-----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, A82imQjUhnC35iC937oaVninyUx2B1KrQDtnCpaNaFaNTVS5q6LA4mQ4N41wWkSl ge2i0K5GSUrBvF8GvcRlaw== 0000950131-98-002937.txt : 19980504 0000950131-98-002937.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950131-98-002937 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-17871 FILM NUMBER: 98608046 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 31, 1998 or [_} Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ________________. Commission File No. 0-17871 EAGLE FOOD CENTERS, INC. (Exact name of registrant as specified in its charter) Delaware 36-3548019 ------------------------------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Route 67 & Knoxville Road, Milan, Illinois 61264 (Address of principal executive offices) Registrant's telephone number including area code (309) 787-7700 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ The aggregate market value of the voting stock held by non-affiliates of the Registrant was $19,428,199 as of April 20, 1998. The number of shares of the Registrant's Common Stock, par value one cent $(0.01) per share, outstanding on April 20, 1998 was 19,873,782. Documents incorporated by reference include: 1) Portions of the definitive Proxy Statement expected to be filed with the Commission on or before May 18, 1998 with respect to the annual meeting of shareholders are incorporated by reference into Part III. 1 of 48 Pages Exhibit Index appears on page 46 FISCAL YEAR ENDED January 31, 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 10 Item 4 Submission of Matters to a Vote of Security Holders 10 Item 4a Executive Officers of the Registrant 11 PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 12 Item 6 Selected Financial Data 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7a Quantitative and Qualitative Disclosures about Market Risk 19 Item 8 Financial Statements and Supplementary Data 20 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 PART III Item 10 Directors and Executive Officers of the Registrant 43 Item 11 Executive Compensation 43 Item 12 Security Ownership of Certain Beneficial Owners and Management 43 Item 13 Certain Relationships and Related Transactions 43 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
2 PART I ITEM 1: BUSINESS - ---------------- General Eagle Food Centers, Inc. (the "Company" or "Eagle"), is a Delaware Corporation. Eagle is a leading regional supermarket chain operating 90 supermarkets in the Quad Cities area of Illinois and Iowa, north, central and eastern Illinois, eastern Iowa, and the Chicago/Fox River Valley and northwestern Indiana area under the trade names "Eagle Food Centers", "Eagle Country Markets(R)", and "BOGO's." Most Eagle supermarkets offer a full line of groceries, meats, fresh produce, dairy products, delicatessen and bakery products, health and beauty aids and other general merchandise, as well as video rental and floral service. The Company's fiscal year ends on the Saturday closest to January 31st. Fiscal 1997 was a 52 week year ending January 31, 1998, fiscal 1996 was a 52-week year ending February 1, 1997, and fiscal 1995 was a 53-week year ending February 3, 1996. Talon Insurance Company ("Talon"), formed in the State of Vermont in 1994 to provide insurance for its workers' compensation and general liability claims, is a wholly-owned subsidiary of Eagle Food Centers, Inc. Prior to the formation of Talon, Eagle used paid loss and retro programs through external insurance companies. Store Development and Expansion Eagle currently operates stores in the three general formats discussed below. Eagle Country Markets represent the Company's current full line supermarket format which was introduced by management in 1991. Of the 76 current Eagle Country Markets, 17 have been opened as new stores and 59 have been remodeled with the Eagle Country Market decor. In the new stores, extra space has been devoted to expanded perishable departments, tying together produce, full-service delicatessen, service bakery, service seafood and meat departments, and, in certain stores, floral, video rental departments and in-store banks. All newly- built Eagle Country Markets are designed to encourage shoppers to walk through the higher margin "Power Aisle," which includes extensive perishable offerings. Eagle Country Markets tend to be larger stores ranging from 38,000 square feet to 67,500 square feet for new stores. The pricing strategy in the Eagle Country Markets is to offer overall lower prices than comparable supermarket competition. Eagle Food Centers use a traditional supermarket format ranging in size from 16,500 square feet to 42,000 square feet. The Company currently has thirteen stores operating under this format. These stores offer a full range of groceries, meats, fresh produce, dairy products, delicatessen and bakery products, health and beauty aids and other general merchandise and many stores offer video rental and floral departments as well. Eagle Food Centers offer overall low prices while providing high quality products and a service-oriented shopping experience. 3 BOGO's Food and Deals uses a limited assortment format covering approximately 2,000 stock-keeping units of groceries, produce, meat, health and beauty aids, and general merchandise. The purpose of this store is to take advantage of consumer demand for deep discount stores in less densely populated markets. The Company currently operates one BOGO's store opened in a previous Eagle Food Center location. BOGO's operates on three pricing themes: BOGO (buy one-get one free), advertised item, and BOGO everyday low price. Management intends to concentrate its future store development strategy around the Eagle Country Market supermarket format. As part of its store development program, management continuously reviews the performance of all its stores and expects to implement a variety of strategies, including converting or modifying certain store formats as well as selling, subleasing or closing underperforming stores. The Company is pursuing a more aggressive store development program to identify markets for new stores and obtain the best potential new store locations available in any target market for openings over the next two to five years. Management intends to focus the Company's new store development within existing markets or new markets within a 300 mile radius of its Headquarters and central distribution facility in Milan, Illinois where the utilization of existing distribution, marketing and support systems is advantageous to its cost structure. Within these markets, the Company expects to select sites for its stores based upon factors such as existing competition, demographic composition and available locations. The Company opened one new store in fiscal 1997. The Company currently has one new store under construction and plans to open five additional new stores during 1998. In addition, the Company is in the process of expanding two existing stores, and plans to expand two additional stores and complete major remodels on six stores during 1998. The Company prefers to lease stores from local developers and pursues this strategy wherever appropriate and cost-effective. The Company completed two sale/leaseback transactions in fiscal 1995, one in 1996, and one in 1997 for a total of seven existing locations in order to reduce the amount of capital committed to real estate. Currently, the Company owns 16 of its stores and leases 74 stores. Store Operations The Company's geographic market is divided into three areas, each having an Area Vice President of Operations who is responsible for approximately thirty stores. Areas and stores operate with a certain degree of autonomy to take advantage of local market and consumer needs. Areas and stores are responsible for store operations, associate recruitment and development, community affairs and other functions relating to local operations. Store managers are given relatively broad discretion in tailoring merchandise and services to the needs of customers in the particular community. Associate involvement and participation has been encouraged through meetings with the chairman and chief executive officer, district advisory boards and store management team incentive bonus programs for sales and earnings improvement. Computer and Information Systems In February, 1996, the Company outsourced its MIS function and signed a long- term contract with MCI Systemhouse, Inc. (formerly SHL Systemhouse, Inc.) to assume complete responsibility for Eagle's MIS organization. 4 Eagle Management uses technology as a means of enhancing productivity, controlling costs, providing an easier shopping experience for customers and learning more about shopper's buying habits. The Company owns a royalty-free license from its former parent, Lucky Stores Inc., to use or modify all legacy computer software programs used for information processing. Eagle has embraced client/server technology and has started replacing several mainframe-based legacy systems with new, client/server systems. Eagle has been successful in implementing and integrating several new client/server systems that will equip Eagle for processing into the next century. These new systems, which support essential business functions include: . Warehouse and Distribution . Purchasing and Inventory Control . Store Applications for Cash Management, DSD Receiving, and Time and Attendance Eagle will complete the implementation and integration of three additional new client/server systems in 1998. These new systems, which also support essential business functions and will prepare Eagle for processing into the next century, include: . Store Application for Labor Scheduling . Pricing and Shelf Label Management . Eagle Savers Card Promotional Offers MCI Systemhouse has identified the scope of work that will need to be completed to ensure that Eagle's remaining systems are Year 2000 compliant. The primary additional systems that need to be upgraded to year 2000 compliant releases include: . Human Resources - Payroll and Benefits . Financial Applications including General Ledger, Accounts Payable, Accounts Receivable, Fixed Assets and Capital Projects . Store Systems Controllers - Operating System and Supermarket Application The Company will utilize IBM 4690 generation equipment for its point-of-sale systems. The systems will continue to provide the ability to offer electronic coupons and processing of the Eagle Savers Card, a customer specific identification card designed to facilitate targeted marketing and frequent shopper programs. The Company will also continue to utilize a Unix processor together with database marketing software to store and analyze customer-specific shopping data for target marketing. See comments at page 18 for further discussion. Merchandising Strategy Eagle's strategy is to strengthen its perception as a price leader compared to other supermarket competitors and to strengthen its image as a high quality, service-oriented supermarket chain and provider of high quality perishables. The Company strives to offer its customers one-stop shopping convenience and price value for all of their food and general merchandise shopping needs. Customer Service - Eagle delivers a wide variety of customer services. Most stores provide customer services such as video rental, check cashing, film processing, lottery ticket and money order sales, and UPS shipping. All stores provide quick, friendly checkout service. Management intends as part of its current strategy to further enhance customer service through additional training of store associates. 5 Corporate Brands (Private Label) - Corporate Brand sales are an important element in Eagle's merchandising plan. The Company became a member of the Topco Associates, Inc. buying organization in 1994 and has engaged Daymon Associates, Inc. as its "corporate brand" broker. Eagle has a strong penetration in many categories with its Lady Lee brand. In 1995 the Company entered into an agreement with Topco to carry World Classics premium corporate brand products and in 1996 introduced the Valu Time label for the low price corporate brand niche. Selection - A typical Eagle store carries over 23,000 items, including food and general merchandise. The Company carries nationally advertised brands and an extensive selection of top quality corporate brand products. All stores carry a full line of dairy, frozen food, health and beauty aids and selected general merchandise. In addition, most stores have service delicatessens and bakeries and some stores provide additional specialty departments such as ethnic food items, floral service, seafood service, beer, wine, liquor, and in-store banking facilities. Promotion - The Company's promotion and merchandising strategy focuses on its image as a high-quality, service-oriented supermarket chain while reinforcing its reputation for price leadership and high quality perishables. Eagle has utilized the Eagle Savers' Card for several continuity promotions and for electronic coupon discounts. Through its store personnel, the Company takes an active interest in the communities in which it operates. The Company also contributes funds, products and services to local charities and civic groups. Consumer Research - The Company utilizes consumer research to track customer attitudes and the market shares of the Company and its competitors. The Company also has a continuous program of soliciting customer opinions in all of its market areas through the use of in-store customer comment cards. This data enables management to respond to changing consumer needs, direct advertising to specific customer perceptions and evaluate store services and product offerings. Advertising Strategy The Company utilizes a broad range of print and broadcast advertising in the markets it serves. In addition, the Company seeks co-op advertising reimbursements from vendors. The additional co-op advertising has allowed the Company to broaden its exposure in various media. The Company eliminated its in-house advertising department in 1993. These services are now being purchased from third party providers. This allowed the Company to take advantage of technological advances in layout, desktop publishing and production more quickly than if the Company had attempted to develop such technology internally. Purchasing and Distribution The Company's stores are located an average of 120 miles from the Company's central distribution facility in Milan, Illinois. This complex includes the Company's executive offices, warehouse, areas used for receiving, shipping and trailer storage, and a truck repair facility. The Company supplies approximately 70% of its stores' inventory requirements from its 935,332 square foot central distribution facility (which includes approximately 189,072 square feet of refrigerated and freezer space). The remaining 30% of the stores' inventory requirements are delivered direct to the store. The Company's purchasing and distribution functions are managed through its central merchandising system. The Company's purchasing and distribution operations permit rapid turnover at its central distribution facility, allowing its stores to offer consistently fresh, high-quality dairy products, meats, produce, bakery items and 6 frozen foods. Also, centralized purchasing and distribution reduces the Company's cost of merchandise and related transportation costs by allowing the Company to take advantage of volume buying opportunities and manufacturers' promotional discounts and allowances and by minimizing vendor distribution costs. The Company engages in forward buying programs to take advantage of temporary price discounts. Due to its proximity to Chicago and other major markets, the Company is able to reduce transportation costs included in cost of goods sold by "backhauling" merchandise to its Milan central distribution facility. Competition The food retailing business is highly competitive. The Company is in direct competition with national, regional and local chains as well as independent supermarkets, warehouse stores, membership warehouse clubs, supercenters, limited assortment stores, discount drug stores and convenience stores. The Company also competes with local food stores, specialty food stores (including bakeries, fish markets and butcher shops), restaurants and fast food chains. The principal competitive factors include store location, price, service, convenience, product quality and variety. The number and type of competitors vary by location, and the Company's competitive position varies according to the individual markets in which the Company does business. The Company's principal competitors operate under the trade names of Cub, Dominicks, Hy-Vee, Jewel, Kmart, Kroger, Shop-N-Save, Target, and Wal-Mart (Supercenters and Sam's Clubs). Management believes that the Company's principal competitive advantages are its value perception, the attractive Eagle Country Market store format, concentration in certain markets and expansion of service and product offerings. The Company is at a competitive disadvantage to some of its competitors due to having unionized associates. A new format appeared in the Company's trade area in 1994 as five Super KMart supercenters opened. One Wal-Mart Supercenter opened in fiscal 1995 followed by six in 1996 and six more in 1997. Additional supercenter openings by KMart, Wal- Mart, Target and Meijer are likely in the next several years. Not only does this format add new grocery square footage to the market but it offers traditional grocery products at low prices to attract customers to the location with the intent to draw them to the general merchandise side of the store. These new competitors operate at a significant cost advantage to supermarkets by using mostly part-time, non-union employees. Trademarks, Trade Names and Licenses The Company uses various trademarks and service marks in its business, the most important of which are the "Eagle Country Market "TM", "5-Star Meats(R)", "Lady Lee(R)", "Eagle Savers' Card "TM", and "Harvest Day(R)" trademarks and the "Eagle(R)" and "Eagle Country Market(R)" service marks. Each such trademark is federally registered or has an application for registration pending. Pursuant to a trademark license agreement (the "Trademark License Agreement") entered into with the Company's former parent, Lucky Stores, Inc., the Company has been granted the royalty-free use of the "5-Star Meats(R)", "Lady Lee(R)" and "Harvest Day(R)" trademarks until November 30, 2007. The Trademark License Agreement permits the Company to use the licensed trademarks only in the states of Illinois, Indiana, Iowa, Michigan, Ohio, Wisconsin, Kentucky and Minnesota. Lucky Stores, Inc. has agreed not to grant to any other person the right to use such trademarks in the states of Illinois, Indiana and Iowa during the period of the license to the Company. Associates and Labor Relations At the end of fiscal 1997, the Company had 6,337 associates, 341 of whom were management and administrative associates and 5,996 of whom were hourly associates. Of the Company's hourly associates, substantially all are represented by 19 separate locals which are associated with four international unions. Store associates are represented by several locals of the United Food and Commercial Workers; warehouse associates, warehouse and bakery drivers and office and clerical workers are represented by Teamsters Local 371; bakery 7 plant workers are represented by Bakery and Confectionery Workers Union Local 36; and bakery plant operating engineers are represented by Operating Engineers Local 150. The Company values its associates and believes that its relationship with them is good. Several associate relations programs have been introduced, including measures that allow associates to participate in store level decisions, safety incentive programs and store management team incentive bonus programs. The Company began offering a 401(k) savings plan in 1996 open to all union associates. In addition, the Company has an associate stock purchase program and a scholarship program for associates' children and offers preferential discounts to associates on merchandise purchases. 8 ITEM 2: PROPERTIES - ------------------- Stores The Company currently operates 90 stores, ranging in size from 16,500 to 67,500 square feet, with an average size of 37,756 square feet. Sixteen of the Company's stores are owned in fee by the Company. The Company is the lessee or sublessee for the remaining 74 stores. The Company sold and leased back one of its stores in fiscal 1997, one in fiscal 1996, and five in fiscal 1995. Selected statistics on Eagle retail food stores are presented below:
Fiscal Year Ended --------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 Average total sq. ft. per store 37,756 37,281 36,772 Average total sq. ft. selling space per store 27,835 27,460 27,102 Stores beginning of year 92 92 96 Opened during year 1 2 0 Major remodels(1) 5 1 3 Closed during year 3 2 4 Stores end of year 90 92 92 Size of stores at end of year: Less than 25,000 sq. ft. 5 5 5 25,000 - 29,999 sq. ft. 25 28 29 30,000 - 34,999 sq. ft. 5 5 5 35,000 - 44,999 sq. ft. 38 38 40 45,000 sq. ft. or greater 17 16 13 Type of stores: Eagle Country Markets 76 74 67 Eagle Country Warehouses (2) 0 0 7 Eagle Food Centers 13 17 17 BOGO's Food and Deals 1 1 1
(1) A remodeling project which costs $300,000 or more for 1997 and $100,000 for 1996 and 1995. (2) The Company discontinued the Eagle Country Warehouse format in 1996 and converted all Eagle Country Warehouses to the Eagle Country Market format. Eagle stores contain various specialty departments such as full service delicatessen (87 stores), bakery (86 stores), floral (63 stores), video rentals (53 stores), pharmacy (17 stores), seafood (31 stores), alcoholic beverages (79 stores), Eagle Country Cafe (11 stores), and in-store banks (18 stores). 9 Most of the leases and subleases for the stores contain renewal options for periods ranging from five to thirty years. The Company is required to pay fixed rent and a percentage (ranging from 0.75% to 1.5%) of its gross sales in excess of stated minimum gross sales amounts under 74 of the leases and subleases. The Company also has subleases on 14 former store locations and has four vacant former store properties with continuing rent obligations of which the Company is attempting to dispose. For additional information on leased premises, see Note H in the notes to the consolidated financial statements included elsewhere in this document. Central Distribution and Bakery Facilities The Company leases its central distribution facility under a lease expiring in 2007. The Company's central distribution facility contains a total of 935,332 square feet of space. The Company's central bakery is a 49,000 square foot facility located in Rock Island, Illinois, three miles from the central distribution facility. The Company's lease for the bakery facility expires in 2001 and has two five-year renewal options. During 1996 the Company terminated the lease on its Westville, Indiana warehouse. The Company incurred a net cash outflow of $9.1 million for the transaction. The transaction had no impact on earnings, as the cost was previously reserved, and was financed through the Company's revolving credit facility. For the most part, store fixtures and equipment, leasehold improvements and transportation and office equipment are owned by the Company. The total cost of the Company's ownership of property and equipment is shown in Note E of the notes to the Company's consolidated financial statements. ITEM 3: LEGAL PROCEEDINGS - -------------------------- A complaint alleging discrimination in employment was filed against the Company in 1994 in the United States District Court for the Central District of Illinois by two current and one former associates individually and as representative of a class of all individuals who are similarly situated. The Plaintiffs moved for class certification and their motion was granted. In 1997, the Court granted the Company's motion to narrow the scope of the class. The Company denies all substantive allegations of the Plaintiffs and of the class. The Company is subject to various other unresolved legal actions which arise in the normal course of its business. It is not possible to predict with certainty the outcome of these unresolved legal actions or the range of the possible loss. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. 10 ITEM 4a: EXECUTIVE OFFICERS OF THE REGISTRANT - ---------------------------------------------- The following table sets forth certain information with respect to the persons who are executive officers of the Company.
Name Age Position(s) Held Robert J. Kelly 53 Chairman of the Board of Directors and Chief Executive Officer S. Patric Plumley 49 Vice President - Chief Financial Officer and Secretary David S. Norton 50 Senior Vice President - Retailing
The business experience of each of the executive officers during the past five years is as follows: Mr. Kelly, who was named Chairman of the Board of Directors on March 30, 1998, joined the Company as President and Chief Executive Officer in May 1995. Prior to May 1995, Mr. Kelly was Executive Vice President, Retailing for The Vons Companies Inc., and was employed by that company since 1963. Mr. Kelly has 35 years of experience in the supermarket industry. Mr. Plumley, who was named Vice President - Chief Financial Officer and Secretary on March 30, 1998, served the Company as Vice President and Corporate Controller from September 15, 1997 until his promotion. Prior to September 1997, Mr. Plumley served as Senior Vice President of American Stores' Super Saver Division from 1994 to 1997, and Senior Vice President of Lucky Stores from 1990 to 1994. Mr. Plumley has 25 years of experience in the supermarket industry. Mr. Norton joined the Company as Senior Vice President - Retailing in July 1995. Prior to July 1995, Mr. Norton was Vice President - Merchandising for Office 1 beginning in June 1994. From May 1993 to June 1994 Mr. Norton was Vice President of Merchandising for Reliable Corporation. For the period between September 1991 and May 1992, Mr. Norton was Senior Vice President for Food 4 Less Corporation. Mr. Norton had been with the Alpha Beta Company, a grocery retailer, from 1963 until September 1991. The last position held by Mr. Norton with the Alpha Beta Company was Vice President - Sales and Merchandising. Mr. Norton has 32 years of experience in the supermarket industry. The Company's directors are elected annually to serve until the next annual meeting of shareholders and until their successors have been elected and qualified. None of the directors or executive officers listed herein is related to any other director or executive officer of the Company. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the two fiscal years ended January 31, 1998 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten- percent beneficial owners were in compliance. 11 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY - ---------------------------------------------- AND RELATED SHAREHOLDER MATTERS - ------------------------------- The Company's common stock trades on the NASDAQ National Market System under the symbol "EGLE". The stock began trading on July 27, 1989. The following table sets forth, by fiscal quarter, the high and low sale prices reported by the NASDAQ National Market System for the periods indicated. As of April 20, 1998 there were approximately 2,693 beneficial holders of shares.
Year Ended January 31, 1998 ---------------------------------- High Low First Quarter $5-3/8 $ 3-5/8 Second Quarter 7-3/8 4-3/4 Third Quarter 6-3/8 4-1/4 Fourth Quarter 5-1/2 3-5/16 Year Ended February 1, 1997 ---------------------------------- High Low First Quarter $4-3/4 $ 1-3/4 Second Quarter 6-1/4 3-1/4 Third Quarter 6-7/8 3-3/8 Fourth Quarter 4-5/8 3-3/8
There were no dividends paid in fiscal 1997 or 1996. The Indenture underlying the Company's Senior Notes and the Revolving Credit Agreement contain restrictions on the payment of dividends. (See Note F of the notes to the Company's consolidated financial statements). The Company does not intend to pay dividends in the foreseeable future. 12 ITEM 6: SELECTED FINANCIAL DATA - -------------------------------- The following table represents selected financial data of the Company on a consolidated basis for the five fiscal years ended January 31, 1998. The selected historical financial data for the five fiscal years ended January 31, 1998 are derived from the consolidated financial statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors. The selected financial data set forth below should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this document.
Year Ended Year Ended Year Ended Year Ended Year Ended January 31, February 1, February 3, January 28, January 29, 1998 1997 1996 1995 1994 (53 Weeks) Consolidated Operating Data: Sales $967,090 $1,014,889 $1,023,664 $1,015,063 $1,062,348 Gross margin 243,644 256,242 254,355 242,452 269,188 Selling, general and administrative expenses 208,133 218,253 227,460 221,408 225,292 Voluntary severance program(1) - - - 6,917 - Store closing and asset revaluation(2) - 1,700 6,519 - 17,015 Depreciation and amortization 19,068 20,494 23,555 23,578 22,579 -------- ---------- ---------- ---------- ---------- Operating income (loss) 16,443 15,795 (3,179) (9,451) 4,302 Interest expense 11,751 12,547 15,497 14,780 14,244 -------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes & extraordinary charge 4,692 3,248 (18,676) (24,231) (9,942) Income taxes (benefit) (400) - (609) (5,357) (3,779) Extraordinary charge(3) - - 625 - 3,969 -------- ---------- ---------- ---------- ---------- Net earnings (loss) $ 5,092 $ 3,248 $ (18,692) $ (18,874) $ (10,132) ======== ========== ========== ========== ========== Earnings (loss) per common share - diluted $.45 $.29 $(1.68) $(1.71) $(.91) Consolidated Balance Sheet Data (at year-end): Total assets $261,624 $ 254,748 $ 265,278 $ 311,484 $ 335,165 Total debt (including capital 122,008 114,585 122,791 143,883 126,126 leases) Total shareholders' equity 32,237 26,688 23,921 42,485 61,746
(1) Represents a charge of $6.9 million for a voluntary severance program for approximately 600 clerks in the Chicago area in fiscal 1994. (2) Represents a charge of $1.7 million to provide for costs of closed stores and asset revaluations in fiscal 1996. Represents a charge of $6.5 million to reduce book value of certain assets to estimated fair value for asset impairment in fiscal 1995. Represents a charge of $17.0 million to provide for costs of closing certain stores and asset revaluations in connection therewith in fiscal 1993. See Notes B and D of the notes to the Company's consolidated financial statements included elsewhere in this document. (3) Represents a charge of $625,000 related to the refinancing of the Revolving Credit Facility in fiscal 1995. Represents a charge of $4.0 million related to the early retirement of debt in fiscal 1993. 13 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain key operating statistics as a percentage of sales for the periods indicated:
Year Ended Year Ended Year Ended Year Ended Year Ended January 31, February 1, February 3, January 28, January 29, 1998 1997 1996 1995 1994 (53 Weeks) Operations Statement Data: Sales 100.00% 100.00% 100.00% 100.00% 100.00% Gross margin 25.19 25.25 24.85 23.89 25.34 Selling, general and administrative expenses 21.52 21.51 22.22 21.81 21.21 Depreciation and amortization expenses 1.97 2.02 2.30 2.32 2.13 Voluntary severance program - - - .68 - Provision for store closing and asset revaluation - .17 .64 - 1.60 Operating income (loss) 1.70 1.56 (0.31) (0.93) .40 Interest expense 1.22 1.24 1.51 1.46 1.34 Earnings (loss) before income taxes & extraordinary charge .49 .32 (1.82) (2.39) (.94) Income taxes (benefit) (.04) - (.06) (.53) (.36) Extraordinary charge - - .06 - .37 Net earnings (loss) .53 .32 (1.83) (1.86) (.95)
RESULTS OF OPERATIONS
Sales Year Ended Year Ended Year Ended January 31, February 1, February 3, 1998 1997 1996 (53 Weeks) Sales $967,090 $1,014,889 $1,023,664 Percent Change (4.7)% (0.9)% 0.8% Same Store Change (5.2)% 1.7% 1.8%
Sales for fiscal 1997 were $967 million, a decrease of $47.8 million or 4.7% from fiscal 1996. Same store sales decreased 5.2% from fiscal 1996 to fiscal 1997. Same store sales decreases are attributed primarily to competitive store openings during the year. The Company was operating 90 stores as of the end of fiscal 1997 and 92 stores at the end of fiscal 1996. Sales for fiscal 1996 were $1.015 billion, a decrease of $8.8 million or 0.9% from the 53-week fiscal 1995. Total sales declined in fiscal 1996 because of one less week compared to fiscal 1995, offset by same store sales increases. Same store sales increased 1.7% from fiscal 1995 to fiscal 1996. Same store sales increases are attributed to a better in-stock position, more consistent promotions, increased margins and increased Eagle Savers' Card usage. The Company was operating 92 stores as of the end of fiscal 1996 and fiscal 1995. 14 Gross Margin Gross margin as a percentage of sales decreased to 25.19% in fiscal 1997 from 25.25% in fiscal 1996 and increased from 24.85% in fiscal 1995. The decrease in gross margin in fiscal 1997 is primarily the result of increased promotional activities. The increase in gross margin in fiscal 1996 is primarily the result of better buying practices, increased corporate brand sales and lower inventory shrinkage. Gross margin included a charge for LIFO in fiscal 1997 of .08% of sales, in fiscal 1996 of .07% of sales and in fiscal 1995 of 0.06% of sales. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of sales were 21.52% in fiscal 1997 compared to 21.51% in fiscal 1996 and 22.22% in fiscal 1995. Selling, general and administrative expenses were $10.1 million or 4.6% lower in fiscal 1997 than fiscal 1996 primarily due to lower sales, increased associate productivity and a one time $2.7 million reduction in associate benefit costs. Selling, general and administrative expenses were $9.2 million or 4.0% lower in fiscal 1996 than 1995 due to lower net advertising costs, lower professional fees and lower equipment rental costs and one less week of operations. Depreciation and Amortization Expense Depreciation and amortization expense as a percentage of sales was 1.97% in fiscal 1997 as compared to 2.02% in fiscal 1996 and 2.30% in fiscal 1995. The decrease in depreciation expense in 1997 primarily relates to a number of assets being fully depreciated in 1996 and 1997. The decrease in depreciation expense from fiscal 1995 to fiscal 1996 primarily relates to assets being written off in fiscal 1995 due to the adoption of Statement of Financial Accounting Standard No. 121, other assets becoming fully depreciated, and the impact of sale/leaseback transactions. There was one new store opened in fiscal 1997 and two new replacement stores opened in fiscal 1996. Provision for Store Closing and Asset Revaluation During fiscal 1997 the costs to close three stores of $.6 million and provide for $1.9 million of estimated future costs on stores to be closed was offset by $1.2 million of favorable lease terminations and $1.3 million of favorable changes in estimates on closed stores The fiscal 1996 charge was primarily related to $2.0 million of costs associated with certain sublease cancellations, net of $.3 million of changes in estimates on existing closed stores. (See Note D to the Company's consolidated financial statements, "Reserve for Closed Stores and Warehouse"). During 1995, the Company recorded a $6.5 million charge for impairment of "Long- Lived Assets" (See Note B to the Company's consolidated financial statements, "Long-Lived Assets"). No provision was made for additional store closings during fiscal 1995. The Company closed three stores during fiscal 1997, two stores during fiscal 1996 and four in 1995. 15 Operating Income (Loss) Operations for fiscal 1997 resulted in operating income of $16.4 million or 1.70% of sales compared to operating income of $15.8 million or 1.56% of sales in fiscal 1996 and an operating loss of $3.2 million or 0.31% of sales in fiscal 1995. The operating income in 1997 increased due to expense reductions in selling, general and administrative costs, including lower associate benefit costs, depreciation and interest, partially offset by reductions resulting from the decrease in sales volume. The operating income in fiscal 1996 compared to an operating loss in fiscal 1995 was the result of higher gross margin and lower selling, general and administrative expenses and lower depreciation and store closing/asset revaluation costs. The fiscal 1996 loss includes a store closing and asset revaluation charge of $1.7 million. The fiscal 1995 loss included a $6.5 million charge for asset impairments. Interest Expense Interest expense decreased to 1.22% of sales in fiscal 1997 compared to 1.24% of sales in fiscal 1996 and 1.51% of sales in fiscal 1995. Interest expense decreased in fiscal 1997 and 1996 due to lower weighted average short term borrowings as compared to the prior fiscal year and lower interest rates in 1996 compared to 1995. Extraordinary Charge In the second quarter of fiscal 1995, the extraordinary charge of $625,000 or $.06 per share was related to the refinancing of the Revolving Credit Facility. Net Earnings (Loss) The Company recognized net earnings of $5.1 million or $.45 per share on a diluted basis for fiscal 1997 compared to net earnings for fiscal 1996 of $3.2 million or $.29 per share on a diluted basis and net loss of $18.7 million or $1.68 per share in fiscal 1995. The 1997 results included a one time associate benefit cost reduction of $2.7 million. The 1996 results include a pre-tax charge of $1.7 million for store closings and asset revaluation. The 1995 net loss includes a $6.5 million pre-tax charge for asset impairment as discussed above. The weighted average common shares outstanding were 10,9l9,720, 10,863,554, and 11,120,815 for fiscal years 1997, 1996, and 1995, respectively. The fiscal 1997 and 1996 tax provision benefited from the utilization of net operating loss carryforwards that were not previously recognized. The effective income tax rate in fiscal 1995 was lower than the statutory federal and state income tax rates primarily due to limiting the income tax benefits recognized for net operating losses that arose in 1995 and prior years. Valuation allowances have been established for the entire amount of net deferred tax assets due to the uncertainty of future recoverability. (See Note I to the Company's consolidated financial statements.) 16 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Net cash flows from operating activities were $8.5 million in fiscal 1997 compared to $24.2 million in fiscal 1996 and $14.6 million in fiscal 1995. The 1997 decrease as compared to 1996 related primarily to a $12.4 million increase in inventory and accounts receivable compared to a decrease in such amounts in 1996. The fiscal 1996 improvement primarily related to increased net earnings. Working capital changes used $18.4 million of cash in fiscal 1997 compared to a use of $4.8 million of cash in fiscal 1996 and to a use of $1.6 million in fiscal 1995. Capital expenditures totaled $19.6 million in fiscal 1997, $12.8 million in fiscal 1996 and $4.6 million in fiscal 1995, including $4.0 million, $4.6 million and $2.2 million invested in property held for resale in fiscal 1997, 1996 and fiscal 1995, respectively. The following table summarizes store development and planned reductions:
Planned Fiscal Fiscal Fiscal 1998 1997 1996 New stores 6 1 2 Store closings 8 3 2 Expansions and major remodels 10 5 1 Store count, end of year 88 90 92
The Company is planning capital expenditures of approximately $65.0 million in fiscal 1998, which is expected to be funded primarily from internally generated cash flows, sale/leaseback transactions and short-term borrowings from the Revolving Credit Facility. The Company owned 16 of its 90 stores as of January 31, 1998 and leased or subleased the remainder. One store was sold and leased back which provided $2.8 million of proceeds during fiscal 1997. One store was also sold and leased back which provided $3.5 million of proceeds during fiscal 1996. The Company completed a three year agreement in May of 1995 with Congress Financial Corporation (Central) for a $40.0 million Revolving Credit Facility (subsequently expanded up to $50.0 million). The Revolving Credit Facility is secured by inventories located at the Company's central distribution facility and stores and is intended to provide for the Company's short-term liquidity needs and capital expenditures. This agreement was subsequently extended to April 15, 2000, and the terms provide for availability up to a maximum of $50 million, increase the capital expenditure limits per year, increase the permitted purchase money security interests and purchase money mortgages and provide for reductions in the interest rate and fees. Cash borrowings under the Company's Revolving Credit Facility were $7.2 million at January 31, 1998. 17 The following table summarizes borrowing and interest information:
Fiscal 1997 Fiscal 1996 Fiscal 1995 January 31, February 1, February 3, 1998 1997 1996 (Dollars in millions) Borrowed as of year-end $ 7.2 $ - $ 2.0 Letters of Credit as of year-end $ - $ 1.8 $12.3 Maximum amount outstanding during year $13.8 $11.1 $26.4 Average amount outstanding during year $ 1.0 $ 1.4 $16.1 Weighted average interest rate 9.3 % 9.3 % 9.5 %
The Company was in compliance with all covenants at January 31, 1998, and expects to be in compliance with all covenants for fiscal 1998 based on management's estimates of fiscal 1998 operating results and cash flows. Working capital and the current ratio were as follows:
Working Current Capital Ratio (Dollars in millions) January 31, 1998 $13.3 1.13 to 1 February 1, 1997 $11.7 1.12 to 1 February 3, 1996 $ 1.6 1.01 to 1
Management believes that working capital is adequate for the Company's reasonably foreseeable needs. The Company terminated the Westville warehouse lease as of April 29, 1996. The Company incurred a net cash outflow of approximately $9.1 million for this transaction. This transaction did not impact reported earnings as the payment was provided for in the Reserve for Closed Stores and Warehouse. Inflation Inflation has had only a minor effect on the operations of the Company and its internal and external sources of liquidity and working capital. Year 2000 Matters The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing inaccuracies and disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is currently engaged in a comprehensive project to upgrade its information, technology, distribution and in-store computer software and hardware in an effort to develop a competitive advantage in the marketplace (see page 5). Addressing Year 2000 matters is an integral part of this process. The Company has phased in a substantial number of computer systems and related programs over the past year in 18 its process of converting from the main frame to a client server format. Addressing and correcting Year 2000 matters is an integral part of this transition expected to be completed by September 1999. The Company and MCI Systemhouse have not yet determined the costs to be incurred relating to the Year 2000 issue. 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-K 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, the effect of economic conditions, the impact of competitive stores and pricing, availability and costs of inventory, the rate of technology change, the cost and uncertain outcomes of pending and unforeseen litigation, the availability of capital, 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- The Company is exposed to certain market risks which are inherent in the Company's financial instruments which arise from transactions entered into in the normal course of business. Although the Company currently utilizes no derivative financial instruments which expose the Company to significant market risk, the Company is exposed to fair value risk due to changes in interest rates with respect to its long-term debt borrowings. The Company is subject to interest rate risk on its long-term fixed interest rate debt borrowings. Borrowings on the Revolving Credit Facility do not give rise to significant interest rate risk because of the floating interest rate charged on such borrowings. The Company manages its exposure to interest rate risk by utilizing a combination of fixed and floating rate borrowings. The following describes information relating to the Company's instrument which is subject to interest rate risk at January 31, 1998 (dollars in millions): Description Contract Term Interest Rate Cost Fair Value - -------------------------------------------------------------------------------- Senior Notes Due April 15, 2000 8 5/8% fixed $100 $97.8 19 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Eagle Food Centers, Inc.: We have audited the accompanying consolidated balance sheets of Eagle Food Centers, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Eagle Food Centers, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Davenport, Iowa April 2, 1998 (April 12, 1998 as to Note P) 20
EAGLE FOOD CENTERS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) - ------------------------------------------------------------------------------- January 31, February 1, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 5,113 $ 9,134 Restricted assets 10,349 8,965 Accounts receivable 10,826 12,210 Income taxes receivable 993 993 Inventories 83,841 76,395 Prepaid expenses and other 1,595 1,225 -------- -------- Total current assets 112,717 108,922 Property and equipment (net) 113,124 118,473 Other assets: Deferred debt issuance costs (net) 1,070 1,761 Excess of cost over fair value of net 2,406 2,487 assets acquired (net) Property held for resale 18,769 13,748 Other 13,538 9,357 -------- -------- Total other assets 35,783 27,353 -------- -------- Total assets $261,624 $254,748 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 43,078 $ 43,824 Payroll and associate benefits 16,982 18,185 Accrued liabilities 19,258 20,085 Reserve for closed stores and warehouse 3,271 2,963 Accrued taxes 9,131 9,633 Bank revolving credit facility 7,208 - Current portion of long term debt 841 2,502 -------- -------- Total current liabilities 99,769 97,192 Long term debt: Senior Notes 100,000 100,000 Capital lease obligations 13,959 12,083 -------- -------- Total long term debt 113,959 112,083 Other liabilities: Reserve for closed stores and warehouse 6,397 8,839 Other deferred liabilities 9,262 9,946 -------- -------- Total other liabilities 15,659 18,785 Shareholders' equity: Preferred stock, $.01 par value, - - 100,000 shares authorized Common stock, $.01 par value, 18,000,000 shares authorized, 11,500,000 shares issued 115 115 Capital in excess of par value 53,336 53,336 Common stock in treasury, at cost, (2,259) (2,590) 553,127 and 633,361 shares Other (199) (448) Retained earnings (deficit) (18,756) (23,725) -------- -------- Total shareholders' equity 32,237 26,688 -------- -------- Total liabilities and $261,624 $254,748 shareholders' equity ======== ========
See notes to the consolidated financial statements. 21
EAGLE FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended January 31, February 1, February 3, 1998 1997 1996 (53 Weeks) Sales $ 967,090 $ 1,014,889 $ 1,023,664 Cost of goods sold 723,446 758,647 769,309 ----------- ----------- ----------- Gross margin 243,644 256,242 254,355 Operating expenses: Selling, general and administrative 208,133 218,253 227,460 Store closing and asset revaluation - 1,700 6,519 Depreciation and amortization 19,068 20,494 23,555 ----------- ----------- ----------- Operating income (loss) 16,443 15,795 (3,179) Interest expense 11,751 12,547 15,497 ----------- ----------- ----------- Earnings (loss) before income taxes and extraordinary charge 4,692 3,248 (18,676) Income taxes (benefit) (400) - (609) ----------- ----------- ----------- Earnings (loss) before extraordinary charge 5,092 3,248 (18,067) Extraordinary charge - - 625 ----------- ----------- ----------- Net earnings (loss) $ 5,092 $ 3,248 $ (18,692) =========== =========== =========== Weighted average common shares outstanding 10,919,720 10,863,554 11,120,815 Weighted average common and potential common shares outstanding 11,364,496 11,171,799 11,120,815 Basic earnings (loss) per common share: Earnings (loss) before extraordinary charge $ .47 $ .30 $ (1.62) Extraordinary charge - - (.06) ----------- ----------- ----------- Net earnings (loss) $ .47 $ .30 $ (1.68) =========== =========== =========== Diluted net earnings (loss) per common share: Earnings (loss) before extraordinary charge $ .45 $ .29 $ (1.62) Extraordinary charge - - (.06) ----------- ----------- ----------- Net earnings (loss) $ .45 $ .29 $ (1.68) =========== =========== ===========
See notes to the consolidated financial statements. 22
EAGLE FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF EQUITY (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------- Common Stock -------------------------------------------------------- Capital in Treasury Retained Par Excess of -------------------- Earnings Shares Value Par Value Shares Dollars Other (Deficit) BALANCE, JANUARY 28, 1995 11,500,000 $115 $53,541 448,006 $(2,850) $(387) $ (7,934) Net loss (18,692) Pension liability adjustment 50 Change in unrealized gain (loss) on marketable securities 494 Purchase of treasury shares 231,900 (416) Officer stock sale (205) (125,000) 795 (281) (309) ---------- ---- ------- -------- ------- ----- -------- BALANCE, FEBRUARY 3, 1996 11,500,000 115 53,336 554,906 (2,471) (124) (26,935) Net earnings 3,248 Pension liability adjustment (19) Purchase of treasury shares 91,200 (171) Stock options exercised (12,745) 52 (38) Change in unrealized gain (loss) on marketable securities (305) ---------- ---- ------- -------- ------- ----- -------- BALANCE, FEBRUARY 1, 1997 11,500,000 115 53,336 633,361 (2,590) (448) (23,725) Net earnings 5,092 Pension liability adjustment 111 Purchase of treasury shares 12,953 (49) Stock options exercised (93,187) 380 (123) Change in unrealized gain (loss) on marketable securities 138 ---------- ---- ------- -------- ------- ----- -------- BALANCE, JANUARY 31, 1998 11,500,000 $115 $53,336 553,127 $(2,259) $(199) $(18,756) ========== ==== ======= ======== ======= ===== ========
See notes to the consolidated financial statements. 23
EAGLE FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) - ----------------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended January 31, February 1, February 3, 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 5,092 $ 3,248 $(18,692) Adjustments to reconcile net earnings (loss) to net cash flows from operating activities: Extraordinary charge before income tax effect - - 658 Depreciation and amortization 19,068 20,494 23,555 Store closing and asset revaluation - 1,700 6,519 Deferred income taxes - - 1,389 LIFO charge 775 731 604 Deferred charges and credits 1,358 1,975 3,586 Loss (gain) on disposal of assets 603 883 (1,448) Changes in assets and liabilities: Accounts receivable and other assets (3,902) (962) (1,268) Inventories (8,221) 3,766 2,443 Accounts payable (746) 1,799 (2,713) Accrued and other liabilities (3,216) 2,766 6,687 Payments on reserve for closed stores and warehouse (2,275) (12,207) (6,764) -------- -------- -------- Net cash flows from operating activities 8,536 24,193 14,556 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (15,560) (8,164) (2,419) Additions to property held for resale (4,028) (4,629) (2,163) Purchase of marketable securities (net) (1,246) (231) (3,122) Cash proceeds from dispositions of property and equipment 3,664 3,884 15,568 -------- -------- -------- Net cash flows from investing activities (17,170) (9,140) 7,864 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Deferred financing costs - - (684) Principal payments on capital lease obligations (2,546) (5,237) (3,927) Net bank revolving credit facility borrowing (repayment) 7,208 (1,992) (20,008) Purchase of treasury stock (49) (171) (416) -------- -------- -------- Net cash flows from financing activities 4,613 (7,400) (25,035) -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (4,021) 7,653 (2,615) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,134 1,481 4,096 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,113 $ 9,134 $ 1,481 ======== ======== ========
24 EAGLE FOOD CENTERS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996 - -------------------------------------------------------------------------------- Note A - Organization - Eagle Food Centers, Inc. (the "Company"), a Delaware corporation, engaged in the operation of retail food stores, was the General Partner of Eagle Food Centers, L.P. ("EFC"), a Delaware limited partnership, which previously conducted the Eagle Food Centers business. On July 27, 1989, the owners of all of the outstanding common limited partnership interests in EFC exchanged their partnership interests for 8.3 million shares of Common Stock of the Company. As a result, and following the consummation of the offering by the Company of 3.2 million shares of Common Stock and the redemption by EFC of the preferred limited partnership interests in EFC held by Lucky Stores, Inc. ("Lucky") on August 3, 1989, the Company succeeded to the business and assets and assumed the liabilities of EFC. Note B - Summary of Significant Accounting Policies Fiscal Year - The Company's fiscal year ends on the Saturday closest to January 31st. Fiscal 1997 was a 52 week year, fiscal 1996 was a 52 week year, and fiscal 1995 was a 53 week year ending January 31, 1998, February 1, 1997, and February 3, 1996, respectively. Advertising Expense - The Company's advertising costs, including radio and television production costs, are expensed as incurred and included in the "Selling, general and administrative" caption of the income statement. The components of advertising expense are as follows:
Gross CO-OP Credits Net Advertising Advertising ---------------------- ---------------------- --------------------- Dollars % of Sales Dollars % of Sales Dollars % of Sales (Dollars in thousands) Fiscal 1997 $16,054 1.7 % $13,525 1.4 % $2,529 0.3 % Fiscal 1996 $15,548 1.5 % $13,724 1.3 % $1,824 0.2 % Fiscal 1995 $16,493 1.6 % $11,771 1.1 % $4,722 0.5 %
Basis of Consolidation - The consolidated financial statements include the accounts of Eagle Food Centers, Inc. and all subsidiaries. All significant intercompany transactions have been eliminated. Debt Issuance Costs - Debt issuance costs, recorded net of accumulated amortization of $2.8 million at January 31, 1998 and $2.1 million at February 1, 1997, are amortized over the terms of the related debt agreements. Deferred Software Costs - The Company classifies software for internal use as Other Assets. Software costs are generally amortized over five years beginning when the software is placed in service. Deferred software balances were $12.1 million and $7.2 million for the year ended January 31, 1998 and February 1, 1997 net of accumulated amortization of $.4 million and $0, respectively. Earnings (Loss) Per Share - Earnings per share ("EPS") are computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic EPS is computed by dividing consolidated net earnings (loss) by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing consolidated net earnings (loss) by the sum of the weighted average number of common shares outstanding and the weighted average number of potential 25 common shares outstanding. Potential common shares consist solely of outstanding options under the Company's stock option plans. Outstanding options excluded from the computation of potential common shares (option price exceeded the average market price during the period) amounted to 39,975 shares for 1997, 328,925 shares for 1996 and 1,285,250 shares for 1995. Excess of Cost Over Fair Value of Net Assets Acquired ("Goodwill") - Goodwill, recorded net of accumulated amortization of $.8 million at January 31, 1998 and February 1, 1997, is amortized using the straight-line method over 40 years. The Company continually reviews goodwill to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if an other than temporary diminution in value occurred. Inventories - Inventories are valued at the lower of cost or market; cost is determined by the last-in, first-out (LIFO) method for substantially all inventories. The current cost of the inventories was greater than the LIFO value by $9.6 million at January 31, 1998 and $8.8 million at February 1, 1997. Long-Lived Assets - The Company accounts for Long-Lived Assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Under the standard, if the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment is measured based on the estimated fair value of the asset. In determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which, for the Company, is generally on a store by store basis. The Company continually monitors under- performing stores and under-utilized facilities for indication that the carrying amount of assets may not be recoverable. Management determined in 1995 that the performance of certain stores was not expected to improve and an accrual for asset impairment was appropriate due to new competitive openings during the two prior years which reduced sales and earnings of such stores. Four of the six stores for which asset impairment was recognized were relatively new and one store had incurred a comprehensive remodeling in 1990. It was the opinion of management that the sustained under- performance of the relatively new and remodeled stores, not any specific event or circumstance, indicated impairment, resulting in further analysis and accrual of the impairment loss. The Company recorded a $6.5 million charge in fiscal 1995 to reduce the carrying amounts of fixed assets to their estimated fair value. Estimated fair values were primarily determined based on independent appraisals. None of the Company's recorded goodwill related to such stores. Impairment Charges are included in the caption "Store closing and asset revaluation" of the income statement. Store Closing and Asset Revaluation - In the event the performance or utilization of under-performing stores and under-utilized facilities cannot be improved, management may decide to close, sell or otherwise dispose of such stores or facilities. A charge for store closing and asset revaluation is provided when management has reached the decision to close, sell or otherwise dispose of such stores within one year and the costs can be reasonably estimated. The charge for store closing and asset revaluation arises primarily from (a) the discounted value of future lease commitments in excess of the discounted value of estimated sublease revenues, (b) store closing costs, (c) elimination of any goodwill identified with such stores to be closed and (d) revaluing fixed assets to estimated fair values when assets are impaired, or to net realizable value for assets to be disposed of (see Long-Lived Assets above). Discount rates have been determined at the time a store was added to the closed store reserve and have not been changed to reflect subsequent changes in rates. The Company's policy is to use a risk-free rate of return for a 26 duration equal to the average remaining lease term at the time the reserve was established. The discount rate used for reserves established in fiscal 1997 and 1996 were 6.0% and 7.5%, respectively. Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed by using the straight-line method over the estimated useful lives of buildings, fixtures and equipment. Leasehold costs and improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Leasehold interests are generally amortized over the lease term plus expected renewal periods or 25 years, whichever is shorter. Property acquired under capital lease is amortized on a straight-line basis over the shorter of the life of the property or the lease term. Property Held for Resale - Property included in this classification represents land acquired for future development and stores the Company is constructing or has recently completed which the Company intends to finance through a sale and lease back transaction and is reported at the lower of cost or estimated market value. These properties are expected to continue to be operated by the Company, are not impaired and have not been written down below cost. Reclassifications - Certain reclassifications were made to prior years' balances to conform with current year presentation. Restricted Assets - Restricted assets are comprised of marketable securities and cash held in escrow by third parties. Marketable securities are restricted to satisfy state insurance reserve requirements related to claim liabilities recorded for workers' compensation, automobile and general liability costs; such claim liability reserves are classified as current. The Company has classified its entire holdings of marketable securities as available for sale reflecting management's intention to hold such securities for indefinite periods of time. Such securities are reported at fair value and the difference between cost and market value is reported as a separate component of shareholders' equity until gains and losses are realized. Such amount is a component in the "Other" caption of shareholders' equity. Risks and Uncertainties - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is party to 24 collective bargaining agreements with 19 local unions representing substantially all of the Company's associates. Three contracts will expire during 1999 covering certain Company associates, in addition to a wage re-opener in one store. The Company expects to negotiate with the unions and to enter into new collective bargaining agreements. There can be no assurance, however, that such agreements will be reached without a work stoppage. A prolonged work stoppage affecting a substantial number of stores could have a material adverse effect on results of the company's operations. Self-Insurance - The Company is primarily self-insured, through its captive insurance subsidiary, for workers' compensation, automobile and general liability costs. For the insurance year beginning November 1, 1997, the automobile liability has been placed with an outside insurance company. The self-insurance claim liability is determined actuarially based on claims filed and an estimate of claims 27 incurred but not yet reported. Self insurance claim liabilities of $7.5 million as of January 31, 1998 and $7.1 million as of February 1, 1997 are included in the "Accrued liabilities" caption of the balance sheet. New Accounting Standards - In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This new standard requires the reporting of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This standard is effective for the Company's 1998 fiscal year and is not expected to have a significant impact on the Company's reporting requirements. In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new standard requires public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This standard is effective for the Company's 1998 fiscal year. However, the reporting requirements need not be applied to interim financial statements in the initial year of application. The Company is in the process of evaluating its reporting requirements under this standard. In March 1998, the American Institute of Certified Public Accountants issued the Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use and related disclosures. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998 and should be applied to internal use computer software costs incurred in the year of adoption for all projects, including those projects in progress upon initial application of the SOP. The Company is in the process of evaluating the potential impact of the adoption of the SOP on the consolidated financial statements. Note C - Consolidated Statements of Cash Flows For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Supplemental cash flow information:
1997 1996 1995 (Dollars in thousands) Cash paid for interest $11,132 $12,009 $14,416 Cash paid (received) for income taxes 52 (2,958) (6,374) Non-cash additions to property and equipment 2,761 - 2,843 Non-cash additions to the capital lease liability 2,761 - - Treasury stock issued 380 52 - Non-cash transfer from property and equipment to property held for resale 1,382 - -
28 Note D - Reserve for Closed Stores and Warehouse An analysis of activity in the reserve for closed stores and warehouse for the years ended January 31, 1998 and February 1, 1997, is as follows:
January 31, February 1, (in thousands) 1998 1997 Balance at beginning of year $11,802 $22,091 Payments, primarily rental payments net of sublease rentals of $1,272 in fiscal 1997 and $1,596 in 1996 (2,765) 12,207) Asset revaluation reserve reclassified as a direct reduction of fixed assets - (810) Interest cost 631 1,028 Provision for store closing and assets revaluation - 1,700 Balance at end of year (including $3.3 million and $3.0 million, respectively, classified as current) $ 9,668 $11,802 ======= =======
During fiscal 1997, the Company benefited from $1.2 million of favorable lease terminations for five stores that were included in the closed store reserve at February 1, 1997, and from $1.3 million in favorable changes in estimates for stores remaining in the reserve at January 31, 1998, based on current negotiations with the landlord or potential sublessees. Additionally, during fiscal 1997, the Company added six stores to the reserve, three of which were closed in the current year with charges of $0.6 million for lease terminations, and three of which $1.9 million was provided for estimated future costs. The charges for the six stores were offset by the favorable lease terminations and changes in estimates. During fiscal 1996, the Company provided $1.7 million for store closing costs and asset revaluations. This charge is primarily related to $2.0 million of costs resulting from sublease cancellations due to bankruptcy by the sublessees, net of favorable changes in assumptions on existing closed stores. During 1996, the Company terminated the lease on its Westville, Indiana warehouse. The Company incurred a net cash outflow of $9.1 million for the transaction, which was previously accrued for in the closed store reserve. The reserve at January 31, 1998, represents estimated future cash outflows primarily related to the present value of net future rental payments. The components of the provision for store closing and asset revaluation relating to asset revaluation is reclassified as a reduction of fixed assets. It is management's opinion that the reserve will be adequate to cover continuing costs for the existing closed stores and the stores scheduled to be closed in fiscal 1998. At the end of fiscal year 1997, the reserve included estimated net future costs for five closed stores and five stores to be closed, plus sublease subsidies for ten other closed stores. At the end of fiscal 1996 the reserve included estimated net future costs for twelve closed stores and two stores to be closed, plus sublease subsidies for eight other closed stores. 29 A roll forward presentation of the number of stores in the closed store reserve for fiscal years 1997 and 1996 is as follows:
1997 1996 Number of stores in reserve at beginning of year 22 21 Leases terminated/expired (8) (2) Stores added to the closed store reserve 6 3 ---- ---- Number of stores in reserve at end of year 20 22 ==== ====
Note E - Property and Equipment The investment in property and equipment is as follows:
January 31, February 1, 1998 1997 (In thousands) Land $ 9,757 $ 10,485 Buildings 32,175 31,261 Leasehold costs and improvements 38,624 38,644 Fixtures and equipment 137,940 131,816 Leasehold interests 29,721 32,793 Property under capital lease 21,506 23,626 ----------- ----------- Total 269,723 268,625 Less accumulated depreciation and amortization (156,599) (150,152) ----------- ----------- Property and equipment (net) $ 113,124 $ 118,473 =========== ===========
The Company owned 16 of its 90 stores as of January 31, 1998 and leased or subleased the remainder. Seven stores have been sold and leased back which provided $2.8 million of proceeds during fiscal 1997, $3.5 million of proceeds during fiscal 1996 and $14.0 million in fiscal 1995. The leases on the seven stores, of which one is recorded as a capital lease, have a 25 year term with one ten year option and four five year options. The gains or losses on the sale of these properties have been deferred and amortized over the life of the original lease term. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The useful lives of the various classes of assets are as follows:
Buildings 10-25 years Leasehold interests 3-25 years Fixtures and Equipment 2-12 years Property under capital lease Shorter of economic life or lease term Leasehold Costs & Improvements 5-23 years
30 Note F - Debt Long-term debt consists of the following:
January 31, February 1, 1998 1997 (In thousands) 8 5/8% Senior Notes $100,000 $100,000 Capital leases (Note H) 14,800 14,585 -------- -------- 114,800 114,585 Less current maturities 841 2,502 -------- -------- Total long-term debt $113,959 $112,083 ======== ========
The Company's 8 5/8% Senior Notes are due April 15, 2000. The indenture relating to the 8 5/8% Senior Notes contains provisions as well as certain restrictions relating to certain asset dispositions, sale/leaseback transactions, payment of dividends, repurchase of equity interests, incurrence of additional indebtedness and liens, and certain other restricted payments. The Company entered into a Credit Agreement with Congress Financial Corporation (Central) on May 25, 1995. The agreement is a $50 million facility which provides for revolving credit loans and letters of credit. No more than an aggregate of $20.0 million of the total commitment may be drawn by the Company as letters of credit. Total availability under the Credit Agreement is based on percentages of allowable inventory up to a maximum of $50.0 million. The Credit Agreement, as amended, terminates on May 31, 1998 but on April 1, 1998 was extended (see Note P) and is secured by a first priority security interest in all inventories of the Company located in its stores and distribution center in Milan, Illinois. Loans made pursuant to the Credit Agreement bear interest at a fluctuating interest rate based, at the Company's option, on a margin over the base interest rate or a margin over the London Interbank Offered Rate multiplied by the applicable reserve requirement (the adjusted LIBOR Rate). The Credit Agreement has one financial covenant related to minimum net worth as defined by the agreement. At January 31, 1998, the defined net worth of the Company exceeds the minimum amount by approximately $37 million. At January 31, 1998, the Company had $7.2 million borrowed against the revolving credit facility and had no letters of credit outstanding, resulting in $39.0 million of availability under the Credit Agreement. The interest rate on the outstanding amount was 9.25% at January 31, 1998. At February 1, 1997, the Company had no borrowings against the revolving credit facility and had $1.8 million in letters of credit outstanding resulting in $41.0 million of availability under the Credit Agreement. The interest rate on the outstanding amount would have been 9.25% at February 1, 1997. The Company was in compliance with all the covenants in its debt agreements at January 31, 1998. The Company expects to be in compliance with all covenants for fiscal 1998 based on management's estimates of fiscal 1998 operating results and cash flows. 31 Note G - Treasury Stock The following summarizes the treasury stock activity for the three years in the period ended January 31, 1998:
Shares Dollars Average (Dollars in thousands) Outstanding January 28, 1995 448,006 $2,850 $6.36 Purchased 231,900 416 1.79 Issued 125,000 795 6.36 Outstanding February 3, 1996 554,906 2,471 4.45 Purchased 91,200 171 1.88 Issued 12,745 52 4.08 Outstanding February 1, 1997 633,361 2,590 4.09 Purchased 12,953 49 3.83 Issued 93,187 380 4.08 ------- ------ ----- Outstanding January 31, 1998 553,127 $2,259 $4.09 ======= ====== =====
During fiscal 1995 the Company sold 125,000 shares of treasury stock to its Chief Executive Officer Robert J. Kelly for $2.25 per share (market value at date of sale) in exchange for a note receivable, which is recorded in the "Other" caption of shareholder's equity and deducted from equity until paid (see Note P). The difference between the average share price of treasury stock and exercise of stock options is charged to retained earnings. Note H - Leases and Long-term Contracts Most of the retail stores are leased. Many of the leases have renewal options for periods ranging from five to thirty years. Some provide the option to acquire the property at certain times during the initial lease term for approximately its estimated fair market value at that time, and some require the Company to pay taxes and insurance on the leased property. The Company also leases its central distribution facility under a lease expiring in 2007. Rent expense consists of:
Year Ended ----------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 (In thousands) Minimum rent under operating leases $19,578 $19,570 $21,461 Additional rent based on sales 82 275 249 Less rentals received on noncancelable subleases (2,536) (2,477) (2,432) ------- ------- ------- $17,124 $17,368 $19,278 ======= ======= =======
32 Future minimum lease payments under operating and capital leases as of January 31, 1998 are as follows:
Operating Capital Leases Leases (In thousands) 1998 $ 15,967 $ 2,560 1999 15,973 2,560 2000 15,747 2,560 2001 15,092 2,560 2002 14,407 2,510 Thereafter 127,996 15,580 -------- ------- Total minimum lease payments $205,182 28,330 ======== Less amount representing interest 13,530 ------- Present value of minimum capital lease payments, including $841 classified as current portion of long-term debt $14,800 =======
The operating lease future minimum lease payments do not include gross minimum commitments of $19.6 million for closed stores, the present value of which (net of estimated sublease payments) is included in the consolidated balance sheet caption "Reserve for closed stores and warehouse". On February 1, 1996, the Company entered into a ten year contract for outsourcing its information system function with MCI Systemhouse, Inc. (formerly SHL Systemhouse, Inc.). The contract may be terminated by the Company for convenience effective at the end of the forty-second month following the commencement date, or may be terminated for cause by either party as a result of specific reasons set forth in the contract. In either event, there are descending termination charges payable by the Company. The convenience termination charge at August 1, 1999 is $4.2 million, descending to $1.3 million at February 1, 2005. The termination charge for cause at February 1, 1998 is $3.3 million, descending to $.4 million at February 1, 2005. 33 Note I - Income Taxes The following summarizes significant components of the provision for income taxes:
Year Ended ---------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 (In thousands) Income taxes (benefit): Federal $(400) $ - $ (609) State - - - ----- ----------- ------- $(400) $ - $ (609) ===== =========== ======= Income taxes (benefit) consists of the following: Current: Federal $(400) $ - $(1,734) State - - (222) ----- ----------- ------- $(400) $ - $(1,956) ===== =========== ======= Deferred: Federal $ - $ - $ 1,125 State - - 222 ----- ----------- ------- $ - $ - $ 1,347 ===== =========== =======
The differences between income taxes (benefit) at the statutory Federal income tax rate and income taxes (benefit) reported in the consolidated statements of operations are as follows:
Year Ended ---------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 (In thousands) Income taxes (benefit) at statutory Federal tax rate of 35% $ 1,642 $ 1,137 $(6,537) Surtax exemption (47) (33) 187 State income taxes, net of Federal benefit 368 213 (934) Tax credits - - - Valuation allowance (2,576) (1,350) 6,662 Other 213 33 13 ------- ------- ------- Total $ (400) $ - $ (609) ======= ======= =======
34 Deferred tax assets and liabilities arise because of differences between the financial accounting bases for assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are comprised of the following significant temporary differences:
January 31, February 1, 1998 1997 (In thousands) Deferred Tax Assets: Store closing and asset revaluation $ 6,353 $ 7,207 Accrued reserves 1,636 2,611 Deferred revenues 2,282 2,946 Associate benefits 1,819 1,516 Tax credit and net operating loss carryforwards 13,825 16,332 Valuation allowance (9,523) (12,099) ------- -------- Total $16,392 $ 18,513 ======= ======== Deferred Tax Liabilities: Depreciation $13,640 $ 15,557 Other, net 2,752 2,956 ------- -------- Total $16,392 $ 18,513 ======= ======== Net deferred tax asset $ - $ - ======= ========
Valuation allowances have been established for the entire amount of the net deferred tax assets as of January 31, 1998 and February 1, 1997 due to the uncertainty of future recoverability. The tax benefit of tax credit carryforwards available, in thousands of dollars, primarily related to the alternative minimum tax and net operating loss carryforwards, totaling $13,825, and expiration dates are as follows: 1998 -$57, 1999 - $54, 2000 - $11, 2001 - $104, 2002 - $60, 2005 - $58, 2006 - $99, 2007 - $158, 2008 - $101, 2009 - $450, 2010 - $6,790, 2011 - $28, 2012 - $165 and unlimited - $5,690. Note J - Associate Benefit Plans Retirement Plans - ---------------- Substantially all associates of the Company are covered by trusteed, non- contributory retirement plans of the Company or by various multi-employer retirement plans under collective bargaining agreements. The Company's defined benefit plans covering salaried and hourly associates provide benefits that are based on associates' compensation during years of service. The Company's policy is to fund no less than the minimum required under the Employee Retirement Income Security Act of 1974. During the years ended January 31, 1998, February 1, 1997, and February 3, 1996, pension costs under the plans totaled $713,000, $706,000, and $736,000, respectively. 35 Net periodic pension cost under the Milan Office and Non-Foods Warehouse Retirement Plan (Milan Plan) and the Eagle Food Centers, Inc. Associate Pension Plan (Eagle Plan) includes the following benefit and cost components for the years ended January 31, 1998, February 1, 1997, and February 3, 1996:
Year Ended ----------------------------------------- January 31, February 1, February 3, 1998 1997 1996 (In thousands) Service cost $ 504 $ 516 $ 505 Interest cost 722 657 583 Actual return on plan assets (942) (553) (1,001) Net amortization and deferral 429 86 649 ----- ----- ------- Net periodic pension cost $ 713 $ 706 $ 736 ===== ===== =======
The funded status and amounts recognized in the Company's consolidated balance sheets for the Milan Plan and Eagle Plan, as of the measurement dates of December 31, 1997 and 1996, are as follows:
December 31, December 31, 1997 1996 (In thousands) Plan assets at market value $ 8,756 $ 7,738 Actuarial present value of projected benefit obligation (10,679) (9,730) -------- ------- Funded status (1,923) (1,992) Unrecognized net loss 135 459 Minimum pension liability recognized (302) (520) -------- ------- Accrued pension cost $ (2,090) $(2,053) ======== =======
The actuarial present value of the Company's vested benefit obligation for the Milan Plan and Eagle Plan was $9.4 million and $8.4 million and the accumulated benefit obligation was $9.8 million and $9.0 million at December 31, 1997 and 1996, respectively. Plan assets are held in a trust and include corporate and U.S. government debt securities and common stocks. Actuarial assumptions used to develop net periodic pension cost for the fiscal years 1997, 1996 and 1995 were as follows:
1997 1996 1995 Discount rate 7.5% 7.5% 7.5% Expected long term rate of return on assets 8.0% 8.0% 8.0% Rate of increase in compensation levels 4.0% 4.0% 4.0%
The Company also participates in various multi-employer plans. The plans provide for defined benefits to substantially all unionized workers. Amounts charged to pension cost and contributed to the plans for the years ended January 31, 1998, February 1, 1997, and February 3, 1996, totaled $4.3 million, $6.4 million, and $6.4 million, respectively. During 1997 the Company received the benefit of a pension contribution moratorium from one union local covering seven months for a total reduction in costs of 36 $2.1 million. Under the provisions of the Multi-employer Pension Plan Amendments Act of 1980, the Company would be required to continue contributions to a multi- employer pension fund to the extent of its portion of the plan's unfunded vested liability if it substantially or totally withdraws from such plans. Management does not intend to terminate operations that would subject the Company to such liability. Incentive Compensation Plans - ---------------------------- The Company has incentive compensation plans for store management, department heads and certain other management personnel. Incentive plans included approximately 700 associates. Provisions for payments to be made under the plans are based upon achievement of sales and earnings in excess of specific performance targets. Non-qualified stock option plans were ratified by stockholders and implemented in 1990 and 1995 for key management associates. Stock options have a ten year life beginning at the grant date. Options granted under the 1990 plan were generally vested at 12 months following the grant date. For the options granted under the 1995 Stock Option Plan vesting provisions generally provide for 25% of the shares vesting at each of the first four anniversaries following the date of the grant. Certain specific employment agreements provide for different vesting schedules. The number of shares outstanding and exercisable is shown in the following table. As of January 31, 1998, there were 721,500 options available for future grants. The Company recognized no compensation expense for fiscal year 1997, 1996, or 1995 because the exercise price is at or above the market value at the date of grant. The following table sets forth the stock option activity for the three years in the period ended January 31, 1998:
Weighted Option Average Shares Price Exercise Subject Range Price of to Option Per Share Options Outstanding 1/28/95 345,350 $3.375 - $10.00 $4.36 Granted 1,016,050 $ 1.50 - $4.50 $2.92 Exercised - - - Cancelled or expired 76,150 $3.375 - $10.00 $4.27 Outstanding 2/3/96 1,285,250 $ 1.50 - $10.00 $3.23 Granted 82,500 $ 4.375 - $6.75 $5.50 Exercised 14,600 $ 1.50 - $3.375 $3.06 Cancelled or expired 108,600 $ 1.50 - $10.00 $3.69 Outstanding 2/1/97 1,244,550 $ 1.50 - $10.00 $3.35 Granted 332,500 $ 4.00 - $5.00 $4.11 Exercised 93,187 $ 1.50 - $3.375 $2.77 Cancelled or expired 116,650 $ 1.50 - $10.00 $3.96 Outstanding 1/31/98 1,367,213 $ 1.50 - $10.00 $3.52
37 Stock options exercisable are as follows:
Weighted Average Options Exercise Exercisable Price February 3, 1996 271,200 $4.22 February 1, 1997 542,138 $3.23 January 31, 1998 734,413 $3.27
The following table summarizes stock option information on outstanding and exercisable shares as of January 31, 1998.
Weighted Weighted Average Weighted Range of Average Remaining Average Exercise Options Exercise Contractual Options Exercise Prices Outstanding Price Life Exercisable Price (Years) $1.50 198,813 $1.50 7.86 87,263 $1.50 $2.50-$4.00 828,425 $3.35 8.19 588,425 $3.09 $4.375-$5.00 300,000 $4.55 7.74 18,750 $4.68 $8.50-$10.00 39,975 $9.23 2.99 39,975 $9.23 --------- ------- Total 1,367,213 734,413 ========= =======
Note K - Stock Based Compensation Eagle accounts for stock option grants and awards under its stock based compensation plans in accordance with APB Opinion No. 25. If compensation cost for stock option grants and awards had been determined based on fair value at the grant dates for fiscal 1997 and fiscal 1996 consistent with the method prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), the Company's net earnings (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995 Net earnings (loss): As reported $5,092 $3,248 $(18,692) Pro Forma $4,474 $3,089 $(19,492) Basic earnings (loss) per share: As reported $ .47 $ .30 $ (1.68) Pro Forma $ .41 $ .28 $ (1.75) Diluted earnings (loss) per As reported $ .45 $ .29 $ (1.68) share: Pro Forma $ .39 $ .28 $ (1.75)
The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: five years expected option life; stock volatility of 61% to 64% in 1997, 91% to 97% in 1996 and 89% in 1995; risk-free interest rate of 5.5% in 1997 and 6.0% in 1996 and 1995; and no dividends during the expected term. Based on this model, the weighted average fair values of stock options awarded were $2.32, $3.32 and $.88 for fiscal year 1997, 1996 and 1995, respectively. 38 During the initial phase-in period, as required by SFAS No. 123, the proforma amounts were determined based on stock option grants and awards in fiscal 1997, 1996, and 1995 only. The pro forma amounts for compensation cost may not be indicative of the effects on net earnings (loss) and net earnings (loss) per share for future years. Note L - Extraordinary Charge The extraordinary charge in fiscal 1995 relates to the refinancing of the Revolving Credit Facility (net of applicable income taxes). Note M - Fair Value of Financial Instruments The carrying amounts and fair values of the Company's financial instruments as of January 31, 1998 and February 1, 1997 are as follows:
January 31, 1998 February 1, 1997 ----------------------- ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value (In thousands) Cash and cash equivalents $ 5,113 $ 5,113 $ 9,134 $ 9,134 Marketable securities 10,349 10,349 8,965 8,965 Bank revolving credit facility 7,208 7,208 - - Senior Notes 100,000 97,840 $100,000 98,380
The fair value of cash and cash equivalents approximated its carrying value due to the short-term nature of these instruments. The fair value of marketable securities is based on quoted market prices. The fair value of the Bank Revolving Credit Facility approximated its carrying value due to its floating interest rate. The fair value of the Senior Notes is based on quoted market prices. The amortized cost, gross unrealized gains and losses, estimated fair values an maturities of the Company's marketable securities at January 31, 1998, are as follows:
January 31, 1998 -------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Restricted cash, due within one year $ 891 $ - $ - $ 891 Money market mutual fund, due within one year 3,752 - - 3,752 U.S. Treasury notes 4,985 69 - 5,054 Equity securities 603 61 12 652 ------- ------- --------- ------- Total marketable securities $10,231 $ 130 $ 12 $10,349 ======= ======= ========= =======
39 The maturity of the U.S. Treasury Notes as of January 31, 1998 are as follows:
Fair Cost Value (In thousands) Within one year $1,999 $ 1,999 1 - 5 years 2,986 3,055 ------ ------- Total U.S. Treasury notes $4,985 $ 5,054 ====== =======
February 1, 1997 --------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Restricted cash due within one year $ 185 $ - $ - $ 185 Money market mutual fund, due within one year 774 - - 774 Municipal bonds, due from 5 to 10 years 8,026 - 20 8,006 ------- ------- ------- ------- Total marketable securities $ 8,985 $ - $ 20 $ 8,965 ======= ======= ======= =======
Note N - Litigation A complaint alleging discrimination in employment was filed against the Company in 1994 in the United States District Court for the Central District of Illinois by two current and one former associates individually and as representative of a class of all individuals who are similarly situated. The Plaintiffs moved for class certification and their motion was granted. In 1997, the Court granted the Company's motion to narrow the scope of the class. The Company denies all substantive allegations of the Plaintiffs and of the class. The Company is subject to various other unresolved legal actions which arise in the normal course of its business. It is not possible to predict with certainty the outcome of these unresolved legal actions or the range of the possible loss. 40 Note O - Earnings Per Share Earnings per share disclosures (net of tax) for the three years in the period ended January 31, 1998 are follows:
(In thousands except per share data) Earnings Shares Per-Share (Numerator) (Denominator) Amount Year Ended 1/31/98: Basic net earnings per share: Earnings available to common shareholders $ 5,092 10,920 $ .47 ======== ====== ====== Effect of dilutive securities - Stock options 445 ------ Diluted net earnings per share: Net earnings available to common shareholders $ 5,092 11,365 $ .45 ======== ====== ====== Year Ended 2/1/97: Basic net earnings per share: Net earnings available to common shareholders $ 3,248 10,864 $ .30 Effect of dilutive securities - Stock options 308 ------ Diluted Net Earnings per share: Net earnings available to common shareholders $ 3,248 11,172 $ .29 ======== ====== ====== Year Ended 2/3/96: Basic net loss per share: Net loss available to common shareholders (18,692) 11,121 $(1.68) Effect of dilutive securities - Stock options - ------ Diluted net loss per share (1): Net loss available to common shareholders $(18,692) 11,121 $(1.68) ======== ====== ====== (1) Includes the impact of extraordinary charge of $609 or $.06 per share.
Note P - Subsequent Events In April 1998, the Company extended the employment agreement of Mr. Robert Kelly, President, Chief Executive Officer, and Chairman of the Board, to extend his employment through December 31, 1999. The terms of the agreement include a $500,000 signing bonus, forgiveness of a promissory note and interest to the Company, totaling $281,250, reimbursement for certain moving costs and an extension of the exercise period for each group of stock options. The agreement also contains a one year non-competition restriction following the termination of Mr. Kelly's employment with the Company. In April 1998, the Company extended the terms of the Revolving Credit Facility. The amended agreement terminates April 15, 2000. The terms of the amendment provide total availability up to a maximum of $50 million, increase the capital expenditure limit to $75 million per year, increase the permitted purchase money security interests and purchase money mortgage amounts to a combined maximum outstanding amount of $50 million, and provide for reductions in the interest rate and fees. During April 1998, two stores, which were recorded in property held for resale, were sold and leased back yielding cash proceeds of $10.8 million. 41 Note Q - Quarterly Financial Data (Unaudited)
Net Earnings Net (Loss) Gross Earnings Per Share - Sales Margin (Loss) Diluted (Dollars in thousands, except per share data) 1997 Quarter: First $ 239,937 $ 61,987 $ 1,788 $ .16 Second 245,383 62,664 1,378 .12 Third 234,200 58,047 (463) (.04) (7) Fourth 247,570 60,946 2,389 .21 ---------- -------- -------- ------ $ 967,090 $243,644 $ 5,092 $ .45 ========== ======== ======== ====== 1996 Quarter: First $ 248,139 $ 62,826 $ 1,027 $ .09 Second 257,645 64,865 1,160 .10 (6) Third 248,293 62,770 530 .05 Fourth 260,812 65,781 531 (1) .05 (1) ---------- -------- -------- ------ $1,014,889 $256,242 $ 3,248 $ .29 ========== ======== ======== ====== 1995 Quarter: First $ 245,530 $ 61,425 $ (4,483) $ (.41) Second 249,045 62,100 (5,291) (4) (.47) (4) Third 246,201 61,836 (2,643) (.24) Fourth (2) 282,888 68,994 (6,275) (5) (.56) (5) ---------- -------- -------- ------ TOTAL(3) $1,023,664 $254,355 $(18,692) $(1.68) ========== ======== ======== ======
(1) Net earnings reduced by a $1.7 million or $.15 per share charge related to closed stores and revaluation of assets. (2) Fourteen week quarter. (3) Fifty-three week year. (4) Net loss increased by an extraordinary charge of $625,000 or $.06 per share related to the refinancing of the Revolving Credit Facility. (5) Net loss increased by a $6.5 million or $.59 per share charge related to the revaluation of certain assets (SFAS 121). (6) Amount differs from amount reported on Form 10Q due to the restatement of balances to comply with the provisions of SFAS 128 "Earnings Per Share". (7) Net loss attributable to lower gross margin dollars resulting from lower sales volume levels and increased promotional activity, partially offset by lower operating costs. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on accounting principles or practices or financial statement disclosures between the Company and its independent certified public accountants during the two fiscal years ended January 31, 1998. 42 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item concerning directors is set forth under "Election of Directors" in the definitive proxy statement filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this 10-K. Certain information concerning the Company's executive officers is included in Item 4(a) of Part I of this report. ITEM 11: EXECUTIVE COMPENSATION The information required by this item is set forth in the section entitled "Executive Compensation" in the definitive proxy statement filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the tabulation of the amount and nature of beneficial ownership of the Company's Common Stock under the heading "Principal Shareholders and Election of Directors" in the definitive proxy statement filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the section entitled "Compensation of Directors" in the definitive proxy statement filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K. 43 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page ---- (a) The following documents are filed as a part of this report: 1. Financial Statements: - Independent Auditors' Report 20 - Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 21 - Consolidated Statements of Operations for the years ended January 31, 1998, February 1, 1997, and February 3, 1996 22 - Consolidated Statements of Equity for the years ended January 31, 1998, February 1, 1997, and February 3, 1996 23 - Consolidated Statements of Cash Flows for the years ended January 31, 1998, February 1, 1997, and February 3, 1996 24 - Notes to the Consolidated Financial Statements 25 2. Financial Statement Schedules: All schedules are omitted because they are not applicable or not required, or because the information required therein is included in the consolidated financial statements or the notes thereto. 3. Exhibits - see Exhibit Index on page 46. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1997.
44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EAGLE FOOD CENTERS, INC. By: /s/ Robert J. Kelly ------------------- Robert J. Kelly Chairman, Chief Executive Officer DATED: April 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Robert J. Kelly Chairman, Chief Executive Officer April 30, 1998 - ------------------------ (Principal Executive Officer) Robert J. Kelly /s/ S. Patric Plumley Vice President-Chief Financial April 30, 1998 - ------------------------ Officer and Secretary S. Patric Plumley (Principal Financial and Accounting Officer) /s/ Peter B. Foreman Director April 30, 1998 - ------------------------ Peter B. Foreman /s/ Steven M. Friedman Director April 30, 1998 - ------------------------ Steven M. Friedman /s/ Michael J. Knilans Director April 30, 1998 - ------------------------ Michael J. Knilans /s/ Alain Oberrotman Director April 30, 1998 - ------------------------ Alain Oberrotman /s/ William J. Snyder Director April 30, 1998 - ------------------------ William J. Snyder /s/ Paul D. Barnett Director April 30, 1998 - ------------------------ Paul D. Barnett
45
Exhibit Number Description - ------- ----------- 3.1-- Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Registration Statement on Form S-1 No. 33-29404 and incorporated herein by reference). 3.2-- By-laws of the Company (filed as Exhibit 3.2 to the Registration Statement on Form S-1 No. 33-29404 and incorporated herein by reference). 4.1-- Form of Note (filed as Exhibit 4.3 to the Registration Statement on Form S-1 No. 33-59454 and incorporated herein by reference). 4.2-- Form of Indenture, dated as of April 26, 1993, between the Company and First Trust National Association, as trustee (filed as Exhibit 4.4 to the Registration Statement on Form S-1 No. 33-59454 and incorporated herein by reference). 10.1-- Transaction Agreement, dated as of October 9, 1987, between EFC and Lucky Stores, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference). 10.2-- Assignment and Assumption Agreement, dated November 10, 1987, among EFC, Lucky Stores, Inc. and Pasquale V. Petitti regarding the Deferred Compensation Agreement (filed as Exhibit 10.11 of the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference). 10.3-- Trademark License Agreement, dated November 10, 1987, between Lucky Stores, Inc. and EFC (filed as Exhibit 10.19 to the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference). 10.4-- Letter Agreement, dated June 10, 1988, between the Company's predecessor and Lucky Stores, Inc. amending the Trademark License Agreement (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 (the "1988 10-K") and incorporated herein by reference). 10.5-- Management Information Services Agreement, dated November 10, 1987, between Lucky Stores, Inc. and the Company's predecessor (filed as Exhibit 10.20 to the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference). 10.6-- Letter Agreement, dated June 10, 1988, between the Company's predecessor and Lucky Stores, Inc. Stores, Inc. amending the Management Information Services Agreement (filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended January 28, 1989 and incorporated herein by reference). 10.7-- Non-Competition Agreement, dated November 10, 1987, between the Company's predecessor and Lucky Stores, Inc. (filed as Exhibit 10.21 to the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference). 10.9-- Letter Agreement, dated April 28, 1988, among American Stores Company, the Company's predecessor and Odyssey Partners (filed as Exhibit 10.29 to the Registration Statement on Form S-1 No. 33-20450 and incorporated herein by reference).
46
10.10-- Eagle Food Centers, Inc. Stock Incentive Plan, adopted in June 1990 (filed as Exhibit 19 to the Company's Annual Report on Form 10-K for the year ended February 1, 1992 and incorporated herein by reference). 10.16-- Loan and Security Agreement, dated as of May 22, 1995, among the Company, as borrower, and the lender party thereto, Congress Financial Corporation (Central). 10.17-- First Amendment to the Loan and Security Agreement dated August 21, 1995. 10.18-- 1995 Stock Incentive Plan as approved on June 21, 1995. 10.19-- Employment agreement dated May 10, 1995 between the Company and Robert J. Kelly, its President and Chief Executive Officer. 10.20-- Employment agreement dated July 10, 1995 between the Company and David S. Norton, its Senior Vice President-Retailing. 10.21-- Employment agreement dated November 14, 1995 between the Company and John N.A. Turley, its Vice President-Grocery. 10.22-- Agreement between the Company, Lucky Stores, Inc., The Midland Grocery Company and Roundy's Inc. to terminate the Westville warehouse lease. 10.23--* Employment Agreement dated April 12, 1998 between the Company and Robert J. Kelly, its President and Chief Executive Officer. 10.24--* Amended Loan and Security Agreement, dated April 1, 1998, between the Company, as borrower, and the lender party thereto, Congress Financial Corporation (Central). 10.25--* Employment Agreement dated September 15, 1997 between the Company and S. Patric Plumley, its Vice President-Chief Financial Officer and Secretary. 12.1-- Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12.1 to the Registration Statement on Form S-1 No. 33-59454 and incorporated herein by reference). 21--* Subsidiaries of the Registrant. 27--* Financial Data Schedule (for SEC use only). 27.1--* Restated Financial Data Schedule for the Fiscal Year ended February 1, 1997 (for SEC use only). 27.2--* Restated Financial Data Schedule for the Quarter ended August 3, 1996 (for SEC use only). 27.3--* Restated Financial Data Schedule for the Quarter ended November 2, 1996 (for SEC use only). 27.4--* Restated Financial Data Schedule for the Quarter ended August 2, 1997 (for SEC use only). 27.5--* Restated Financial Data Schedule for the Quarter ended November 1, 1997 (for SEC use only).
*Filed herewith. 47 EX-10.23 2 EMPLOYMENT AGREEMENT DATED APRIL 12, 1998 EXHIBIT 10.23 Eagle Food Centers, Inc. Route 67 and Knoxville Road Milan, Illinois 61264 Robert J. Kelly Chief Executive Officer Eagle Food Centers, Inc. Route 67 and Knoxville Road Milan, Illinois 61264 Dear Mr. Kelly: Reference is made herein to the Employment Agreement, dated as of May 10, 1995 between yourself (the "Executive") and Eagle Food Centers, Inc. (the "Company") (the "Employment Agreement"). Capitalized terms used herein shall have the meaning set forth in the Employment Agreement, unless otherwise defined herein. The Executive has served as Chief Executive Officer and President of the Company since May 10, 1995 and the term of employment of the Executive pursuant to the Employment Agreement is scheduled to expire on May 22, 1998. The Company desires to continue to retain the services of the Executive for an additional term and to amend certain terms of the Employment Agreement in light of the significant contributions made by the Executive to the business and affairs of the Company to date. In furtherance of the foregoing, the parties agree to the following: 1. Extended Term/Chairmanship. Section (2) of the Employment Agreement shall be amended to extend the Executive's term of employment to December 31, 1999. During the extended term, and for so long as the Executive remains employed, the Company shall cause the Executive to be elected as a Director and Chairman of the Board of Directors. The references to "Chairman of the Board" in Sections 3(a), 3(b), and 4(a) shall be eliminated, and such reference in Sections 6, 7(b), (c), 10, 11(a), 11(b), 12(a), 12(b), 13 and 19 of the Employment Agreement shall be replaced with references solely to the "Board of Directors." 2. Extension Payment. The Company shall pay to the Executive the sum of $500,000, subject to applicable deductions and withholding, within ten (10) business days of the execution and delivery of this Letter Agreement. 3. Loan Forgiveness. (a) So long as the Executive shall remain employed by the Company, the loan previously extended by the Company to the Executive in the amount of $281,250 for the purchase of 125,000 shares of Common Stock of the Company (pursuant to the promissory note and pledge agreement, each dated May 10, 1995) (the "Loan")) shall be forgiven as follows: so long as the Executive remains actively employed through to and including December 31, 1998 and has not otherwise been terminated for cause, one half of the then outstanding balance of principal and interest shall be forgiven; so long as the Executive remains actively employed through to and including December 31, 1999 and has not otherwise been terminated for cause, the remaining outstanding balance of principal and interest shall be forgiven; provided that if the Company terminates the employment of the Executive without cause, or the Executive terminates his employment for good reason, all principal and interest outstanding as of the date of such termination shall be forgiven. (b) The Company shall reimburse the Executive, on an after-tax basis (and based on the net marginal Federal tax rate then applicable to the Executive), for any income tax liability incurred by the Executive in any calendar year as a result of the loan forgiveness provided for in Section (3)(a) above and the gross-up payment provided hereunder. The parties agree that the accountants for the Company shall calculate the amount of gross-up payments due to the Executive and that the Executive shall cooperate fully with such accountants in providing evidence of his applicable tax rate and related matters. 4. Moving Costs. The Company shall reimburse the Executive (i) for the cost of all reasonable moving expenses incurred by the Executive in connection with his move to Chicago, subject to the presentation of satisfactory documentation in accordance with the Company's relocation policy, and (ii) for any income tax liability incurred by the Executive in any calendar year as a result of the reimbursement provided for in subclause (i) hereof and this subclause (ii). The amount of the tax gross-up provided for in subclause (ii) shall be calculated by the accountants to the Company in the same manner as set forth in Section (3)(b) hereof. The reimbursement payment provided for in this Section (4) shall be made to the Executive within 30 days of the presentation of satisfactory documentation. 5. Incentive Compensation and Insurance Matters. For each full calendar year the Executive remains employed by the Company, commencing on December 31, 1997, and continuing on each December 31, thereafter (the one year period from December 31, 1997 through to December 31, 1998, and each year ending on December 31 thereafter, are referred to herein as a "Service Year" or "Service Years," as the case may be), the Company shall ensure that: (a) Extended Option Exercise Period. The exercise period for each tranche of vested Options as provided for in Section (5)(b) of the Employment Agreement shall, upon the Executive's termination of employment for any reason other than cause, be extended by one year for each completed Service Year, up to the maximum ten-year expiration period provided for under the Company's stock incentive plans. (b) Extended Split-Dollar Insurance Coverage. Upon the Executive's termination of employment for any reason other than cause, the Company shall continue to pay all premiums associated with the Executive's split dollar life insurance policy as in effect at the time of such termination, for a period following his termination equal to the aggregate of completed Service Years as of the date of his termination. 2 6. Non-Renewal. Section (11)(c) of the Employment Agreement shall be eliminated in its entirety. 7. No-Solicit/No-Raid/Non-Compete. Section (12)(a) of the Employment Agreement shall be amended to (i) eliminate the phrase "without the prior written approval of the Chairman of the Board" and (ii) add the following subclause (iii): "(iii) participate (whether as director, officer, shareholder (other than a passive investment in up to 5% of any class of publicly traded stock), owner, partner, principal, employee, consultant, agent or otherwise)) in any Competitive Business (as hereinafter defined); provided that the foregoing restriction shall apply only if the Executive has been terminated for cause, or has voluntarily terminated his employment without Good Reason. As used herein, the term "Competitive Business" means any supermarket business conducted in the Company's service area. 8. Survival. Except as otherwise provided for herein, the Employment Agreement shall remain in full force and effect. 9. Counterparts. This Letter Agreement may be executed in counterparts which, taken together, shall be deemed to be a fully executed original hereof. 10. Governing Law. This Letter Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Please acknowledge your agreement to the foregoing by signing where indicated below. Very truly yours, EAGLE FOOD CENTERS, INC. By: /s/ Steve Friedman -------------------------- Title: Director ACCEPTED AND AGREED TO THIS 12 DAY OF APRIL, 1998: /s/ Robert J. Kelly - -------------------------- Robert J. Kelly 3 EX-10.24 3 AMENDED LOAN AND SECURITY AGREEMENT EXHIBIT 10.24 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT This AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this "Amendment") dated as of April 1, 1998 by and between Congress Financial Corporation (Central)("Lender") and Eagle Food Centers, Inc. ("Borrower"). R E C I T A L S: WHEREAS, Lender and Borrower are parties to that certain Loan and Security Agreement dated as of May 25, 1995; as the same has been amended, (the "Loan Agreement"; capitalized terms used and not defined herein shall have the meanings assigned to them in the Loan Agreement as amended hereby); WHEREAS, the Borrower has requested that Lender consent to a second amendment to the Loan agreement as more fully described herein; and WHEREAS, Lender has granted its consent to such amendment upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Amendment. Immediately upon the satisfaction of each of the conditions precedent set forth in Section 2 of this Amendment: 1.1. Section 1.28 of the Loan Agreement is amended by (i) replacing the language "a rate of one percent (1%)" in the first clause (a) of such section with "a rate of, from and after March 1, 1998, one half percent (0.50%)" and (ii) replacing the language "a rate of three and one half percent (3.50%)" in the first clause (b) of such section with "a rate of, from and after March 1, 1998, two and one quarter percent (2.25%)". 1.2. Section 3.2 of the Loan Agreement is amended by replacing the dollar amount of "$7,500" stated therein with the dollar amount of "$5000". 1.3. Section 6.3(b) of the Loan Agreement is amended by amending and restating the first sentence of such section in its entirety as follows: "For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations on the date of receipt of immediately available funds by Lender in the Payment Account." 1.4. Section 7.2 of the Loan Agreement is amended by amending and restating clause (d) of such section in its entirety as follows: "(d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request (i) on or after an Event of Default has occurred and is continuing or (ii) on or after a date in which the amount available under the lending formula set forth in Section 2.1(a) hereof exceeds the outstanding Loans and Letter of Credit Accommodations by less than $10,000,000, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory, prepared in form, scope and methodology (including, without limitation, on a "going out of business" basis) acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; provided that Borrower may request such a report or appraisal at any time or times as Borrower may desire for the purpose of inducing Lender to modify the Inventory Advance Rate;" 1.5. Section 9.8 of the Loan Agreement is amended by replacing the dollar amount of "$10,000,000" which appears in clause (e) therein with the dollar amount "$50,000,000". 1.6. Section 9.13 of the Loan Agreement is amended by (i) replacing the dollar amount of "$10,000,000" set forth opposite the period designated as "Borrower's fiscal year 1998" in such section with the amount of "$75,000,000" and (ii) adding the following at the end of the categories designated as "Period" and "Maximum Amount": "Borrower's fiscal year 1999 $75,000,000 or such greater amount as agreed to by Lender in writing prior to the first day of such fiscal year Borrower's fiscal year 2000 $75,000,000 or such greater amount as agreed to by Lender in writing prior to the first day of such fiscal year" 1.7. Section 12.1(a) of the Loan Agreement is amended by (i) replacing the language "the date three (3) years from the date hereof" in the first sentence of such section with "April 15, 2000" and (ii) replacing the dollar amount of "$100,000" appearing in the second sentence of such section with "$50,000". Section 2. Conditions to Effectiveness of Amendment. This Amendment shall be effective as of the date first above written and the following conditions precedent shall have been satisfied at or prior to such date; 2.1. Documents. (a) Amendment. The Lender shall have received a duly executed counterpart of this Amendment from Borrower. (b) Participation of Loan Agreement Consents. Each Person which has acquired a participation interest in any or all of Lender's rights under the Loan Agreement shall have executed and delivered to Lender an Acknowledgment and Consent, in form and substance satisfactory to Lender, with respect to the applicable participation agreement. 2.2. Certified Resolutions, etc. Lender shall have received a certificate, in form and substance satisfactory to the Lender, of the secretary or assistant secretary of the Borrower dated the effective date of this Amendment (the "Effective Date"), certifying (i) the resolutions of its Board of Directors approving and authorizing the execution, delivery and performance by it of 2 this Amendment and the continued effectiveness thereof, (ii) that there have been no changes in its certificate of incorporation or by-laws since May 25, 1995, or if there have been changes in its certificate of incorporation or by-laws since May 25, 1995, certifying its certificate of incorporation and/or by-laws, as the case may be, as in effect on the Effective Date and (iii) specimen signatures of its officers authorized to sign this Amendment. 2.3. Consents, Licenses, Approval, etc. All consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrower of this Amendment or the Loan Agreement, as amended by this Amendment, or the validity or enforceability thereof, or in connection with any of the transactions effected pursuant to this Amendment or the Loan Agreement, as amended by this Amendment, shall be in full force and effect. 2.4. No Injunction. No law or regulation shall have been adopted, no order, judgment or decree of any governmental authority shall have been issued, and no litigation shall be pending or threatened, which in the reasonable judgment of Lender would enjoin, prohibit or restrain, or impose or result in the imposition of any material adverse condition upon, the execution, delivery or performance by the borrower of this Amendment or the Loan Agreement, as amended by this amendment. Section 3. Representations and Warranties. In order to induce Lender to enter into this Amendment, Borrower represents and warrants to Lender, upon the effectiveness of this Amendment, which representations and warranties shall survive the execution and delivery of this amendment that: 3.1. No Default; etc. No Event of Default and no event or condition which, merely with notice or the passage of time or both, would constitute an Event of Default, has occurred and is continuing after giving effect to this Amendment or would result from the execution or delivery of this Amendment or the consummation of the transactions contemplated hereby. 3.2. Corporate Power and Authority; Authorization. Borrower has the corporate power and authority to execute and deliver this Amendment and to carry out the terms and provisions of the Loan Agreement, as amended by this Amendment, and the execution and delivery by Borrower of this Amendment and the Loan Agreement, as amended by this Amendment, and the performance by the Borrower of its obligations hereunder and thereunder have been duly authorized by all requisite corporate action by Borrower. 3.3. Execution and Delivery. Borrower has duly executed and delivered this Amendment. 3.4. Enforceability. This Amendment and the Loan Agreement, as amended by this Amendment, constitute the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' right generally, and by general principles of equity. 3.5. Representations and Warranties. All of the representations and warranties 3 contained in the Loan Agreement and in the other Financing Agreements (other than those which speak expressly only as of a different date) are true and correct as of the date hereof after giving effect to this Amendment and the transactions contemplated hereby. Section 4. Miscellaneous. 4.1. Effect; Ratification. The amendments set forth herein are effective solely for the purposes set forth herein and shall be limited precisely as written, and shall not be deemed to (i) be a consent to any amendment, waiver or modification of any other term or condition of the Loan Agreement or of any other Financing Agreement or (ii) prejudice any right or rights that Lender may now have or may have in the future under or in connection with the Loan Agreement or any other financing Agreement. Each reference in the Loan Agreement to "this Agreement", "herein", "hereof" and words of like import and each reference in the other Financing Agreements to the "Loan Agreement" shall mean the Loan Agreement as amended hereby. This Amendment shall be construed in connection with and as part of the Loan Agreement and all terms, conditions, representations, warranties, covenants and agreements set forth in the Loan Agreement and each other Financing Agreement, except as herein amended or waived, are hereby ratified and confirmed and shall remain in full force and effect. 4.2. Counterparts. This Amendment may be executed in any number of counterparts, each such counterpart constituting an original but all together one and the same instrument. 4.3. Governing Law. This Amendment shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Illinois. [Signature page follows] 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. CONGRESS FINANCIAL CORPORATION (CENTRAL) By: /s/ Steven Linckrman -------------------------------- Name: Steven Linckrman Title: Vice President EAGLE FOOD CENTERS, INC. By: /s/ Patric Plumley -------------------------------- Name: Patric Plumley Title: Secretary 5 EX-10.25 4 EMPLOYMENT AGREEMENT DATED SEPTEMBER 15, 1997 EXHIBIT 10.25 Eagle Food Centers P.O. Box 6700, Rock Island, Illinois 61204-6700/Executive Offices & Distribution Center: Rt. 67 & Knoxville Road, Milan, Illinois 61264 Telephone: 309-787-7700/Fax: 309-787-7895 September 8, 1997 Mr. Pat Plumley 8035 S. Hunters Meadow Circle Sandy, Utah 84093 Dear Pat: This letter is intended to define the terms of the employment offer being proposed by Eagle Food Centers, Inc. Please recognize this is by no means an employment agreement, but simply serves to clarify our previous discussions. Title: Vice President and Controller Reports To: Herb Dotterer, Senior Vice President, CFO Effective Date: As Soon As Possible Duties: Responsible for all accounting functions and controls, budgeting, internal and external reporting. Responsible for developing a professional staff and for working closely with operating, distribution, and marketing departments to develop sound procedures and reporting vehicles and in analyzing and interpreting results and trends. Salary: $80,000 Signing Bonus: $10,000 Annual Incentive Bonus Potential: Participation in the Eagle bonus plan at the administrative vice president targeted norm of thirty percent (30%) of average annual salary with a maximum potential of sixty percent (60%) should the Company exceed budgeted expectations as defined in the plan. Payout or partial payout is contingent on Company performance with final determination solely vested with the Board of Directors. Employment at time of payout (late March) is a prerequisite for payment. First year bonus is pro-rated based on average salary earned. Stock: Eagle will provide a stock option based on the following criteria: Award: 15,000 shares Grant Price: The closing price on date of employment. Vesting Schedule: 25% at each of the first four anniversaries of the grant and options must be exercised within ten (10) years of award thereof or once eligible, within thirty (30) days following termination of employment. Award Level: 10,000 shares on the first anniversary of employment. Grant Price: Closing price on that day in 1998. Vesting Schedule: Same as above. Relocation: Eagle will provide reimbursement of all usual and customary real estate fees associated with the sale of your primary residence not to exceed seven (7%) of the documented sale price. Packing and movement of household goods will be provided in accordance with polity. Execution of the physical move must be completed within six (6) months of your date of hire or the terms described herein shall be vacated. Relocation costs to be repaid if employment is terminated by associate within six months. Temporary Living: $3,000 to be paid in advance to cover temporary living expenses. Trips home every 2 - 3 weeks would fall within the "reasonable" guidelines. Househunting: Reasonable costs of two househunting trips for yourself and spouse. Vacation: Four weeks from start date to December 31, 1998. Four weeks per calendar year thereafter. Benefits: Enrollment in the Eagle Food Centers, Inc. health and welfare plan upon the completion of the ninety (90) day eligibility period. The Company will pay for up to ninety (90) days of documented COBRA contributions to assure continuation of benefits throughout the eligibility period as defined above. Another copy of the Eagle benefits package will be mailed to you today. Severance: Severance agreement covering one year of salary and average bonus if employment is terminated due to change of control. Hopefully, you will find this summary to be acceptable. Eagle offers a great challenge and the change to participate in an exciting turnaround effort. It will be a pleasure working with you and I look forward to your becoming a valuable and contributing member of the management team. Please give me a call so we can finalize the details and answer any questions. Very truly yours, EAGLE FOOD CENTERS, INC. ACCEPTANCE: /s/ Herbert T. Dotterer /s/ Pat Plumley HERBERT T. DOTTERER ------------------------ Senior V.P. - Finance & Administration & DATE: 9/15/97 Chief Financial Officer ------------------- EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 ---------- EAGLE FOOD CENTERS, INC. SUBSIDIARIES Eagle Pharmacy Co. Milan Distributing Co. Eagle Country Markets, Inc. BOGO'S, Inc. Talon Insurance Company, Inc. EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS JAN-31-1998 JAN-31-1998 5,113,000 10,349,000 11,819,000 1,032,698 83,841,000 112,717,000 269,723,163 156,598,983 261,624,000 99,769,000 100,000,000 0 0 115,000 32,122,000 261,624,000 967,090,000 967,090,000 723,446,000 723,446,000 0 85,000 11,751,000 4,692,000 (400,000) 5,092,000 0 0 0 5,092,000 0.47 0.45
EX-27.1 7 RESTATED FINANCIAL DATA SCHEDULE FEBRUARY 1, 1997
5 12-MOS FEB-01-1997 FEB-01-1997 9,134,000 8,780,000 13,388,000 921,000 76,395,000 108,922,000 271,776,000 153,303,000 254,748,000 97,192,000 100,000,000 0 0 115,000 26,573,000 254,748,000 1,014,889,000 1,014,889,000 758,647,000 758,647,000 0 131,000 12,547,000 3,248,000 0 3,248,000 0 0 0 3,248,000 0.30 0.29
EX-27.2 8 RESTATED FINANCIAL DATA SCHEDULE AUGUST 3, 1996
5 6-MOS FEB-01-1997 AUG-03-1996 6,609,000 9,412,000 15,829,000 970,000 78,668,000 112,520,000 264,776,000 144,707,000 250,753,000 97,793,000 100,000,000 115,000 0 0 25,462,000 250,753,000 507,784,000 505,784,000 378,093,000 378,093,000 0 49,600 6,657,000 2,187,000 0 2,187,000 0 0 0 2,187,000 0.20 0.20
EX-27.3 9 RESTATED FINANCIAL DATA SCHEDULE NOVEMBER 2, 1996
5 9-MOS FEB-01-1997 NOV-02-1996 3,450,000 8,897,000 16,438,000 1,001,000 84,703,000 115,338,000 269,175,000 150,464,000 257,260,000 102,948,000 100,000,000 115,000 0 0 26,081,000 257,260,000 754,077,000 754,077,000 563,616,000 563,616,000 0 80,400 9,846,000 2,717,000 0 2,717,000 0 0 0 2,717,000 0.25 0.24
EX-27.4 10 RESTATED FINANCIAL DATA SCHEDULE AUGUST 2, 1997
5 6-MOS JAN-31-1998 AUG-02-1997 12,858,000 9,661,000 11,660,000 884,000 67,755,000 105,039,000 269,944,000 157,558,000 249,795,000 89,431,000 100,000,000 0 0 115,000 29,965,000 249,795,000 485,320,000 485,320,000 360,669,000 360,669,000 0 0 5,905,000 3,166,000 0 3,166,000 0 0 0 3,166,000 0.29 0.27
EX-27.5 11 RESTATED FINANCIAL DATA SCHEDULE NOVEMBER 1, 1997
5 9-MOS JAN-31-1998 NOV-01-1997 11,427,000 10,117,000 10,338,000 909,000 75,239,000 109,416,000 266,296,000 158,253,000 253,914,000 92,633,000 100,000,000 0 0 115,000 29,546,000 253,914,000 719,520,000 719,520,000 536,822,000 536,822,000 0 0 8,666,000 2,703,000 0 2,703,000 0 0 0 2,703,000 0.25 0.24
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