**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 
| **ý** |   | **Annual report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934**                                                                                                                          |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                               |
|       |   | **for the Fiscal year ended February 1, 2003 or**                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                               |
| **o**      |   | **Transition report pursuant to Section  13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                      |
|       |   |                                                                                                                                                                                                               |
|       |   | **for the transition period  from                to                .** |

 

**Commission FileNo.  0-17871**

 

**EAGLE FOOD CENTERS, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **36-3548019**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**Route 67 & Knoxville Road, Milan, Illinois 61264**

(Address of principal executiveoffices)

 

Registrant’stelephone number including area code ** (309) 787-7700**

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act: **Common Stock**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No o.

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court:            Yes ý     No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K   o.

 

Indicateby checkmark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes o            No ý

 

Theaggregate market value of the voting stock held by non-affiliates of theRegistrant was $304,733 as of May 2, 2003.

 

Thenumber of shares of the Registrant’s Common Stock, par value four cent $(0.04)per share, outstanding on May 2, 2003 was 3,110,935.

 

 

----

 

**FISCAL YEAR ENDED FEBRUARY 1, 2003**

**FORM 10-K ANNUAL REPORT**

 

**TABLE OF CONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| Item 1:      | Business |
|         |   |
| Item 2:      | Properties |
|         |   |
| Item 3:      | Legal Proceedings |
|         |   |
| Item 4:      | Submission of Matters to  a Vote of Security Holders |
|         |   |
| **PART II**  |
|         |   |
| Item 5:      | Market for  Registrant’s Common Equity and Related Shareholder Matters |
|         |   |
| Item 6:      | Selected Financial Data |
|         |   |
| Item  7:     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |   |
| Item  7a:    | Quantitative  and Qualitative Disclosure About Market Risk |
|         |   |
| Item 8:      | Financial Statements and Supplementary Data |
|         |   |
| Item  9:     | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures |
|         |   |
| **PART III** |
|         |   |
| Item  10:    | Directors  and Executive Officers of the Registrant |
|         |   |
| Item 11:     | Executive Compensation |
|         |   |
| Item  12:    | Security  Ownership of Certain Beneficial Owners and Management |
|         |   |
| Item  13:    | Certain  Relationships and Related Transactions |
|         |   |
| Item 14:     | Controls and  Procedures |
|         |   |
| **PART IV**  |
|         |   |
| Item  15:    | Exhibits,  Financial Statement Schedules and Reports on Form 10-K |

 

2

----

 

**PART I**

 

**ITEM 1****:  BUSINESS**

 

***General***

 

Eagle Food Centers, Inc. (the “Company” or “Eagle”), is a DelawareCorporation.  Eagle is a leadingregional supermarket chain operating 62 supermarkets as of the end of fiscal2002 in northern and central Illinois and eastern Iowa under the trade names“Eagle Country Market®”, “Foodco“ä””, “Eagle Discount Foods“ä”” and “BOGO’s Food and Deals”ä“.” Most Eagle supermarkets offer a full line of groceries, meats, freshproduce, dairy products, delicatessen and bakery products, health and beautyaids and other general merchandise, and in certain stores, service seafood,prescription medicine, video rental, floral service, in-store banks, drycleaners and coffee shops.

 

The Company’s fiscal year ends on the Saturday closest toJanuary 31st.  Fiscal 2002 was a52-week year ending on February 1, 2003, fiscal 2001 was a 52-week year endingon February 2, 2002, and fiscal 2000 was a 53-week year ending on February 3,2001.

 

Talon Insurance Company (“Talon”), formed in the State of Vermont toprovide insurance for Eagle’s workers’ compensation, general liability andautomobile (effective November 1, 2001) claims, is a wholly owned subsidiary ofEagle Food Centers, Inc.

 

***Reorganization Proceedings Under Chapter 11of the Bankruptcy Code***

 

On February 29, 2000 (the “Petition Date I”), the Company filed avoluntary petition under Chapter 11 of Title 11 of the United States Code (the“First Bankruptcy Case”).  The petitionwas filed in the United States Bankruptcy Court for the District of Delawareunder case number 00-01311.  The Companycontinued to manage its affairs and operate its business as adebtor-in-possession while the First Bankruptcy Case was pending. The FirstBankruptcy Case, which proceeded before the United States District Court forthe District of Delaware, was commenced in order to implement a financialrestructuring of the Company that had been pre-negotiated with holders ofapproximately 29% of the principal amount of the Company’s Senior Notes dueApril 15, 2000.  On March 10, 2000, theCompany filed a plan of reorganization (the “2000 Plan”) to implement thefinancial restructuring, which Plan was subsequently amended on April 17, 2000.

 

The 2000 Plan was confirmed on July 7, 2000 and consummated on August7, 2000.  The Company replaced theSenior Notes with new Senior Notes that have the following material terms andconditions; (i) maturity date of April 15, 2005, (ii) an interest rate of 11%,(iii) a $15 million repayment of outstanding principal by the Company upon theeffective date of the 2000 Plan, and (iv) the Company may, at its option andwith no prepayment penalty, redeem the Senior Notes at any time at 100% of theprincipal amount outstanding at the time of redemption.  In addition, under the 2000 Plan, theCompany agreed to issue 15% of fully-diluted common stock of the Company(482,605 shares after adjusting for reverse stock split – see item 5) to theholders of the old Senior Notes, of which 10% would have been returned to theCompany had the Company been sold or the debt retired prior to October 15,2001.  If the Company had been sold orthe debt had been retired prior to October 15, 2002, 5% of the common stockwould have been returned to the Company. None of the common stock was returned to the Company since the Companywas not sold and the debt was not retired prior to October 15, 2002.  The shares were recorded at fair value inthe amount of $2.1 million with the offsetting amount recorded as a discountagainst the Senior Notes.  The discountis being amortized over the life of the debt.

 

The United States Bankruptcy Court for the District of Delaware, onJanuary 28, 2002, entered a final decree and order closing the Chapter 11 case.

 

On April 7, 2003 (the “Petition Date II”), the Company filed avoluntary petition under Chapter 11 of Title 11 of the United States Code (the“Second Bankruptcy Case”).  The petitionwas filed in the United States Bankruptcy Court for the Northern District ofIllinois in Chicago under case number 03-15299.  The Company continues to manage its affairs and operate itsbusiness as a debtor-in-possession while the Second Bankruptcy Case is pending.  Reference is made to Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, NoteB of the notes to the consolidated financial statements, and the IndependentAuditor’s Report included herein.

 

3

----

 

As described above, the Company emerged from Chapter 11 approximately 3years ago, following the completion of a largely pre-negotiated financialrestructuring.  When the SecondBankruptcy Case was filed, the Company’s capital structure was comprised of a$50 million revolving credit facility with Congress Financial Corporation(Central) (“Congress”), of which approximately $26 million wasoutstanding,  $85 million of 11% SeniorNotes that are due April 15, 2005 (the “Senior Notes”), of which approximately$64 million in principal is still outstanding and 3.1 million shares of commonstock outstanding.

 

Since the Company’s restructuring efforts in 2000, it has faced newthreats from increased competition, rising costs in connection with itsunionized labor, significant cash outlays to cover interest expense from itsoutstanding Senior Notes, and a recessionary economy.  As a result, the Company’s overall cost of doing businessincreased. The Company has experienced cumulative losses during the last threeyears of $34.8 million, and had a stockholders deficit of $6 million atFebruary 1, 2003.

 

During the third fiscal quarter of 2002, the Company became concernedthat it may violate a covenant under its Second Amended and Restated Loan andSecurity Agreement (“Revolver”).  Inparticular, the Revolver contains a financial covenant requiring the Company tomaintain an “Adjusted Net Worth” (as defined in the Revolver) of $3.0million.  As a precaution the Companyand Congress entered into a limited waiver agreement, effective as of November1, 2002, which waived the Adjusted Net Worth covenant until February 1, 2003,which was subsequently extended to April 5, 2003 (the “Waiver”).  Moreover, the Company’s Senior Notesrequired an interest payment of approximately $3.5 million on April 15,2003.  Accordingly, the upcominginterest payment, the low excess availability under the Revolver, thetightening of vendor credit, the expiration of the Waiver, the Company’s coststructure, and the slow economic climate forced the Company to file for Chapter11 protection.  The Company is embarkingupon this restructuring in order to attempt to create financial flexibility forfuture operating requirements and capital expenditures.  In preparations for the Chapter 11 filing,the Company, together with its outside advisors, have identified certainstrategic alternatives to maximize value for its creditors.  The Company, in its business judgment, isevaluating all possible strategic alternatives, including the possible sale of someor all of its assets.

 

***Common Stock Risks* -At this time, it is not possible to predict the effect of the Chapter 11reorganization on our business, various creditors and security holders or whenwe will be able to exit Chapter 11.**

 

**Underthe priority scheme established by the Bankruptcy Code, certain post-petitionliabilities and pre-petition liabilities need to be satisfied beforeshareholders are entitled to receive any distribution.  The ultimate recovery to commonshareholders, if any, will not be determined until confirmation of a plan orplans of reorganization.  No assurancecan be given as to what values, if any, will be ascribed in the bankruptcyproceedings to the common shareholders. A plan of reorganization could also result in holders of the Company’scommon stock receiving no value for their interests.  Because of such possibilities, the value of the common stock ishighly speculative.  Accordingly, theCompany urges that appropriate caution be exercised with respect to existingand future investments in the securities.**

** **

**Currently,the Board of Directors believes it is unlikely there will be any recovery ofvalue to common shareholders.**

*** ***

***Store Development and Expansion***

 

The Company operates 60 Eagle Country Markets, one Foodco and oneBogo’s Food and Deals. Eagle Country Markets represent the Company’s primaryfull line supermarket format. Most Eagle Country Markets offer extra spacedevoted to expanded perishable departments, tying together meat, produce,full-service delicatessen and service bakery departments, and, in certain stores,offering service seafood, prescription medicine, video rental, floral service,in-store banks, dry cleaners and coffee shops. Eagle Country Markets range insize from 16,500 to 67,500 square feet, with an average size of 39,949 squarefeet.  The Company converted one EagleCountry Market to the Eagle Discount Foods format during fiscal 2001and sevenduring the first quarter of fiscal 2002. This format offered many of the same product selection, quality and servicefeatures as an Eagle Country Market, with the addition of a wall of values,fewer stock keeping units and lower overall prices.  Due to under performance of this format, these eight stores wereconverted back to the Eagle Country Market format during the second quarter offiscal 2002.  The Company also convertedone Eagle Country Market to the Foodco format during fiscal 2001.  Foodco operatesas a high standard, price impact store designed to serve the needs of valueconscious customers.  The Foodco storemaintains an aggressive pricing strategy while meeting the needs of the localmarket for product selection, quality and service.  The Company expects the lower prices in Foodco to be morethan offset by the benefits of higher sales. The Company operates one BOGO’s Food and Deals, which uses a limitedassortment format covering approximately 2,000 stock-keeping units ofgroceries, produce, meat, health and beauty aids, and general merchandise.

 

4

----

 

The Company reviews the performance of all stores and expects toimplement a variety of strategies, including selling, subleasing or otherwiseclosing underperforming stores. The Company completed five major remodels infiscal 2002.  The Company closed twostores during fiscal 2002 and closed 19 stores and sold one store during fiscal2000.  In addition, the Company closedtwo stores in the first quarter of fiscal 2003.

 

The Company prefers to lease stores from local developers and pursuesthis strategy wherever appropriate and cost-effective.  The Company completed three sale/leasebacktransactions in fiscal 1999 to reduce the amount of capital committed to realestate.  As of year-end, the Companyowned eight operating stores and one closed store, with the closed storeclassified in “Property held for resale.” The Company leased 54 operatingstores and two locations that are subleased to other tenants.

 

***Store Operations***

 

The Company’s geographic market is divided into five districts, eachhaving a District Manager responsible for approximately 12 stores.  Districts and stores operate with a certaindegree of autonomy to take advantage of local market and consumer needs.  Districts and stores are responsible forstore operations, associate recruitment and development, community affairs andother functions relating to local operations.

 

Store managers and marketing work together in tailoring merchandise andservices to the needs of customers in the particular community.  Associate involvement and participation hasbeen encouraged through district meetings and a store management incentivebonus program for sales and earnings improvement.

*** ***

***Computer and Information Systems***

 

The Company outsources its Information Systems function to ElectronicData Systems (“EDS”).  The Companysigned a Services Agreement with EDS on July 1, 2000 with a term of fiveyears.  Either party may terminate theServices Agreement at any time after the first three contract years by givingthe other party at least ninety days written notice designating the terminationdate.

 

Eagle management uses technology as a means of enhancing productivity,controlling costs, providing a quality shopping experience for customers andlearning more about shoppers’ buying preferences.  Eagle embraced client/server technology and completed thereplacement of all mainframe-based legacy systems with new client/serversystems as of the end of fiscal year 1999. Eagle will continue to research and explore possibilities to enhanceservice to its customers and suppliers through technology.

 

During fiscal 2001, the Company implemented and integrated several newor modified client/server applications that will equip the Company forprocessing well into the future.  Theseapplications, which support essential business functions, include a categorymanagement and pricing system, gift cards, a web site, loyalty card databasemanagement and in-store printing of signs, tags and labels.  The Company also completed the upgrade ofnumerous systems including human resources, warehouse and distribution, storeapplications (cash management, direct store delivery and pricing) and paymentprocessing systems (debit, credit and check processing).

 

***MerchandisingStrategy***

 

Eagle’s strategy is to strengthen its image as ahigh quality, service-oriented supermarket chain and provider of high qualityperishables.  The Company strives tooffer its customers one-stop shopping convenience and price value for all oftheir food and general merchandise shopping needs.

* *

*Customer Service* -******Eagledelivers a wide variety of customer services. Most stores provide customer services such as video rental, checkcashing, film processing, lottery ticket sales and money order sales.  All stores provide quick, friendly checkoutservice.  Management intends as part ofits current strategy to further enhance customer service through additionaltraining of store associates.

* *

*Corporate Brands (Private Label)* -****Corporate brand sales are an importantelement in Eagle’s merchandising plan. The Company is a member of the Topco Associates, Inc. (“Topco”) buyingorganization and has engaged Daymon Associates, Inc. as its “corporate brand”broker.  Eagle has a strong penetrationin many categories with its Lady Lee, Food Club, Best Yet, Top Care and TopCrest brands. Eagle also has the Valu Time label for the low price corporatebrand niche.

 

5

----

 

*Selection*-****Atypical Eagle store carries over 23,000 items, including food, generalmerchandise and specialty department items. The Company carries nationally advertised brands and an extensiveselection of top quality corporate brand products.  Most Eagle supermarkets offer a full line of groceries,meats, fresh produce, dairy products, delicatessen and bakery products, healthand beauty aids and other general merchandise, and in certain stores, serviceseafood, prescription medicine, video rental, floral service, in-store banks,dry cleaners and coffee shops.  Product selection also includes ethnic fooditems, beer, wine and liquor.

 

*Promotion*- The Company’s promotion and merchandising strategy focuses on its image as ahigh-quality, service-oriented supermarket chain while reinforcing itsreputation for price leadership and high quality perishables.  Eagle has utilized the Eagle Savers’ Cardfor several continuity promotions and for electronic coupon discounts.  Through its store personnel, the Companytakes an active interest in the communities in which it operates.  The Company also contributes funds, productsand services to local charities and civic groups.

* *

*Consumer Research* - The Company utilizes consumer research to track customer attitudesand the market shares of the Company and its competitors.  The Company also has a continuous program ofsoliciting customer opinions in all of its market areas through the use of in-storecustomer comment cards.  This dataenables management to respond to changing consumer needs, direct advertising tospecific customer perceptions and evaluate store services and productofferings.

*** ***

***Advertising Strategy***

 

The Company utilizes a broad range of print andbroadcast advertising in the markets it serves.  The Company seeks co-op advertising reimbursements from vendors,which has allowed the Company to broaden its exposure in various media.

*** ***

***Purchasing andDistribution***

 

The majority of the Company’s stores are locatedwithin 200 miles of the Company’s central distribution facility in Milan,Illinois.  This complex includes theCompany’s corporate office, warehouse, areas used for receiving, shipping andtrailer storage and a truck repair facility.

 

The Company supplies approximately 64% of itsstores’ inventory requirements from a 935,332 square foot centraldistribution facility (which includes approximately 189,072 square feet ofrefrigerated and freezer space).  TheCompany discontinued warehousing most health and beauty care products duringthe third quarter of fiscal 1999 and currently purchases these products,representing approximately 4% of the stores’ inventory requirements, from awholesaler.  The remaining 32% of thestores’ inventory is delivered direct from product vendors to the stores.  The Company’s purchasing and warehousingfunctions are managed through its central merchandising system.

 

The Company’s purchasing and distributionoperations permit rapid turnover at its central distribution facility, allowingits stores to offer consistently fresh, high-quality dairy products, meats,produce, bakery items and frozen foods. Also, centralized purchasing and distribution reduces the Company’s costof merchandise and related transportation costs by allowing the Company to takeadvantage of volume buying opportunities and manufacturers’ promotionaldiscounts and allowances and by minimizing vendor distribution costs. TheCompany participates in “consortium buys” (consolidated volume buys) involvingother regional chains and independent retailers to reduce product cost. TheCompany engages in forward buying programs to take advantage of temporary pricediscounts. Due to its proximity to Chicago and other major markets, the Companyis able to reduce transportation costs included in cost of goods sold by“backhauling” merchandise to its Milan central distribution facility.  Overall, the Company believes thatits relationship with suppliers is good. However, there can be no assurance that suppliers will continue toprovide product to Eagle on the same terms and conditions in the future.

*** ***

***Competition***

 

The food retailing business is highlycompetitive.  The Company is in directcompetition with national, regional and local chains as well as independentsupermarkets, warehouse stores, membership warehouse clubs, supercenters,limited assortment stores, discount drug stores and convenience stores.  The Company also competes with local foodstores, specialty food stores (including bakeries, fish markets and butchershops), 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 theCompany’s competitive position varies according to the individual markets inwhich the Company does business.  TheCompany’s principal competitors operate under the trade names of Hy-Vee, Cub,Dominicks, Jewel Osco, Kmart, Kroger, Meijer, Shop-N-Save, Target and Wal-Mart(Supercenters and Sam’s Clubs). Management believes that the Company’s potential principal competitiveadvantages are its strength of perishables (especially meat and produce), theattractive Eagle store format, concentration in certain markets and expansionof service

 

6

----

 

and product offerings.  The Company is at a competitive disadvantage to most of itscompetitors due to work rules, labor and benefit costs of unionized associates.

 

Supercenters continue to open in trade areasserved by the Company.  Wal-MartSupercenters opened three stores in fiscal 2002, two stores in fiscal 2001 andtwo stores in fiscal 2000.   Meijeropened one store in fiscal 2002, two stores in fiscal 2001 and three stores infiscal 2000.  Super Target opened onestore in fiscal 2002.  Wal-Mart willopen three additional supercenters in fiscal 2003 within the Company’s tradearea.  In addition, regular Wal-Martstores continue to add aisles containing traditional grocery items such as beverages,chips, snacks and dairy products.  Thesupercenter format, which adds new grocery square footage to the market, offerstraditional grocery products at low prices with the intent to attract customersto the general merchandise side of the store. These competitors operate at a significant cost advantage tosupermarkets by using mostly part-time, non-union employees with no health andwelfare costs.  The Company expects thisgrowth to continue in both the traditional supermarket format and the supercenterformat.

*** ***

***Trademarks, TradeNames and Licenses***

 

The Company uses various trademarks and servicemarks in its business, the most important of which are the “Eagle CountryMarket ®”, “5-Star Meats®”, “Lady Lee®”, “Eagle Savers’ Card®” and “HarvestDay®” trademarks, and the “Eagle®”, “Eagle Country Market®”, “Eagle DiscountFoods“ä”“,“Foodco“ä”“,“BOGO’s Food and Deals“ä”“and “Liquor Locker“ä”“service marks.  Each such trademark isfederally registered.  Pursuant to atrademark license agreement (the “Trademark License Agreement”) entered intowith the Company’s former parent, Lucky Stores, Inc., the Company has beengranted the royalty-free use of the “5-Star Meats®”, “Lady Lee®” and “HarvestDay®” trademarks until November 2007. The Trademark License Agreement permits the Company to use the licensedtrademarks 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 rightto use such trademarks in the states of Illinois, Indiana and Iowa during theperiod of the license to the Company.

 

***Associates and LaborRelations***

 

At the end of fiscal 2002, the Company had 3,457associates, 247 of whom were management and administrative associates and 3,210of whom were hourly associates.  Of theCompany’s hourly associates, substantially all are represented by 15 collectivebargaining agreements with six separate locals that are associated with twointernational unions.  Store associatesare represented by several locals of the United Food and Commercial Workers;warehouse associates, warehouse drivers and office and clerical workers arerepresented by Teamsters Local 371.  Twelve contracts will expire during fiscal 2003, covering 78% ofthe Company’s associates.  The Company’scollective bargaining agreement with Union locals covering 35 stores,representing 45.5% of the Company’s associates, were due to expire on November16, 2002.  The Company signed anextension agreement on November 1, 2002 extending the term of the collectivebargaining agreement until December 16, 2002 and subsequently signed anotherextension agreement on December 16, 2002 extending the term of the collectivebargaining agreement until February 1, 2003 and subsequently signed another extensionagreement extending the term of the collective bargaining agreement untilAugust 1, 2003.  In addition, theCompany has collective bargaining agreements covering two stores, representing1.8% of the Company’s associates, which are under extension agreements pendingnegotiation of new collective bargaining agreements.  The Company expects to continue to negotiate with the unionswhile a plan of reorganization develops. There can be no assurance, however, that such agreements will be reachedwithout a work stoppage.  A prolongedwork stoppage affecting a substantial number of stores could have a materialadverse effect on the Company’s financial position and results of operations.

 

The Company values its associates and believesthat its relationship with them is good. Associate relations programs continue, including measures that allowassociates to participate in store-level decisions, a 401(k) savings plan, andcustomer service initiatives.  Inaddition, managers, assistant managers and other key personnel haveparticipated in management training.

 

7

----

 

**ITEM 2:  PROPERTIES**

 

***Stores***

 

The Company operated 62 stores as of thefiscal year end, ranging in size from 16,500 to 67,500 square feet, with anaverage size of 39,949 square feet. Nine of the Company’s stores, including one closed store, are owned infee by the Company.  The closed store isclassified in “Property held for resale.” The Company is the lessee for the remaining 54 operating stores andtwo locations that are subleased to other tenants.  The Company closed and assigned the leases for two propertiesduring fiscal year 2002.

 

Selected statistics on Eagle retail food storesare presented below:

 
|                                          |   | **Fiscal Year Ended** |   |
|-----------------------------------------------|--------|-----------------------|--------|
|                                          |   | **February 1,  2003** |   | **February 2,  2002** |   | **February 3,  2001** |   |
|                                          |   |                  |   |   |   |   |   |
| Average total sq. ft. per store               |   | 39,949                |   | 39,762 |   | 39,730 |   |
| Average total sq. ft. selling space per store |   | 29,507                |   | 29,341 |   | 29,329 |   |
|                                          |   |                  |   |   |   |   |   |
| Stores beginning of year                      |   | 64                    |   | 64 |   | 84 |   |
| Opened during year                            |   | 0                     |   | 0 |   | 0 |   |
| Expansions/major remodels(1)                  |   | 5                     |   | 6 |   | 3 |   |
| Closed during year                            |   | 2                     |   | 0 |   | 19 |   |
| Sold during year                              |   | 0                     |   | 0 |   | 1 |   |
| Stores end of year                            |   | 62                    |   | 64 |   | 64 |   |
|                                          |   |                  |   |   |   |   |   |
| Size of stores at end of year:                |   |                  |   |   |   |   |   |
| Less than 25,000 sq. ft.                      |   | 3                     |   | 3 |   | 3 |   |
| 25,000 - 29,999 sq. ft.                       |   | 11                    |   | 12 |   | 12 |   |
| 30,000 - 34,999 sq. ft.                       |   | 2                     |   | 2 |   | 2 |   |
| 35,000 - 44,999 sq. ft.                       |   | 31                    |   | 32 |   | 32 |   |
| 45,000 sq. ft. or greater                     |   | 15                    |   | 15 |   | 15 |   |
|                                          |   |                  |   |   |   |   |   |
| Type of stores:                               |   |                  |   |   |   |   |   |
| Eagle Country Markets                         |   | 60                    |   | 61 |   | 63 |   |
| Eagle Discount Foods                          |   | 0                     |   | 1 |   | 0 |   |
| Foodco                                        |   | 1                     |   | 1 |   | 0 |   |
| BOGO’s Food and Deals                    |   | 1                     |   | 1 |   | 1 |   |

 

----

(1)          A major remodelingproject is one that costs $300,000 or more.

 

Eagle stores contain various specialty departments such as delicatessen(61 stores), bakery (60 stores), service seafood (15 stores),pharmacies (16 stores), video rentals (34 stores), floral service(52 stores), in-store banks (13 stores) and alcoholic beverages(57 stores).

 

Most of the leases for the stores contain renewal options for periodsranging from five to 30 years.  TheCompany is required to pay fixed rent on 54 operating stores and a percentage(ranging from 0.75% to 3.0%) of its gross sales in excess of stated minimumgross sales amounts under 40 of these leases. The Company is also the lessee for two locations that are subleased toother tenants.  For additionalinformation on leased premises, see Notes D and H of the notes to theConsolidated Financial Statements.

 

***Central Distribution***

 

The Company leases its central distribution facility under a lease expiringFebruary 28, 2007.  The Company’scentral distribution facility contains a total of 935,332 square feet ofspace.

 

Substantially all store fixtures and equipment, leasehold improvementsand transportation and office equipment are owned by the Company.  The total cost of the Company’s ownership ofproperty and equipment is shown in Note E of the notes to the ConsolidatedFinancial Statements.

 

8

----

 

**ITEM 3:  LEGAL PROCEED****INGS**

*** ***

***Bankruptcy Cases***

 

The  First Bankruptcy Case wasconsummated on August 7, 2000 and closed on January 28, 2002.  The Second Bankruptcy Case commenced onApril 7, 2003.  Additional informationrelating to the Bankruptcy Cases is set forth in PART 1, ITEM 1 of this Form10-K report under the caption “Reorganization Proceedings Under Chapter 11 ofthe Bankruptcy Code.”  Such informationis incorporated herein by reference. (See also Notes B and  M of thenotes to the Consolidated Financial Statements.)

 

***Other Cases***

 

The Company is subject to various other unresolved legal actions thatarise in the normal course of its business. Although it is not possible to predict with certainty and no assurancescan be given with respect to such matters, the Company believes the outcome ofthese unresolved legal actions will not have a materially adverse effect on itsresults of operations, liquidity or financial position.

 

**ITEM 4:  SUBMISSION OF MATTER****S TO AVOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of security holders during the fourthquarter of fiscal 2002.

 

9

----

 

**PART II**

 

**ITEM5:  MARKET FOR REGISTRANT’S COMMON****EQUITYAND RELATED SHAREHOLDER MATTERS**

 

The Company’s common stock trades on the OTC Bulletin Board under thesymbol “EGLE.OB” The stock began trading publicly on July 27, 1989 on theNasdaq National Market. Trading of the Company’s common stock was suspendedsubsequent to the close of business on February 29, 2000 as a result of theFirst Bankruptcy Case.  Trading resumedon August 10, 2000.  The Company’scommon stock began trading on the Nasdaq SmallCap Market on May 15, 2001.  The Company’s common stock was delisted fromthe Nasdaq SmallCap Market and began trading on the OTC Bulletin Board on March27, 2003.  As of May 2, 2003, there wereapproximately 3,800 beneficial holders of shares. The following table setsforth, by fiscal quarter, the high and low bid prices reported by the NasdaqNational Market and Nasdaq SmallCap Market systems for the periods indicated.  The following bid prices reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 
|           |   | **Year  Ended  February 1, 2003** |   |
|----------------|--------|-----------------------------------|--------|
|           |   | **High**                          |   | **Low** |   |
|           |   |                              |   |   |   |
| First Quarter  |   | $                                 | 0.90   |   | $ | 0.60 |   |
| Second Quarter |   | 1.40                              |   | 0.65 |   |
| Third Quarter  |   | 0.71                              |   | 0.35 |   |
| Fourth Quarter |   | 0.61                              |   | 0.19 |   |
|                |        |                                   |        |  |  |  |  |

 
|           |   | **Year Ended  February 2, 2002** | ** ** |
|----------------|--------|----------------------------------|------------|
|           |   | **High**                         |       | **Low** | ** ** |
|           |   |                             |       |   |   |
| First Quarter  |   | $                                | 3.00       |   | $ | 1.38 |   |
| Second Quarter |   | 4.74                             |       | 0.40 |   |
| Third Quarter  |   | 2.10                             |       | 1.13 |   |
| Fourth Quarter |   | 1.42                             |       | 0.45 |   |
|                |        |                                  |            |  |  |  |  |

 

There were no dividends paid in fiscal 2002 or fiscal 2001.  The indenture underlying the Company’sSenior Notes and the Amended and Restated Loan and Security Agreement containrestrictions on the payment of dividends (see Note F of the notes to the ConsolidatedFinancial Statements).  The Company doesnot intend to pay dividends in the foreseeable future.

 

Nasdaq staff informed the Company, by letter dated November 13, 2000,that it had not maintained a minimum market value of public float of $5,000,000and a minimum bid price of $1.00 over 30 consecutive trading days as requiredfor continued listing on the Nasdaq National Market.  Nasdaq staff had determined that the Company’s Common Stock wouldbe delisted from quotation on the Nasdaq National Market at the opening ofbusiness on February 14, 2001.  OnFebruary 12, 2001, the Company delivered a request for an appeal to the NasdaqListing Qualifications Panel.  Thedelisting process was suspended pending resolution of the appeal.

 

The Company presented a plan to the Nasdaq Listing Qualifications Panelfor achieving compliance with the listing requirements of the Nasdaq NationalMarket at a hearing held March 28, 2001. No decision was made at the hearing regarding the continued listing ofthe Company’s shares.  Members of theListing Qualifications Panel suggested that the Company consider a reversestock split and applying for listing on the Nasdaq SmallCap Market.  The Company sent a letter to the panel onApril 2nd in which the Company modified its earlier plan by(i) consenting to the possible change from listing on the Nasdaq NationalMarket to listing on the Nasdaq SmallCap Market and (ii) consenting torecommend shareholder approval of a reverse stock split in the event othermeasures are not sufficient to achieve compliance with the Nasdaq listingrequirements for either the Nasdaq National Market or the Nasdaq SmallCapMarket.

 

The Company’s common stock began trading on the Nasdaq SmallCap Marketon May 15, 2001.  On June 27, 2001 theShareholders of Eagle Food Centers, Inc. approved an amendment to the Company’sCertificate of Incorporation to accomplish a reverse stock split.  This was effective on June 29, 2001 andresulted in each four outstanding shares of the Company’s common stock beingautomatically reclassified and changed into one share of the Company’s commonstock. Prior period common stock information has been presented on acomparative basis.

 

Nasdaq staff again informed the Company, by letter dated February 14,2002, that it had not maintained a minimum closing bid price of $1.00 per shareover 30 consecutive trading days as required for continued listing on theNasdaq SmallCap Market.  Nasdaq staffgave the Company until August 13, 2002 to regain compliance with the minimum

 

10

----

 

closing bid price of $1.00 per share for at least ten consecutivetrading days. The Company was notified, by letter dated August 14, 2002, thatit had not regained compliance with the minimum bid price of $1.00 pershare.  However, the Company was grantedan additional 180 days to achieve the minimum closing bid price based onmeeting the initial listing requirement of $5.0 million in stockholders’ equityas of May 4, 2002.

 

The Company received a Nasdaq Staff Determination on March 18, 2003indicating that the Company had failed to regain compliance with the minimumbid price and did not comply with the minimum market value of publicly heldshares as required by Marketplace Rules 4310(c)(4) and 4310(c)(7), respectively.  Accordingly, Nasdaq notified the Companythat its Common Stock would be delisted from the Nasdaq Stock Market effectiveas of the opening of business on March 27, 2003.  The Company’s Common Stock began trading on the OTC BulletinBoard on March 27, 2003.

 

Inclusion of the Company’s common stock on the OTC Bulletin Board orsimilar quotation system could adversely affect the liquidity of the Company’scommon stock and may impact the public’s perception of the Company.  There can be no assurance that delistingwill not have a material adverse effect on liquidity or business operations.

 

***Common Stock Risks* -At this time, it is not possible to predict the effect of the Chapter 11reorganization on our business, various creditors and security holders or whenwe will be able to exit Chapter 11.**

 

**Underthe priority scheme established by the Bankruptcy Code, certain post-petitionliabilities and pre-petition liabilities need to be satisfied beforeshareholders are entitled to receive any distribution.  The ultimate recovery to commonshareholders, if any, will not be determined until confirmation of a plan orplans of reorganization.  No assurancecan be given as to what values, if any, will be ascribed in the bankruptcyproceedings to the common shareholders. A plan of reorganization could also result in holders of the Company’scommon stock receiving no value for their interests.  Because of such possibilities, the value of the common stock ishighly speculative.  Accordingly, theCompany urges that appropriate caution be exercised with respect to existingand future investments in the securities**.

 

**Currently,the Board of Directors believes it is unlikely there will be any recovery ofvalue to common shareholders.**

 

**ITEM6: SELECTED FINANCIAL DATA**

 

The following table represents selected financial data of the Companyon a consolidated basis for the five fiscal years ended February 1, 2003.  Prior year amounts have been adjusted toreflect the implementation of EITF Issue No. 01-9”Consideration Given by aVendor to a Customer (Including a Reseller of the Vendor’s Products)”, SFAS No.144  *Accounting for Asset Retirement Obligations*and the change in accounting principle for inventory valuation from thelast-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.  For further information on EITF Issue No.01-9 and SFAS No. 144 see New Accounting Standards and for the change inaccounting principle see Critical Accounting Policies in Item 7: Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

The selected historical financial data for the five fiscal years endedFebruary 1, 2003 are derived from the Consolidated Financial Statements of theCompany.  The fiscal years endedFebruary 1, 2003, February 2, 2002 and February 3, 2001 have been audited byKPMG LLP, independent auditors, and are included in this Form 10-K.

 

The selected financial data set forth below should be read inconjunction with the Company’s Consolidated Financial Statements and relatednotes included elsewhere in this document. Per share amounts have been adjusted to reflect the reverse stock splitthat occurred on June 29, 2001.

 

11

----

 
| **(Dollars in thousands, except per  share data)  Consolidated Operating Data:** |   | **Year  Ended  February 1,****2003** |    | **Year  Ended  February 2,****2002** | ** ** | **Year  Ended  February 3,****2001**        | ** ** | **Year  Ended  January 29,****2000** | ** ** | **Year  Ended  January 30,****1999** | ** ** |
|----------------------------------------------------------------------------------|--------|--------------------------------------|---------|--------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|                                                                             |   |                                 |    | **(as  adjusted,  see note B)**      |       | **(53  weeks)  (as adjusted,  see note B)** |       | **(as  adjusted  see 4 and 5)**      |       | **(as adjusted  see 4 and 5)**       | ** ** |
| Sales(5)                                                                         |   | $                                    | 599,452 |                                 | $          | 630,398                                     |       | $                                    | 682,503    |                                 | $          | 846,920 |   | $ | 875,298 |   |
| Gross margin(5)                                                                  |   | 165,717                              |    | 178,458                              |       | 186,703                                     |       | 231,442                              |       | 224,411                              |       |
| Selling, general and administrative(5)                                           |   | (153,380                             | )       | (153,129                             | )          | (165,302                                    | )          | (197,255                             | )          | (195,463                             | )          |
| Store closing, asset impairment and lease termination(1)                         |   | (1,747                               | )       | —                               |       | (821                                        | )          | (8,367                               | )          | (2,925                               | )          |
| Reorganization items, net(2)                                                     |   | —                               |    | 830                                  |       | (10,782                                     | )          | —                               |       | —                               |       |
| Depreciation and amortization                                                    |   | (16,997                              | )       | (18,151                              | )          | (18,618                                     | )          | (20,596                              | )          | (18,657                              | )          |
| Operating income (loss)                                                          |   | (6,407                               | )       | 8,008                                |       | (8,820                                      | )          | 5,224                                |       | 7,366                                |       |
| Interest expense                                                                 |   | (12,185                              | )       | (12,871                              | )          | (13,430                                     | )          | (13,906                              | )          | (11,870                              | )          |
| Gain on extinguishment of debt(3)                                                |   | 860                                  |    | 2,529                                |       | 5,286                                       |       | —                               |       | —                               |       |
| Earnings (loss) from continuing operations                                       |   | (17,732                              | )       | (2,334                               | )          | (16,964                                     | )          | (8,682                               | )          | (4,504                               | )          |
| Earnings (loss) from discontinued operations                                     |   | (111                                 | )       | 815                                  |       | 1,463                                       |       | 1,406                                |       | 1,264                                |       |
| Net loss                                                                         |   | $                                    | (17,843 | )                                    | $          | (1,519                                      | )          | $                                    | (15,501    | )                                    | $          | (7,276 | ) | $ | (3,240 | ) |
|                                                                             |   |                                 |    |                                 |       |                                        |       |                                 |       |                                 |       |
| Basic and diluted loss per common share:                                         |   |                                 |    |                                 |       |                                        |       |                                 |       |                                 |       |
| Earnings (loss) from continuing operations                                       |   | $                                    | (5.70   | )                                    | $          | (0.73                                       | )          | $                                    | (5.71      | )                                    | $          | (3.18 | ) | $ | (1.65 | ) |
| Earnings (loss) from discontinued operations                                     |   | (0.03                                | )       | 0.25                                 |       | 0.49                                        |       | 0.52                                 |       | 0.46                                 |       |
| Net loss                                                                         |   | $                                    | (5.73   | )                                    | $          | (0.48                                       | )          | $                                    | (5.22      | )                                    | $          | (2.66 | ) | $ | (1.19 | ) |
|                                                                             |   |                                 |    |                                 |       |                                        |       |                                 |       |                                 |       |
| **Consolidated Balance Sheet Data (at year-end):**                               |   |                                 |    |                                 |       |                                        |       |                                 |       |                                 |       |
| Total assets                                                                     |   | $                                    | 175,108 |                                 | $          | 208,462                                     |       | $                                    | 205,615    |                                 | $          | 269,981 |   | $ | 293,615 |   |
| Total debt (including capital leases)                                            |   | 121,957                              |    | 122,320                              |       | 109,896                                     |       | 144,735                              |       | 138,770                              |       |
| Total shareholders’ (deficit) equity(4)                                     |   | (6,040                               | )       | 14,621                               |       | 18,136                                      |       | 31,544                               |       | 38,686                               |       |

 

----

(1)                   Represents acharge of $2.1 million for asset impairment and $386 thousand for favorablechanges in estimates for the costs of closed stores in fiscal 2002.  Represents a charge of $821 thousand forasset impairment in fiscal 2000. Represents a charge of $1.7 million to provide for costs of closedstores, $4.6 million for asset impairments, and a $2.1 million goodwill writeoff in fiscal 1999.  Represents a $2.9million charge related to future lease costs for the mainframe, and variousrelated software, software licenses and contracting costs in connection withthe migration from mainframe to client/server technology in fiscal 1998.  (See Notes B and D of the notes to theConsolidated Financial Statements).

(2)                   See Item 7:Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “Reorganization Items, Net.”

(3)                   Represents gainof $860 thousand, $2.5 million and $5.3 million related to the buy back of theSenior Notes in fiscal  2002, 2001 andfiscal 2000, respectively.  (See Note Fof the notes to the Consolidated Financial Statements.)

(4)                   Represents theretroactive application of the change in accounting principle for inventoryvaluation from LIFO to FIFO.  The effectis an increase in shareholders’ (deficit) equity of $8.4 million in fiscal 2001and fiscal 2000, $9.6 million in fiscal 1999 and $10.3 million in fiscal1998.  The application also resulted inan increase in the loss reported of $735 thousand for fiscal 1999 and adecrease in the loss reported of $685 thousand for fiscal 1998.  (See Item 7: Management’s Discussion andAnalysis of Financial Condition and Results of Operations, “Critical AccountingPolicies”).

(5)                   The effect ofthe implementation of EITF Issue No. 01-9 is decreases in sales of $51.1million, cost of goods sold of $50.2 million and selling, general andadministrative of $0.9 million for fiscal 1999 and decreases in sales of $32.2million, cost of goods sold of 32.1 million and selling, general andadministrative of $0.1 million for fiscal 1998.

 

12

----

 

**ITEM 7****:  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following table sets forth certain key operating statistics as apercentage of sales for the periods indicated:

 
|                                                  |   | **Year  Ended  February 1,  2003** |   | **Year  Ended  February 2,  2002** |   | **Year  Ended  February 3,  2001**            |   | **Year  Ended  January 29,  2000** |       | **Year  Ended  January 30,  1999** |       |
|-------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|-----------------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|
|                                                  |   |                               |   | **(as adjusted,  see note B)**     |   | **(53 weeks)  (as adjusted,****see note  B)** |   | **(as adjusted  see Item 6)**      | ** ** | **(as adjusted)  see Item 6)**     | ** ** |
| **Statements of Operations Data:**                    |   |                               |   |                               |   |                                          |   |                               |       |                               |       |
| Sales                                                 |   | 100.00                             | %      | 100.00                             | %      | 100.00                                        | %      | 100.00                             | %          | 100.00                             | %          |
| Gross margin                                          |   | 27.64                              |   | 28.31                              |   | 27.36                                         |   | 27.33                              |       | 25.64                              |       |
| Selling, general and administrative                   |   | (25.58                             | )      | (24.29                             | )      | (24.21                                        | )      | (23.30                             | )          | (22.33                             | )          |
| Store closing, asset impairment and lease termination |   | (0.29                              | )      | —                             |   | (0.12                                         | )      | (0.99                              | )          | (0.33                              | )          |
| Reorganization items, net                             |   | —                             |   | 0.13                               |   | (1.58                                         | )      | —                             |       | —                             |       |
| Depreciation and amortization                         |   | (2.84                              | )      | (2.88                              | )      | (2.73                                         | )      | (2.43                              | )          | (2.13                              | )          |
| Operating income (loss)                               |   | (1.07                              | )      | 1.27                               |   | (1.28                                         | )      | 0.61                               |       | 0.85                               |       |
| Interest expense                                      |   | (2.03                              | )      | (2.04                              | )      | (1.97                                         | )      | (1.64                              | )          | (1.36                              | )          |
| Gain on extinguishment of debt                        |   | 0.14                               |   | 0.40                               |   | 0.77                                          |   | —                             |       | —                             |       |
| Earnings (loss) from continuing operations            |   | (2.96                              | )      | (0.37                              | )      | (2.48                                         | )      | (1.03                              | )          | (0.51                              | )          |
| Earnings (loss) from discontinued operations          |   | (0.02                              | )      | 0.13                               |   | 0.21                                          |   | 0.17                               |       | 0.14                               |       |
| Net loss                                              |   | (2.98                              | )%     | (0.24                              | )%     | (2.27                                         | )%     | (0.86                              | )%         | (0.37                              | )%         |

 

***Results Of Continuing Operations***

 

*Sales*

 
| **(Dollars  in thousands)** |   | **Year Ended  February 1,  2003** |    | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|-----------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
|                        |   |                              |    |                              |   |                              |   |
| Sales                       |   | $                                 | 599,452 |                              | $      | 630,398                           |   | $ | 682,503 |   |
| Percent Change              |   | (4.9                              | )%      | (7.6                              | )%     | (19.4                             | )%     |
| Same Store Change           |   | (4.9                              | )%      | (2.7                              | )%     | (0.1                              | )%     |
|                             |        |                                   |         |                                   |        |                                   |        |  |  |  |

 

Sales for fiscal 2002 were $599.5 million, a decrease of $30.9 millionor 4.9% from fiscal 2001.  Same storesales also decreased 4.9% from fiscal 2001 to fiscal 2002.  The Company was operating 62 stores as ofthe end of fiscal 2002 and 64 stores as of the end of fiscal 2001, however theabove sales amounts do not include the sales for the two stores that closedduring fiscal 2002 and the two stores that closed during the first quarter offiscal 2003 as such stores are classified as discontinued operations.

 

Sales for fiscal 2001 (52 weeks) were $630.4 million, a decrease of$52.1 million or 7.6% from fiscal 2000 (53 weeks).  Same store sales decreased 2.7% from fiscal 2000 to fiscal 2001,after adjusting fiscal 2000 to a comparable 52 week year.  The Company was operating 64 stores as ofthe end of fiscal 2001 and fiscal 2000.

 

The reduction in total sales in fiscal 2002 and fiscal 2001 is dueprimarily to continued new store openings by competitors and a challengingcompetitive environment.

 

*GrossMargin*

 

Gross margin as a percentage of sales was 27.64% in fiscal 2002compared to 28.31% in fiscal 2001 and 27.36% in fiscal 2000. Gross margin was$12.7 million or 7.1% lower in fiscal 2002 than in fiscal 2001 primarily due toa decline in sales and a reduction in vendor funding.  The gross margin rate decline from fiscal 2001 also included theimpact of the lower gross margin rate in the eight Eagle Discount Foods storeswhich were converted back to the Eagle Country Market format in the secondquarter of fiscal 2002. Gross margin was $8.2 million or 4.4% lower in fiscal2001 than in fiscal 2000 partially due to a decrease of $4.7 million relatingto the closure of nineteen stores and sale of one store during fiscal 2000 anda decline in sales in continuing stores.

 

13

----

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of saleswere 25.58% in fiscal 2002 compared to 24.29% in fiscal 2001 and 24.21% infiscal 2000.  Selling, general and administrativeexpenses were $0.3 million higher in fiscal 2002 than in fiscal 2001 primarilydue to additional health and welfare costs of $3.2 million, partially offset bya reduction in variable expenses associated with the decline in sales.  Selling, general and administrative expenseswere $12.2 million or 7.40% lower in fiscal 2001 than in fiscal 2000 primarilydue to a decrease of $8.2 million relating to the closure of nineteen storesand sale of one store during fiscal 2000

 

*StoreClosing and Asset Impairment*

 

The Company closed two stores during fiscal 2002 and closed 19 storesand sold one store during fiscal 2000. Also, the Company closed two stores in the first quarter of fiscal 2003.

 

The Company does not anticipate any future costs associated with theclosure and lease assignment of the two stores that were closed during fiscal2002, as well as, the two stores that were closed in the first quarter offiscal 2003.  During fiscal 2002, theCompany benefited $386 thousand from favorable changes in the reserve forclosed stores.  During fiscal 2002, theCompany also recognized a charge of $2.1 million for asset impairment,excluding $50 thousand accounted for in discontinued operations.

 

During fiscal 2001, the Company benefited $1.0 million from the favorablesettlement of leases included in the reserve at the end of fiscal 2000.  Fourteen of the 17 stores included in thereserve at the end of fiscal 2000 were either terminated or expired during theyear.  An agreement to terminate oneadditional store, included in the Reserve for Closed Stores, was reached priorto the end of fiscal 2001, with the payment in fiscal 2002.  The net benefit is included inReorganization Items, Net as presented below.

 

During fiscal 2000, the Company added 15 stores to the reserve forwhich $10.4 million was provided for estimated future lease costs.  In addition, the Company benefited from netfavorable changes in estimates of $3.9 million for both the 18 stores in thereserve at the end of fiscal 1999.  Theleases for 16 stores terminated or expired during fiscal 2000.  The net cost is included in ReorganizationItems, Net as presented below.

 

During fiscal 2000, the Company also recognized a charge of $821thousand for asset impairments.  Thecharge represents impairment of assets for one underperforming store.  (See Note B of the notes to the ConsolidatedFinancial Statements.)

 

*ReorganizationItems, Net*

 

AICPA Statement of Position 90-7 *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* provides guidance on financial reportingby entities that have filed petitions with the U.S. Bankruptcy Court and expectto reorganize as going concerns under Chapter 11 of Title 11 of the UnitedStates Code.  Revenues, expenses(including professional fees), realized gains and losses, and provisions forlosses resulting from the reorganization and restructuring of the business arereported separately as reorganization items***. ***A summary ofcosts recognized during the fiscal years ended February 1, 2003, February 2,2002 and February 3, 2001 relating to the Company’s reorganization during theFirst Bankruptcy Case is as follows:

 
| **(Dollars  in thousands)**                                                                |   | **Year Ended  February 1,  2003** |   | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| Store closing and asset impairment                                                         |   | $                                 | — |                              | $      | 1,005                             |   | $ | (6,533 | ) |
| Employee termination benefits                                                              |   | —                            |   | (16                               | )      | (1,361                            | )      |
| Professional fees                                                                          |   | —                            |   | (166                              | )      | (3,608                            | )      |
| Net realized gains on sale/disposal of leases and equipment and  release of capital leases |   | —                            |   | —                            |   | 944                               |   |
| Other                                                                                      |   | —                            |   | 7                                 |   | (224                              | )      |
| Total                                                                                      |   | $                                 | — |                              | $      | 830                               |   | $ | (10,782 | ) |

 

14

----

 

*EmployeeTermination Benefits* – In connection with the FirstBankruptcy Case, the Company recognized $1.4 million in employee terminationbenefits during fiscal 2000, representing severance costs for 353 employeesterminated as a result of the store closings under the provisions of the 2000Plan.

 

*ProfessionalFees* – Professional fees relate to legal, accounting,consulting and other professional costs directly attributable to the FirstBankruptcy Case and have been expensed as incurred.

 

*NetRealized Gains* – During fiscal 2000, the Company hadrealized gains on the sale/disposal of leases and equipment and release ofcapital lease obligations of $944 thousand, all related to the 20 closed orsold stores as part of the 2000 Plan.

 

No expenses relating to the Second Bankruptcy Case that was filed onApril 7, 2003 were recognized as reorganization costs for fiscal year 2002 asexpenses are included in this category only after the petition has been filed(see note B).

 

*Depreciationand Amortization Expense*

 

Depreciation and amortization expense as a percentage of sales was2.84% in fiscal 2002, 2.88% in fiscal 2001and 2.73% in fiscal 2000.  Depreciation and amortization expense was$1.2 million or 6.36% lower in fiscal 2002 than in fiscal 2001 primarily due toa decrease in capital spending since fiscal year 1999 resulting in a higherpercentage of the Company’s capital assets have fully depreciated.  Depreciation and amortization expense was$0.6 million or 2.98% lower in fiscal 2001 than in fiscal 2000 primarily due toa decrease of $0.4 million relating to the closure of nineteen stores and saleof one store during fiscal 2000.

 

*Operating  Income (Loss)*

 

Operations for fiscal 2002 resulted in an operating loss of $6.4million or 1.07% of sales compared to an operating income of $8.0 million or1.27% of sales in fiscal 2001 and an operating loss of $8.8 million or 1.28% ofsales during fiscal 2000.  The decreasein operating income for fiscal 2002 included a $12.7 million reduction in grossmargin and a $2.1 million charge for impairment of assets, partially offset bya decrease of $1.2 million in depreciation and amortization expense.  The increase in operating income for fiscal2001 included an $830 thousand benefit compared to an expense of $10.8 millionfor fiscal 2000 for reorganization items and a $12.2 million reduction inselling, general and administrative expenses, offset by a decrease of  $8.2 million in gross margin.

 

*InterestExpense*

 

Interest expense, which is net of interest income, decreased to 2.03%of sales in fiscal 2002 compared to 2.04% of sales in fiscal 2001 and 1.97% ofsales in fiscal 2000.  Interest expenseas a percentage of sales increased in fiscal 2001 and fiscal 2000 due to lowersales resulting from the closure or sale of stores.  Interest expense decreased $0.7 million in fiscal 2002 comparedto fiscal 2001 and $0.6 million in fiscal 2001 compared to fiscal 2000 dueprimarily to lower interest on the Senior Notes due to redemptions that havetaken place, partially offset by increased interest expense on revolverborrowings.

 

*Gain onextinguishment of debt*

 

A gain on extinguishment of debt of $860 thousand was recorded infiscal 2002 relating to the repurchase of Senior Notes.  Senior Notes with a face value of $1.7million were repurchased for $840 thousand. A gain on extinguishment of debt of $2.5 million was recorded in fiscal2001 relating to the repurchase of Senior Notes.  Senior Notes with a face value of $6.2 million were repurchasedfor $3.7 million.  In fiscal 2000, again on extinguishment of debt of $5.3 million was recorded relating to therepurchase of Senior Notes.  SeniorNotes with a face value of $13.0 million were repurchased for $7.7 million.(See Note F of the notes to the Consolidated Financial Statements.)

 

*Earnings(Loss) from Discontinued Operations*

 

In accordance with SFAS No. 144, the two stores that the Company closedin fiscal 2002 and the two stores that the Company closed in the first quarterof fiscal 2003 are required to be reported as discontinued operations.  The results include all direct charges tothe operations of the stores.  Corporateoverhead, including interest, is not included in discontinued store operations.  The results are excluded from theaccompanying notes to the Consolidated Financial Statements, unless otherwisenoted.  Sales relating to discontinuedoperations, adjusted for EITF Issue No. 01-9, were $26.4 million in fiscal2002, $32.4 million in fiscal 2001 and $35.9 million in fiscal 2000.  Also in accordance with SFAS No. 144, theCompany recorded a charge of $50 thousand for asset impairment relating to thediscontinued

 

15

----

 

store operations.  The Company’sdiscontinued operations recorded a loss of $0.1 million in fiscal 2002, incomeof $0.8 million in fiscal 2001 and income of $1.5 million in fiscal 2000.

 

*NetEarnings (Loss)*

 

The Company recognized a net loss of $17.8 million or $5.73 per sharefor fiscal 2002 compared to a net loss of $1.5 million or $0.48 per share forfiscal 2001 and a net loss of $15.5 million or $5.22 per share for fiscal2000.  The weighted average commonshares outstanding were 3,112,867, 3,178,109, and 2,969,013 for fiscal years2002, 2001 and 2000, respectively.

 

No tax benefit was recognized in fiscal 2002, 2001, or 2000 as theCompany is in a net operating loss carryforward position. Valuation allowanceshave been established for the entire amount of net deferred tax assets due tothe uncertainty of future recoverability (See Note I of the notes to theConsolidated Financial Statements).

 

***Critical Accounting Policies***

 

Critical accounting policies are those accounting policies thatmanagement believes are important to the portrayal of Eagle’s financialcondition and results of operations and require management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.

 

*Inventory-*The Company implemented a change in accounting principle,effective February 3, 2002, from valuing substantially all inventories at thelower of cost or market utilizing the last-in, first-out (“LIFO”) method tovaluing all inventories at the lower of cost or market utilizing the first-in,first-out (“FIFO”) method.  This changewas adopted because the FIFO method more clearly follows the actual flow ofinventory, due to its perishable nature, and more closely matches actual costsand revenues. Financial statements have been restated to apply the change inaccounting principle retroactively, resulting in a decrease in the net lossreported of $95 thousand (or $0.03 per share) for fiscal year 2001 and anincrease in the net loss reported of $1.2 million (or $0.41 per share) forfiscal year 2000.  In addition, theinventory previously reported as of February 2, 2002 increased $8.4 million andthe balance of accumulated deficit as of January 29, 2000 has been restated by$9.6 million to reflect retroactive application of this new accountingmethod.  The new accounting policy forinventories is as follows:

 

Inventories are stated at the lower of cost or market.  Cost is determined through use of the FIFOmethod, for substantially all inventories, applied to inventory valuesdetermined primarily by the retail inventory method (“RIM”) for storeinventories and the weighted average inventory method for warehouseinventories.

 

Under RIM the valuation of inventories are at cost and the resultinggross margins are calculated by applying a cost-to-retail ratio to sales.  Inherent in the RIM calculations are certainmanagement judgments and estimates, including shrinkage, which could impact theending inventory valuation at cost, as well as the resulting grossmargins.  RIM is an averaging methodthat has been widely used in the retail industry due to its practicality.

 

*Long-LivedAssets*— The Company monitors under-performing stores andunder-utilized facilities for an indication that the carrying amount of assetsmay not be recoverable.  If the sum ofthe expected future undiscounted cash flows is less than the carrying amount ofthe asset an impairment loss is recognized. Impairment is measured based on the estimated fair value of theasset.  Fair value is based on management’sestimate of the amount that could be realized from the sale of assets in acurrent transaction between willing parties based on professional appraisals,offers and other indications of fair value. In determining whether an asset is impaired, assets are grouped at thelowest level for which there are identifiable cash flows that are largelyindependent of the cash flows of other groups of assets, which, for theCompany, is generally on a store by store basis.

 

*Self-Insurance*- The Company is primarily self-insured, through its captive insurancesubsidiary, for workers’ compensation, general liability and automobile(effective November 1, 2001) claims. The self-insurance claim liability is determined actuarially based onclaims filed and an estimate of claims incurred but not yet reported.  Actuarial projections of the losses areemployed due to the high degree of variability in the liability estimates.  Some factors affecting the uncertainty ofclaims include the timeframe of development, settlement patterns, litigationand adjudication direction and medical treatment and cost trends.  The liability is not discounted.

 

A single parent captive is used to fund the self-insuranceliabilities.  The captive allows greaterflexibility and management control over the claims activities while earningincome on the reserves.

 

16

----

 

***Liquidity and Capital Resources***

 

As a result of the Company’s inability to refinance its Senior Notes,due April 15, 2000, the Company filed the First Bankruptcy Case on February 29,2000.  The Company operated its businessand managed properties as a debtor-in-possession pursuant to the BankruptcyCode, through August 7, 2000, the date on which the 2000 Plan became effective(See Item 1: Business “Reorganization Proceedings Under Chapter 11 of theBankruptcy Code”).

 

In connection with the reorganization under the 2000 Plan, the Companypaid $7.9 million relating to lease rejection costs and other reorganizationcosts of  $175 thousand during fiscal2001.  The Company paid $4.1 millionrelating to lease rejection costs, $3.6 million in professional fees and $1.4million in employee severance costs during fiscal 2000.  The Company sold certain assets andterminated leases in fiscal 2000 for net proceeds of $3.7 million.

 

The Company entered into a Second Amended and Restated Loan andSecurity Agreement (“Revolver”) with Congress Financial Corporation (Central)on August 24, 2001, which amended and restated the Amended and Restated Loanand Security Agreement dated August 7, 2000 and extended the term of thefacility to August 24, 2004.  TheRevolver is a $50 million facility that provides for revolving credit loans andletters of credit.  No more than anaggregate of $20 million of the total commitment may be drawn by theCompany as letters of credit.  Totalavailability under the Revolver is based on percentages of allowable inventoryand selected real estate up to a maximum of $50 million.  The terms of the Revolver provide forcapital expenditures up to $75 million per year and purchase money securityinterests and purchase money mortgage amounts to a combined maximum outstandingamount of $75 million. The Revolver is secured by a first priority securityinterest in selected real estate with a book value of $22.9 million and in allinventories of the Company located in its stores and distribution center inMilan, Illinois.  Loans made pursuant tothe Revolver bear interest at a fluctuating interest rate based, at theCompany’s option, on a margin over the Prime Rate or a margin over the LondonInterbank Offered Rate (LIBOR). The Revolver has one financial covenantrequiring the Company to maintain an “Adjusted Net Worth” (as defined in theRevolver) of $3.0 million.  During thethird fiscal quarter of 2002, the Company became concerned that it may violatethe covenant under its Revolver.  As aprecaution the Company and Congress entered into a limited waiver agreement,effective as of November 1, 2002, which waived the Adjusted Net Worth covenantuntil February 1, 2003, which was subsequently extended to April 5, 2003 (the“Waiver”).  Since the Company did notattempt to extend the Waiver beyond April 5, 2003, it was not in compliancewith the financial covenant as of April 6, 2003.  The Company determined it would not be able to cure the defaultwithin the next twelve months. Therefore, according to EITF Issue No. 86-30“Classification of Obligations When a Violation is Waived by the Creditor” therelated debt must be classified as current. Also, the filing of the SecondBankruptcy Case is an event of default under the Revolver and the loans becameimmediately due and payable subject to the automatic stay provisions of Chapter11.  The Revolver also has as anevent of default the actual or likely occurrence or existence of any event orcircumstance which, in the lender’s reasonable judgement, has a materialadverse effect on the Company or the lender, as defined in the Revolver.

 

At February 1, 2003, the Company had $25.1 million in loans against theRevolver and no letters of credit outstanding, resulting in $1.5 million ofexcess availability, subject to the conditions of the limited waiver, under theRevolver.   Of the $25.1 million, $25.0million was at an average rate of 4.37% using the LIBOR option.  The remaining $0.1 million was at a rate of5.00%.  At February 2, 2002, the Companyhad $23.3 million in loans against the Revolver and no letters of creditoutstanding, resulting in $21.0 million of availability under theRevolver.   Of the $23.3 million, $15.0million was at an average rate of 4.28% using the LIBOR option.  The remaining $8.3 million was at a rate of5.25%.

 

Moreover, the Company’s Senior Notes required an interest payment ofapproximately $3.5 million on April 15, 2003. Accordingly, the upcoming interest payment, the low excess availabilityunder the Revolver, the tightening of vendor credit, the expiration of theWaiver, the Company’s cost structure, and the slow economic climate forced theCompany to file for Chapter 11 protection on April 7, 2003 (See Item 1:Business “Reorganization Proceedings Under Chapter 11 of the BankruptcyCode”).  Subsequent to the filing, theSenior Notes interest payment was not made, which is an event of default underthe Indenture for the Senior Notes.  Also, the filing of the Second Bankruptcy Case isan event of default under the Indenture and the Senior Notes became immediatelydue and payable subject to the automatic stay provisions of Chapter 11. TheCompany is embarking upon this restructuring in order to attempt to createfinancial flexibility for future operating requirements and capitalexpenditures.  In preparations for theChapter 11 filing, the Company, together with its outside advisors, have identifiedcertain strategic alternatives to maximize value for its creditors.  The Company, in its business judgment, isevaluating all possible strategic alternatives, including the possible sale ofsome or all of its assets.

 

In conjunction with the Chapter 11 filing on April 7, 2003, the Companyreceived a commitment for $40 million in debtor-in-possession (DIP) financingfrom Congress which the bankruptcy court approved on an interim basis, with thefinal DIP order approved on May 20, 2003. The interest rates for this facility are the same as defined in theWaiver.

 

17

----

 

Cash provided by operating activities was $3.9 million for fiscal 2002compared to cash used of $1.3 million in fiscal 2001.  The net loss and non-cash charges provided $0.7 million ofcash.  Working capital provided $3.2million primarily due to a decrease in inventories, offset by decreases inaccounts payable, accrued liabilities and the reserve for closed stores and anincrease in receivables and other assets.

 

Capital expenditures, including property held for resale, were $4.7million for fiscal 2002 compared to $7.4 million for fiscal 2001.  During fiscal 2002, five major remodels werecompleted and no major remodels were in progress at year-end.  The Company converted one Eagle CountryMarket to the Eagle Discount Foods format during fiscal 2001 and seven duringthe first quarter of fiscal 2002.  Thisformat offered many of the same product selection, quality and service featuresas an Eagle Country Market, with the addition of a wall of values, fewer stockkeeping units and lower overall prices. Due to under performance of this format, these eight stores wereconverted back to the Eagle Country Market format during the second quarter of fiscal2002.  The Company opened the firstFoodco store in fiscal year 2001.  Thisstore, a remodeled and converted Eagle Country Market store, operates as a highstandard, price impact store designed to serve the needs of value consciouscustomers.  The Foodco store maintainsan aggressive pricing strategy while meeting the needs of the local market forproduct selection, quality and service.

 

Working capital on February 1, 2003 was negative $4.4 million and thecurrent ratio was 0.94 to 1 compared to $27.0 million and 1.43 to 1 on February2, 2002.  The decrease is primarily dueto classifying the Revolver as current in fiscal 2002 compared to long-term infiscal 2001.

 

The following table summarizes store development and reductions:

 
|                          |   | **Planned  Fiscal  2003** |   | **Fiscal  2002** |   | **Fiscal  2001** |   |
|-------------------------------|--------|---------------------------|--------|------------------|--------|------------------|--------|
|                          |   |                      |   |             |   |             |   |
| Store closings and sales      |   | 2                         |   | 2                |   | 0                |   |
| Expansions and major remodels |   | 0                         |   | 5                |   | 6                |   |
| Store count, end of year      |   | 60                        |   | 62               |   | 64               |   |

 

As of February 1, 2003, the Company owned eight operating stores andone closed store, with the closed store classified in “Property held forresale” and leased 54 operating stores and two locations that are subleased toother tenants.

 

State insurance reserve requirements for funds held in escrow by thirdparties to satisfy claim liabilities recorded for workers’ compensation, generalliability and automobile claims were not adjusted in fiscal 2002, and werereduced $1.5 million in fiscal 2001 and $1.7 million in fiscal 2000.

 

The Company repurchased $1.7 million of its Senior Notes during fiscal2002 at a cost of $840 thousand, recording a gain on extinguishment of debt of$860 thousand.  The Company repurchased$6.2 million of its Senior Notes during fiscal 2001 at a cost of $3.7 million,recording a gain on extinguishment of debt of $2.5 million. The Companyrepurchased $13.0 million of its Senior Notes during fiscal 2000 at a cost of$7.7 million, recording a gain on extinguishment of debt of $5.3 million.  The repurchase of the Senior Notes wasprimarily funded from cash on hand, cash flows from operations and loansagainst the Revolver.

 

The Company purchased shares of its common stock to the extent that theBoard of Directors believed that the shares were undervalued and that suchpurchases were in the best interests of the Company and consistent with itscash requirements.  The Company fundedsuch purchases from cash on hand, cash flows from operations and loans againstthe Revolver.  The market price of theCompany’s common stock fluctuates and it is likely that the price will changesubsequent to any such purchases by the Company.

 

The following table summarizes loans and interest information for theRevolver:

 

18

----

 
| **(Dollars  in millions)**             |   | **Fiscal  2002  February 1,  2003** |   | **Fiscal  2001  February 2,  2002** |   | **Fiscal  2000  February 3,  2001** |   |
|----------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                   |   |                                |   |                                |   |                                |   |
| Loans as of year-end                   |   | $                                   | 25.1   |                                | $      | 23.3                                |   | $ | 4.4 |   |
| Maximum amount outstanding during year |   | $                                   | 29.7   |                                | $      | 31.4                                |   | $ | 11.1 |   |
| Average amount outstanding during year |   | $                                   | 22.3   |                                | $      | 15.4                                |   | $ | 2.1 |   |
| Weighted average interest rate         |   | 4.3                                 | %      | 6.0                                 | %      | 9.8                                 | %      |

 

The table below presents significant contractual obligations of theCompany as of the end of fiscal year 2002:

 
| **(Dollars in thousands)** |   | **Fiscal  2003** |   | **Fiscal  2004** |   | **Fiscal  2005** |   | **Fiscal  2006** |   | **Fiscal  2007** |   | **Thereafter** |   | **Total** |   |
|----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|----------------|--------|-----------|--------|
|                       |   |             |   |             |   |             |   |             |   |             |   |           |   |      |   |
| Senior notes               |   | $                | — |             | $      | —           |   | $                | 64,076 |             | $      | —         |   | $         | — |   | $ | — |   | $ | 64,076 |   |
| Revolver                   |   | 25,135           |   | —           |   | —           |   | —           |   | —           |   | —         |   | 25,135    |   |
| Capital lease obligation   |   | 3,944            |   | 3,947            |   | 3,947            |   | 3,947            |   | 3,947            |   | 50,885         |   | 70,617    |   |
| Operating leases           |   | 11,119           |   | 10,891           |   | 10,578           |   | 9,590            |   | 7,820            |   | 54,345         |   | 104,343   |   |
| Reserve for closed stores  |   | 318              |   | 318              |   | 310              |   | 217              |   | 145              |   | 146            |   | 1,454     |   |
| EDS technology agreement   |   | 3,568            |   | 3,568            |   | 1,487            |   | —           |   | —           |   | —         |   | 8,623     |   |
| Other                      |   | 165              |   | 167              |   | 134              |   | —           |   | —           |   | —         |   | 466       |   |
|                            |        |                  |        |                  |        |                  |        |                  |        |                  |        |                |        |           |        |  |  |  |  |  |  |  |

 

Working capital and the current ratio were as follows:

 
| **(Dollars in millions)** |   | **Working  Capital** |   | **Current  Ratio** |       |
|---------------------------|--------|----------------------|--------|--------------------|------------|
|                      |   |                 |   |               |       |
| February 1, 2003          |   | $                    | (4.4   | )                  | 0.94  to 1 |   |
| February 2, 2002          |   | $                    | 27.0   |               | 1.43  to 1 |   |
| February 3, 2001          |   | $                    | 11.7   |               | 1.18  to 1 |   |

 

See Item 5:  Market forRegistrant’s Common Equity and Related Shareholder Matters for a discussion ofthe Company’s common stock.

 

***Inflation***

 

Inflation has had only a minor effect on the operations of the Companyand its internal and external sources of liquidity and working capital.

 

***New Accounting Standards***

 

Existing accounting principles generally accepted in the United Statesof America do not provide specific guidance on the accounting for salesincentives that many companies offer to their customers.  The Financial Accounting Standards Board(“FASB”) Emerging Issues Task Force (“EITF”), a group responsible forpromulgating changes to accounting policies and procedures, has issued anaccounting pronouncement, EITF Issue No. 01-9, which addresses the recognition, measurement and income statementclassification for certain sales incentives offered by companies in the form ofdiscounts, coupons or rebates.  Theimplementation of this accounting pronouncement in the first quarter of fiscal2002 required the Company to make certain reclassifications between TotalSales, Cost of Goods Sold and Selling, General and Administrative Expenses inthe Company’s Consolidated Statements of Operations.  The implementation of EITF Issue No. 01-9 did not have an effecton reported Operating Income (Loss) or Net Earnings (Loss).  In accordance with such implementation, theCompany, including stores accounted for as discontinued operations,reclassified certain prior period financial statements, for comparabilitypurposes, having the following impact on Sales, Cost of Goods Sold and Selling,General and Administrative Expenses:

 

19

----

 
| **(Dollars  in thousands)**                  |   | **February 1,  2003** |   | **February 2,  2002** |   | **February 3,  2001** |   |
|----------------------------------------------|--------|-----------------------|--------|-----------------------|--------|-----------------------|--------|
|                                         |   |                  |   |                  |   |                  |   |
| Sales Decrease                               |   | $                     | 53,403 |                  | $      | 60,310                |   | $ | 58,408 |   |
| Cost of Goods Sold Decrease                  |   | $                     | 52,707 |                  | $      | 59,865                |   | $ | 57,611 |   |
| Selling, General and Administrative Decrease |   | $                     | 696    |                  | $      | 445                   |   | $ | 797 |   |

 

EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller)for Certain Consideration Received from a Vendor,” became effective for theCompany on January 1, 2003. This issue addresses the appropriate accounting forcash consideration received from a vendor that is presumed to be a reduction ofthe prices of the vendor’s products or services and should, therefore, becharacterized as a reduction in cost of sales when the related products aresold unless it is a payment for assets or services delivered to the vendor, inwhich case the cash consideration should be characterized as revenue, or it isa reimbursement of costs incurred to sell the vendor’s products, in which casethe cash consideration should be characterized as a reduction of that cost.Historically, we recognized those allowances as they were earned, based on thefulfillment of the related obligations of the contract. This accounting treatmentwas consistent with generally accepted accounting principles. For all contractsentered or modified after January 1, 2003, we have recognized prospectively,and will continue to recognize, vendor allowances in accordance with EITF IssueNo. 02-16. Net loss for fiscal 2002 was not affected by the adoption of EITFIssue No. 02-16 on January 1, 2003.

 

In June 2001, the FASB issued SFAS No. 143, *Accountingfor Asset Retirement Obligations*. SFAS No.143 requires a company to record the fair value of an assetretirement obligation as a liability in the period in which it incurs a legalobligation associated with the retirement of tangible long-lived assets thatresult from the acquisition, construction, development and/or normal use of theassets.  A corresponding asset is alsorecorded, which is depreciated over the life of the asset.   Subsequent to the initial measurement ofthe asset retirement obligation, the obligation is adjusted at the end of eachperiod to reflect the passage of time and changes in the estimated future cashflows underlying the obligation.  TheCompany is required to adopt SFAS No. 143 for fiscal years beginning after June15, 2002.  The Company does not expectthis statement to have a material effect on its consolidated financialstatements.

 

In August, 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  SFAS No. 144 supersedes SFAS No. 121 and theaccounting and reporting provision of APB Opinion No. 30 for the disposal of asegment of a business.  SFAS No. 144addresses financial accounting and reporting for the impairment or disposal oflong-lived assets and requires that long-lived assets be reviewed forimpairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future net cash flows expected to begenerated by the asset.  If the carryingamount of an asset exceeds its estimated undiscounted future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, abandonment, or in a distribution to owners) oris classified as held for sale.  Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.  The Companyimplemented the statement on February 3, 2002. During fiscal 2002 the Company recorded as asset impairment charge of$2.1 million which is included in Store closing and asset impairment in theConsolidated Statements of Operations. In accordance with SFAS No. 144, the two stores that the Company closedin fiscal 2002 and the two stores that the Company closed in the first quarterof fiscal 2003 are required to be reported as discontinued operations.  The results include all direct charges tothe operations of the stores.  Corporateoverhead, including interest, is not included in discontinued storeoperations.  The results are excludedfrom the accompanying notes to the Consolidated Financial Statements, unlessotherwise noted.  Sales relating todiscontinued operations, adjusted for EITF Issue No. 01-9, were $26.4 millionin fiscal 2002, $32.4 million in fiscal 2001 and $35.9 million in fiscal 2000.  Also in accordance with SFAS No. 144, theCompany recorded a charge of $50 thousand for asset impairment relating to thediscontinued store operations.  TheCompany’s discontinued operations recorded a loss of $0.1 million in fiscal2002, income of $0.8 million in fiscal 2001 and income of $1.5 million infiscal 2000.

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections*.  Under Statement No. 4, all gains and lossesfrom extinguishment of debt are required to be aggregated and, if material,classified as an extraordinary item. The rescission of Statement No. 4 affects the Company since iteliminates the exception to applying APB Opinion No. 30 to the Company’s gainson extinguishment of debt.  As a result,the gains should be classified as extraordinary only if they meet the criteriain APB Opinion No. 30.  The Company doesnot believe its debt extinguishment gains are both unusual in nature orinfrequent of occurrence, and thus do not meet the criteria to be classified asan extraordinary item.

 

20

----

 

The provisions of Statement No. 145 related to the rescission of SFASNo. 4 shall be applied in fiscal years beginning after May 15, 2002.  Early application of the provisions relatedto the rescission of Statement No. 4 is encouraged.  Any gain or loss on extinguishment of debt that was classified asan extraordinary item in prior periods that does not meet the criteria forclassification as an extraordinary item should be reclassified.  The Company implemented this statement onMay 5, 2002.  The effects ofimplementation are illustrated as follows:

 
| **(Dollars  in thousands)**                                   |   | **Fiscal 2002  February 1,  2003** | ** ** | **Fiscal 2001  February 2,  2002** | ** ** | **Fiscal 2000  February 3,  2001** | ** ** |
|---------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                                          |   |                               | ** ** |                               | ** ** |                               | ** ** |
| Gain on  extinguishment of debt increase                      |   | $                                  | 860        |                               | $          | 2,529                              |       | $ | 5,286 |   |
| Extraordinary  item - gain on extinguishment of debt decrease |   | $                                  | 860        |                               | $          | 2,529                              |       | $ | 5,286 |   |

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated withExit or Disposal Activities*. This Statement addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).* Under EITF Issue No. 94-3, a liability for an exit cost was recognizedat the date of the company’s commitment to an exit plan.  SFAS No. 146 requires that the liability forcosts associated with an exit or disposal activity be recognized when theliability is incurred.  In accordancewith SFAS No. 146, store lease exit costs are accrued when a store isclosed.  SFAS No. 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  SFAS No. 146 may affect thetiming of recognizing future store closures and restructuring costs, if any, aswell as the amounts recognized.  Theprovisions of this Statement are effective for exit and disposal activities thatare initiated after December 31, 2002. The Company has determined the application of this statement does nothave an effect on its consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The provisions of SFAS No. 148 are effectivefor financial statements for fiscal years ending after December 15, 2002.  The Company accounts for stock-basedemployee compensation arrangements in accordance with the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and complies with the disclosure provisions of SFAS No. 123 andSFAS No. 148, as disclosed in these financial statements.

 

***Safe Harbor Statements Under the PrivateSecurities Litigation Reform Act of 1995***

 

The statements under Management’s Discussion and Analysis of FinancialCondition and Results of Operations and the other statements in this Form 10-Kwhich are not historical facts are forward looking statements.  These forward looking statements involverisks and uncertainties that could render them materially different, including,but not limited to, acceptance of the Company’s products in the marketplace,the effect of economic conditions, the impact of current and additionalcompetitive stores and pricing, availability and costs of inventory, employeecosts and availability, the rate of technology change, the cost and uncertainoutcomes of pending and unforeseen litigation including the Second BankruptcyCase, the availability and cost of capital including the continued availabilityof capital under the interim DIP facility (final order approved May 20, 2003),supply constraints or difficulties, the effect of the Company’s accountingpolicies, the effect of regulatory and legal developments and other risksdetailed in the Company’s Securities and Exchange Commission filings or inmaterial incorporated therein by reference.

 

Similarly, these and other factors, including the terms of anyreorganization plan ultimately confirmed, can affect the value of the Company’svarious pre-petition liabilities, common stock.  No assurance can be given as to what values, if any, will beascribed in the bankruptcy proceedings to each of these constituencies.  Accordingly, the Company urges that theappropriate caution be exercised with respect to existing and futureinvestments in any of these liabilities and/or securities.

 

21

----

 

**ITEM7a: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

The Company is exposed to certain market risks that are inherent in theCompany’s financial instruments that arise from transactions entered into inthe normal course of business.  Althoughthe Company currently utilizes no derivative financial instruments that exposethe Company to significant market risk, the Company is exposed to fair valuerisk due to changes in interest rates with respect to its long-term debtborrowings.

 

The Company is subject to interest rate risk on its long-term fixedinterest rate debt borrowings.  Loansagainst the Revolver do not give rise to significant interest rate risk becauseof the floating interest rate charged on such loans.  The Company manages its exposure to interest rate risk byutilizing a combination of fixed and floating rate borrowings.

 

The following describes information relating to the Company’sinstruments that are subject to interest rate risk at February 1, 2003 (dollarsin millions):

 
| **Description** |   | **Contract  Terms** |       | **Interest  Rate** |       | **Cost** |       | **Fair Value** |       |
|-----------------|--------|---------------------|------------|--------------------|------------|----------|------------|----------------|------------|
|            |   |                | ** ** |               | ** ** |     | ** ** |           | ** ** |
| Senior Notes    |   | Due April 15, 2005  |       | 11% fixed          |       | $        | 64.1       |           | $          | 12.8 |   |
|                 |        |                     |            |                    |            |          |            |                |            |  |  |

 

The Company recorded a discount of $2.1 million in conjunction with therefinancing of its Senior Notes. The discount is being amortized over the termof the Senior Notes.  (See Note F of thenotes to the Consolidated Financial Statements.)

 

22

----

 

**ITEM 8****:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Board ofDirectors and Shareholders of Eagle Food Centers, Inc.:

 

We have audited the accompanying consolidated balance sheets of EagleFood Centers, Inc. and subsidiaries as of February 1, 2003 and February 2,2002, and the related consolidated statements of operations, stockholders’equity and comprehensive income (loss), and cash flows for each of the years inthe three-year period ended February 1, 2003. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Eagle FoodCenters, Inc. and subsidiaries as of February 1, 2003 and February 2, 2002, andthe consolidated results of their operations and their cash flows for each ofthe years in the three-year period ended February 1, 2003, in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in Note B to the financialstatements, the Company has suffered recurring losses from operations, has anet capital deficiency, as of April 6, 2003 was not in compliance with afinancial covenant of its Second Amended and Restated Loan and SecurityAgreement (“Revolver”), and, as of April 7, 2003, filed for voluntarybankruptcy protection and reorganization under Chapter 11 of Title 11 of theUnited States Code.  The filing forvoluntary bankruptcy protection and reorganization is an event of default underboth the Revolver and the Indenture for the 11% Senior Notes.  In addition, another event of defaultoccurred on April 15, 2003 when the required interest payment on the 11% SeniorNotes was not made. These issues raise substantial doubt about its ability tocontinue as a going concern. Management’s plans in regard to these matters are also described in NoteB.  The financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note B to the consolidatedfinancial statements, the accompanying consolidated balance sheet as ofFebruary 2, 2002 and the related consolidated statements of operations,stockholders’ equity and comprehensive income (loss) and cash flows for theyears ended February 2, 2002 and February 3, 2001 have been restated for thechange in inventory costing method from last-in-first-out (LIFO) tofirst-in-first-out (FIFO) during 2002.

 

 

KPMG LLP

 

Des Moines, IowaMay 2, 2003

 

23

----

 

**EAGLE FOOD CENTERS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(Dollars in thousands, except per share data)**

 
|                                                                                                                        |   | **February  1,  2003** |    | **February  2,  2002**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------------------|------------|
|                                                                                                                        |   |                   |    | **(as adjusted,  see note B)** |       |
| **ASSETS**                                                                                                                  |   |                   |    |                           |       |
| Current assets:                                                                                                             |   |                   |    |                           |       |
| Cash and cash equivalents                                                                                                   |   | $                      | 3,892   |                           | $          | 4,667 |   |
| Restricted assets                                                                                                           |   | 8,840                  |    | 7,901                          |       |
| Accounts receivable, net of allowance for doubtful accounts of $1.4  million in fiscal 2002 and $1.2 million in fiscal 2001 |   | 7,246                  |    | 9,553                          |       |
| Inventories                                                                                                                 |   | 46,666                 |    | 65,016                         |       |
| Prepaid expenses and other                                                                                                  |   | 5,823                  |    | 2,870                          |       |
| Total current assets                                                                                                        |   | 72,467                 |    | 90,007                         |       |
|                                                                                                                        |   |                   |    |                           |       |
| Property and equipment, net                                                                                                 |   | 95,962                 |    | 107,307                        |       |
|                                                                                                                        |   |                   |    |                           |       |
| Other assets:                                                                                                               |   |                   |    |                           |       |
| Deferred software costs, net                                                                                                |   | 3,029                  |    | 6,740                          |       |
| Property held for resale, net                                                                                               |   | 2,530                  |    | 3,056                          |       |
| Other                                                                                                                       |   | 1,120                  |    | 1,352                          |       |
| Total other assets                                                                                                          |   | 6,679                  |    | 11,148                         |       |
| Total assets                                                                                                                |   | $                      | 175,108 |                           | $          | 208,462 |   |
|                                                                                                                        |   |                   |    |                           |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                               |   |                   |    |                           |       |
| Current liabilities:                                                                                                        |   |                   |    |                           |       |
| Accounts payable                                                                                                            |   | $                      | 19,016  |                           | $          | 29,236 |   |
| Payroll and associate benefits                                                                                              |   | 14,336                 |    | 12,441                         |       |
| Accrued liabilities                                                                                                         |   | 11,963                 |    | 14,536                         |       |
| Reserve for closed stores                                                                                                   |   | 64                     |    | 364                            |       |
| Accrued taxes                                                                                                               |   | 5,436                  |    | 5,647                          |       |
| Loan and Security Agreement                                                                                                 |   | 25,135                 |    | —                         |       |
| Current portion of other long term debt                                                                                     |   | 900                    |    | 833                            |       |
| Total current liabilities                                                                                                   |   | 76,850                 |    | 63,057                         |       |
| Long term debt:                                                                                                             |   |                   |    |                           |       |
| Senior Notes, net                                                                                                           |   | 63,318                 |    | 64,659                         |       |
| Capital lease obligations                                                                                                   |   | 32,303                 |    | 33,037                         |       |
| Loan and Security Agreement                                                                                                 |   | —                 |    | 23,325                         |       |
| Other                                                                                                                       |   | 301                    |    | 466                            |       |
| Total long term debt                                                                                                        |   | 95,922                 |    | 121,487                        |       |
| Other liabilities:                                                                                                          |   |                   |    |                           |       |
| Reserve for closed stores                                                                                                   |   | 910                    |    | 1,302                          |       |
| Other deferred liabilities                                                                                                  |   | 7,466                  |    | 7,995                          |       |
| Total other liabilities                                                                                                     |   | 8,376                  |    | 9,297                          |       |
| Total liabilities                                                                                                           |   | 181,148                |    | 193,841                        |       |
|                                                                                                                        |   |                   |    |                           |       |
| Shareholders’ (deficit) equity:                                                                                        |   |                   |    |                           |       |
| Preferred stock, $.01 par value, 100,000 shares authorized                                                                  |   | —                 |    | —                         |       |
| Common stock, $.04 par value, 4,500,000 shares authorized; 3,357,605  issued                                                |   | 134                    |    | 134                            |       |
| Capital in excess of par value                                                                                              |   | 55,464                 |    | 55,464                         |       |
| Common stock in treasury, at cost, 246,670 and 229,351 shares                                                               |   | (2,383                 | )       | (2,369                         | )          |
| Accumulated other comprehensive loss                                                                                        |   | (4,700                 | )       | (1,896                         | )          |
| Accumulated deficit                                                                                                         |   | (54,555                | )       | (36,712                        | )          |
| Total shareholders’ (deficit) equity                                                                                   |   | (6,040                 | )       | 14,621                         |       |
| Commitments and contingencies                                                                                               |   |                   |    |                           |       |
| Total liabilities and shareholders’ (deficit) equity                                                                   |   | $                      | 175,108 |                           | $          | 208,462 |   |

 

Seenotes to the consolidated financial statements.

 

24

----

 

**EAGLE FOOD CENTERS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollars in thousands, except per share data)**

 
|                                                                                              |   | **Year  Ended  February 1,  2003** |       | **Year  Ended  February 2,  2002** | ** ** | **Year  Ended  February 3,  2001**        | ** ** |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|-------------------------------------------|------------|
|                                                                                              |   |                               |       | **(as adjusted,  see note B)**     |       | **(53 weeks  (as adjusted,  see note B)** |       |
|                                                                                              |   |                               | ** ** |                               | ** ** |                                      | ** ** |
| Sales                                                                                             |   | $                                  | 599,452    |                               | $          | 630,398                                   |       | $ | 682,503 |   |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Cost of goods sold                                                                                |   | (433,735                           | )          | (451,940                           | )          | (495,800                                  | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Gross margin                                                                                      |   | 165,717                            |       | 178,458                            |       | 186,703                                   |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Operating expenses:                                                                               |   |                               |       |                               |       |                                      |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Selling, general and   administrative                                                        |   | (153,380                           | )          | (153,129                           | )          | (165,302                                  | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Store closing and asset impairment                                                                |   | (1,747                             | )          | —                             |       | (821                                      | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Reorganization items, net                                                                         |   | —                             |       | 830                                |       | (10,782                                   | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Depreciation and amortization                                                                     |   | (16,997                            | )          | (18,151                            | )          | (18,618                                   | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Operating income (loss)                                                                           |   | (6,407                             | )          | 8,008                              |       | (8,820                                    | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Interest expense                                                                                  |   | (12,185                            | )          | (12,871                            | )          | (13,430                                   | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Gain on extinguishment of debt                                                                    |   | 860                                |       | 2,529                              |       | 5,286                                     |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Earnings (loss) from continuing operations                                                        |   | (17,732                            | )          | (2,334                             | )          | (16,964                                   | )          |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Earnings (loss) from discontinued operations (Including gain on  disposal of $103 in fiscal 2002) |   | (111                               | )          | 815                                |       | 1,463                                     |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Net loss                                                                                          |   | $                                  | (17,843    | )                                  | $          | (1,519                                    | )          | $ | (15,501 | ) |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Weighted average basic shares outstanding                                                         |   | 3,112,867                          |       | 3,178,109                          |       | 2,969,013                                 |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Basic and diluted loss per common share:                                                          |   |                               |       |                               |       |                                      |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Earnings (loss) from continuing operations                                                        |   | $                                  | (5.70      | )                                  | $          | (0.73                                     | )          | $ | (5.71 | ) |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Earnings (loss) from discontinued operations                                                      |   | (0.03                              | )          | 0.25                               |       | 0.49                                      |       |
|                                                                                              |   |                               |       |                               |       |                                      |       |
| Net loss                                                                                          |   | $                                  | (5.73      | )                                  | $          | (0.48                                     | )          | $ | (5.22 | ) |

 

Seenotes to the consolidated financial statements.

 

25

----

 

**EAGLE FOOD CENTERS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**(Dollars in thousands)**

 
|                                                       |   | **Common  Stock** |      | **Accumulated  Deficit**              |   | **Accumulated  Other  Comprehensive  Income/(Loss)** |   | **Total  (Deficit)  Equity** |   |
|------------------------------------------------------------|--------|-------------------|-----------|---------------------------------------|--------|------------------------------------------------------|--------|------------------------------|--------|
| **Shares**                                                 |   | **Par  Value**    |      | **Capital  in  Excess of  Par Value** |   | **Treasury**                                         |
| **Shares**                                                 |   | **Dollars**       |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   | **(as  adjusted  see note B)** |   |   |   |   | **(as  adjusted  see note B)** |   |
| BALANCE, JANUARY  29, 2000                                 |   | 2,875,000         |      | $                                     | 115    |                                                 | $      | 53,336                       |   | 140,238 |   | $ | (2,228 | ) | $ | (19,692 | ) | $ | 13 |   | $ | 31,544 |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Comprehensive  income/(loss):                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Net loss                                                   |   |              |      |                                  |   |                                                 |   |                         |   |   |   | (15,501 | ) |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Pension liability  adjustment                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | (129 | ) |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Change in  unrealized gain/(loss) on marketable securities |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | 125 |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Total  comprehensive income/(loss)                         |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   | (15,505 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Purchase of  treasury stock                                |   |              |      |                                  |   |                                                 |   | 19,135                       |   | (50 | ) |   |   |   |   | (50 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Issuance of stock  in connection with  senior notes   |   | 482,338           |      | 19                                    |   | 2,128                                                |   |                         |   |   |   |   |   |   |   | 2,147 |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| BALANCE, FEBRUARY  3, 2001                                 |   | $                 | 3,357,338 |                                  | $      | 134                                                  |   | $                            | 55,464 |   | $ | 159,373 |   | $ | (2,278 | ) | $ | (35,193 | ) | $ | 9 |   | $ | 18,136 |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Comprehensive  income/(loss):                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Net loss                                                   |   |              |      |                                  |   |                                                 |   |                         |   |   |   | (1,519 | ) |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Pension liability  adjustment                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | (1,789 | ) |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Change in  unrealized gain/(loss) on marketable securities |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | (116 | ) |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Total  comprehensive income/(loss)                         |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   | (3,424 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Purchase of  treasury stock                                |   |              |      |                                  |   |                                                 |   | 69,978                       |   | (91 | ) |   |   |   |   | (91 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Issuance of stock  in connection with senior notes         |   | 267               |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| BALANCE, FEBRUARY  2, 2002                                 |   | 3,357,605         |      | $                                     | 134    |                                                 | $      | 55,464                       |   | 229,351 |   | $ | (2,369 | ) | $ | (36,712 | ) | $ | (1,896 | ) | $ | 14,621 |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Comprehensive  income/(loss):                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Net loss                                                   |   |              |      |                                  |   |                                                 |   |                         |   |   |   | (17,843 | ) |   |   |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Pension liability  adjustment                              |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | (2,622 | ) |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Change in  unrealized gain/(loss) on marketable securities |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   | (182 | ) |   |   |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Total  comprehensive income/(loss)                         |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   | (20,647 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Purchase of  treasury stock                                |   |              |      |                                  |   |                                                 |   | 17,319                       |   | (14 | ) |   |   |   |   | (14 | ) |
|                                                       |   |              |      |                                  |   |                                                 |   |                         |   |   |   |   |   |   |   |   |   |
| BALANCE, FEBRUARY  1, 2003                                 |   | 3,357,605         |      | $                                     | 134    |                                                 | $      | 55,464                       |   | 246,670 |   | $ | (2,383 | ) | $ | (54,555 | ) | $ | (4,700 | ) | $ | (6,040 | ) |
|                                                            |        |                   |           |                                       |        |                                                      |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Seenotes to the consolidated financial statements.

 

26

----

 

**EAGLE FOOD CENTERS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

 
|                                                                            |   | **Years  Ended**       |    |
|---------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                            |   | **February  1,  2003** |    | **February  2,  2002** | ** ** | **February  3,  2001** | ** ** |
|                                                                            |   |                   |    | **(as adjusted,  see note B)** |   | **(53 weeks  (as adjusted,  see note B)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                   |    |   |   |   |   |
|                                                                            |   |                   |    |   |   |   |   |
| Net loss                                                                        |   | $                      | (17,843 | ) | $ | (1,519 | ) | $ | (15,501 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Adjustments to reconcile net loss to net cash flows from operating  activities: |   |                   |    |   |   |   |   |
|                                                                            |   |                   |    |   |   |   |   |
| Gain on extinguishment of debt                                                  |   | (860                   | )       | (2,529 | ) | (5,286 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Depreciation and amortization                                                   |   | 17,084                 |    | 18,256 |   | 18,816 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Store closing and asset impairment                                              |   | 1,797                  |    | (1,005 | ) | 7,354 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Deferred charges and credits                                                    |   | 645                    |    | 791 |   | 869 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Gain on disposal of assets                                                      |   | (122                   | )       | (225 | ) | (987 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Changes in assets and liabilities:                                              |   |                   |    |   |   |   |   |
|                                                                            |   |                   |    |   |   |   |   |
| Receivables and other assets                                                    |   | (614                   | )       | (3,194 | ) | 6,626 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Inventories                                                                     |   | 18,350                 |    | (5,118 | ) | 16,358 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Accounts payable                                                                |   | (10,220                | )       | 3,515 |   | (10,644 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Accrued and other liabilities                                                   |   | (3,911                 | )       | (4,080 | ) | (4,215 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Payments on reserve for closed stores                                           |   | (381                   | )       | (6,207 | ) | (8,124 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Net cash flows from operating activities                                        |   | 3,925                  |    | (1,315 | ) | 5,266 |   |
|                                                                            |   |                   |    |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                   |    |   |   |   |   |
|                                                                            |   |                   |    |   |   |   |   |
| Purchases of marketable securities, net                                         |   | (1,121                 | )       | (821 | ) | (653 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Additions to property and equipment                                             |   | (4,656                 | )       | (7,374 | ) | (7,538 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Additions to property held for resale                                           |   | —                 |    | (4 | ) | — |   |
|                                                                            |   |                   |    |   |   |   |   |
| Cash proceeds from sale/leasebacks or dispositions of property and  equipment   |   | 1,053                  |    | 71 |   | 3,974 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Cash proceeds from sale/leasebacks or dispositions of property held  for resale |   | —                 |    | — |   | 246 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Net cash flows from investing activities                                        |   | (4,724                 | )       | (8,128 | ) | (3,971 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                   |    |   |   |   |   |
|                                                                            |   |                   |    |   |   |   |   |
| Deferred financing costs                                                        |   | (90                    | )       | (370 | ) | (337 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Principal payments on capital lease obligations                                 |   | (832                   | )       | (900 | ) | (923 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Principal payments on senior notes                                              |   | (850                   | )       | (3,731 | ) | (22,666 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Net revolving loans                                                             |   | 1,810                  |    | 18,939 |   | 4,386 |   |
|                                                                            |   |                   |    |   |   |   |   |
| Purchase of treasury stock                                                      |   | (14                    | )       | (91 | ) | (50 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| Net cash flows from financing activities                                        |   | 24                     |    | 13,847 |   | (19,590 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                         |   | (775                   | )       | 4,404 |   | (18,295 | ) |
|                                                                            |   |                   |    |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  |   | 4,667                  |    | 263 |   | 18,558 |   |
|                                                                            |   |                   |    |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                        |   | $                      | 3,892   |   | $ | 4,667 |   | $ | 263 |   |

 

Seenotes to the consolidated financial statements.

 

27

----

 

**EAGLE FOOD CENTERS, INC.**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002 AND FEBRUARY 3, 2001**

 

***Note A – Organization***– Eagle Food Centers, Inc. (the “Company”), a Delaware corporation, is engagedin the operation of retail food stores, with 62 stores in northern and centralIllinois and eastern Iowa.

 

***Note B – Summary of Significant AccountingPolicies and Practices***

 

***Fiscal Year***– TheCompany’s fiscal year ends on the Saturday closest to January 31st.  Fiscal 2002 was a 52-week year ending onFebruary 1, 2003, fiscal 2001 was a 52-week year ending on February 2, 2002 andfiscal 2000 was a 53-week year ending on February 3, 2001.

 

***Basis of Consolidation***– The consolidated financial statements include the accounts of Eagle FoodCenters, Inc. and all subsidiaries.  Allsignificant intercompany transactions have been eliminated.

 

***Risks and Uncertainties***– The preparation of the Company’s Consolidated Financial Statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

On April 7, 2003 (the “Petition Date II”), the Company filed a voluntarypetition under Chapter 11 of Title 11 of the United States Code (the “SecondBankruptcy Case”).  The petition wasfiled in the United States Bankruptcy Court for the Northern District ofIllinois in Chicago under case number 03-15299.  The Company continues to manage its affairs and operate itsbusiness as a debtor-in-possession while the Second Bankruptcy Case is pending.

 

Since the Company’s restructuring efforts in 2000, it has faced newthreats from increased competition, rising costs in connection with itsunionized labor, significant cash outlays to cover interest expense from itsoutstanding Senior Notes, and a recessionary economy.  As a result, the Company’s overall cost of doing businessincreased.  The Company has experiencedcumulative losses during the last three years of $34.8 million, and had astockholders deficit of $6 million at February 1, 2003.

 

During the third fiscal quarter of 2002, the Company became concernedthat it may violate a covenant under its Second Amended and Restated Loan andSecurity Agreement (“Revolver”).  Inparticular, the Revolver contains a financial covenant requiring the Company tomaintain an “Adjusted Net Worth” (as defined in the Revolver) of $3.0 million.  As a precaution the Company and Congressentered into a limited waiver agreement, effective as of November 1, 2002,which waived the Adjusted Net Worth covenant until February 1, 2003, which wassubsequently extended to April 5, 2003 (the “Waiver”). Since the Company didnot attempt to extend the Waiver beyond April 5, 2003, it was not in compliancewith the financial covenant as of April 6, 2003.  The Company determined it would not be able to cure the defaultwithin the next twelve months. Therefore, according to EITF Issue No. 86-30“Classification of Obligations When a Violation is Waived by the Creditor” therelated debt must be classified as current. Moreover, the Company’s Senior Notes required an interest payment ofapproximately $3.5 million on April 15, 2003. Subsequent to the filing, theSenior Notes interest payment was not made, which is an event of default underthe Indenture for the Senior Notes.   Accordingly, the upcoming interest payment,the low excess availability ($1.5 million) under the Revolver, the tighteningof vendor credit, the expiration of the Waiver, the Company’s cost structure,and the slow economic climate forced the Company to file for Chapter 11protection. The filing of the SecondBankruptcy Case is an event of default under the Revolver and the Indenture forthe Senior Notes and the debt outstanding became immediately due and payablesubject to the automatic stay provisions of Chapter 11.  The Company is embarking upon thisrestructuring in order to attempt to create financial flexibility for futureoperating requirements and capital expenditures.  In preparations for the Chapter 11 filing, the Company, togetherwith its outside advisors, have identified certain strategic alternatives tomaximize value for its creditors.  TheCompany, in its business judgment, is evaluating all possible strategicalternatives, including the possible sale of some or all of its assets.

 

Nasdaq staff informed the Company, by letter dated November 13, 2000,that it had not maintained a minimum market value of public float of $5,000,000and a minimum bid price of $1.00 over 30 consecutive trading days as requiredfor continued listing on the Nasdaq National Market.  Nasdaq staff had determined that the Company’s Common Stock wouldbe delisted from quotation on the Nasdaq National Market at the opening ofbusiness on

 

28

----

 

February 14, 2001.  On February12, 2001, the Company delivered a request for an appeal to the Nasdaq ListingQualifications Panel.  The delistingprocess was suspended pending resolution of the appeal.

 

The Company presented a plan to the Nasdaq Listing Qualifications Panelfor achieving compliance with the listing requirements of the Nasdaq NationalMarket at a hearing held March 28, 2001. No decision was made at the hearing regarding the continued listing ofour shares.  Members of the ListingQualifications Panel suggested that the Company consider a reverse stock splitand applying for listing on the Nasdaq SmallCap Market.  The Company sent a letter to the panel onApril 2, 2001 in which the Company modified its earlier plan by(i) consenting to the possible change from listing on the Nasdaq NationalMarket to listing on the Nasdaq SmallCap Market and (ii) consenting torecommend shareholder approval of a reverse stock split in the event othermeasures were not sufficient to achieve compliance with the Nasdaq listingrequirements for either the Nasdaq National Market or the Nasdaq SmallCapMarket.

 

The Company’s common stock began trading on the Nasdaq SmallCap Marketon May 15, 2001.  On June 27, 2001 theshareholders of Eagle Food Centers, Inc. approved an amendment to the Company’sCertificate of Incorporation to accomplish a reverse stock split.  This was effective on June 29, 2001 andresulted in each four outstanding shares of the Company’s common stock beingautomatically reclassified and changed into one share of the Company’s commonstock.  Prior period common stockinformation has been presented on a comparative basis.

 

Nasdaq staff again informed the Company, by letter dated February 14,2002, that it had not maintained a minimum bid price of $1.00 per share over 30consecutive trading days as required for continued listing on the NasdaqSmallCap Market.  Nasdaq staff gave theCompany until August 13, 2002 to regain compliance with the minimum closing bidprice of $1.00 per share for ten consecutive trading days. The Company wasnotified, by letter dated August 14, 2002, that it had not regained compliancewith the minimum bid price of $1.00 per share. However, the Company was granted an additional 180 days to achieve theminimum closing bid price based on meeting the initial listing requirement of$5.0 million in stockholders’ equity as of May 4, 2002.

 

The Company received a Nasdaq Staff Determination on March 18, 2003 indicatingthat the Company had failed to regain compliance with the minimum bid price anddid not comply with the minimum market value of publicly held shares asrequired by Marketplace Rules 4310(c)(4) and 4310(c)(7), respectively.  Accordingly, Nasdaq notified the Companythat its Common Stock would be delisted from the Nasdaq Stock Market effectiveas of the opening of business on March 27, 2003.  The Company’s Common Stock began trading on the OTC BulletinBoard, on March 27, 2003.

 

Inclusion of the Company’s common stock on the OTC Bulletin Board orsimilar quotation system could adversely affect the liquidity of the Company’scommon stock and may impact the public’s perception of the Company.  There can be no assurance that delistingwill not have a material adverse effect on liquidity or business operations.

 

***Common Stock Risks* -At this time, it is not possible to predict the effect of the Chapter 11reorganization on our business, various creditors and security holders or whenwe will be able to exit Chapter 11.**

 

**Underthe priority scheme established by the Bankruptcy Code, certain post-petitionliabilities and pre-petition liabilities need to be satisfied beforeshareholders are entitled to receive any distribution.  The ultimate recovery to common shareholders,if any, will not be determined until confirmation of a plan or plans ofreorganization.  No assurance can begiven as to what values, if any, will be ascribed in the bankruptcy proceedingsto the common shareholders.  A plan ofreorganization could also result in holders of the Company’s common stockreceiving no value for their interests. Because of such possibilities, the value of the common stock is highlyspeculative.  Accordingly, the Companyurges that appropriate caution be exercised with respect to existing and futureinvestments in the securities.**

 

**Currently,the Board of Directors believes it is unlikely there will be any recovery ofvalue to common shareholders.**

 

***Revenue Recognition –***Revenueis recognized at the point of sale.

 

***Cash and Cash Equivalents***—-The Company considers all highly liquid investments with a maturity of threemonths or less at the time of purchase to be a cash equivalent.  Cash and cash equivalents were $3.9 millionand $4.7 million as of February 1, 2003 and February 2, 2002, respectively.

 

***Restricted Assets***—-Restricted assets are comprised of marketable securities and cash held inescrow by third parties.  Marketablesecurities are restricted to satisfy state insurance reserve requirementsrelated to claim liabilities recorded

 

29

----

 

for workers’ compensation, general liability and automobile (effectiveNovember 1, 2001) claims; such claim liability reserves are classified ascurrent.

 

The Company has classified its entire holdings of marketable securitiesas available for sale.  Such securitiesare reported at fair value and the difference between cost and fair value isreported as a separate component of shareholders’ equity until gains and lossesare realized.  Such amount is acomponent in the “Accumulated other comprehensive loss” caption ofshareholders’ equity.  The decline inmarket value of any security below cost that is deemed to be other thantemporary results in a reduction in carrying amount to fair value.  The impairment is charged to earnings and anew cost basis for the security is established.

 

***Accounts Receivable*** –Accounts receivable are recorded at cost, less the related allowance fordoubtful accounts.  The allowance isbased on management’s evaluation of accounts receivable considering currentinformation and events regarding the debtors’ ability to repay.  The activity in the allowance for doubtfulaccounts for the years ended February 1, 2003, February 2, 2002 and February 3,2001 follows:

 
| **(In  Thousands)**          |   | **Year  Ending  February 1, 2003** | ** ** | **Year  Ending  February 2, 2002** | ** ** | **Year  Ending  February 3, 2001** | ** ** |
|------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                         |   |                               |       |                               |       |                               |       |
| Balance at beginning of year |   | $                                  | (1,160     | )                                  | $          | (1,668                             | )          | $ | (1,388 | ) |
|                         |   |                               |       |                               |       |                               |       |
| Bad debt provision           |   | (357                               | )          | (2                                 | )          | (323                               | )          |
|                         |   |                               |       |                               |       |                               |       |
| Writeoffs                    |   | 164                                |       | 510                                |       | 43                                 |       |
|                         |   |                               |       |                               |       |                               |       |
| Balance at end of year       |   | $                                  | (1,353     | )                                  | $          | (1,160                             | )          | $ | (1,668 | ) |

 

***Inventories–*** TheCompany implemented a change in accounting principle, effective February 3,2002, from valuing substantially all inventories at the lower of cost or marketutilizing the last-in, first-out (“LIFO”) method to valuing all inventories atthe lower of cost or market utilizing the first-in, first-out (“FIFO”)method.  This change was adopted becausethe FIFO method more clearly follows the actual flow of inventory, due to itsperishable nature, and more closely matches actual costs and revenues.Financial statements have been restated to apply the change in accountingprinciple retroactively, resulting in a decrease in the loss reported of $95thousand (or $0.03 per share) for fiscal year 2001 and an increase in the lossreported of $1.2 million (or $0.41 per share) for fiscal year 2000.  In addition, the inventory previouslyreported as of February 2, 2002 increased $8.4 million and the balance ofaccumulated deficit as of January 29, 2000 has been restated by $9.6 million toreflect retroactive application of this new accounting method.  The new accounting policy for inventories isas follows:

 

Inventories are stated at the lower of cost or market.  Cost is determined through use of thefirst-in, first-out (“FIFO”) method, for all inventories, applied to inventoryvalues determined primarily by the retail inventory method (“RIM”) for storeinventories and the weighted average inventory method for warehouse inventories.

 

Under RIM the valuation of inventories are at cost and the resultinggross margins are calculated by applying a cost-to-retail ratio to sales.  Inherent in the RIM calculations are certainmanagement judgments and estimates, including shrinkage, which could impact theending inventory valuation at cost, as well as the resulting grossmargins.  RIM is an averaging methodthat has been widely used in the retail industry due to its practicality.

 

***Vendor Funding***- EITFIssue No. 02-16, “Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor,” became effective for the Company onJanuary 1, 2003. This issue addresses the appropriate accounting for cashconsideration received from a vendor that is presumed to be a reduction of theprices of the vendor’s products or services and should, therefore, becharacterized as a reduction in cost of sales when the related products aresold unless it is a payment for assets or services delivered to the vendor, inwhich case the cash consideration should be characterized as revenue, or it isa reimbursement of costs incurred to sell the vendor’s products, in which casethe cash consideration should be characterized as a reduction of that cost.Historically, the Company recognized those allowances as they were earned,based on the fulfillment of the related obligations of the contract. Thisaccounting treatment was consistent with generally accepted accountingprinciples. For all contracts entered or modified after January 1, 2003, wehave recognized prospectively, and will continue to recognize, vendorallowances in accordance with EITF Issue No. 02-16.

 

30

----

 

***Property and Equipment***–Property and equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is computedby using the straight-line method over the estimated useful lives of buildings,fixtures and equipment.  Leasehold costsand improvements are amortized over their estimated useful lives or theremaining original lease term, whichever is shorter.  Leasehold interests are generally amortized over the lease termplus expected renewal periods or 25 years, whichever is shorter.  Property acquired under capital lease isamortized on a straight-line basis over the shorter of the estimated usefullife of the property or the original lease term.

 

***Long-Lived Assets***–The Company monitors under-performing stores and under-utilized facilities foran indication that the carrying amount of assets may not be recoverable.  If the sum of the expected futureundiscounted cash flows is less than the carrying amount of the asset animpairment loss is recognized. Impairment is measured based on the estimated fair value of theasset.  Fair value is based on management’sestimate of the amount that could be realized from the sale of assets in acurrent transaction between willing parties based on professional appraisals,offers and other indications of fair value. In determining whether an asset is impaired, assets are grouped at thelowest level for which there are identifiable cash flows that are largelyindependent of the cash flows of other groups of assets, which, for theCompany, is generally on a store by store basis.

 

During fiscal 2002 and fiscal 2000, the Company recognized charges of$2.1 million and $821 thousand, respectively, for asset impairments onunderperforming stores.  Impairmentcharges are included in the caption “Store closing, asset impairment and leasetermination” in the Consolidated Statements of Operations.

 

***Debt Issuance Costs***-Debt issuance costs are amortized over the terms of the related debt agreementsusing the interest method.

 

***Property Held for Resale***–—Property in this classification includes a closed store, undeveloped lots andassets (in the amount of $184 thousand) for two leased stores that were closedin the first quarter of fiscal 2003.

 

***Deferred Software Costs***–—Software costs are generally amortized over five years beginning when thesoftware is placed in service.  Deferredsoftware balances were $3.0 million and $6.7 million as of February 1, 2003 andFebruary 2, 2002, respectively; net of accumulated amortization of $18.2million and $14.4 million, respectively.

 

***Self-Insurance***–— TheCompany is primarily self-insured, through its captive insurance subsidiary,for workers’ compensation, general liability and automobile (effective November1, 2001) claims.  The self-insuranceclaim liability is determined actuarially based on claims filed and an estimateof claims incurred but not yet reported. Actuarial projections of the lossesare employed due to the high degree of variability in the liabilityestimates.  Some factors affecting theuncertainty of claims include the timeframe of development, settlementpatterns, litigation and adjudication direction and medical treatment and costtrends.  The liability is notdiscounted.

 

A single parent captive is used to fund the self-insuranceliabilities.  The captive allows greaterflexibility and management control over the claims activities while earningincome on the reserves.

 

Self-insurance claim liabilities of $7.0 million as of February 1, 2003and $6.1 million as of February 2, 2002 are included in the “Accruedliabilities” caption of the balance sheet.

 

***Store Closing and Asset Impairment***–—In the event the performance or utilization of underperforming stores andunderutilized facilities cannot be improved, management may decide to close,sell or otherwise dispose of such stores or facilities.  A charge for store closing and assetimpairment is provided when management has reached the decision to close, sellor otherwise dispose of such stores within one year and the costs can bereasonably estimated.  The charge forstore closing arises primarily from (a) the discounted value of future leasecommitments in excess of the discounted value of estimated sublease revenues,(b) store closing costs and (c) revaluing fixed assets to estimated fair valueswhen assets are impaired, or to net realizable value for assets to be disposedof (see Long-Lived Assets above). Discount rates have been determined at the time a store was added to theclosed store reserve and have not been changed to reflect subsequent changes inrates.  The Company’s policy is to use arisk-free rate of return for a duration equal to the remaining lease term atthe time the reserve was established.

 

The provision for store closing and asset impairment includes the itemsdiscussed in Note D of notes to Consolidated Financial Statements for the yearended February 1, 2003 and asset impairment charges for underperforming storesthat are not being closed, sold or otherwise disposed of (see *Long-LivedAssets* above).  Thecomponents of the provision for the years ended February 1, 2003, February 2,2002 and February 3, 2001 were as follows:

 

31

----

 
| **(Dollars in thousands)**  |   | **Year  Ended  February 1,  2003** |   | **Year  Ended  February 2,  2002** |   | **Year  Ended  February 3,  2001** |   |
|-----------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                        |   |                               |   |                               |   |                               |   |
| Provision for store closing |   | 386                                |   | $                                  | — |                               | $      | — |   |
| Asset impairment charges    |   | (2,133                             | )      | —                             |   | (821                               | )      |
| Total                       |   | (1,747                             | )      | $                                  | — |                               | $      | (821 | ) |

 

***Reorganization Items, Net –***AICPAStatement of Position 90-7 *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* provides guidance on financial reportingby entities that have filed petitions with the U.S. Bankruptcy Court and expectto reorganize as going concerns under Chapter 11 of Title 11 of the UnitedStates Code.  Revenues, expenses(including professional fees), realized gains and losses, and provisions for lossesresulting from the reorganization and restructuring of the business arereported separately as reorganization items***. ***A summary ofcosts recognized during the fiscal years ended February 1, 2003, February 2,2002 and February 3, 2001 relating to the Company’s reorganization during theFirst Bankruptcy Case is as follows:

 
| **(Dollars in thousands)**                                                                 |   | **Year  Ended  February 1,  2003** |   | **Year  Ended  February 2,  2002** |   | **Year  Ended  February 3,  2001** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
| Store closing and asset impairment                                                         |   | $                                  | — |                               | $      | 1,005                              |   | $ | (6,533 | ) |
| Employee termination benefits                                                              |   | —                             |   | (16                                | )      | (1,361                             | )      |
| Professional fees                                                                          |   | —                             |   | (166                               | )      | (3,608                             | )      |
| Net realized gains on sale/disposal of leases and equipment and  release of capital leases |   | —                             |   | —                             |   | 944                                |   |
| Other                                                                                      |   | —                             |   | 7                                  |   | (224                               | )      |
| Total                                                                                      |   | $                                  | — |                               | $      | 830                                |   | $ | (10,782 | ) |

 

*EmployeeTermination Benefits* - In connection with the FirstBankruptcy Case, the Company recognized $1.4 million in employee terminationbenefits during fiscal 2000, representing severance costs for 353 employeesterminated as a result of the store closings under the provisions of the Planof Reorganization (2000 Plan).

 

*ProfessionalFees* - Professional fees relate to legal, accounting,consulting and other professional costs directly attributable to the FirstBankruptcy Case and have been expensed as incurred.

 

*NetRealized Gains* - During fiscal 2000, the Company hadrealized gains on the sale/disposal of leases and equipment and release ofcapital lease obligations of $944 thousand, all related to the 20 closed orsold stores as part of the 2000 Plan.

 

No expenses relating to the Second Bankruptcy Case that was filed onApril 7, 2003 were recognized as reorganization costs for fiscal year 2002 asexpenses are included in this category only after the petition has been filed(see note B).

 

***Advertising Expense*** -The Company’s advertising costs, including radio and television productioncosts, are expensed as incurred and included in the “Selling, general andadministrative” caption of the Consolidated Statements of Operations.  The components of advertising expense are asfollows:

 
|                       |   | **Gross  Advertising** |   | **Co-Op  Credits** |   | **Net  Advertising** |   |
|----------------------------|--------|------------------------|--------|--------------------|--------|----------------------|--------|
| **(Dollars in thousands)** |   | **Dollars**            |   | **%****of Sales**  |   | **Dollars**          |   | **%****of Sales** |   | **Dollars** |   | **%****of Sales** |   |
| Fiscal 2002                |   | $                      | 10,198 |               | 1.7    | %                    | $      | 8,142 |   | 1.4 | % | $ | 2,056 |   | 0.3 | % |
| Fiscal 2001                |   | $                      | 11,601 |               | 1.8    | %                    | $      | 9,034 |   | 1.4 | % | $ | 2,567 |   | 0.4 | % |
| Fiscal 2000                |   | $                      | 11,695 |               | 1.7    | %                    | $      | 10,620 |   | 1.5 | % | $ | 1,075 |   | 0.2 | % |

 

32

----

 

***Income Taxes*** - Incometaxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax law is recognized in the period thatincludes the enactment date.  Valuationallowances are recorded to reduce deferred tax assets when there is uncertaintyof future recoverability.

 

***Loss Per Share*** -Basic net loss per common share is based on the weighted average number ofcommon shares outstanding in each year. Diluted net loss per common share assumes that outstanding common shareswere increased by shares issuable upon exercise of those stock option sharesfor which market price exceeds exercise price, if any, less shares which couldhave been purchased by the Company with the related proceeds.  Shares resulting in an antidilutive effectare excluded in accordance with SFAS No. 128, *Earnings Per Share.*

 

***Stock Based Compensation***- The Company accounts for stock option grants and awards under its stock basedcompensation plans in accordance with Accounting Principles Board Opinion No.25.  If compensation cost for stockoption grants and awards had been determined based on fair value at the grantdates for fiscal 2002, 2001 and 2000 consistent with the method prescribed bySFAS No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No.148, the Company’s net loss and net loss per share would have been adjusted tothe pro forma amounts indicated below:

 
|                                                                                                                                                |   |        |   | **2002**                                   |    | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------------------------------------------|---------|----------|--------|----------|--------|
|                                                                                                                                                |   |        |   | **(In  thousands, except per share data)** |    |
| Net loss:                                                                                                                                           |   | As reported |   | $                                          | (17,843 | )        | $      | (1,519   | )      | $ | (15,501 | ) |
| Deduct:  Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   |        |   | —                                     |    | (13      | )      | (546     | )      |
|                                                                                                                                                |   | Pro Forma   |   | $                                          | (17,843 | )        | $      | (1,532   | )      | $ | (16,047 | ) |
|                                                                                                                                                |   |        |   |                                       |    |     |   |     |   |
| Basic net loss per share:                                                                                                                           |   | As reported |   | $                                          | (5.73   | )        | $      | (0.48    | )      | $ | (5.22 | ) |
|                                                                                                                                                |   | Pro Forma   |   | $                                          | (5.73   | )        | $      | (0.48    | )      | $ | (5.40 | ) |

 

***Reclassifications*** -Certain reclassifications were made to prior years’ balances to conform tocurrent year presentation.

 

***New Accounting Standards***–

 

Existing accounting principles generally accepted in the United Statesof America do not provide specific guidance on the accounting for salesincentives that many companies offer to their customers.  The Financial Accounting Standards Board(“FASB”) Emerging Issues Task Force (EITF), a group responsible forpromulgating changes to accounting policies and procedures, has issued anaccounting pronouncement, EITF Issue No. 01-9, “Consideration Given by a Vendorto a Customer (Including a Reseller of the Vendor’s Products)”, which addressesthe recognition, measurement and income statement classification for certainsales incentives offered by companies in the form of discounts, coupons orrebates.  The implementation of thisaccounting pronouncement in the first quarter of fiscal 2002 required theCompany to make certain reclassifications between Total Sales, Cost of GoodsSold and Selling, General and Administrative Expenses in the Company’sConsolidated Statements of Operations.  The implementation of EITF Issue No. 01-9 did not have an effect onreported Operating Income (Loss) or Net Earnings (Loss).  In accordance with such implementation, theCompany, including stores accounted for as discontinued operations,reclassified certain prior period financial statements, for comparabilitypurposes, having the following impact on Sales, Cost of Goods Sold and Selling,General and Administrative Expenses:

 
| **(Dollars in thousands)**                   |   | **February 1,  2003** |   | **February 2,  2002** |   | **February 3,  2001** |   |
|----------------------------------------------|--------|-----------------------|--------|-----------------------|--------|-----------------------|--------|
|                                         |   |                  |   |                  |   |                  |   |
| Sales Decrease                               |   | $                     | 53,403 |                  | $      | 60,310                |   | $ | 58,408 |   |
| Cost of Goods Sold Decrease                  |   | $                     | 52,707 |                  | $      | 59,865                |   | $ | 57,611 |   |
| Selling, General and Administrative Decrease |   | $                     | 696    |                  | $      | 445                   |   | $ | 797 |   |

 

EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller)for Certain Consideration Received from a

 

33

----

 

Vendor,” became effective for the Company on January 1, 2003. Thisissue addresses the appropriate accounting for cash consideration received froma vendor that is presumed to be a reduction of the prices of the vendor’sproducts or services and should, therefore, be characterized as a reduction incost of sales when the related products are sold unless it is a payment forassets or services delivered to the vendor, in which case the cashconsideration should be characterized as revenue, or it is a reimbursement ofcosts incurred to sell the vendor’s products, in which case the cashconsideration should be characterized as a reduction of that cost.Historically, the Company recognized those allowances as they were earned,based on the fulfillment of the related obligations of the contract. Thisaccounting treatment was consistent with generally accepted accountingprinciples. For all contracts entered or modified after January 1, 2003, wehave recognized prospectively, and will continue to recognize, vendorallowances in accordance with EITF Issue No. 02-16. Net loss for fiscal 2002was not affected by the adoption of EITF Issue No. 02-16 on January 1, 2003.

 

In June 2001, the FASB issued SFAS No. 143, *Accountingfor Asset Retirement Obligations*. SFAS No.143 requires a company to record the fair value of an assetretirement obligation as a liability in the period in which it incurs a legalobligation associated with the retirement of tangible long-lived assets thatresult from the acquisition, construction, development and/or normal use of theassets.  A corresponding asset is alsorecorded, which is depreciated over the life of the asset.   Subsequent to the initial measurement ofthe asset retirement obligation, the obligation is adjusted at the end of eachperiod to reflect the passage of time and changes in the estimated future cashflows underlying the obligation.  TheCompany is required to adopt SFAS No. 143 for fiscal years beginning after June15, 2002.  The Company does not expectthis statement to have a material effect on its consolidated financialstatements.

 

In August, 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived*Assets.  SFAS No. 144 supersedes SFAS No. 121 and theaccounting and reporting provision of APB Opinion No 30 for the disposal of asegment of a business.  SFAS No. 144addresses financial accounting and reporting for the impairment or disposal oflong-lived assets and requires that long-lived assets be reviewed forimpairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future net cash flows expected to begenerated by the asset.  If the carryingamount of an asset exceeds its estimated undiscounted future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, abandonment, or in a distribution to owners) oris classified as held for sale.  Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.  The Companyimplemented the statement on February 3, 2002. During fiscal 2002 the Company recorded as asset impairment charge of$2.1 million which is included in Store closing and asset impairment on theConsolidated Statements of Operations. In accordance with SFAS No. 144, the two stores that the Company closedin fiscal 2002 and the two stores that the Company closed in the first quarterof fiscal 2003 are required to be reported as discontinued operations.  The results include all direct charges tothe operations of the stores.  Corporateoverhead, including interest, is not included in discontinued storeoperations.  The results are excludedfrom the accompanying notes to the Consolidated Financial Statements, unlessotherwise noted.  Sales relating todiscontinued operations, adjusted for EITF Issue No. 01-9, were $26.4 millionin fiscal 2002, $32.4 million in fiscal 2001 and $35.9 million in fiscal 2000.  Also in accordance with SFAS No. 144, theCompany recorded a charge of $50 thousand for asset impairment relating to thediscontinued store operations.  TheCompany’s discontinued operations recorded a loss of $0.1 million in fiscal2002, income of $0.8 million in fiscal 2001 and income of $1.5 million in fiscal2000.

 

In April, 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections*.  Under Statement No. 4, all gains and lossesfrom extinguishment of debt were required to be aggregated and, if material,classified as an extraordinary item. The rescission of Statement No. 4 affects the Company since iteliminates the exception to applying APB Opinion No. 30 to the Company’s gainson extinguishment of debt.  As a result,the gains should be classified as extraordinary only if they meet the criteriain APB Opinion No. 30.  The Company doesnot believe its debt extinguishment gains are both unusual in nature orinfrequent of occurrence, and thus do not meet the criteria to be classified asan extraordinary item.

 

The provisions of Statement No. 145 related to the rescission of SFASNo. 4 shall be applied in fiscal years beginning after May 15, 2002.  Early application of the provisions relatedto the rescission of Statement No. 4 is encouraged.  Any gain or loss on extinguishment of debt that was classified asan extraordinary item in prior periods that does not meet the criteria forclassification as an extraordinary item should be reclassified.  The Company implemented this statement onMay 5, 2002.  The effects ofimplementation are illustrated as follows:

 

34

----

 
| **(Dollars  in thousands)**                                   |   | **Fiscal 2002  February 1,  2003** |       | **Fiscal 2001  February 2,  2002** |       | **Fiscal 2000  February 3,  2001** |       |
|---------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                                          |   |                               | ** ** |                               | ** ** |                               | ** ** |
| Gain on  extinguishment of debt increase                      |   | $                                  | 860        |                               | $          | 2,529                              |       | $ | 5,286 |   |
| Extraordinary  item - gain on extinguishment of debt decrease |   | $                                  | 860        |                               | $          | 2,529                              |       | $ | 5,286 |   |

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated withExit or Disposal Activities*. This Statement addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).*  Under EITF Issue No. 94-3, a liability foran exit cost was recognized at the date of the company’s commitment to an exitplan.  SFAS No. 146 requires that theliability for costs associated with an exit or disposal activity be recognizedwhen the liability is incurred.  Inaccordance with SFAS No. 146, store lease exit costs are accrued when a storeis closed.  SFAS No. 146 alsoestablishes that the liability should initially be measured and recorded atfair value.  SFAS No. 146 may affect thetiming of recognizing future store closures and restructuring costs, if any, aswell as the amounts recognized.  Theprovisions of this Statement are effective for exit and disposal activitiesthat are initiated after December 31, 2002. The Company has not determined whether future application of thisstatement will have an effect on its consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The provisions of SFAS No. 148 are effectivefor financial statements for fiscal years ending after December 15, 2002.  The Company accounts for stock-basedemployee compensation arrangements in accordance with the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and complies with the disclosure provisions of SFAS No. 123 andSFAS No. 148.

 

***Note C - Consolidated Statements of Cash Flows***

 

For purposes of the Consolidated Statements of Cash Flows, the Companyconsiders all highly liquid debt instruments purchased with a maturity of threemonths or less to be cash equivalents.

 

35

----

 

**SUPPLEMENTAL CASH FLOW INFORMATION**

 
| **(Dollars in thousands)**                                                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                            |   |     |   |     |   |     |   |
| Cash paid for interest                                                          |   | $        | 11,692 |     | $      | 12,378   |   | $ | 13,173 |   |
| Non-cash additions to property and equipment and capital lease  obligation      |   | —   |   | 533      |   | —   |   |
| Non-cash reductions in property and equipment                                   |   | —   |   | 215      |   | —   |   |
| Non-cash reductions in capital lease obligation                                 |   | —   |   | 386      |   | —   |   |
| Non-cash transfer from property held for resale to property and  equipment, net |   | —   |   | —   |   | 4,163    |   |
| Additions to property and equipment and debt                                    |   | —   |   | —   |   | 103      |   |
| Unrealized gain (loss) on marketable securities                                 |   | (182     | )      | (116     | )      | 125      |   |
| Stock issued to New Senior Note holders                                         |   | —   |   | —   |   | 2,147    |   |
|                                                                                 |        |          |        |          |        |          |        |  |  |  |

 

***Note D - Reserve for Closed Stores***

 

An analysis of activity in the reserve for closed stores for the yearsended February 1, 2003, February 2, 2002, and February 3, 2001 is as follows:

 
| **(In thousands)**                                                                                                                |   | **February  1,  2003** |   | **February  2,  2002** |   | **February  3,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                                                                              |   |                   |   |                   |   |                   |   |
| Balance at beginning of year                                                                                                      |   | $                      | 1,666  |                   | $      | 8,704                  |   | $ | 9,986 |   |
|                                                                                                                              |   |                   |   |                   |   |                   |   |
| Payments, primarily rental payments, net of sublease rentals of $270  in fiscal 2002, $280 in fiscal 2001 and $636 in fiscal 2000 |   | (381                   | )      | (6,207                 | )      | (8,124                 | )      |
|                                                                                                                              |   |                   |   |                   |   |                   |   |
| Interest cost                                                                                                                     |   | 75                     |   | 174                    |   | 309                    |   |
|                                                                                                                              |   |                   |   |                   |   |                   |   |
| Provision for store closing                                                                                                       |   | (386                   | )      | (1,005                 | )      | 6,533                  |   |
|                                                                                                                              |   |                   |   |                   |   |                   |   |
| Balance at end of year (including $0.1 million , $0.4 million and $5.6  million, respectively, classified as current)             |   | $                      | 974    |                   | $      | 1,666                  |   | $ | 8,704 |   |

 

The provision for store closing and asset impairment is classified inthe Consolidated Statements of Operations under the caption “Store closing andasset impairment” for fiscal 2002 and the caption “Reorganization items, net”for fiscal 2001 and fiscal 2000.

 

During fiscal 2002, the Company recorded favorable changes in thereserve for closed stores of $386 thousand. The Company settled one store lease that was included in the reserve atthe end of fiscal 2001.

 

During fiscal 2001, the Company benefited $1.0 million from thefavorable settlement of leases included in the reserve at the end of fiscal2000.  Fourteen of the 17 storesincluded in the reserve at the end of fiscal 2000 were either terminated orexpired during the year.  An agreementto terminate one additional store, included in the Reserve for Closed Stores,was reached prior to the end of fiscal 2001, with the payment in fiscal 2002.

 

During fiscal 2000, the Company added 15 stores to the reserve forwhich $10.4 million was provided for estimated future lease costs.  In addition, the Company benefited from netfavorable changes in estimates of $3.9 million for both the 18 stores in thereserve at the end of fiscal 1999.  Theleases for 16 stores terminated or expired during fiscal 2000.

 

The reserve at February 1, 2003 represents estimated future cashoutflows primarily related to the present value of net future rentalpayments.  It is management’s opinionthat the reserve will be adequate to cover continuing costs for the existingclosed stores.

 

At the end of fiscal year 2002, the reserve included estimated netfuture costs for sublease subsidies for two closed stores.  At the end of fiscal year 2001, the reserveincluded estimated net future costs for one closed store and sublease subsidiesfor two closed stores.

 

36

----

 

A rollforward presentation of the number of stores in the closed storereserve for fiscal years 2002, 2001 and 2000 is as follows:

 
|                                             |   | **Fiscal****2002** |   | **Fiscal****2001** |   | **Fiscal****2000** |   |
|--------------------------------------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                                             |   |               |   |               |   |               |   |
| Number of stores in reserve at beginning of year |   | 3                  |   | 17                 |   | 18                 |   |
| Leases terminated or expired                     |   | (1                 | )      | (14                | )      | (16                | )      |
| Stores added to the closed store reserve         |   | 0                  |   | 0                  |   | 15                 |   |
| Number of stores in reserve at end of year       |   | 2                  |   | 3                  |   | 17                 |   |

 

See Note B of the notes to the Consolidated Financial Statements underthe captions*Store Closing and Asset Impairment,*and*Reorganization Items, Net.*

 

***Note E - Property and Equipment***

 

The investment in property and equipment is as follows:

 
| **(In thousands)**                             |   | **February  1,  2003** |   | **February  2,  2002** |   |
|------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                           |   |                   |   |                   |   |
| Land                                           |   | $                      | 5,383  |                   | $      | 5,732 |   |
| Buildings                                      |   | 24,720                 |   | 25,325                 |   |
| Leasehold costs and improvements               |   | 41,235                 |   | 40,778                 |   |
| Fixtures and equipment                         |   | 121,507                |   | 125,249                |   |
| Leasehold interests                            |   | 14,232                 |   | 15,852                 |   |
| Property under capital leases                  |   | 37,025                 |   | 37,025                 |   |
| Total                                          |   | 244,102                |   | 249,961                |   |
| Less accumulated depreciation and amortization |   | (148,140               | )      | (142,654               | )      |
| Property and equipment (net)                   |   | $                      | 95,962 |                   | $      | 107,307 |   |

 

As of February 2, 2002, the Company owned eight operating stores andone closed store, with the closed store classified in “Property Held forResale.” The leased stores include 54 operating stores and two locations thatare subleased to other tenants.  Ofthese 56 leased stores, nine are capital leases included in Property andEquipment.

 

Property under capital leases represents capital leases for land,buildings and improvements. The capital leases have 22-25 year terms with up tosix five-year renewal options. The gains on the sale of these properties havebeen deferred and are amortized over the life of the original lease term.  The Company eliminated one capital leaseduring fiscal 2001.  Accumulated amortizationfor property under capital leases as of February 1, 2003 was $9.2 million andas of February 2, 2002 was $7.5 million. Amortization of the capital lease assets are included in the caption“Depreciation and amortization” in the Consolidated Statements of Operations.

 

Depreciation and amortization are computed using the straight-linemethod over the estimated useful lives of the assets.  Depreciation expense was $13.2 million, $14.2 million and $14.8million for fiscal years 2002, 2001 and 2000 respectively.  The useful lives of the various classes ofassets are as follows:

 
| Buildings                          | 20-25 years                            |
|------------------------------------|----------------------------------------|
|                               |                                   |
| Fixtures and Equipment             | 2-12 years                             |
|                               |                                   |
| Leasehold Costs & Improvements | 5-23 years                             |
|                               |                                   |
| Leasehold interests                | 12-25 years                            |
|                               |                                   |
| Property under capital lease       | Shorter of economic life or lease term |

 

37

----

 

In fiscal year 2002, the Company reclassed the assets of two storeswith a combined book value of $184 thousand from “Property and Equipment (Net)”to “Property Held for Resale”.   Thesetwo stores were closed and the assets sold during the first quarter of fiscal2003.

 

***Note F – Long-Term Debt***

 

Long-term debt consists of the following:

 
| **(In thousands)**          |   | **February  1,  2003** |   | **February  2,  2002** |   |
|-----------------------------|--------|------------------------|--------|------------------------|--------|
|                        |   |                   |   |                   |   |
| 11% Senior Notes, net       |   | $                      | 63,318 |                   | $      | 64,659 |   |
| Capital leases (Note H)     |   | 33,038                 |   | 33,693                 |   |
| Loan and Security Agreement |   | 25,135                 |   | 23,325                 |   |
| Other                       |   | 466                    |   | 643                    |   |
|                        |   | 121,957                |   | 122,320                |   |
| Less current maturities     |   | 26,035                 |   | 833                    |   |
| Total long-term debt        |   | $                      | 95,922 |                   | $      | 121,487 |   |

 

The maturities of long-term debt, including capital lease obligationsare: fiscal year 2003 - $26.0 million, fiscal year 2004 - $1.0 million, fiscalyear 2005 - $64.4 million, fiscal year 2006 - $1.0 million and fiscal year 2007- $1.1 million.

 

The Senior Notes have the following material terms and conditions; (i)maturity date of April 15, 2005, (ii) an interest rate of 11%, (iii) a $15million repayment of outstanding principal by the Company on August 7, 2000,and (iv) the Company may, at its option and with no prepayment penalty, redeemthe Senior Notes at any time at 100% of the principal amount outstanding at thetime of redemption.

 

In addition, under the 2000 Plan, the Company agreed to issue 15% offully-diluted common stock of the Company (482,605 shares) to the holders ofthe Senior Notes, of which 10% would have been returned to the Company if theCompany had been sold or the debt had been retired prior to October 15,2001.  If the Company had been sold orthe debt had been retired prior to October 15, 2002, 5% of the common stockwould have been returned to the Company. None of the common stock was returned to the Company since the Companywas not sold nor the debt retired prior to October 15, 2002.  The shares were recorded at fair value inthe amount of $2.1 million with the offsetting amount recorded as a discountagainst the Senior Notes. The indenture relating to the 11% Senior Notescontains provisions as well as certain restrictions relating to certain assetdispositions, sale/leaseback transactions, payment of dividends, repurchase ofequity interests, incurrence of additional indebtedness and liens, and certainother restricted payments. The filing ofthe Second Bankruptcy Case is an event of default under the Indenture and theSenior Notes became immediately due and payable subject to the automatic stayprovisions of Chapter 11.  Subsequent tothe filing of the Second Bankruptcy Case, a required interest payment ofapproximately $3.5 million due April 15, 2003 was not made, which is also anevent of default under the Indenture.

 

The Company repurchased $1.7 million of its Senior Notes during fiscal2002 at a cost of $840 thousand, recording a gain on extinguishment of debt of$860 thousand.  The balance of theSenior Notes on February 1, 2003 was $64.1 million less unamortized discount of$758 thousand.  The Company repurchased$6.2 million of its Senior Notes during fiscal 2001 at a cost of $3.7 million,recording a gain on extinguishment of debt of $2.5 million.  The balance of the Senior Notes on February2, 2002 was $65.8 million less unamortized discount of $1.1 million. TheCompany repurchased $13.0 million of its Senior Notes during fiscal 2000 at acost of $7.7 million, recording a gain on extinguishment of debt of $5.3million.  The balance of the SeniorNotes on February 3, 2001 was $72.0 million less unamortized discount of $1.6million.   The effective interest rateon the Senior Notes is 11.5%.  Therepurchase of the Senior Notes was primarily funded with cash on hand, cashfrom Company operations and loans against the Revolver.

 

The Company entered into a Second Amended and Restated Loan andSecurity Agreement (“Revolver”) with Congress Financial Corporation (Central)on August 24, 2001, which amended and restated the Amended and Restated Loanand Security Agreement dated August 7, 2000 and extended the term of thefacility to August 24, 2004.  TheRevolver is a $50 million facility that provides for revolving credit loans andletters of credit.  No more than anaggregate of $20 million of the total commitment may be drawn by theCompany as letters of credit.  Total

 

38

----

 

availability under the Revolver is based on percentages of allowableinventory and selected real estate up to a maximum of $50 million.  The terms of the Revolver provide forcapital expenditures up to $75 million per year and purchase money securityinterests and purchase money mortgage amounts to a combined maximum outstandingamount of $75 million. The Revolver is secured by a first priority securityinterest in selected real estate with a book value of $22.9 million and in allinventories of the Company located in its stores and distribution center inMilan, Illinois.  Loans made pursuant tothe Revolver bear interest at a fluctuating interest rate based, at theCompany’s option, on a margin over the Prime Rate or a margin over the LondonInterbank Offered Rate (LIBOR). The Revolver has one financial covenantrequiring the Company to maintain an “Adjusted Net Worth” (as defined in theRevolver) of $3.0 million.  During thethird fiscal quarter of 2002, the Company became concerned that it may violatethe covenant under its Revolver.  As aprecaution the Company and Congress entered into a limited waiver agreement,effective as of November 1, 2002, which waived the Adjusted Net Worth covenantuntil February 1, 2003, which was subsequently extended to April 5, 2003 (the“Waiver”). Since the Company did not attempt to extend the Waiver beyond April5, 2003, it was not in compliance with the financial covenant as of April 6,2003.  The Company determined it wouldnot be able to cure the default within the next twelve months. Therefore,according to EITF Issue No. 86-30 the related debt must be classified ascurrent.  Also, the filing of the Second Bankruptcy Case is an event of defaultunder the Revolver and the loans became immediately due and payable subject tothe automatic stay provisions of Chapter 11. The Revolver also has as anevent of default the actual or likely occurrence or existence of any event orcircumstance which, in the lender’s reasonable judgement, has a materialadverse effect on the Company or the lender, as defined in the Revolver.

 

At February 1, 2003, the Company had $25.1 million in loans against theRevolver and no letters of credit outstanding, resulting in $1.5 million ofexcess availability, subject to the conditions of the limited waiver, under theRevolver.   Of the $25.1 million, $25.0million was at an average rate of 4.37% using the LIBOR option.  The remaining $0.1 million was at a rate of5.00%.  At February 2, 2002, the Companyhad $23.3 million in loans against the Revolver and no letters of creditoutstanding, resulting in $21.0 million of availability under theRevolver.   Of the $23.3 million, $15.0million was at an average rate of 4.28% using the LIBOR option.  The remaining $8.3 million was at a rate of5.25%.

 

In conjunction with the Chapter 11 filing on April 7, 2003, the Companyreceived a commitment for $40 million in debtor-in-possession (DIP) financingfrom Congress which the bankruptcy court approved on an interim basis, with thefinal DIP order approved on May 20, 2003. The interest rates for this facility are the same as defined in theWaiver.

 

***Note G - Treasury Stock***

 

The following summarizes the treasury stock activity for the threeyears in the period ended February 1, 2003:

 
| **(Dollars in thousands, except share  information)** |   | **Shares** |   | **Dollars** |   | **Average** |   |
|-------------------------------------------------------|--------|------------|--------|-------------|--------|-------------|--------|
|                                                  |   |       |   |        |   |        |   |
| Balance January 29, 2000                              |   | 140,238    |   | $           | 2,228  |        | $      | 15.89 |   |
| Purchased                                             |   | 19,135     |   | 50          |   | $           | 2.60   |   |
|                                                  |   |       |   |        |   |        |   |
| Balance February 3, 2001                              |   | 159,373    |   | 2,278       |   | $           | 14.28  |   |
| Purchased                                             |   | 69,978     |   | 91          |   | $           | 1.30   |   |
|                                                  |   |       |   |        |   |        |   |
| Balance February 2, 2002                              |   | 229,351    |   | $           | 2,369  |        | $      | 10.33 |   |
| Purchased                                             |   | 17,319     |   | 14          |   | $           | 0.81   |   |
|                                                  |   |       |   |        |   |        |   |
| Balance February 1, 2003                              |   | 246,670    |   | $           | 2,383  |        | $      | 9.66 |   |

 

***Note H - Leases and Long-term Contracts***

 

Fifty-four operating stores and two locations that are subleased toother tenants were leased at February 1, 2003, many of which have renewaloptions for periods ranging from five to 30 years.  Some provide the option to acquire the property at certain timesduring the initial lease term for approximately its estimated fair market valueat that time, and some require the Company to pay taxes, common areamaintenance and insurance on the leased property.  The

 

39

----

 

Company also leases its central distribution facility under a leaseexpiring February 28, 2007.  Rentexpense consists of:

 
|                                             |   | **Year Ended**        |   |
|--------------------------------------------------|--------|-----------------------|--------|
| **(In thousands)**                               |   | **February 1,  2003** |   | **February 2,  2002** |   | **February 3,  2001** |   |
|                                             |   |                  |   |   |   |   |   |
| Minimum rent under operating leases              |   | $                     | 11,751 |   | $ | 11,564 |   | $ | 13,531 |   |
| Additional rent based on sales                   |   | 38                    |   | 88 |   | 98 |   |
| Less rentals received on noncancelable subleases |   | (305                  | )      | (284 | ) | (251 | ) |
|                                             |   | $                     | 11,484 |   | $ | 11,368 |   | $ | 13,378 |   |

 

Future minimum lease payments under non-cancelable operating andcapital leases as of February 1, 2003 are as follows:

 
| **(In thousands)**                                                                                               |   | **Operating  Leases** |    | **Capital  Leases** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|---------------------|--------|
| 2003                                                                                                             |   | 11,119                |    | 3,944               |   |
| 2004                                                                                                             |   | 10,891                |    | 3,947               |   |
| 2005                                                                                                             |   | 10,578                |    | 3,947               |   |
| 2006                                                                                                             |   | 9,590                 |    | 3,947               |   |
| 2007                                                                                                             |   | 7,820                 |    | 3,947               |   |
| Thereafter                                                                                                       |   | 54,345                |    | 50,885              |   |
| Total minimum lease payments                                                                                     |   | $                     | 104,343 |                | $      | 70,617 |   |
| Less amount representing interest                                                                                |   |                  |    | 37,579              |   |
| Present value of minimum capital lease payments, including  $735 classified as current portion of long-term debt |   |                  |    | $                   | 33,038 |   |
|                                                                                                                  |        |                       |         |                     |        |  |  |

 

The operating and capital lease future minimum lease payments do notinclude gross minimum commitments of $1.5 million for closed stores, thepresent value of which (net of estimated sublease payments) is included in theConsolidated Balance Sheet caption “Reserve for closed stores.”

 

The Company outsources its Information Systems function to EDS.  The Company signed a Services Agreement withEDS on July 1, 2000 with a term of five years. The agreement has provisions for inflationary increases.  The obligation based on current rates is:fiscal year 2003 - $3.6 million, fiscal year 2004 - $3.6 million, and fiscalyear 2005 - $1.5 million.  Either partymay terminate the Services Agreement at any time after the first three contractyears by giving the other party at least ninety days written notice designatingthe termination date.

 

***Note I - Income Taxes***

 

The provision for income taxes for the years ended February 1, 2003,February 2, 2002, and February 3, 2001 was $0.

 

Income tax benefit of $0 differs from the amounts computed by applyingthe federal income tax rate of 35% to pretax loss from continuing operations asa result of the following:

 
|                                                                                |   | **Year  Ended**        |   |
|-------------------------------------------------------------------------------------|--------|------------------------|--------|
| **(In thousands)**                                                                  |   | **February  1,  2003** |   | **February  2,  2002** |   | **February  3,  2001** |   |
|                                                                                |   |                   |   |   |   |   |   |
| Income tax benefit from continuing operations at statutory Federal tax  rate of 35% |   | $                      | (6,206 | ) | $ | (817 | ) | $ | (5,937 | ) |
| Surtax exemption                                                                    |   | 177                    |   | 23 |   | 170 |   |
| State income taxes, net of Federal benefit                                          |   | (922                   | )      | (121 | ) | (882 | ) |
| Change in valuation allowance                                                       |   | 7,446                  |   | 910 |   | 6,274 |   |
| Other                                                                               |   | (495                   | )      | 5 |   | 375 |   |
| Total                                                                               |   | $                      | — |   | $ | — |   | $ | — |   |

 

40

----

 

Deferred tax assets and liabilities arise becauseof differences between the financial accounting bases of assets and liabilitiesand their respective tax bases and tax credit and net operating losscarryforwards.  The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and liabilities are presented below:

 
| **(In thousands)**                              |   | **February  1,  2003** |   | **February  2,  2002** | ** ** |
|-------------------------------------------------|--------|------------------------|--------|------------------------|------------|
|                                            |   |                   |   |                   |       |
| Deferred Tax Assets:                            |   |                   |   |                   |       |
| Store closing                                   |   | $                      | 402    |                   | $          | 693 |   |
| Accrued reserves                                |   | 1,148                  |   | 1,992                  |       |
| Deferred revenues                               |   | 802                    |   | 1,256                  |       |
| Associate benefits                              |   | 272                    |   | 507                    |       |
| Other, net                                      |   | 567                    |   | 492                    |       |
| Tax credit and net operating loss carryforwards |   | 37,818                 |   | 34,058                 |       |
| Valuation allowance                             |   | (32,005                | )      | (29,325                | )          |
| Total                                           |   | $                      | 9,004  |                   | $          | 14,439 |   |
|                                            |   |                   |   |                   |       |
| Deferred Tax Liabilities:                       |   |                   |   |                   |       |
| Property and equipment                          |   | $                      | 2,425  |                   | $          | 5,488 |   |
| LIFO inventory reserve                          |   | 6,579                  |   | 8,951                  |       |
| Total                                           |   | $                      | 9,004  |                   | $          | 14,439 |   |
|                                            |   |                   |   |                   |       |
| Net deferred tax asset                          |   | $                      | — |                   | $          | — |   |

 

Valuation allowances have been established for the entire amount of thenet deferred tax assets as of February 1, 2003 and February 2, 2002, due to theuncertainty of future recoverability.

 

The tax credit carryforwards of $0.9 million expire at various datesfrom 2003 through the year 2010; alternative minimum tax credit carryforwardsof $5.7 million have no expiration date. Net operating loss carryforwards totaled $79.8 million at February 1,2003 and expire at various dates from 2009 through the year 2022.

 

***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-employerretirement plans under collective bargaining agreements.

 

The Company’s defined benefit plans covering salaried and hourlyassociates provide benefits that are based on associates’ compensation duringyears of service.  The Company’s policyis to fund no less than the minimum required under the Employee RetirementIncome Security Act of 1974.  During theyears ended February 1, 2003, February 2, 2002, and February 3, 2001, pension costsunder the plans totaled $182 thousand, $16 thousand and $646 thousand,respectively.

 

Net periodic pension cost under the Milan Office and Non-FoodsWarehouse Retirement Plan (“Milan Plan”) and the Eagle Food Centers, Inc.Associate Pension Plan (“Eagle Plan”) includes the following benefit and costcomponents for the years ended February 1, 2003, February 2, 2002, and February3, 2001:

 
|                               |   | **Year Ended**         |   |
|------------------------------------|--------|------------------------|--------|
| **(In thousands)**                 |   | **February  1,  2003** |   | **February  2,  2002** | ** ** | **February  3,  2001** | ** ** |
|                               |   |                   |   |   |   |   |   |
| Service cost                       |   | $                      | 38     |   | $ | 34 |   | $ | 607 |   |
| Interest cost                      |   | 987                    |   | 956 |   | 926 |   |
| Expected return on plan assets     |   | (961                   | )      | (1,018 | ) | (923 | ) |
| Amortization of prior service cost |   | 44                     |   | 44 |   | 36 |   |
| Amortization of net loss           |   | 74                     |   | — |   | — |   |
| Net periodic pension cost          |   | $                      | 182    |   | $ | 16 |   | $ | 646 |   |

 

The amounts included within other comprehensive income (loss) arisingfrom a change in the additional minimum pension liability are a loss of $2.6million for fiscal 2002, a loss of $1.8 million for fiscal 2001, and a loss of$129 thousand for fiscal 2000.

 

41

----

 

During 2000, the Eagle Plan provided an early retirement window and wasfrozen as of December 31, 2000.  Nofuture benefits will accrue after that date. This action resulted in acurtailment gain of $780 thousand offset by unrecognized prior service costsand an unrecognized net loss on plan assets of $387 thousand and additionaltermination benefits of $89 thousand.

 

The changes in benefit obligation and plan assets, the funded statusand amounts recognized in the Company’s Consolidated Balance Sheets for theMilan Plan and Eagle Plan, as of the measurement dates of December 31, 2002 and2001 and reflected in the financial statements at February 1, 2003 and February2, 2002, respectively, are as follows:

 
| **(In thousands)**                                                                           |   | **February  1,  2003** | ** ** | **February  2,  2002** | ** ** |
|----------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
|                                                                                         |   |                   | ** ** |                   | ** ** |
| **Change in Benefit Obligation**                                                             |   |                   |       |                   |       |
| Balance at January 1, 2002 and 2001                                                          |   | $                      | 13,758     |                   | $          | 12,994 |   |
| Service cost                                                                                 |   | 38                     |       | 34                     |       |
| Interest cost                                                                                |   | 987                    |       | 956                    |       |
| Plan amendment                                                                               |   | —                 |       | 153                    |       |
| Actuarial (gain) loss                                                                        |   | 1,286                  |       | 284                    |       |
| Benefits paid                                                                                |   | (660                   | )          | (663                   | )          |
|                                                                                         |   |                   |       |                   |       |
| Balance at December 31, 2002 and 2001                                                        |   | $                      | 15,409     |                   | $          | 13,758 |   |
|                                                                                         |   |                   |       |                   |       |
| **Change in Plan Assets at Fair Value**                                                      |   |                   |       |                   |       |
| Balance at January 1, 2002 and 2001                                                          |   | $                      | 12,415     |                   | $          | 12,394 |   |
| Actual return on plan assets                                                                 |   | (449                   | )          | (321                   | )          |
| Company contributions                                                                        |   | 477                    |       | 1,005                  |       |
| Benefits paid                                                                                |   | (660                   | )          | (663                   | )          |
|                                                                                         |   |                   |       |                   |       |
| Balance at December 31, 2002 and 2001                                                        |   | $                      | 11,783     |                   | $          | 12,415 |   |
|                                                                                         |   |                   |       |                   |       |
| **Reconciliation of Funded Status to Amounts Recognized  in Financial Statements**           |   |                   |       |                   |       |
| Funded status at December 31, 2002 and 2001                                                  |   | $                      | (3,626     | )                      | $          | (1,343 | ) |
| Unrecognized loss                                                                            |   | 4,540                  |       | 1,918                  |       |
| Unrecognized prior service cost                                                              |   | 214                    |       | 258                    |       |
| Contributions after December 31 and before fiscal year end                                   |   | 54                     |       | 156                    |       |
|                                                                                         |   |                   |       |                   |       |
| Recognized prepaid (accrued) pension cost                                                    |   | $                      | 1,182      |                   | $          | 989 |   |
|                                                                                         |   |                   |       |                   |       |
| **Amounts Recognized in the Financial Statements at  February 1, 2003 and February 2, 2002** |   |                   |       |                   |       |
| Accrued benefit liability                                                                    |   | $                      | (3,572     | )                      | $          | (1,187 | ) |
| Intangible asset                                                                             |   | 214                    |       | 258                    |       |
| Accumulated other comprehensive income                                                       |   | 4,540                  |       | 1,918                  |       |
|                                                                                         |   |                   |       |                   |       |
| Net amount recognized                                                                        |   | $                      | 1,182      |                   | $          | 989 |   |

 

Plan assets are held in a trust and primarily include corporate andU.S. government debt securities and common stocks.

 

Actuarial assumptions used to develop net periodic pension cost andrelated pension obligations for the fiscal years 2002, 2001 and 2000 were asfollows:

 
|                                        |   | **2002** |       | **2001** |       | **2000** |       |
|---------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                        |   |     | ** ** |     | ** ** |     | ** ** |
| Discount rate                               |   | 6.75     | %          | 7.25     | %          | 7.50     | %          |
| Expected long term rate of return on assets |   | 8.25     | %          | 8.50     | %          | 8.50     | %          |
| Rate of increase in compensation levels     |   | N/A      |       | N/A      |       | 4.00     | %          |

 

The rate of increase in compensation levels related to the Eagle Planis not applicable since the Eagle Plan was frozen as of December 31, 2000.  The rate of increase related to the MilanPlan is based on years of service and not compensation levels.

 

42

----

 

The Company has a defined contribution plan pursuant to Section 401K ofthe Internal Revenue Code (“401K Plan”), which covers salaried and non-unionhourly associates.  The Company matchesemployee contributions, up to specified percentages of those contributions, asapproved by the Board of Directors.  TheCompany recognized no expense relating to matching contributions under the 401KPlan during fiscal 2002.  During fiscal2001 and 2000 the Company recognized expense relating to matching contributionsunder the 401K Plan of $429 thousand and $425 thousand, respectively.  Effective January 1, 2001, the 401K Plan wasamended to include a 3% contribution to replace the Eagle Plan.  The Company recognized expense of $426thousand and $412 thousand in fiscal 2002 and fiscal 2001, respectively,relating to the 3% contribution.

 

The Company also participates in various multi-employer plans.  The plans provide for defined benefits tosubstantially all unionized workers. Amounts charged to pension cost and contributed to the plans for theyears ended February 1, 2003, February 2, 2002, and February 3, 2001 totaled$5.0 million, $5.2 million and $5.9 million, respectively. Under the provisionsof the Multi-employer Pension Plan Amendments Act of 1980, the Company would berequired to continue contributions to a multi-employer pension fund to theextent of its portion of the plan’s unfunded vested liability if itsubstantially or totally withdraws from such plans.

 

***Incentive Compensation Plans***

 

The Company has incentive compensation plans for store management andcertain other management personnel. Incentive plans include approximately 160 associates.  Provisions for payments to be made under theplans are based primarily on achievement of sales and earnings in excess ofspecific performance targets.

 

Non-qualified stock option plans were ratified by stockholders andimplemented in 2000, 1995 and 1990 for key management associates.  Stock options generally have a ten-year lifebeginning at the grant date. For the options granted under the 2000 and 1995Stock Option Plans, vesting provisions generally provide for 1/3 of the sharesvesting at each of the first three anniversaries following the date of thegrant. Options granted under the 1990 plan were generally vested at 12 monthsfollowing the grant date.  All optionsunder the 1990 plan have either been issued or expired.  Certain specific employment agreementsprovide for different vesting schedules. As of February 1, 2003, there were 571,630 shares available for futuregrants under the plans.   The Companyrecognized no compensation expense for fiscal years 2002, 2001 or 2000 becausethe exercise price was at or above the market value at the date of grant.

 

The Company cancelled stock option grants and issued replacement stockoption grants for certain individuals during fiscal 2000.  The new stock option grants were issued at aprice of $5.00, with a market price of $4.12 at the time of issuance.  In addition, the term of the new stockoption grants was shortened by two years compared with the cancelledgrants.  Stock option grants for a totalof 56,875 shares were cancelled, with the same number of shares issued inreplacement grants.  As such, thesestock option grants are variable. The Company has not recognized compensationexpense for these replacement stock option grants since, at the measurementdates and thereafter, the market value was below the exercise price.

 

43

----

 

The following table sets forth the stock option activity for the threeyears in the period ended February 1, 2003:

 
|                         |   | **Shares  Subject  to Option** |   | **Option  Price  Range  Per Share**                                                                            |   | **Weighted  Average  Exercise  Price of  Options** |   |
|------------------------------|--------|--------------------------------|--------|----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                         |   |                           |   |                                                                                                           |   |                                               |   |
| Outstanding January 29, 2000 |   | 311,175                        |   | $5.00  - $40.00                                                                                                |   | $                                                  | 13.72  |   |
| Granted                      |   | 276,575                        |   | $1.12  - $13.04                                                                                                |   | $                                                  | 7.28   |   |
| Forfeited                    |   | 93,175                         |   | $5.00  - $40.00                                                                                                |   | $                                                  | 12.76  |   |
|                         |   |                           |   |                                                                                                           |   |                                               |   |
| Outstanding February 3, 2001 |   | 494,575                        |   | $1.12  - $34.00                                                                                                |   | $                                                  | 10.28  |   |
| Granted                      |   | 12,500                         |   | $1.30  - $1.62                                                                                                 |   | $                                                  | 1.46   |   |
| Forfeited                    |   | 102,306                        |   | $4.00  - $34.00                                                                                                |   | $                                                  | 10.02  |   |
|                         |   |                           |   |                                                                                                           |   |                                               |   |
| Outstanding February 2, 2002 |   | 404,769                        |   | $1.12  - $18.00                                                                                                |   | $                                                  | 10.09  |   |
| Granted                      |   | —                         |   |         -          - |   | —                                             |   |
| Forfeited                    |   | 233,000                        |   | $1.88  - $16.00                                                                                                |   | $                                                  | 9.56   |   |
|                         |   |                           |   |                                                                                                           |   |                                               |   |
| Outstanding February 1, 2003 |   | 171,769                        |   | $1.12  - $18.00                                                                                                |   | $                                                  | 10.80  |   |

 

Stock options exercisable are as follows:

 
|             |   | **Options  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|------------------|--------|--------------------------|--------|----------------------------------------|--------|
|             |   |                     |   |                                   |   |
| February 3, 2001 |   | 295,156                  |   | $                                      | 11.36  |   |
| February 2, 2002 |   | 304,703                  |   | $                                      | 10.56  |   |
| February 1, 2003 |   | 148,909                  |   | $                                      | 11.88  |   |

 

The following table summarizes stock option information on outstandingand exercisable options as of February 1, 2003:

 
| **Range of  Exercise  Prices** |   | **Options  Outstanding** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life  (Years)** |   | **Options  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------|--------|--------------------------|--------|----------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------|--------|----------------------------------------|--------|
|                           |   |                     |   |                                   |   |                                                         |   |                     |   |                                   |   |
| $1.12 - $6.00                  |   | 72,044                   |   | $                                      | 3.86   |                                                         | 5.26   |                     | 54,808 |                                   | $      | 4.53 |   |
| $8.00 - $14.00                 |   | 29,100                   |   | $                                      | 11.95  |                                                         | 4.47   |                     | 23,476 |                                   | $      | 12.41 |   |
| $16.00 - $18.00                |   | 70,625                   |   | $                                      | 17.42  |                                                         | 1.39   |                     | 70,625 |                                   | $      | 17.42 |   |
| Total                          |   | 171,769                  |   |                                   |   |                                                         |   | 148,909                  |   |                                   |   |

 

The Company’scalculations were made using the Black-Scholes option pricing model with thefollowing weighted average assumptions: expected option life of ten years;stock volatility of 73% to 76% in 2001, 64% to 76% in 2000; risk-free interestrate of 4.50% in 2001, 6.63% to 6.82% in 2000; and no dividends during theexpected term.  Based on this model, theweighted average fair values of stock options awarded were $1.28 and $3.16 forfiscal years 2001 and 2000, respectively. There were no stock options issued during fiscal year 2002.  The pro forma amounts for compensation costmay not be indicative of the effects on net earnings (loss) and net earnings(loss) per share for future years.

 

44

----

 

***Note K - Fair Value of FinancialInstruments***

 

The carrying amounts and fair values of the Company’s financialinstruments as of February 1, 2003 and February 2, 2002 are as follows:

 
|                      |   | **February  1, 2003** |   | **February 2,  2002** |       |
|---------------------------|--------|-----------------------|--------|-----------------------|------------|
| **(In thousands)**        |   | **Carrying  Amount**  |   | **Fair  Value**       | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                      |   |                  |   |                  |       |   |   |   |   |
| Cash and cash equivalents |   | $                     | 3,892  |                  | $          | 3,892 |   | $ | 4,667 |   | $ | 4,667 |   |
| Marketable securities     |   | 8,840                 |   | 8,840                 |       | 7,901 |   | 7,901 |   |
| Senior notes              |   | 63,318                |   | 12,815                |       | 64,659 |   | 39,472 |   |
|                           |        |                       |        |                       |            |  |  |  |  |  |  |  |  |

 

The fair value of cash and cash equivalents approximated its carryingvalue due to the short-term nature of these instruments.  The fair value of marketable securities andthe Senior Notes is based on quoted market prices.

 

The amortized cost, gross unrealized gains and losses, and estimatedfair values of the Company’s marketable securities at February 1, 2003 andFebruary 2, 2002 are as follows:

 
|                                          |   | **February  1, 2003** |       |
|-----------------------------------------------|--------|-----------------------|------------|
| **(In thousands)**                            |   | **Cost**              |       | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                          |   |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Money market mutual fund, due within one year |   | $                     | 8,392      |   | $ | — |   | $ | — |   | $ | 8,392 |   |
| Equity securities                             |   | 609                   |       | 7 |   | 168 |   | 448 |   |
| Total marketable securities                   |   | $                     | 9,001      |   | $ | 7 |   | $ | 168 |   | $ | 8,840 |   |

 
|                                          |   | **February  2, 2002** |   |
|-----------------------------------------------|--------|-----------------------|--------|
| **(In thousands)**                            |   | **Cost**              |   | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                          |   |                  |   |   |   |   |   |   |   |
| Money market mutual fund, due within one year |   | $                     | 4,342  |   | $ | — |   | $ | — |   | $ | 4,342 |   |
| U.S. Treasury notes                           |   | 3,001                 |   | 38 |   | — |   | 3,039 |   |
| Equity securities                             |   | 537                   |   | 35 |   | 52 |   | 520 |   |
| Total marketable securities                   |   | $                     | 7,880  |   | $ | 73 |   | $ | 52 |   | $ | 7,901 |   |

 

***Note L - Litigation***

 

***Bankruptcy Cases***

 

On February 29, 2000 (the “Petition Date I”), the Company filed avoluntary petition under Chapter 11 of Title 11 of the United States Code (the“First Bankruptcy Case”.  The petitionwas filed in the United States Bankruptcy Court for the District of Delawareunder case number 00-01311).  TheCompany continued to manage its affairs and operate its business as adebtor-in-possession while the First Bankruptcy Case was pending. The FirstBankruptcy Case, which proceeded before the United States District Court forthe District of Delaware, was commenced in order to implement a financialrestructuring of the Company that had been pre-negotiated with holders ofapproximately 29% of the principal amount of the Company’s Senior Notes dueApril 15, 2000.  On March 10, 2000, theCompany filed a Plan to implement the financial restructuring, which Plan wassubsequently amended on April 17, 2000. The 2000 Plan was confirmed on July 7, 2000 and consummated on August 7,2000.  On January 28, 2002, the UnitedStates Bankruptcy Court for the District of Delaware entered a final decree andorder closing the First Bankruptcy Case.

 

On April 7, 2003 (the “Petition Date II”), the Company filed a voluntarypetition under Chapter 11 of Title 11 of the United States Code (“SecondBankruptcy Case”).  The petition wasfiled in the United States Bankruptcy Court for

 

45

----

 

the Northern District of Illinois in Chicago under case number03-15299.  The Company continues tomanage its affairs and operate its business as a debtor-in-possession while theSecond Bankruptcy Case is pending.  (SeeNote B of the notes to the Consolidated Financial Statements.)

 

***Other Cases***

 

The Company is subject to various other unresolvedlegal actions that arise in the normal course of its business.  Although it is not possible to predict withcertainty, and no assurances can be given with respect to such matters, theCompany believes the outcome of these unresolved legal actions will not have amaterially adverse effect on its results of operations, liquidity or financialposition.

 

***Note M - Loss PerShare***

 

Loss per sharedisclosures for the three years ended February 1, 2003 is as follows:

 
| **(In thousands except per share data)** |   | **Net Loss  (Numerator)** |       | **Wtd. Ave.  Shares  (Denominator)** |       | **Per Share  Amount** |       |
|------------------------------------------|--------|---------------------------|------------|--------------------------------------|------------|-----------------------|------------|
|                                     |   |                      | ** ** |                                 | ** ** |                  | ** ** |
| **Year Ended February 1, 2003:**         |   |                      | ** ** |                                 | ** ** |                  | ** ** |
| Basic and diluted net loss per share:    |   |                      |       |                                 |       |                  |       |
| Net loss from continuing operations      |   | (17,732                   | )          | 3,113                                |       | $                     | (5.70      | ) |
| Discontinued operations                  |   | (111                      | )          | 3,113                                |       | (0.03                 | )          |
| Net loss                                 |   | $                         | (17,843    | )                                    | 3,113      |                  | $          | (5.73 | ) |
|                                     |   |                      |       |                                 |       |                  |       |
| **Year Ended February 2, 2002:**         |   |                      |       |                                 |       |                  |       |
| Basic and diluted net loss per share:    |   |                      |       |                                 |       |                  |       |
| Net loss from continuing operations      |   | (2,334                    | )          | 3,178                                |       | $                     | (0.73      | ) |
| Discontinued operations                  |   | 815                       |       | 3,178                                |       | 0.25                  |       |
| Net loss                                 |   | $                         | (1,519     | )                                    | 3,178      |                  | $          | (0.48 | ) |
|                                     |   |                      |       |                                 |       |                  |       |
| **Year Ended February 3, 2001:**         |   |                      |       |                                 |       |                  |       |
| Basic and diluted net loss per share:    |   |                      |       |                                 |       |                  |       |
| Net loss from continuing operations      |   | (16,964                   | )          | 2,969                                |       | $                     | (5.71      | ) |
| Discontinued operations                  |   | 1,463                     |       | 2,969                                |       | 0.49                  |       |
| Net loss                                 |   | $                         | (15,501    | )                                    | 2,969      |                  | $          | (5.22 | ) |

 

46

----

 

***Note N - Quarterly Financial Data(Unaudited)***

 
| **(Dollars in thousands, except per share data)** |   | **Sales** |    | **Gross  Margin** |   | **Earnings  (Loss)  From  Continuing  Operations** |   | **Net  Earnings  (Loss)** |    | **Earnings  (Loss) From  Continuing  Operations Per  Share - Diluted** |   | **Net  Earnings  (Loss)  Per Share -  Diluted** |   |
|---------------------------------------------------|--------|-----------|---------|-------------------|--------|----------------------------------------------------|--------|---------------------------|---------|------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| 2002                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| Quarter:   First                        |   | $         | 154,121 |              | $      | 42,307                                             |   | $                         | (3,358  | )                                                                      | $      | (3,179                                          | )      | $ | (1.08 | ) | $ | (1.02 | ) |
| Second                                            |   | 154,925   |    | 42,423            |   | (6,016                                             | )      | (6,068                    | )       | (1.93                                                                  | )      | (1.95                                           | )(1)   |
| Third                                             |   | 144,250   |    | 41,415            |   | (2,549                                             | )      | (2,416                    | )       | (0.82                                                                  | )      | (0.78                                           | )      |
| Fourth                                            |   | 146,156   |    | 39,572            |   | (5,809                                             | )      | (6,180                    | )       | (1.87                                                                  | )      | (1.98                                           | )(1)   |
| Total                                             |   | $         | 599,452 |              | $      | 165,717                                            |   | $                         | (17,732 | )                                                                      | $      | (17,843                                         | )      | $ | (5.70 | ) | $ | (5.73 | ) |
|                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| 2001                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| Quarter:   First                        |   | $         | 154,036 |              | $      | 43,541                                             |   | $                         | (1,137  | )                                                                      | $      | (884                                            | )      | $ | (0.36 | ) | $ | (0.28 | ) |
| Second                                            |   | 160,589   |    | 45,299            |   | (1,219                                             | )      | (1,127                    | )       | (0.38                                                                  | )      | (0.35                                           | )      |
| Third                                             |   | 153,880   |    | 43,577            |   | (537                                               | )      | (326                      | )       | (0.17                                                                  | )      | (0.10                                           | )      |
| Fourth                                            |   | 161,893   |    | 46,041            |   | 559                                                |   | 818                       |    | 0.18                                                                   |   | 0.26                                            |   |
| Total                                             |   | $         | 630,398 |              | $      | 178,458                                            |   | $                         | (2,334  | )                                                                      | $      | (1,519                                          | )      | $ | (0.73 | ) | $ | (0.48 | ) |
|                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| 2000                                              |   |      |    |              |   |                                               |   |                      |    |                                                                   |   |                                            |   |
| Quarter:   First                        |   | $         | 179,289 |              | $      | 48,946                                             |   | $                         | (17,180 | )                                                                      | $      | (16,827                                         | )      | $ | (6.28 | ) | $ | (6.15 | )(2) |
| Second                                            |   | 167,102   |    | 46,307            |   | (550                                               | )      | (138                      | )       | (0.20                                                                  | )      | (0.05                                           | )      |
| Third                                             |   | 157,911   |    | 43,875            |   | (1,510                                             | )      | (1,235                    | )       | (0.48                                                                  | )      | (0.39                                           | )      |
| Fourth                                            |   | 178,201   |    | 47,575            |   | 2,276                                              |   | 2,699                     |    | 0.71                                                                   |   | 0.84                                            | (1)    |
| Total                                             |   | $         | 682,503 |              | $      | 186,703                                            |   | $                         | (16,964 | )                                                                      | $      | (15,501                                         | )      | $ | (5.71 | ) | $ | (5.22 | ) |

 

----

(1)            Netearnings include an asset impairment charge of $606 thousand in the secondquarter of fiscal 2002, $1.2 million in fourth quarter of fiscal 2002 and $821thousand in fourth quarter of fiscal 2000.

(2)            Netloss is attributable primarily to reorganization costs of $11.3 million in thefirst quarter of fiscal 2000.

 

**ITEM 9:      CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

 

There have been no disagreements on accounting principles or practicesor financial statement disclosures between the Company and its independentcertified public accountants during the two fiscal years ended February 1,2003.

 

47

----

 

**PART III**

 

**ITEM10:  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

The Board ofDirectors currently consists of six members as follows:

 
| **Name**            |   | **Age** |   | **Position(s)  Held**                                                      |
|---------------------|--------|---------|--------|----------------------------------------------------------------------------|
|                |   |    |   |                                                                       |
| Robert J. Kelly     |   | 58      |   | Chairman of the Board  of Directors, Chief Executive Officer and President |
| Peter B. Foreman    |   | 67      |   | Director                                                                   |
| Steven M. Friedman  |   | 48      |   | Director                                                                   |
| Alain M. Oberrotman |   | 52      |   | Director                                                                   |
| Jerry I. Reitman    |   | 65      |   | Director                                                                   |
| William J. Snyder   |   | 60      |   | Director, Secretary                                                        |

 

The businessexperience of each of the nominees during the past five years is as follows:

 

Mr. Kelly returnedto the position of Chief Executive Officer and President on March 18,2002.  Mr. Kelly was named Chairman ofthe Board of Directors for the Company on March 30, 1998.  Mr. Kelly also held the titles of ChiefExecutive Officer and President from May 10, 1995 through January 31,2000.  Prior to May 1995, Mr. Kelly wasExecutive Vice President, Retailing for The Vons Companies, Inc. and wasemployed by that Company since 1963. Mr. Kelly has 39 years of experience in the supermarket industry.

 

Mr. Foreman has been President of Sirius Corporation,a private investment management firm, since 1993. Prior to 1993, Mr. Foremanwas a Principal at Harris Associate LP since 1976.  Mr. Foreman has been a director of the Company since June 1989.

 

Mr. Friedman is aGeneral Partner of EOS Partners, LP, an investment firm which he co-founded in1994. EOS invests in private companies and marketable securities.  Until 1994 he was a General Partner ofOdyssey Partners, LP, an investment partnership where he was responsible forits private investment group.  Beforejoining Odyssey in 1983, he was vice president at Citibank, NA.  He is a director of several public andprivate companies.  Mr. Friedman hasserved as a director of the Company since November 1987.  He has an AB and MBA from the University ofChicago and a JD from Brooklyn Law School.

 

Mr. Oberrotman iscurrently employed in merchant banking and consulting and previously was aPrincipal with Odyssey Partners LP from October 1992 to May 1997.  Mr. Oberrotman became a director of theCompany in June 1996.

 

Mr. Reitman is ViceChairman, Partner of the Callahan Group, a full service management consultingcompany in Chicago, Illinois, a lecturer at Northwestern University, author,and an advisor to Senior Management on direct marketing, integratedcommunications, and strategic positioning. Previously, Mr. Reitman was Executive Vice President of Worldwide DirectMarketing for the Leo Burnett Agency. Mr. Reitman became a director of the Company in December 1998.  Mr. Reitman also serves on the board ofdirectors of CADMUS Communication (CDMS).

 

Mr. Snyder is asenior shareholder in the law firm of Snyder, Schwarz, Park & Nelson P.C.,Attorneys at Law, Rock Island, Illinois since March 1983 and has maintained anactive law practice for 36 years in the Quad-City area.  The law firm of Snyder, Schwarz, Park &Nelson, P.C., has acted as legal counsel to the Company for many years and hasreceived legal fees from the Company in various amounts.  Mr. Snyder has been a director of theCompany since June 1989.

 

The directors of the Company are elected annually to serve until thenext annual meeting of shareholders and until their successors have beenelected and qualified.  None of thedirectors or executive officers listed herein is related to any other directoror executive officer.

 

48

----

 

The following table sets forth certain information with respect to thepersons who are executive officers of the Company as of February 1, 2003.

 
| **Name**             |   | **Age** |   | **Position(s)  Held**                                                      |
|----------------------|--------|---------|--------|----------------------------------------------------------------------------|
| Robert  J. Kelly     |   | 58      |   | Chairman  of the Board of Directors, Chief Executive Officer and President |
| Randall  D. McMurray |   | 46      |   | Vice  President-Controller and Acting Chief Financial Officer              |
| Clark  Jordan        |   | 52      |   | Senior  Vice President – Operations                                   |
| Jill  Cirivello      |   | 43      |   | Vice  President – Human Resources and General Counsel                 |
| Frank  Klun          |   | 55      |   | Vice  President – Support Services                                    |

 

The business experience of each of the executive officers during thepast five years is as follows:

 

Mr. Kelly returnedto the position of Chief Executive Officer and President on March 18,2002.  Mr. Kelly was named Chairman ofthe Board of Directors for the Company on March 30, 1998.  Mr. Kelly also held the titles of ChiefExecutive Officer and President from May 10, 1995 through January 31,2000.  Prior to May 1995, Mr. Kelly wasExecutive Vice President, Retailing for The Vons Companies, Inc. and wasemployed by that Company since 1963. Mr. Kelly has 39 years of experience in the supermarket industry.

 

Mr. Jeffery L.Little left the Company on March 18, 2002.  Mr. Little was named Chief Executive Officerand President on January 31, 2000 and became a director in September 2000.  Mr. Little was Vice President, Marketing forFleming Companies and President of ABCO Foods (a division of Fleming) fromJanuary 1998 to January 2000.  FromAugust 1989 to December 1997, Mr. Little was with Haggen, Inc. serving invarious capacities as Senior Vice President Operations, Vice PresidentSales/Marketing and Vice President Perishables.  Mr. Little has 34 years of experience in the supermarketindustry.

 

Mr. McMurray was named Acting Chief Financial Officer and VicePresident - Controller in January 2003 and served the Company as Vice President– Controller from January 2001, Corporate Controller from April 1998, AssistantController from May 1996 and General Accounting Supervisor from October 1993until his promotions.

 

Mr. S. Patric Plumley left the Company on January 24, 2003.  Mr. Plumley was named Director in September2000, was named Senior Vice President - Chief Financial Officer and Secretaryon March 1, 1999, served the Company as Vice President - Chief FinancialOfficer and Secretary from March 30, 1998 and Vice President and CorporateController from September 15, 1997 until his promotions.  Prior to September 1997, Mr. Plumley servedas Senior Vice President of American Stores’ Super Saver Division from 1994 to1997 and Senior Vice President of Lucky Stores, Inc. from 1990 to 1994.  Mr. Plumley has 29 years of experience inthe supermarket industry.

 

Mr. Jordan was named Sr. Vice President of Operations in September 2001and served the Company as Vice President of Operations since joining theCompany in May 2000.  Prior to May 2000,Mr. Jordan held the position of regional Vice President of Operations withBrown & Cole stores in Bellingham, Washington.  From 1988 to 1998, Mr. Jordan was District Manager for Haggen/TopFoods in Bellingham, Washington.  Mr.Jordan has 29 years of experience in the grocery industry.

 

Ms. Cirivello was named Vice President of Human Resources/GeneralCounsel in March of 2001.  Ms. Cirivellojoined the company as Senior Counsel in October of 1998.  Prior to October 1998, Ms. Cirivello wasemployed by the law firm of Wessels & Pautsch, Davenport, Iowa, as a Laborand Employment Law Attorney.

 

Mr. Klun joined the Company as Vice President - Support Services inFebruary 1998.  Prior to February 1998,Mr. Klun was employed by Bruno’s, Birmingham, Alabama as Assistant DistributionManager.  For the period from December1968 to December 1997, Mr. Klun held various positions with Jewel Food Stores,Chicago, Illinois.  Mr. Klun has over 34years of experience in the supermarket industry.

 

***Compensation of Directors***

 

Four of the non-employee directors of the Company receive an annualretainer of $32,000 and fees of $750 for each board meeting and $1,000 for eachcommittee meeting attended plus reimbursement of travel expenses.  Mr. Snyder does not receive fees asdirector, but does receive legal fees for his services as counsel to theCompany while serving as a member of the board and as a committee member.

 

#### ***Limitation of Liability of Directors***

 

As permitted bythe Delaware General Corporation Law, the Certificate of Incorporation of theCompany provides that a director of the Company will not be personally liableto the Company or its shareholders for monetary damages for breach of thefiduciary duty of care as a director, including breaches which constitute grossnegligence.  By its

 

49

----

 

terms and inaccordance with the Delaware General Corporation Law, this provision does noteliminate or limit the liability of a director of the Company (i) for breach ofthe duty of loyalty to the Company or its shareholders by the director, (ii)for acts or omissions not in good faith or which involve intentional misconductor a knowing violation of law, (iii) under Section 174 of the Delaware GeneralCorporation Law (relating to unlawful payment of dividends or unlawful stockrepurchase or redemption), or (iv) for any transaction from which the directorderived an improper personal benefit.

 

***Section 16(a) Beneficial Ownership Reporting Compliance***

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the directors of the Company andexecutive officers, and persons who own more than ten percent of a registeredclass of the equity securities of the Company, to file with the Securities andExchange Commission initial reports of ownership and reports of changes inownership of Common Stock and other equity securities of the Company.  Officers, directors and greater thanten-percent shareholders are required by SEC regulation to furnish the Companywith copies of all Section 16(a) forms they file.

 

To the knowledgeof the Company, based solely on review of the copies of such reports furnishedto the Company and written representations that no other reports were required,during the three fiscal years ended February 1, 2003, all Section 16(a) filingrequirements applicable to its officers, directors, and greater thanten-percent beneficial owners were in compliance except for the following,which were inadvertently filed late in fiscal 2000:  Mr. Jeffrey Little with one report disclosing one transaction;Mr. Frank Klun with two reports disclosing one transaction each; and Mr. S.Patric Plumley with three reports each disclosing one transaction. There wasone report for Mr. Clark Jordan disclosing two transactions, which was inadvertentlyfiled late in fiscal 2001.

 

**ITEM11:  EXECUTIVE COMPENSATION**

 

The SummaryCompensation Table below shows compensation information for the Chief ExecutiveOfficer of the Company and the four other most highly compensated executiveofficers who were serving at the end of the last fiscal year whose total annualsalary and bonus exceeded $100,000 for the fiscal years indicated, as well astwo individuals for whom disclosure would have been provided had the individualbeen serving as an executive officer at the end of the fiscal year.

 

## **SUMMARY COMPENSATION TABLE**

 
| **Name and  Principal Position**    |   | **Fiscal  Year** |   | **Annual Compensation**         |    | **Long-Term  Compensation  Securities  Underlying  Options (#)** |   | **All Other  Compensation** |   |
|-------------------------------------|--------|------------------|--------|---------------------------------|---------|------------------------------------------------------------------|--------|-----------------------------|--------|
| **Salary**                          |   | **Bonus**        |   | **Other  Annual  Compensation** |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Robert J. Kelly,                    |   | 2002             |   | $                               | 375,769 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 16,386 | (2) |
| Chairman of the  Board,             |   | 2001             |   | 190,000                         |    | 0                                                                |   |                        | (1)    | 0 |   | 20,736 | (2) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Chief Executive Officer, President  |   | 2000             |   | 221,271                         |    | 0                                                                |   |                        | (1)    | 0 |   | 15,121 | (2) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Jeffrey L.  Little,                 |   | 2002             |   | $                               | 85,571  |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 362,286 | (3) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Chief Executive  Officer,           |   | 2001             |   | 333,613                         |    | 0                                                                |   |                        |   | 0 |   | 13,382 | (3) |
| President                           |   | 2000             |   | 331,250                         |    | 57,978                                                           |   |                        | (1)    | 150,000 |   | 197,397 | (3) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| S. Patric Plumley,                  |   | 2002             |   | $                               | 211,613 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 8,257 | (4) |
| Senior Vice  President,             |   | 2001             |   | 192,246                         |    | 0                                                                |   |                        | (1)    | 0 |   | 12,622 | (4) |
| Chief Financial  Officer, Secretary |   | 2000             |   | 183,462                         |    | 32,111                                                           |   |                        | (1)    | 10,000 | (5) | 85,908 | (4) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Ward Dunn,                          |   | 2002             |   | $                               | 162,019 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 54,800 | (6) |
| Vice President,                     |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Sales and  Marketing                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Clark J. Jordan,                    |   | 2002             |   | $                               | 178,899 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 7,113 | (7) |
| Senior Vice  President,             |   | 2001             |   | 158,878                         |    | 0                                                                |   |                        | (1)    | 6,250 |   | 6,882 | (7) |
| Operations                          |   | 2000             |   | 108,750                         |    | 19,034                                                           |   |                        | (1)    | 12,500 |   | 58,518 | (7) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Patrick M.  Flatley                 |   | 2002             |   | $                               | 118,275 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 5,734 | (8) |
| Vice President,                     |   | 2001             |   | 114,095                         |    | 0                                                                |   |                        | (1)    | 0 |   | 12,546 | (8) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Non-Retail  Procurement             |   | 2000             |   | 107,565                         |    | 26,838                                                           |   |                        | (1)    | 10,000 |   | 30,000 | (9) |
|                                |   |             |   |                            |    |                                                             |   |                        |   |   |   |   |   |
| Frank A. Klun,                      |   | 2002             |   | $                               | 118,273 |                                                             | $      | 0                           |   |   | (1) | 0 |   | $ | 10,230 | (10) |
| Vice President,                     |   | 2001             |   | 113,995                         |    | 11,581                                                           |   |                        | (1)    | 0 |   | 17,869 | (10) |
| Support Systems                     |   | 2000             |   | 110,276                         |    | 37,983                                                           |   |                        | (1)    | 750 |   | 8,239 | (10) |

 

50

----

 

----

Notes:

(1)                    Received otherannual compensation consisting of perquisites and personal benefits valued atless than the lesser of ten percent of total annual salary and bonus or$50,000.

(2)                    Mr. Kelly returned as the Chief Executive Officerand President on March 18, 2002, having served as the Company’s Chairman sinceMarch 30, 1998 and as the Chief Executive Officer and President from May 10,1995 to January 31, 2000.  Mr.Kelly’s annual salary became $400,000 effective March 18, 2002.  Mr. Kelly received full dollar value ofpremiums paid by the Company on an Executive Term Life policy of $10,386 and a$6,000 defined contribution to his 401(k) in 2002.  Mr. Kelly received a 401(k)-matching amount of $5,250; a $5,100defined contribution to his 401(k) and full dollar value of premiums paid bythe Company on an Executive Term Life policy of $10,386 in 2001.  Mr. Kelly received a 401(k)-matching amountof $5,250 and full dollar value of premiums paid by the Company on an ExecutiveTerm Life policy of $9,871 in 2000.

(3)                    Mr. Littleleft the Company March 18, 2002 and received a severance of $342,286,outplacement of $20,000 and up to 12 months of company provided healthinsurance coverage.  Mr. Little’s stockoptions expired April 17, 2002.  Mr.Little received full dollar value of premiums paid by the Company on ExecutiveTerm Life policy of $3,182, a 401(k)-matching amount of $5,100 and a $5,100defined contribution to his 401(k) in 2001. In 2000, Mr. Little received a signing bonus of $100,000, temporaryliving expenses of $12,855, taxable moving expenses of $61,927, non-taxablemoving expenses of $15,243, full dollar value of premiums paid by the Companyon Executive Term Life policy of $2,122 and a 401(k)-matching amount of $5,250.

(4)                    Mr. Plumleyleft the Company January 24, 2003.  Mr.Plumley received full dollar value of premiums paid by the Company on anExecutive Term Life policy of $2,272 and a $5,985 defined contribution to his401(k) in 2002.  Mr. Plumley received a401(k)-matching amount of $5,250; a $5,100 defined contribution to his 401(k)and full dollar value of premiums paid by the Company on an Executive Term Lifepolicy of $2,272 in 2001.  Mr. Plumley receiveda 401(k)-matching amount of $5,250, a retention bonus of $78,495 and fulldollar value of premiums paid by the Company on an Executive Term Life policyof $2,163 in 2000.

(5)                    Along withother key employees, Mr. Plumley agreed to cancellation and reissue of optionson 10,000 shares as follows: 3,750 shares issued September 15, 1997 at $20.00per share, expiring September 15, 2007, were cancelled and reissued at $5.00per share, expiring September 15, 2005; 2,500 shares issued September 15, 1998at $10.00 per share, expiring September 15, 2008, were cancelled and reissuedat $5.00 per share, expiring September 15, 2006; and 3,750 shares issued April1, 1999 at $11.75 per share, expiring April 1, 2009, were cancelled andreissued at $5.00 per share, expiring April 1, 2007.  Mr. Plumley received an option grant for 15,000 shares on May 31,2000.  Mr. Plumley’s options expiredFebruary 23, 2003, thirty days after leaving the Company.

(6)                    Mr. Dunnjoined the Company May 9, 2002 and received a singing bonus of $35,000, taxablemoving expenses of $12,743, and non-taxable moving expenses of $1,804 and a$5,253 defined contribution to his 401(k).

(7)                    Mr. Jordanreceived full dollar value of premiums paid by the Company on an Executive TermLife policy of $1,782 and a $5,331 defined contribution to his 401(k) in2002.  Mr. Jordan received full dollarvalue of premiums paid by the Company on an Executive Term Life policy of$1,782 and a $5,100 defined contribution to his 401(k) in 2001.  In 2000, Mr. Jordan received a signing bonusof $25,000, temporary living expenses of $2,559, taxable moving expenses of$21,821, non-taxable moving expenses of $8,395 and full dollar value ofpremiums paid by the Company on an Executive Term Life policy of $743.

(8)                    Mr. Flatleyreceived full dollar value of premiums paid by the Company on an Executive TermLife policy of $2,196 and a $3,538 defined contribution to his 401(k) in2002.  Mr. Flatley received a401(k)-matching amount of $5,250; a $5,100 defined contribution to his 401(k)and full dollar value of premiums paid by the Company on an Executive Term Lifepolicy of $2,196 in 2001.

(9)                    Mr. Flatleyreceived $30,000 for cost savings management.

 

51

----

 

(10)              Mr. Klun receivedfull dollar value of premiums paid by the Company on an Executive Term Lifepolicy of $6,692 and a $3,538 defined contribution to his 401(k) in 2002.  Mr. Klun received a 401(k)-matching amountof $5,250; a $5,100 defined contribution to his 401(k) and full dollar value ofpremiums paid by the Company on an Executive Term Life policy of $7,519 in2001.  In 2000, Mr. Klun received fulldollar value of premiums paid by the Company on an Executive Term Life policyof $8,239.

 

***Options/SAR Grants in Fiscal Year 2002***

 

There were nostock options issued in fiscal 2002.

 

#### ***Aggregated Option/SARExercises and Fiscal Year End Option/SAR Values***

#### ** **

The followingtable shows information regarding the values of certain unexercised optionsowned by the named executive officers at the end of the last completed fiscalyear.  No options or stock appreciationrights were exercised during the fiscal year. No stock appreciation rights were granted during fiscal 2002 or wereoutstanding at the end of fiscal 2002.

 

**Aggregated Option/SAR Exercises inLast Fiscal Year and Fiscal Year End Option/SAR Values Table**

 

 
|                  |   | **Shares  Acquired  on** |   | **Value**    |   | **Number of  Securities  Underlying Unexercised  Options at February 1, 2003** |   | **Value of  Unexercised  In-the-Money Options  At February 1, 2003(1)** |   |
|-----------------------|--------|--------------------------|--------|--------------|--------|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                  |   | **Exercise**             |   | **Realized** |   | **Exercisable  (#)**                                                           |   | **Non-Exercisable  (#)**                                                |   | **Exercisable  ($)** |   | **Non-Exercisable  ($)** |   |
| Robert  J. Kelly      |   | 0                        |   | 0            |   | 50,000                                                                         |   | 0                                                                       |   | 0 |   | 0 |   |
| S.  Patric Plumley(2) |   | 0                        |   | 0            |   | 16,562                                                                         |   | 0                                                                       |   | 0 |   | 0 |   |
| Clark  Jordan         |   | 0                        |   | 0            |   | 10,312                                                                         |   | 8,438                                                                   |   | 0 |   | 0 |   |
| Pat  Flatley          |   | 0                        |   | 0            |   | 8,750                                                                          |   | 1,250                                                                   |   | 0 |   | 0 |   |
| Frank  A. Klun        |   | 0                        |   | 0            |   | 6,000                                                                          |   | 1,000                                                                   |   | 0 |   | 0 |   |

 

----

Notes:

(1)          Market value ofunderlying securities at February 1, 2003 ($0.20) minus the base price.  The market price of all unexercised optionswas below the exercise price on February 1, 2003.

(2)          Mr. Plumley’s optionsexpired February 23, 2003.

 

**COMPENSATIONCOMMITTEE REPORT**

 

The CompensationCommittee for fiscal 2002 was composed of two non-employee members from theBoard of Directors.  The members wereMr. Friedman and Mr. Reitman.  Mr. Kellyattended meetings as a non-voting participant. The Committee establishes objectives for the executive compensationprogram and reviews and approves all salary and other remuneration for theexecutive officers of the Company.

 

The objectives ofthe executive compensation program are to:

 

1.               Promote theattainment of Company goals by emphasizing a greater portion of compensationsubject to performance goals.

2.               Attract and retainqualified talent.

3.               Enhance shareholdervalue by providing opportunities for equity ownership through performance-basedprograms.

 

The executiveofficer compensation program is comprised of salary, cash incentivecompensation and other benefits, including pension, 401(k) contributions andmedical benefits that are available to other employees of the Company.

 

***Base Salary***

 

There is no formalCompensation Committee policy regarding the determination of salaries, however,consideration is given to several factors, including individual workexperience, performance and comparable salaries within the retail food industry.

 

52

----

 

***Annual Incentive Bonuses***

 

Annual bonuspotentials depend upon job levels and are set at a stated percent of the basecompensation. Bonuses are paid based on an allocation formula primarily derivedfrom performance against budgeted sales and earnings targets.  The bonus plan had no pay outs in fiscal2002 and paid out below target amounts in fiscal 2001 and fiscal 2000 based onthe financial results for each year.

 

***Long-Term Incentive***

 

The Committee hasutilized stock options as the vehicle to provide a long-term focus. No stockoptions were issued in fiscal 2002. Stock options were issued in fiscal 2001 and in fiscal 2000.

 

***Chief Executive Officer Compensation***

 

Robert Kelly returned as the Chief Executive Officer and President onMarch 18, 2002, having served as the Company’s Chairman since March 30, 1998and as the Chief Executive Officer and President from May 10, 1995 to January31, 2000.  On April 25, 2002 the Companyand Mr. Kelly entered into an agreement to extend his employment throughDecember 31, 2003 with an annual salary of $400,000 and all other terms toremain the same.

 

On January 24,2002, the Company and Robert Kelly entered into an extension of the employmentagreement dated May 10, 1995.  TheCompany agreed to extend his employment through December 31, 2002 with allother terms to remain the same.  Theagreement provides Mr. Kelly with $190,000 per year as Chairman of the Board ofDirectors and for services provided in the ongoing operation of the Companythrough the end of the agreement.  Anyperiod of time spent over and above one week per month shall be compensated atthe annual salary of $350,000 and paid on a weekly basis

 

Through fiscal1999, Mr. Kelly was eligible to receive bonus compensation, in an amountdetermined by the Board of Directors based upon mutually acceptable performancetargets, of 50% of the base salary with a maximum potential of 100% should theCompany exceed budgeted expectations.

 

Under the December15, 1999 extension of his Employment Agreement, Mr. Kelly was also entitled to(1) in the event of a Change of Control of the Company occurring within twoyears of termination of his employment for any reason other than cause, to anextended exercise period for each group of options, based on a one yearextension for each completed year of service from December 31, 1997 (up to amaximum exercise period of the ten year expiration period as provided for underthe stock incentive plans of the Company), and (2) upon termination of hisemployment for any reason other than cause, extended payment by the Company ofall premiums associated with the split dollar life insurance policy in effectfor Mr. Kelly, for a period equal to each year of service from December 31,1997.

 

Mr. Kellypurchased 31,250 shares of common stock of the Company at the time of hisoriginal employment by delivering to the Company a promissory note with thepurchase price of the shares based upon the closing sale price of the commonstock of the Company on the business day immediately preceding the date of theEmployment Agreement. Under the May 10, 1998 amendment to his EmploymentAgreement, the foregoing loan (and interest) was forgiven in 50% increments foreach year of service completed by Mr. Kelly, commencing as of December 31,1997.  The company also provided Mr.Kelly with a tax gross up of the loan forgiveness.  Mr. Kelly had an option to purchase 150,000 shares of Companystock as follows: 50,000 shares of stock of the Company at $10.00 per sharewhich expired May 22, 2001, 50,000 shares at $14.00 per share which expired May22, 2002 and 50,000 shares at $18.00 per share which expire May 22, 2003, allof which are contingently exercisable within two years of termination ofemployment under all extensions of the Employment Agreement dated May 15,1995.  The May 10, 1998 extension to theEmployment Agreement of Mr. Kelly also subjects him to a one yearnon-competition restriction following the termination of his employment,prohibiting Mr. Kelly from engaging in any supermarket business conducted inthe service area of the Company.

 

Jeffery Littleserved as the Company’s President and Chief Executive Officer from January 31,2000 until March 18, 2002.  Hisemployment with the Company ended on March 18, 2002.  His severance package included: wages of $342,286, outplacementcosts of $20,000 and up to 12 months of company provided health insurancecoverage.

 

As of January 31,2000, the Company retained Mr. Jeffrey Little as its President and ChiefExecutive Officer. The Company and Mr. Little entered into an EmploymentContract with an initial term of three years to end January 31, 2003.   TheEmployment Contract provided for a base salary at the rate of $325,000 peryear.  In addition, the Company paid a signingbonus of $100,000 at the commencement of his employment.  Also, Mr. Little was eligible to receivebonus compensation, in an amount determined by the Board of Directors basedupon mutually acceptable

 

53

----

 

performancetargets, of 50% of the base salary, with a maximum potential of 100% should theCompany exceed budgeted expectations. In the event the Company terminated Mr. Little’s Employment other thanfor “cause”, Mr. Little was to receive a payment in a lump sum equal toeighteen (18) months of compensation, continued health and dental insurancecoverage for a period of eighteen (18) months, any accrued and unused vacationpay and professional outplacement services up to the sum of $20,000.

 

The Company hadalso granted Mr. Little the option to purchase up to 150,000 shares of stock ofthe Company.  Under the terms of hisoption, up to 50,000 shares could have been purchased by Mr. Little on or afterthe first anniversary date of his employment at $5.04 per share, up to anadditional 50,000 shares could have been purchased on or after the secondanniversary of his employment at $9.04 per share and the final 50,000 sharescould have been purchased on or after the third anniversary of the employment ofMr. Little at $13.04 per share with the expiration of options at January 31,2010.  One hundred thousand sharesrepresented by the vested options expired April 17, 2002.  All other options expired on March 18, 2002,the date his employment ended.  Mr. Littlereceived relocation and temporary housing expenses and was entitled to regularCompany benefits and four weeks of vacation per year.

 

***Compensation Committee Interlocks and Insider Information***

 

The CompensationCommittee is comprised exclusively of directors who are not and have never beenCompany employees.  No Company executiveofficer serves on the Compensation Committee or as a director of anothercompany in which one of whose executive officers serves as a director orexecutive officer of the Company.

 

**Summary of Compensation Plans**

 

***Retirement Plans***

 

The Company maintains atax-qualified defined benefit pension plan covering both salaried and non-unionhourly employees.  The benefit formulaunder such plan is the sum of 1% of annual compensation for each year up to theSocial Security Wage Base for that year and 1.33% of annual compensation overthe Social Security Wage Base with a minimum benefit of $360 per yearmultiplied by years of credited service. There is full vesting of benefits after five years of service.  The Company makes all contributions.  Effective October 1, 1990, the pensionplans were amended to provide for voluntary early retirement at age 55.  The annual benefits payable beginning at age65 to the executive officers are as follows: Mr. Kelly—$11,294; Mr. Plumley—$5,669; Mr. Klun—$4,263; and Mr.Flatley—$2,624.  This plan was frozen asof December 31, 2000 and no future benefits will accrue after that date.

 

The Companymaintains a tax-qualified defined contribution plan covering both salaried andnon-union hourly employees.  Under thisplan, employees may contribute up to 100% of eligible earnings up to a maximumof $11,000 during the plan year.  Theplan year begins on January 1 and ends on December 31.  The plan includes a discretionary Companymatching contribution of up to 50% of the first 10% of employee contributionsor a maximum match of 5% of eligible earnings. The matching contribution becomes partially vested after two years ofservice and fully vested after five years. Effective January 1, 2001, the Company amended the plan to include aprofit sharing contribution of 3% of eligible earnings.  The profit sharing contribution isimmediately vested.  The profit sharingcontribution was added in fiscal 2001 to replace the defined benefit plandescribed above.

 

***Stock Incentive Plan***

 

The Company has aStock Incentive Plan which was ratified by the shareholders at the 2000 AnnualShareholders Meeting.  The Plan providesthe Compensation Committee with the discretion to make grants until September12, 2010 to all salaried employees of the Company who are not in a bargainingunit, in the form of Non-qualified Stock Options, Incentive Stock Options,Stock Appreciation Rights and Restricted Stock. The plan contains a provisionallowing non-employee Directors of the Company to elect annually to receivepayment of all or any portion of the fees for their services as Directors inthe form of options to acquire Company Common Stock.  The Plan authorized 250,000 shares of common stock.  There were 250,000 shares available as ofFebruary 1, 2003 for future grants.

 

The Company has aStock Incentive Plan which was ratified by the shareholders at the 1995 AnnualShareholders Meeting.  The Plan providesthe Compensation Committee with the discretion to make grants until June 20,2005 to all salaried employees of the Company who are not in a bargaining unit,in the form of Non-qualified Stock Options, Incentive Stock Options, StockAppreciation Rights, Limited Stock Appreciation Rights and RestrictedStock.  Grants of Stock AppreciationRights, Limited Stock Appreciation Rights and Restricted Stock are intended tobe confined to key employees in special situations.  The Plan originally authorized 500,000 shares of commonstock.  There were 321,630 sharesavailable as of February 1, 2003 for future grants.

 

54

----

 

In order toprotect all of the rights of the participant in the event of a Change inControl of the Company, the 2000 and 1995 Stock Incentive Plans provide for theimmediate vesting of all outstanding awards upon the occurrence of such anevent.  A Change in Control of theCompany is deemed to occur if any one or more of the following conditions arefulfilled:  (i) any person orentity (with the exception of Odyssey Partners) acquires 50% or more of thevoting securities of the Company; (ii) the shareholders approve a plan ofcomplete liquidation, an agreement for sale or disposition of substantially allof the assets of the Company, or a materially dilutive merger or consolidationof the Company; or (iii) the Board of Directors agrees by a two-thirdsvote that a Change in Control has occurred or is about to occur and within sixmonths actually does occur.  However, inno event shall a Change in Control be deemed to occur with respect to any Planparticipant who is a material equity participant of the purchasing group thatconsummates a Change in Control.

 

***Employment Contracts and Termination of Employment andChange-in-Control Arrangements***

 

Robert Kelly,Chairman, President and Chief Executive Officer, has an employment contractwhich is described above.

 

Jeffrey L. Little, former President and Chief Executive Officer, had anemployment contract which is described above. Mr. Little left the Company on March 18, 2002.

 

The Companyentered into an employment contract with Ward Dunn on May 9, 2002 as VicePresident of Sales and Marketing for a term of two years.  The terms of the contract include an annualsalary of $190,000; a signing bonus of $35,000; bonus eligibility at the VicePresident level of 40% of annual salary; reimbursement of relocation andtemporary living expenses; participation in life, health and disabilityinsurance programs; and four weeks of annual vacation.

 

***Retention Agreement***

 

There are noRetention Agreements currently in effect between the Company and any employees.

 

The Company had a Retention Agreement with certain key employees in theevent that the Company commenced a voluntary case under Chapter 11 of theUnited States Bankruptcy Code.  Theagreement provided a bonus for continuing services provided that the employeeis still employed by the Company six months after consummation of a plan ofreorganization in the Chapter 11 Case. On May 31, 2000 the Retention Agreements were modified to provide forthe payment of the bonuses should the employee’s employment by the Company beterminated prior to such six month period as a result of (i) a sale of all orsubstantially all of the assets of the Company, whether in separate transactionor as part of a plan of reorganization for the company, or (ii) a merger,consolidation, liquidation, dissolution or similar transaction involving theCompany.  The Company did commenceChapter 11 proceedings on February 29, 2000. On July 7, 2000 the United States District Court for the District ofDelaware confirmed the Company’s plan of reorganization, which plan the Companyconsummated on August 7, 2000.  Paymentsunder the Retention Agreements were made in January 2001.

 

***Change of Control***

 

There are no Change of Control agreements currently in effect betweenthe Company and any employees.

 
| Respectfully submitted,      |             |
|------------------------------|------------------|
| Steven M. Friedman, Chairman | Jerry I. Reitman |

 

***Performance Presentation***

* *

Shown below is a line graph comparing total shareholder return for theCompany, the Russell 2000 and the S&P Retail Stores (Food) since theCompany’s stock resumed trading on August 7, 2000 at the exit from Chapter 11,as required by Item 402(l) of SEC Regulation S-K.  The graph assumes $100 invested on August 7, 2000 in Eagle commonstock and $100 invested at the same time in the Russell 2000 index and theS&P 500 Retail index.

 

55

----

 

 

Note: Companiescomprising the S&P Retail Stores (Food) Index include: Albertson’s, Inc.,Kroger Co., Safeway, Inc. and Winn-Dixie Stores, Inc.

 

**ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The followingtable sets forth information with respect to the beneficial ownership of sharesof Common Stock by (a) each person or group that is known to the Companyto be the beneficial owner of more than 5% of the outstanding shares,(b) each director and named executive officer of the Company and(c) all directors and executive officers of the Company as a group.  A total of 3,110,935 shares of Common Stockwere outstanding on May 2, 2003.

 

 
| **Names of Beneficial Owners**                                                                            |   | **Amount and  Nature of  Beneficial  Ownership (1)** |   | **Percent  of  Class** |   |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|------------------------|--------|
| Odyssey  Partners, LP (2)                                                                                 |   | 996,096                                              |   | 32.02                  | %      |
| Dimensional  Fund Advisors, Inc. (3)                                                                      |   | 182,850                                              |   | 5.88                   | %      |
| REKCEB  Enterprises, LLC (4)                                                                              |   | 156,610                                              |   | 5.03                   | %      |
| Robert  J. Kelly (5)                                                                                      |   | 81,250                                               |   | 2.61                   | %      |
| Steven  M. Friedman (6)                                                                                   |   | 56,836                                               |   | 1.83                   | %      |
| O.  L. Becker Trust (4)                                                                                   |   | 60,000                                               |   | 1.93                   | %      |
| Peter  B. Foreman                                                                                         |   | 37,755                                               |   | 1.21                   | %      |
| Clark  J. Jordan (7)                                                                                      |   | 11,443                                               |   |                   | *      |
| The  Friedman Family Foundation (6)                                                                       |   | 10,000                                               |   |                   | *      |
| Patrick  M. Flatley (8)                                                                                   |   | 8,750                                                |   |                   | *      |
| Frank  A. Klun (9)                                                                                        |   | 8,750                                                |   |                   | *      |
| Alain  M. Oberrotman                                                                                      |   | 1,000                                                |   |                   | *      |
| Jerry  I. Reitman                                                                                         |   | 500                                                  |   |                   | *      |
| William  J. Snyder (10)                                                                                   |   | 250                                                  |   |                   | *      |
| Directors  and Executive Officers as a group (10 persons) including certain of the  persons listed above. |   | 223,401                                              |   | 7.18                   | %      |

 

----

*Owns less than1%.

 

Notes:

 

(1)   Unlessotherwise noted, each person has sole investment and voting power with respectto the shares indicated.

(2)   OdysseyPartners LP, 280 Park Avenue, West Tower, 21st Floor, New York, NY10017, a private investment partnership in liquidation, owns 996,096 shares,which may be deemed to be beneficially owned by each of Messrs. Stephen Berger,The Estate of Leon Levy, Jack Nash, Joshua Nash and Brian Wruble, whocollectively constitute all of the general partners of Odyssey Partners,LP.  Does not include 158,034 shares ofCommon Stock owned by The Jerome Levy Foundation, as to which The Estate of Mr.Leon Levy may be deemed to have 

 

56

----

 

beneficialownership, or 115,300 shares of Common Stock owned by The Nash FamilyFoundation, a charitable foundation, as to which Messrs. Nash may be deemed tohave beneficial ownership.

(3)   DimensionalFund Advisors Inc. (“Dimensional”), an investment advisor registered underSection 203 of the Investment Advisors Act of 1940, furnishes investment adviceto four investment companies registered under the Investment Company Act of1940, and serves as investment manager to certain other investment vehicles,including commingled group trusts. (These investment companies and investment vehicles are the“Portfolios.”)  In its role asinvestment advisor and investment manager, Dimensional possessed bothinvestment and voting power over 182,850 shares of Eagle Food Centers, Inc.stock as of December 31, 2002.  ThePortfolios own all securities reported in this statement, and Dimensionaldisclaims beneficial ownership of such securities.  The business office address of Dimensional Fund Advisors Inc. is1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.

(4)   REKCEBEnterprises, LLC, 320 Guaranty Building, Cedar Rapids, Iowa 52401, owns 156,610shares of Common Stock of the Company. O. L. Becker Trust owns 42,200 shares of Common Stock of theCompany.  Harold M. Becker is thePrincipal of REKCEB Enterprises, LLC and Trustee of the O. L. BeckerTrust.  Mr. Becker is Chairman of theBoard of Directors of Guaranty Bankshares, LTD, Cedar Rapids, Iowa, a bankholding company.  Mr. Becker may bedeemed to have beneficial ownership of 216,610 shares of Common Stock of theCompany.

(5)   Mr. Kellypurchased 31,250 shares of Common Stock of the Company at the time of theexecution of his Employment Agreement. The beneficial ownership includes options for 50,000 shares that areexercisable as of May 2, 2003.

(6)   Steven M.Friedman owns 56,836 shares of Common Stock of the Company, which does notinclude the 10,000 shares owned by The Friedman Family Foundation, a charitablefoundation, as to which Steven M. Friedman may be deemed to have beneficialownership.

(7)   Thebeneficial ownership represents 1,130 shares that are owned by Mr. Jordan plusthe exercisable portion of options on 18,750 shares.  A total of 10,313 shares were exercisable as of May 2, 2003.

(8)   Thebeneficial ownership represents the exercisable portion of options on 10,000shares owned by Mr. Flatley.  A total of8,750 shares were exercisable as of May 2, 2003.

(9)   Thebeneficial ownership represents the exercisable portion of options on 8,750shares owned by Mr. Klun.  All 8,750shares were exercisable as of May 2, 2003.

(10) The profitsharing plan of Snyder, Schwarz, Park & Nelson P.C., the law firm of whichMr. Snyder is a member, owns 250 shares of Common Stock.

 

## **Equity Compensation PlanInformation**

 
| **Plan category**                                           |   | **Number of  securities to be  issued upon exercise of  outstanding options, warrants  and rights  (a)** |   | **Weighted-average  exercise  price of outstanding options,  warrants and rights  (b)** |   | **Number of  securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (a))  (c)** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity  compensation plans approved by security holders     |   | 171,769                                                                                                  |   | $10.80                                                                                  |   | 571,630                                                                                                                                                    |   |
| Equity  compensation plans not approved by security holders |   | 0                                                                                                        |   | 0                                                                                       |   | 0                                                                                                                                                          |   |
| **Total**                                                   |   | 171,769                                                                                                  |   | $10.80                                                                                  |   | 571,630                                                                                                                                                    |   |

 

#### ***Ownershipof Principal Shareholders***

#### ** **

Odyssey Partners,LP, Dimensional Fund Advisors, certain Beneficial Owners of Odyssey Partners,LP and Company Directors and Executive Officers currently hold the right tovote, or have the right to acquire through the exercise of options, shares ofCommon Stock of the Company representing 52.46% of shares that would beoutstanding upon the exercise of such options.

 

***Stock Issued in Conjunction with the Company’s Plan ofReorganization***

 

The Company fileda voluntary petition under Chapter 11 of the Bankruptcy Code in the UnitedStates Bankruptcy Court for the District of Delaware on February 29, 2000.  Pursuant to the Company’s Plan of Reorganization,15% of the fully-diluted common stock of the Company was issued to the holdersof the Senior Notes, of which 10% would have been returned to the Company ifthe Company had been sold or the debt retired prior to October 15, 2001.  If the Company would have been sold or thedebt would have been retired after October 14, 2001 and prior to October 15,2002,

 

57

----

 

5% of the commonstock would have been returned to the Company. None of the common stock was returned to the Company since the Companywas not sold nor the debt retired prior to October 15, 2002.

 

**ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Snyder, Schwarz,Park & Nelson P.C., the law firm of which Mr. Snyder, a director of the Company,is a member, serves as counsel to the Company. The Company paid that law firm $147,693, $116,492 and $275,437 forservices rendered in fiscal 2002, 2001, and 2000, respectively.  These amounts include remuneration for theservices of Mr. Snyder as a director of the Company.  The Board has determined that the fees paid for services renderedfrom Snyder, Schwarz, Park & Nelson P.C. were fair and competitive.

 

Mr. Oberrotman waspaid $15,000 including expenses, in fiscal 2000 for services rendered as aconsultant in connection with the restructuring of the Senior Notes of theCompany.  The Board has determined thatthe fees paid for services rendered by Mr. Oberrotman were fair andcompetitive.

 

**ITEM 14:  CONTROLS AND PROCEDURES**

 

a.       Evaluationof disclosure controls and procedures

 

Based on theirevaluation as of a date within 90 days of the filing date of the Annual Reporton Form 10-K, the Company’s Chief Executive Officer and Acting Chief FinancialOfficer have concluded that the Company’s disclosure controls and procedures(as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of1934 (the “Exchange Act”)) are effective to ensure that information required tobe disclosed by the Company in reports that are filed and submitted under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.

 

b.       Changesin internal controls

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

**PART IV**

 

**ITEM 15:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K**

 

 
| (a)    | The following documents  are filed as a part of this report: |
|--------|--------------------------------------------------------------|
|   |                                                         |   |
|   | 1.                                                           | Financial  Statements: |
|   |                                                         |   |
|   |                                                         | - Independent Auditors’  Reports |
|   |                                                         |   |
|   |                                                         | - Consolidated Balance  Sheets as of February 1, 2003 and February 2, 2002 |
|   |                                                         |   |
|   |                                                         | - Consolidated  Statements of Operations for the years ended February 1, 2003, February 2,  2002, and February 3, 2001 |
|   |                                                         |   |
|   |                                                         | -  Consolidated Statements of Stockholders’ Equity and Comprehensive Income  (Loss) for the years ended February 1, 2003, February 2, 2002,  and February 3, 2001 |
|   |                                                         |   |
|   |                                                         | - Consolidated  Statements of Cash Flows for the years ended February 1, 2003, February 2,  2002, and February 3, 2001 |
|   |                                                         |   |
|   |                                                         | - Notes  to the Consolidated Financial Statements |
|   |                                                         |   |
|   | 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 62. |

 

58

----

 

(b) Reports onForm 8-K:

 

On December 4,2002, the Company announced that it has entered into an agreement with CongressFinancial Corporation (Central) (“Congress”) relating to an adjusted net worthcovenant in the Second Amended and Restated Loan and Security Agreement datedas of August 24, 2001 (“Revolver”).  TheRevolver has a financial covenant requiring the Company to maintain a minimumadjusted net worth.  To prevent apotential default under the covenant, the Company has signed a Limited Waiverin which Congress has agreed to waive such default until February 1, 2003.

 

On January 31,2003, the Company announced that Mr. Randall McMurray has been appointed asActing Chief Financial Officer and Mr. Herbert Fickel, Vice President,Treasurer, has assumed additional responsibilities in the areas of audit andcompliance following the departure of Chief Financial Officer, Mr. PatricPlumley, on January 24, 2003.

 

Also on January31, 2003, the Company announced that it has received an extension on theLimited Waiver Agreement (“Waiver”) with Congress Financial Corporation(Central) (“Congress”) until March 8, 2003. The Waiver with Congress was signed to prevent a default, or potentialdefault, under the adjusted net worth covenant in the Second Amended andRestated Loan Agreement dated August 24, 2001 (“Revolver”).

 

On March 11, 2003,the Company announced that it has received an extension on the Limited WaiverAgreement (“Waiver”) with Congress Financial Corporation (Central) (“Congress”)until April 5, 2003.  The Waiver with Congresswas signed to prevent a default, or potential default, under the adjusted networth covenant in the Second Amended and Restated Loan Agreement dated August24, 2001 (“Revolver”).  The Company alsoannounced that its current Collective Bargaining Agreement with UFCW Locals 881and 1546 has been extended to August 1, 2003.

 

On March 25, 2003,the Company announced that its Common Stock will be delisted from the NasdaqStock Market effective as of the opening of business on March 27, 2003.

 

On April 7, 2003,the Company announced that it filed voluntary Chapter 11 petitions in the U.S.Bankruptcy Court for the Northern District of Illinois in Chicago.  The Company received approval on an interimbasis of its debtor-in-possession (DIP) financing and first-day orders inconnection with restructuring.

 

On May 21, 2003,the Company announced that it received final Court approval of the Company’s$40 million debtor-in-possession (DIP) financing facility.

 

59

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**EAGLEFOOD CENTERS, INC.**

 
| By:                                | /s/ Robert J. Kelly |   |
|------------------------------------|---------------------|--------|
| Robert J. Kelly                    |
| Chairman, Chief  Executive Officer |
| and President                      |

 

DATED:  May 23, 2003

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons in the capacities and on the datesindicated:

 
| **Signature**           |   | **Title**                                        |                                             | **Date** |
|-------------------------|--------|--------------------------------------------------|--------------------------------------------------|----------|
|                    |   |                                             |                                             |     |
| /s/ Robert J. Kelly     |   |                                             | Chairman, Chief  Executive Officer and President |     | May 23, 2003 |
| Robert J. Kelly         |   |                                             |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ Randall D. McMurray |   |                                             | Vice President-  Controller and Acting Chief     |     | May 23, 2003 |
| Randall D. McMurray     |   | Financial Officer  (Principal Financial Officer) |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ HerbertW. Fickel    |   |                                             | Vice President-  Treasurer                       |     | May 23, 2003 |
| Herbert W. Fickel       |   | (Principal Accounting  Officer)                  |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ Peter B. Foreman    |   |                                             | Director                                         |     | May 23, 2003 |
| Peter B. Foreman        |   |                                             |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ Steven M. Friedman  |   |                                             | Director                                         |     | May 23, 2003 |
| Steven M. Friedman      |   |                                             |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ Alain M. Oberrotman |   |                                             | Director                                         |     | May 23, 2003 |
| Alain Oberrotman        |   |                                             |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ Jerry I. Reitman    |   |                                             | Director                                         |     | May 23, 2003 |
| Jerry I. Reitman        |   |                                             |                                             |     |
|                    |   |                                             |                                             |     |
| /s/ William J. Snyder   |   |                                             | Director and Acting  Secretary                   |     | May 23, 2003 |
| William J. Snyder       |   |                                             |                                             |     |

 

60

----

** **
| **Exhibit No. —** |   | **Description**                                                                                                                                                                                                                                                                                                                                            |
|------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 2.1—              |   | First Amended Reorganization Plan of Eagle Food  Centers, Inc., dated April 17, 2000 (filed as Exhibit 2.1 to Form 8-K dated  July 7, 2000 and incorporated herein by reference).                                                                                                                                                                          |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 2.2—              |   | Order Pursuant to 11 U.S.C. Sections 105 and 1127  (b) Allowing Non-Material, Technical Modification to First Amended  Reorganization Plan of Eagle Food Centers, Inc. (filed as Exhibit 2.1 to Form  8-K dated August 7, 2000 and incorporated herein by reference).                                                                                      |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 2.3—              |   | Announcement of filing voluntary Chapter 11  petitions in U.S. Bankruptcy Court (filed as Exhibit 2.1 on Form 8-K dated  April 7, 2003 and incorporated herein by reference).                                                                                                                                                                              |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 2.4—              |   | Announcement of the Company receiving approval of  first-day orders in connection with restructuring and debtor-in-possession  (DIP) financing (filed as Exhibit 2.2 on Form 8-K dated April 7, 2003 and  incorporated herein by reference).                                                                                                               |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 2.5—              |   | Announcement of the Company receiving final Court  approval of the Company’s $40 million debtor-in-possession (DIP) financing  facility (filed as Exhibit 2.3 on Form 8-K dated May 21, 2003 and  incorporated herein by reference).                                                                                                                  |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 3.1—              |   | Restated By-laws of the  Company (filed as Exhibit 3.2 to the Form 8-K dated July 7, 2000 and  incorporated herein by reference).                                                                                                                                                                                                                     |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2—              |   | Amended and Restated  Certificate of Incorporation of the Company (filed as Exhibit 3(i) to  the Form 8-K dated July 5, 2001 and incorporated herein by reference).                                                                                                                                                                                   |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1—              |   | Form of Note (filed as  Exhibit 4.2 to the Form 8-K dated August 7, 2000 and incorporated herein by  reference).                                                                                                                                                                                                                                           |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.2—              |   | Form of Indenture,  dated as of August 7, 2000, between the Company and U.S. Bank Trust National  Association, as trustee (filed as Exhibit 4.1 to the Form 8-K dated August 7,  2000 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  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).                                                                                              |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.5—             |   | 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). |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.6—             |   | 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).                                                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.7—             |   | Employment agreement  dated May 10, 1995 between the Company and Robert J. Kelly, its President and  Chief Executive Officer (filed as Exhibit 19 to the Company’s  Form 10-Q for the quarter ended July 29, 1995 and incorporated herein by  reference).                                                                                   |

 

61

----

 
| 10.8—  |   | 1995 Stock Incentive  Plan as approved on June 21, 1995 (filed as Exhibit 18 to the Company’s  Form 10-Q for the quarter ended July 29, 1995 and incorporated herein by  reference).                                                                                                                                  |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.9—  |   | Employment Contract  dated December 13, 1999 between the Company and Jeff Little, its Chief  Executive Officer and President effective January 31, 2000 (filed as  Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the  year ended January 29, 2000 and incorporated herein by reference).              |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.10— |   | Escrow Agreement  between Eagle Food Centers, Inc. and U.S. Bank Trust National Association  (filed as Exhibit 10.1 to Form 8-K dated August 7, 2000 and incorporated  herein by reference).                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.11— |   | Eagle Food Centers,  Inc. 2000 Stock Incentive Plan, dated and approved September 13, 2000 (filed  as Exhibit 10.19 to the Company’s Annual Report on Form 10K for the year  ended February 3, 2001 and incorporated herein by reference).                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.12— |   | Employment Contract  correction for contract dated December 13, 1999 between the Company and Jeff  Little, its Chief Executive Officer and President effective January 31, 2000  (filed as Exhibit 10.19 to the Company’s Annual Report on Form 10K for the  year ended February 3, 2001 and incorporated herein by reference). |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.13— |   | Second Amended and  Restated Loan and Security Agreement with Congress Financial Corporation  (Central) date August 24, 2001 (filed as Exhibit 10.21 to the Company’s Form  10Q for the quarter ended November 3, 2001 and incorporated herein by  reference).                                                                  |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.14— |   | Amended Employment  Agreement dated January 24, 2002 between the Company and Robert J. Kelly,  Chairman of the Board, President and Chief Executive Officer.                                                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.15— |   | Employment agreement  dated May 9, 2002 between the Company and Ward Dunn, Vice President of Sales  and Marketing.                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.16— |   | Announcement of Limited  Waiver Agreement with Congress Financial Corporation (Central) (filed as  Exhibit 10.1 to Form 8-K dated December 4, 2002 and incorporated herein by  reference).                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.17— |   | Announcement of  extension on Limited Waiver Agreement with Congress Financial Corporation  (Central) (filed as Exhibit 10.2 to Form 8-K dated January 31, 2003 and  incorporated herein by reference).                                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.18— |   | Announcement of  extension on Limited Waiver Agreement with Congress Financial Corporation  (Central) (filed as Exhibit 10.1 to Form 8-K dated March 11, 2003 and  incorporated herein by reference).                                                                                                                                |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 16.1—  |   | Letter from Deloitte  & Touche LLP on change of certifying accountant (filed as Exhibit 16 to  Form 8-K dated July 28, 2000 and incorporated herein by reference).                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 18.1—  |   | Preferability Letter  from Deloitte and Touche dated April 14, 2000 (filed as Exhibit 18.1 to the  Form 10-K dated April 28, 2000 and incorporated herein by reference).                                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 18.2—  |   | Letter from KPMG LLP  regarding preferability of change in accounting principle for inventories  (filed as Exhibit 18.2 to the Form 10-Q for the quarter ended May 4, 2002 and  incorporated herein by reference).                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 21—*   |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 99.1—  |   | Form of Noteholder agreements to vote for Plan of  Reorganization (filed as Exhibit 99.2 to Form 8-K dated February 29, 2000 and  incorporated herein by reference).                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 99.2—  |   | Disclosure Statement with Respect to First Amended  Reorganization Plan of Eagle Food Centers, Inc. dated April 17, 2000 (filed  as Exhibit 99.1 to Form 8-K dated July 7, 2000 and incorporated herein by  reference).                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 99.3—  |   | Findings of Fact,  Conclusion of Law, and Order Under 11 U.S.C. §§ 1129(a) and (b) and Fed. R.  Bankr. P. 3020 Confirming First Amended Reorganization Plan of Eagle Food  Centers, Inc. (filed as Exhibit 99.2 to Form 8-K dated July 7, 2000 and  incorporated herein by reference).                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                 |
| 99.4—  |   | Order and Final Decree  closing the Chapter 11 Case as of January 28, 2002.                                                                                                                                                                                                                                                          |

 

62

----

 
| 99.5— |   | Announcement of Mr.  Randall McMurray appointed as Acting Chief Financial Officer and Mr. Herbert  Fickel assuming additional responsibilities (filed as Exhibit 99.1 to Form  8-K dated January 31, 2003 and incorporated herein by reference). |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                             |
| 99.6— |   | Announcement that the  Company’s Common Stock will be delisted from the Nasdaq Stock Market (filed  as Exhibit 99.1 to Form 8-K dated March 25, 2003 and incorporated herein by  reference).                                                |

 

----

*Filed herewith.

 

63

----

 

CERTIFICATIONS

 

I, Robert J. Kelly, certify that:

1. I have reviewed this annual report on Form 10-K of Eagle FoodCenters, Inc.;

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); andc) presented in this annual report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  | May 23, 2003                                    |   |   |
|--------|-------------------------------------------------|--------|--------|
|   |                                            |
|   |                                            |
|   | /s/ Robert J. Kelly                             |
|   | Robert J. Kelly                                 |
|   | Chairman, Chief Executive Officer and President |

 

64

----

 

I, Randall D. McMurray, certify that:

1. I have reviewed this annual report on Form 10-K of Eagle FoodCenters, Inc.;

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); andc) presented in this annual report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  | May 23, 2003                                                         |   |   |
|--------|----------------------------------------------------------------------|--------|--------|
|   |                                                                 |
|   |                                                                 |
|   | /s/ Randall D. McMurray                                              |
|   | Randall D. McMurray                                                  |
|   | Vice President – Controller and Acting Chief  Financial Officer |

 

65

----

 

**Certification of Chief Executive Officer**

**Pursuant to Section 906 of the**

**Sarbanes-Oxley Act of 2002**

 

In connection with this annual report on Form 10-K of Eagle FoodCenters, Inc. I, Robert J. Kelly, Chief Executive Officer of Eagle FoodCenters, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that, to the best of my knowledge:

 

(1)                                  Thereport fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

 

(2)                                  Theinformation contained in this report fairly presents, in all material respects,the financial condition and results of operations of Eagle Food Centers, Inc.

 
| Date:  May 23, 2003 |   | /s/ Robert J. Kelly                               |
|--------------------------|--------|---------------------------------------------------|
|                     |   | Robert J. Kelly                                   |
|                     |   | Chairman, Chief Executive Officer and   President |

 

66

----

 

**Certification of Chief Financial Officer**

**Pursuant to Section 906 of the**

**Sarbanes-Oxley Act of 2002**

 

In connection with this annual report on Form 10-K of Eagle Food Centers,Inc. I, Randall D. McMurray, Acting Chief Financial Officer of Eagle FoodCenters, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that, to the best of my knowledge:

 

(1)                                  Thereport fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

 

(2)                                  Theinformation contained in this report fairly presents, in all material respects,the financial condition and results of operations of Eagle Food Centers, Inc.

 

 
| Date:  May 23, 2003 |   | /s/ Randall D. McMurray                                       |
|--------------------------|--------|---------------------------------------------------------------|
|                     |   | Randall D. McMurray                                           |
|                     |   | Vice President-Controller and Acting Chief  Financial Officer |

 

67

----