at the time of termination of employment, for a period of twelve (12) months or until Employee is gainfully employed by a new employer offering such benefits. 2) Any accrued but unused vacation pay. 3) Professional outplacement services and assistance to provided and paid for by the Corporation up to the sum of $10,000. 5. EXPENSES OTHER THAN RELOCATION EXPENSES. It is contemplated that, in connection with his employment hereunder, Employee may be required to incur reasonable and necessary travel, business entertainment and other business expenses. The Corporation agrees to pay, or reimburse Employee for, all reasonable and necessary travel, business entertainment and other business expenses incurred or expended by him incident to the performance of his duties and responsibilities hereunder, upon submission by Employee to the CEO (or his designee or designees) of vouchers or expense statements satisfactorily evidencing such expenses and such expenses being approved by the CEO. 6. RELOCATION AND RELOCATION EXPENSES. Employer agrees to pay reasonable relocation expenses for moving. Such expenses to be reimbursed after submission and approval by the CEO. If the Corporation changes the location of its Principal Office City during the Term, then concurrently with such change Employee agrees to move to a new residence within one hour commuting distance of such new Principal Office City. Such a concurrent move will be expensed in accordance with paragraphs 7(b), (c), and (d) herein. Employer will provide reimbursement of all usual and customary real estate fees and closing costs (up to 7%) associated with the sale of your primary residence if sold within one (1) year following the execution of this agreement. Reasonable costs do not include items such as fire and hazard insurance, real estate taxes or loan initiation fees or loan points. Eagle will pay reasonable closing costs on the purchase of a new residence when submitted with appropriate closing documents and approved by the CEO. Any relocation costs or real estate fees or costs paid pursuant to this agreement will be repaid to the Employer if Employee terminates employment within one (1) year of the execution of this Agreement. Employer shall provide up to three (3) months of reasonable temporary living expenses beginning with the first date of employment with Employer. 20 7. EMPLOYEE BENEFITS; VACATIONS. Employee shall be entitled to participate in any and all life insurance, medical insurance, disability insurance, directors' and officers' liability insurance and any other employee benefit plan or plans which may be generally made available during the Term to senior level executives of the Corporation to the extent that Employee qualifies under the eligibility provisions of any such plan or plans and as such plans may be amended. Employee shall be entitled to vacations (taken in segments), aggregating four (4) weeks in each twelve month period of the Term, in accordance with the Corporation's vacation policy, to be taken at times consistent with the effective discharge of Employee's duties. 8. DEATH. In the event of the death of Employee during the Term, the salary to which Employee would be otherwise entitled pursuant to Paragraph 4(a) hereof shall continue to be paid through the end of the month in which death occurs to the last beneficiary designated by Employee by written notice to the Corporation, or, failing such designation, to his estate and such beneficiary or estate shall also be entitled to all accrued and unpaid bonus compensation owing to Employee under Paragraph 4(b). Employee shall have the right to name, from time to time, any one person as beneficiary hereunder or, with the consent of the CEO, he may make other forms of designation of beneficiary or beneficiaries. Employee's designated beneficiary or beneficiaries or personal representative, as the case may be, shall accept the payments provided for in this Paragraph 10 in full discharge and release of the Corporation of and from any further obligations under this Agreement. 9. TERMINATION. Employee's employment hereunder may be terminated by the Corporation for "cause" at any time if Employee shall commit any of the following "Acts of Default": (i) Employee shall have refused to perform any of his obligations set forth herein in any material respect or Employee shall have taken any action which causes material harm to the Corporation or its operations, and Employee shall have failed to cure such failure or action within five (5) days after receiving written notice thereof from the CEO; (ii) Employee shall have committed an act of fraud, theft or dishonesty against, or shall breach fiduciary obligation to, the Corporation and/or any of its subsidiary companies; or (iii) Employee shall be convicted of (or plead NOLO CONTENDERE to) any felony or any misdemeanor (whether or not involving the Corporation and/or any of its subsidiary companies) involving moral turpitude or which might, in the opinion of the Board of Directors, cause embarrassment to the Corporation and/or any of its subsidiary companies. In the event the Corporation elects to terminate the employment of Employee for "cause" pursuant to this Paragraph 11(a), the CEO shall send written notice to Employee terminating such employment and describing the action of Employee constituting the Act of Default, and thereupon the Corporation shall have no further obligations under this Agreement, with the exception of the obligation to pay Employee, promptly after such termination, any accrued or unpaid salary earned by Employee through and including the effective date of such termination and any accrued and unpaid bonus compensation owing to Employee pursuant to Paragraph 4(b) hereof, but Employee shall continue to have the obligations provided for in Paragraph 12 hereof. Nothing contained in this Paragraph 11 shall constitute a waiver or release by the Corporation of any rights or claims it may have against Employee for actions or omissions which may give rise to an event causing termination of this Agreement pursuant to this Paragraph 11(a). 21 10. RESTRICTIVE COVENANTS AND CONFIDENTIALITY INJUNCTIVE RELIEF. (a) Employee agrees, as a condition to the performance by the Corporation of its obligations hereunder, particularly its obligations under Paragraph 4 hereof, that during the Term and during the further period of one (1) year after the termination of such employment, for any reason, Employee shall not, without prior written approval of the CEO, directly or indirectly through any other individual or entity: (i) solicit, raid, entice or induce any individual or entity that presently is or at any time during the Term shall be, or who has indicated an interest in becoming, a supplier of the Corporation, and/or any of its subsidiary companies, to become a supplier of any other individual or entity, and Employee shall not approach any such individual or entity for such purpose or authorize or knowingly approve the taking of such actions by any other individual or entity; or (ii) solicit, raid, entice or induce an individual who presently is or at any time during the Term shall be an employee of or consultant to the Corporation and/or any of its subsidiary companies, to leave such employment or consulting position or positions or to become employed by or become a consultant to any other individual or entity, and Employee shall not approach any such employee or consultant for such purpose or authorize or knowingly approve the taking of such actions by any other individual or entity. (b) Recognizing and acknowledging that confidential information may exist, from time to time, with respect to the business and/or activities of the Corporation and/or its subsidiary companies, and that the knowledge, information and relationships with suppliers and agents, including, but not limited to, supplier lists and/or other such lists, and that the knowledge of the Corporation's and/or its subsidiary companies' business methods, systems, plans and policies and other confidential information which he has heretofore and shall hereafter establish, receive or obtain as an employee of the Corporation and/or its subsidiary companies or otherwise, are valuable and unique assets of the respective businesses of the Corporation and its subsidiary companies, Employee agrees that during and at all times after the Term he shall not (otherwise than pursuant to his duties hereunder), without the prior written approval of the CEO, disclose any such knowledge or information pertaining to the Corporation and/or any of its subsidiary companies, their business, activities, personnel or policies, to any individual or entity, for any reason or purpose whatsoever, or use for his own benefit or for the benefit of any other individual or entity, any such knowledge or information. The provisions of this Paragraph 12(b) shall not apply to information which is or shall become generally known to the public or the trade (except by reason of Employee's breach of his obligations hereunder), information which is or shall become available in trade or other publications and information which Employee is required to disclose by order of, or subpoena issued by, a court of competent jurisdiction or other governmental authority (but only to the extent specifically ordered by such court or other governmental authority); provided, however, that promptly upon receipt of such subpoena or order requiring disclosure Employee shall give the Corporation written notice of the circumstances under which Employee is so required to make disclosure of such information, as well as the intended disclosure of such information, so that the Corporation has the opportunity to seek a protective order or follow such other course or courses of action as the Corporation, in its sole discretion, may deem appropriate. (c) The provisions of this Paragraph 12 shall survive the termination of Employee's employment hereunder, irrespective of the reason thereof. 22 (d) Employee recognizes and acknowledges that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to confidential information vital to the Corporation's and/or it subsidiary companies' businesses. By reason of this, Employee consents and agrees that if he violates any of the provisions of this Agreement with respect to diversion of the Corporation's and/or its subsidiary companies' suppliers or employees, or confidentiality, the Corporation and its subsidiary companies would sustain irreparable harm, and, therefore, in addition to any other remedies which the Corporation may have under this Agreement or otherwise, the Corporation and/or its subsidiary companies shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Employee from committing or continuing any such violation or violations of this Agreement, and Employee shall not object to any such application or applications made in good faith. Nothing in this Agreement shall be construed as prohibiting the Corporation and/or its subsidiary companies from pursuing any other remedy or remedies, including, without limitation, recovery of damages. 11. TRANSACTIONS OFFERED TO THE CORPORATION; PROPRIETARY MATERIALS. During the term of his employment hereunder, Employee agrees to bring to the attention of the CEO, all proposals, business opportunities or investments of whatever nature, in areas in which the Corporation and/or any of its subsidiary companies is active or may be interested in becoming active, which are created or devised by Employee or come to the attention of Employee and which might reasonably be expected to be of interest to the Corporation and/or any of its subsidiary companies. Without limiting the generality of the foregoing, Employee acknowledges and agrees that memoranda, notes, records and other documents made or compiled by Employee or made available to Employee during the term of this Agreement concerning the business and/or activities of the Corporation and/or any of its subsidiary companies shall be the Corporation's property and shall be delivered by Employee to the CEO upon termination of this Agreement or at any other time at the request of the CEO. 12. DEDUCTIONS AND WITHHOLDING. Employee agrees that the Corporation shall withhold from any and all payments paid or payable to Employee, or on Employee's behalf, pursuant to this Agreement, an amount equal to any taxes required by any governmental regulatory authority to be withheld or otherwise deducted and paid by the Corporation in respect of such payments. In connection with the exercise of the Option, the Corporation may require the Employee to reimburse the Corporation for any such withholding tax liability in respect of the issuance of shares upon such exercise. In lieu thereof, the Corporation shall have the right to withhold the amount of such taxes from any other sums due or to become due from the exercise of any such option. The Corporation may, in its discretion, hold the stock certificate to which Employee is entitled upon exercise of the Option as security for the payment of such withholding tax liability, until cash sufficient to pay that liability has been accumulated. In addition, the Corporation shall be authorized, without the prior written consent of Employee, to effect any such withholding upon exercise of the Option by retention of shares issuable upon such exercise having a fair market value at the date of exercise which is equal to the amount to be withheld; provided, however, that the Corporation shall not be authorized to effect such withholding without the prior written consent of Employee if such withholding would subject Employee to liability under Section 16(b) of the Securities Exchange Act of 1934, as amended. 13. PRIOR AGREEMENTS. This Agreement cancels and supersedes any and all prior agreements and understandings between the parties hereto respecting the employment of Employee by the Corporation. 23 14. REPRESENTATIONS AND WARRANTIES OF THE PARTIES. (a) Employee (x) represents and warrants to the Corporation that (i) he is not under any obligation, restriction or limitation, contractual or otherwise, to any other individual or entity which would prohibit or impede him from performing his duties and responsibilities hereunder, and that he is free to enter into and perform the terms and provisions of this Agreement, (ii) he does not have any impairment which would interfere with his ability to perform the essential functions of his job, and (iii) Common Stock purchased or acquired hereunder will be purchased or acquired for his own account, for investment only and not with a view to the resale or distribution thereof in violation of any federal or state securities laws, and (y) agrees that any subsequent resale or distribution of any such Common Stock shall be made only pursuant to either (A) an effective registration statement under the Securities Act of 1933, as amended, covering such Common Stock and under applicable state securities laws or (B) specific exemptions from the registration requirements of the Securities Act of 1933, as amended, and any applicable state securities laws. In the event that Employee exercises the Option, in connection therewith Employee shall deliver to the Corporation a written statement to the effect set forth in clauses (x) (iii) and (y) above. (b) This Agreement has been duly authorized by all necessary corporate action on the part of the Corporation and has been duly executed and delivered on behalf and in the name of the Corporation by the CEO. 15. EFFECTIVENESS. This Agreement shall become effective when, and only when, the Corporation shall have received this Agreement signed by the Corporation and Employee. 16. WAIVER. Waiver by either party hereto of any breach or default by the other party of any of the terms and provisions of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. 17. NOTICES. All notices required to be given under this Agreement shall be in writing and sent by registered mail or certified mail, postage prepaid, return receipt requested. Such notices shall be deemed to have been validly served, given or delivered three (3) business days after deposit in the United States mail addressed to the party or parties. Either party may change the address to which notices, requests, demands and other communications hereunder shall be sent by sending written notice of such change of address to the other party in the manner above stated. 18. ASSIGNABILITY AND BINDING EFFECT. This Agreement shall inure the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of Employee, and shall inure to the benefit of and be binding upon the Corporation and its successors and assigns. The obligations of Employee may not be delegated and, except as expressly provided in Paragraph 9 above relating to the designation of beneficiaries, Employee may not assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement, or any of his rights hereunder, without the prior written consent of the Corporation, and any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void without effect. This Agreement may be assigned by the Corporation, in its sole discretion, to any one or more of its subsidiary companies or to another individual or entity in connection with the merger or consolidation of the Corporation with another corporation, partnership or other business enterprise or the sale of all or substantially all of the assets and business of the Corporation to another individual or entity. 24 19. COMPLETE UNDERSTANDING; AMENDMENTS, ETC. This Agreement constitutes the complete understanding and entire agreement between the parties hereto with respect to the employment of Employee hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be altered, modified, amended or terminated (other than in accordance with the provisions hereof) except by written instrument signed by the party against whom enforcement may be sought. 20. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Illinois. 21. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not limit, define or affect in any way the meaning or interpretation of this Agreement or any portion or portions thereof. 22. SEPARABILITY. In case any one or more of the provisions of this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected thereby. 23. ATTORNEYS' FEES. Each party hereto agrees that if the other party shall prevail in any action or proceeding arising hereunder or in connection herewith, such other party shall be entitled to reimbursement of reasonable attorneys' fees and disbursements related to such action or proceeding. 24. This Employment Contract supercedes the Employment Offer letter between the parties hereto dated February 16, 2002. IN WITNESS WHEREOF, the parties hereto have entered in to this Agreement and duly set their hands on the day and year first above written. EAGLE FOOD CENTERS, INC. By: /s/ Robert J. Kelly /s/ Ward Dunn - --------------------------------- ------------------------------------ Robert J. Kelly Ward Dunn Chief Executive Officer Chairman of the Board 25 -----END PRIVACY-ENHANCED MESSAGE-----