10-Q 1 a2066077z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ------------- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended NOVEMBER 3, 2001 ------------------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE ------------- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ Commission File Number 0-17871 ------- EAGLE FOOD CENTERS, INC. ------------------------ (Exact name of registrant as specified in the charter) DELAWARE 36-3548019 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Rt. 67 & Knoxville Rd., Milan, Illinois 61264 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (309) 787-7700 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yes /X/ No / / The number of shares of the Registrant's Common Stock, par value four cents ($0.04) per share, outstanding on December 14, 2001 was 3,152,522. Page 1 of 12 pages PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS EAGLE FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
QUARTER ENDED THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Sales $ 175,828 $ 180,215 $ 537,745 $ 573,815 Cost of goods sold 130,164 133,592 399,137 426,160 ----------- ----------- ----------- ----------- Gross margin 45,664 46,623 138,608 147,655 Operating expenses: Selling, general and administrative 40,017 39,430 120,797 130,077 Reorganization items, net (648) 167 (921) 11,344 Depreciation and amortization 4,528 4,573 13,591 14,046 ----------- ----------- ----------- ----------- Operating income (loss) 1,767 2,453 5,141 (7,812) Interest expense, net 3,216 3,385 9,667 9,476 ----------- ----------- ----------- ----------- Earnings (loss) before extraordinary item (1,449) (932) (4,526) (17,288) Extraordinary item: Gain on extinguishment of debt 972 -- 1,740 -- ----------- ----------- ----------- ----------- Net earnings (loss) $ (477) $ (932) $ (2,786) $ (17,288) =========== =========== =========== =========== Basic net earnings (loss) per share: Net earnings (loss) before extraordinary item $ (0.46) $ (0.29) $ (1.42) $ (6.00) Extraordinary item $ 0.31 $ -- $ 0.55 $ -- ----------- ----------- ----------- ----------- Net earnings (loss) $ (0.15) $ (0.29) $ (0.87) $ (6.00) =========== =========== =========== =========== Weighted average basic shares outstanding 3,171,091 3,174,129 3,188,651 2,881,218
See notes to the unaudited consolidated financial statements. 2 EAGLE FOOD CENTERS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
NOVEMBER 3, FEBRUARY 3, 2001 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 275 $ 263 Restricted assets 8,695 7,271 Accounts receivable, net of allowance for doubtful accounts of $1.1 million in fiscal 2001 and $1.7 million in fiscal 2000 8,342 7,655 Inventories, net of LIFO reserve of $8.8 million in fiscal 2001 and $8.4 million in fiscal 2000 63,282 51,547 Prepaid expenses and other 1,963 2,363 --------- --------- Total current assets 82,557 69,099 Property and equipment (net) 109,171 113,781 Other assets: Deferred software costs (net) 7,429 10,007 Property held for resale 3,067 3,140 Other 1,293 1,238 --------- --------- Total other assets 11,789 14,385 --------- --------- Total assets $ 203,517 $ 197,265 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 32,265 $ 25,721 Payroll and associate benefits 10,900 11,800 Accrued liabilities 13,107 14,029 Reserve for closed stores 703 5,636 Accrued taxes 4,840 7,624 Current portion of long term debt 914 942 --------- --------- Total current liabilities 62,729 65,752 Long term debt: Senior Notes 66,529 70,421 Capital lease obligations 33,903 33,504 Loan and Security Agreement 23,279 4,386 Other 511 643 --------- --------- Total long term debt 124,222 108,954 Other liabilities: Reserve for closed stores 1,329 3,068 Other deferred liabilities 8,416 9,706 --------- --------- Total other liabilities 9,745 12,774 --------- --------- Total liabilities 196,696 187,480 --------- --------- Shareholders' equity: Preferred stock, $.01 par value, 100,000 shares authorized -- -- Common stock, $.04 par value, 4,500,000 shares authorized, 3,357,345 shares issued 134 134 Capital in excess of par value 55,464 55,464 Common stock in treasury, at cost, 199,682 shares in fiscal 2001 and 159,374 shares in fiscal 2000 (2,341) (2,278) Accumulated other comprehensive income(loss) (106) 9 Accumulated deficit (46,330) (43,544) --------- --------- Total shareholders' equity 6,821 9,785 --------- --------- Commitments and contingencies Total liabilities and shareholders' equity $ 203,517 $ 197,265 ========= =========
See notes to the unaudited consolidated financial statements. 3 EAGLE FOOD CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss $ (2,786) $(17,288) Adjustments to reconcile net loss to net cash flows from operating activities: Extraordinary gain on extinguishment of debt (1,740) -- Depreciation and amortization 13,591 14,046 Store closing and asset revaluation, and lease termination (1,005) 7,434 LIFO charge (credit) 450 (1,300) Deferred charges and credits 600 387 Loss (gain) on disposal of assets 16 (1,174) Changes in assets and liabilities: Receivables and other assets (711) 6,930 Inventories (12,185) 7,230 Accounts payable 6,544 (5,043) Accrued and other liabilities (5,833) (7,736) Principal payments on reserve for closed stores (5,667) (5,895) -------- -------- Net cash flows from operating activities (8,726) (2,409) Cash flows from investing activities: Additions to property and equipment (5,016) (5,595) Purchases of marketable securities (1,602) (2,065) Cash proceeds from dispositions of property and equipment 65 3,902 Cash proceeds from dispositions of property held for resale -- 246 -------- -------- Net cash flows from investing activities (6,553) (3,512) Cash flows from financing activities: Deferred financing costs (320) (326) Principal payments on capital lease obligations (693) (701) Principal payments on senior notes (2,526) (15,000) Net revolving loans 18,893 4,992 Purchase of treasury stock (63) -- -------- -------- Net cash flows from financing activities 15,291 (11,035) Net change in cash and cash equivalents 12 (16,956) Cash and cash equivalents at beginning of period 263 18,558 -------- -------- Cash and cash equivalents at end of period $ 275 $ 1,602 ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest $ 11,132 $ 11,847 Cash paid for income taxes $ -- $ 7 Noncash investing and financing activities: Additions to property and equipment and debt $ 932 $ 103 Unrealized (loss) gain on securities $ (178) $ 166 Stock issued to Senior Noteholders $ -- $ 2,147
See notes to the unaudited consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with the summary of significant accounting policies set forth in the notes to the audited financial statements contained in the Company's Form 10-K filed with the Securities and Exchange Commission on May 4, 2001. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results of operations and financial position for the interim periods presented. Operating results for the thirty-nine weeks ended November 3, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2002. NEW ACCOUNTING STANDARDS - In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.143 requires a company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. A corresponding asset is also recorded, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 for fiscal years beginning after June 15,2002. The Company does not expect this statement to have a material effect on its consolidated financial statements. In August, 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 for fiscal years beginning after December 15, 2001. Management is currently evaluating the impact this statement will have on its consolidated financial statement. 5 RECLASSIFICATIONS - Certain reclassifications were made to prior years' balances to conform to current year presentation. RESERVE FOR CLOSED STORES An analysis of activity in the reserve for closed stores for the quarter and three quarters ended November 3, 2001 and October 28, 2000 is as follows:
QUARTER ENDED THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 ---------------------- ---------------------- (Dollars in thousands) Balance at beginning of period $ 3,980 $ 16,131 $ 8,704 $ 9,986 Payments, primarily rental payments and lease rejection costs, net of sublease rentals of $68 and $212 in fiscal 2001 and $102 and $524 in fiscal 2000 (1,317) (3,606) (5,817) (6,089) Interest cost 33 107 150 239 Provision for store closing and asset revaluation (664) (1,062) (1,005) 7,434 ---------------------- ---------------------- Balance at end of period $ 2,032 $ 11,570 $ 2,032 $ 11,570 ====================== ======================
The provision for store closing and asset revaluation is included in the Consolidated Statement of Operations under the caption "Reorganization items, net". A rollforward presentation of the number of stores in the closed store reserve for the third quarter and three quarters ended November 3, 2001 and October 28, 2000 is as follows:
QUARTER ENDED THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Number of stores in reserve at beginning of period 8 25 17 18 Leases terminated/expired (5) (5) (14) (13) Stores added to the closed store reserve - - - 15 -------------- -------------- -------------- -------------- Number of stores in reserve at end of period 3 20 3 20 ============== ============== ============== ==============
6 LOAN AND SECURITY AGREEMENT On August 24, 2001 the Company entered into a Second Amended and Restated Loan and Security Agreement ("Revolver") with Congress Financial Corporation (Central) which amends and restates the Amended and Restated Loan and Security Agreement dated August 7, 2000. This is a $50 million facility secured by a security interest in all inventories of the Company and selected real estate. This is an increase of $10 million over the previous credit facility and extends the terms of the facility to August 24, 2004. REORGANIZATION ITEMS, NET A summary of costs recognized during the quarter and three quarters ended November 3, 2001 and October 28, 2000 is as follows:
QUARTER ENDED THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, (Dollars in thousands) 2001 2000 2001 2000 -------- -------- -------- -------- Store closing and asset revaluation $ (664) $ (1,062) $ (1,005) $ 7,434 Employee termination benefits -- 23 16 1,361 Professional fees 5 1,614 39 3,425 Net realized gain on sale/disposal of leases and equipment and release of capital leases -- (425) -- (1,023) Other 11 17 29 147 -------- -------- -------- -------- Total $ (648) $ 167 $ (921) $ 11,344 ======== ======== ======== ========
The net reorganization items are based on information presently available to the Company, however, the actual costs could differ materially from the estimates. Additionally, other costs may be incurred which cannot be presently estimated. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT Extraordinary gains of $972 thousand and $1.7 million were recorded in the quarter and three quarters ended November 3, 2001 relating to the repurchase of Senior Notes. Senior Notes with a face value of $2.4 million were purchased during the third quarter of fiscal 2001 for $1.4 million plus accrued interest. For the three quarters ended November 3, 2001, Senior Notes with a face value of $4.2 million were purchased for $2.5 million plus accrued interest. 7 COMPREHENSIVE INCOME - Comprehensive income includes all changes in the Company's equity during the period, except transactions with stockholders of the Company. Comprehensive income consisted of the following (in thousands of dollars):
QUARTER ENDED THREE QUARTERS ENDED NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 -------- -------- -------- -------- Net earnings (loss) $ (477) $ (932) $ (2,786) $(17,288) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities (19) 98 (115) 108 -------- -------- -------- -------- Comprehensive income (loss) $ (496) $ (834) $ (2,901) $(17,180) ======== ======== ======== ========
LITIGATION The Company is subject to various 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 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales for the Company's third fiscal quarter ended November 3, 2001 were $175.8 million, a decrease of $4.4 million or 2.4% compared with the prior year. For the three quarters ended November 3, 2001, sales were $537.7 million, a decrease of $36.1 million, or 6.3% compared to the same period in fiscal 2000, due primarily to the closure of seventeen stores and sale of one store during the first quarter of fiscal 2000, and the closure of two stores in the second quarter of fiscal 2000. Same store sales decreased 2.4% for the third quarter and 2.2% for the three quarters ended November 3, 2001, due primarily to competitive store growth during the past year. There were 64 stores operating at the end of the third quarter of fiscal 2001 and fiscal 2000. The gross margin rate for the third quarter of fiscal 2001 was 26.0% of sales compared to 25.9% for the same quarter of fiscal 2000, with a gross margin decline of $1.0 million. For the three quarters ended November 3, 2001 and October 28, 2000, the gross margin rate was 25.8% and 25.7%, respectively, with a gross margin decline of $9.0 million primarily related to the reduction in sales volume due to the lower store count. In addition, the Company recorded a LIFO charge of $450 thousand in the first three quarters of fiscal 2001 compared to a LIFO credit of $1.3 million in the same period of last year. 8 Selling, general and administrative expense for the third quarter of fiscal 2001 was $40.0 million or 22.8% of sales compared to $39.4 million or 21.9% of sales in the same quarter of fiscal 2000. For the three quarters ended November 3, 2001, selling, general and administrative expense was $120.8 million, or 22.5% of sales, versus $130.1 million, or 22.7% of sales, for the same period in fiscal 2000. The year to date decrease in dollars is primarily related to the decline in the number of stores plus an overall reduction of store operating expenses, which included an increase in associate health benefits expense. The first three quarters of fiscal 2001 included reorganization items of $84 thousand offset by a reduction in the provision for store closing of $1.0 million. The first three quarters of fiscal 2000 included reorganization items of $11.3 million primarily consisting of store closing and asset revaluation of $7.4 million and professional fees of $3.4 million. For the quarters ended November 3, 2001 and October 28, 2000, depreciation and amortization expense was $4.5 million or 2.6% of sales and $4.6 million or 2.5% of sales, respectively. For the three quarters ended November 3, 2001, depreciation and amortization expense was $13.6 million or 2.5% of sales versus $14.0 million or 2.4% of sales for the same period in fiscal 2000, due primarily to the reduction in the number of stores. Net interest expense decreased to $3.2 million or 1.8% of sales in the third quarter of fiscal 2001 compared to $3.4 million or 1.9% of sales in the same quarter of fiscal 2000. For the three quarters ended November 3, 2001, net interest expense increased to $9.7 million or 1.8% of sales compared to $9.5 million or 1.7% of sales in the same period of fiscal 2000. The year to date increase is due primarily to lower interest income of $751 thousand, partially offset by a decrease in interest expense of $560 thousand. Extraordinary gains of $972 thousand and $1.7 million were recorded in the quarter and three quarters ended November 3, 2001 relating to the repurchase of Senior Notes. Senior Notes with a face value of $2.4 million were purchased during the third quarter of fiscal 2001 for $1.4 million plus accrued interest. For the three quarters ended November 3, 2001, Senior Notes with a face value of $4.2 million were purchased for $2.5 million plus accrued interest. The net loss for the third quarter of fiscal 2001 was $477 thousand or $0.15 per share compared to a net loss of $932 thousand or $.29 per share in the same quarter of fiscal 2000. For the three quarters ended November 3, 2001, the net loss was $2.8 million or $0.87 per share compared to a net loss of $17.3 million or $6.00 per share for the comparable period of fiscal 2000. No tax benefit was recognized in fiscal 2001 or 2000 as the Company is in a net operating loss carryforward position. Valuation allowances have been established for the entire amount of net deferred tax assets due to the uncertainty of future recoverability. LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities was $8.7 million for the three quarters ended November 3, 2001 and $2.4 million in the comparable period of fiscal 2000. The net loss and non-cash charges generated $9.1 million of cash. Working capital changes used $17.8 million, due primarily to an increase in inventories and accounts receivable and decreases in accrued liabilities and the reserve for closed stores, partially offset by an increase in accounts payable. 9 Working capital at November 3, 2001 was $19.8 million and the current ratio was 1.32 to 1 compared to $3.3 million and 1.05 to 1 at February 3, 2001. Additions to property and equipment for the first three quarters of fiscal 2001 were $5.0 million compared to $5.6 million in the comparable period of fiscal 2000. The Company completed four major remodels during the first three quarters of fiscal 2001 and had two major remodels in progress at the end of the third quarter. The Company opened the first Foodco store on November 10, 2001, subsequent to the end of the third quarter. This store, a remodeled and converted Eagle store, will operate as a high standard, price impact store designed to serve the needs of value conscious customers. The Foodco store will maintain an aggressive pricing strategy while meeting the needs of the local market for product selection, quality and service. On August 24, 2001 the Company entered into a Second Amended and Restated Loan and Security Agreement ("Revolver") with Congress Financial Corporation (Central) which amends and restates the Amended and Restated Loan and Security Agreement dated August 7, 2000. This is a $50 million facility secured by a security interest in all inventories of the Company and selected real estate. This is an increase of $10 million over the previous credit facility and extends the terms of the facility to August 24, 2004. The Company repurchased $4.2 million of its Senior Notes during the first three quarters of fiscal 2001 at a cost of $2.5 million, recording an extraordinary gain of $1.7 million. Payments related to lease rejection costs were $7.4 million during the first three quarters of fiscal 2001. The repurchase of the Senior Notes and the lease rejection payments were primarily funded from loans against the Revolver. On November 3, 2001 the Company had $23.3 million in loans against the Revolver, no letters of credit outstanding and availability of $26.2 million. Cash on hand, operating cash flows and other sources of funds, including loans against the Revolver, are expected to be adequate to meet the Company's liquidity requirements for the coming year. SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements under Management's Discussion and Analysis of Financial Condition and Results of Operations and the other statements in this Form 10-Q which are not historical facts are forward looking statements. These forward looking statements involve risks and uncertainties that could render them materially different, including, but not limited to, 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, ability to complete all requirements relating to Chapter 11, the availability of capital, supply constraints or difficulties, the effect of the Company's accounting policies, the effect of regulatory, legal and other risks detailed in the Company's Securities and Exchange Commission filings. 10 PART II : OTHER INFORMATION: ITEM 1 : LEGAL PROCEEDINGS Not Applicable ITEM 2 : CHANGE IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3 : DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4 : SUBMITTED MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5 : OTHER Not Applicable ITEM 6 : EXHIBITS AND REPORTS ON FORM 8K Exhibit 10.21 Second Amended and Restated Loan and Security Agreement with Congress Financial Corporation (Central) date August 24, 2001. No reports are applicable. 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: EAGLE FOOD CENTERS, INC. Dated: December 18, 2001 /s/ Jeffrey L. Little ----------------------------------- Jeffrey L. Little Chief Executive Officer and President Dated: December 18, 2001 /s/ S. Patric Plumley ----------------------------- S. Patric Plumley Senior Vice President -Chief Financial Officer and Secretary 12