<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-6672
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2745285
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2430 EAST DEL AMO BOULEVARD
DOMINGUEZ, CALIFORNIA 90220-6306
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 537-9220
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Shares Outstanding at November 27, 1994 26,055,543
<PAGE> 2
MAC FRUGAL'S BARGAINS *
CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
October 30, January 30,
----------- -----------
1994 1994
<S> <C> <C>
Assets
Current Assets :
Cash and cash equivalents $ 8,707 $ 1,015
Merchandise inventories 232,973 181,755
Other current assets 15,368 15,114
--------- --------
Total current assets 257,048 197,884
Property, Equipment and Improvements :
Land 31,432 27,109
Buildings and improvements 77,020 71,784
Automobiles and trucks 2,778 2,778
Furniture, fixtures and equipment 86,545 75,797
Leasehold improvements 72,245 64,843
Construction in progress 3,090 1,137
--------- --------
273,110 243,448
Less: Accumulated depreciation
and amortization (100,964) (89,628)
--------- --------
172,146 153,820
Deferred Federal and State Income
Tax Asset 1,352 1,252
Deferred Financing Costs and Other Assets 4,305 5,177
--------- --------
Total Assets $ 434,851 $358,133
========= ========
Liabilities and Stockholders' Equity
Current Liabilities:
Loan payable to bank $ 157,600 $ 34,900
Current portion of long-term debt 61 97
Accounts payable 16,354 13,444
Accrued expenses 34,294 31,726
Income taxes payable - -
Sales tax payable 6,891 9,394
--------- --------
Total current liabilities 215,200 89,561
Long-Term Debt 4,288 3,869
Deferred Federal and State Income Taxes 7,353 7,353
Stockholders' Equity
Preferred stock, $1 par value;
authorized, 500 shares; issued, none
Common stock, $.02778 par value;
authorized, 100,000 shares;
issued 29,826 shares (October 30, 1994)
and 29,727 shares (January 30, 1994) 828 825
Additional paid-in capital 2,535 1,319
Retained earnings 269,711 256,033
--------- --------
273,074 258,177
Less: Treasury stock, at cost, 3,457 shares
(October 30,1994) and 55 shares
(January 30,1994) (65,064) (827)
--------- --------
Total Stockholders' Equity 208,010 257,350
--------- --------
Total Liabilities and Stockholders' Equity $ 434,851 $358,133
========= ========
</TABLE>
- ------------
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
( UNAUDITED )
( Amounts in thousands except per share amounts )
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------------- -------------------------------
October 30, October 31, October 30, October 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $158,491 $140,581 $434,279 $383,359
Cost of sales 83,793 74,869 230,413 204,979
-------- -------- -------- --------
GROSS PROFIT 74,698 65,712 203,866 178,380
Store expenses 48,769 44,976 132,254 116,205
Warehouse and administrative
expenses 14,918 13,070 44,136 38,744
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 63,687 58,046 176,390 154,949
OPERATING INCOME 11,011 7,666 27,476 23,431
Interest expense, net 2,288 1,670 4,679 4,201
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 8,723 5,996 22,797 19,230
INCOME TAX EXPENSE 3,489 2,398 9,119 7,692
-------- -------- -------- --------
NET EARNINGS $ 5,234 $ 3,598 $ 13,678 $ 11,538
======== ======== ======== ========
EARNINGS PER COMMON SHARE $0.19 $0.12 $0.47 $0.39
AVERAGE SHARES OUTSTANDING 28,142 29,869 29,042 29,892
======== ======== ======== ========
</TABLE>
- ------------
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Amounts in thousands)
Common Stock Additional Treasury Stock
------------------- Paid-in Retained ---------------------
Shares Amount Capital Earnings Shares Amount Total
------- ------ ---------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1994 29,727 $825 $1,319 $256,033 55 $ (827) $257,350
Exercise of stock options 99 3 1,159 1,162
Non-cash compensation
expense 57 57
Purchase of Treasury stock,
at cost 3,402 (64,237) (64,237)
Net earnings for nine months 13,678 13,678
------ ---- ------ -------- ----- -------- --------
Balance, October 30, 1994 29,826 $828 $2,535 $269,711 3,457 $(65,064) $208,010
====== ==== ====== ======== ===== ======== ========
</TABLE>
- -----------
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months ended
---------------------------------
October 30, October 31,
1994 1993
------------ ----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Cash received from customers $ 434,279 $ 383,359
Cash paid to suppliers and employees (443,171) (390,814)
Income taxes paid (9,868) (21,425)
Interest paid (3,868) (4,935)
Interest received 51 607
--------- ---------
Net cash used in operating activities (22,577) (33,208)
Cash flows from investing activities:
Capital expenditures (30,212) (18,244)
Proceeds from sale of fixed assets 473 25,879
--------- ---------
Net cash (used in) provided by investing
activities (29,739) 7,635
Cash flows from financing activities:
Net borrowings under line of credit agreements 122,700 83,800
Repurchase of treasury stock (64,237) -
Payment of long-term debt (82) (76,738)
Proceeds from sale of stock options 1,162 435
Other (net) 465 360
--------- ---------
Net cash provided by financing activities 60,008 7,857
--------- ---------
Increase (decrease) in cash and cash equivalents 7,692 (17,716)
Cash and cash equivalents, beginning of period 1,015 21,820
--------- ---------
Cash and cash equivalents, end of period $ 8,707 $ 4,104
========= =========
</TABLE>
- ------------
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(continued)
<TABLE>
<CAPTION>
For the nine months ended
-------------------------------
October 30, October 31,
1994 1993
----------- ------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash Used
In Operating Activities:
Net income $ 13,678 $ 11,538
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 11,590 11,446
Gain on sale of fixed assets (177) (1,789)
Non-cash compensation expense 57 57
Changes in assets and liabilities:
Increase in inventory (51,218) (61,393)
Decrease (increase) in other assets 618 (16,403)
(Increase) decrease in deferred income tax asset (100) 12,753
Increase in accounts payable, accrued
expenses and sales tax payable 2,975 23,925
Decrease in federal and state income taxes - (14,717)
Increase in deferred federal and state income taxes - 1,375
-------- --------
Total adjustments (36,255) (44,746)
-------- --------
Net cash used in operating activities $(22,577) $(33,208)
======== ========
</TABLE>
- ------------
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES
PART I - ITEM I - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The information furnished was prepared internally by the Company and
has not been independently verified. However, it reflects all
adjustments which are, in the opinion of Management, necessary to
present a fair statement of results for the interim period. All
adjustments are of a normal, recurring nature.
Note 2 Earnings per Common Share is based on the weighted average number of
Common Shares outstanding, adjusted for dilutive effects of stock
options, if applicable.
Note 3 The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", effective February 1, 1993
with no significant income statement impact. This statement
supersedes APB Opinion No. 11.
The Company's effective tax rate during the third quarter and first
nine months of fiscal 1994 was 40.0%. The provision for income tax
expense was $3,489,000 and $9,119,000 for the third quarter and first
nine months of fiscal 1994, respectively. For interim reporting
purposes the entire provision for income tax expense was classified as
current.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company had a net deferred tax liability of $770,000 at
October 30, 1994 and $915,000 at January 30, 1994. This change in net
deferred tax liability is due to a reclassification from deferred
income taxes to current income taxes payable. Other current assets on
the balance sheet includes $5,231,000 and $5,186,000 of current
deferred assets at October 30, 1994 and January 30, 1994,
respectively. Other current assets also includes $927,000 of current
refundable taxes at January 30, 1994.
The Company provided no valuation allowance against its deferred tax
assets recorded as of October 30, 1994 and January 30, 1994.
Note 4 The Company repurchased 2,121,900 and 3,402,300 shares of its common
stock in the third quarter and first nine months of fiscal 1994,
respectively. The repurchase resulted in a dilution of the quarterly
weighted average shares outstanding and, as such, the sum of the
quarterly earnings per share exceeds annual earnings per share by
$0.01.
7
<PAGE> 8
PART I - ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND INTERIM RESULTS OF OPERATIONS
SALES
- -----
Total sales and comparable store sales increased 12.7% and 3.5%, respectively,
for the three months ended October 30, 1994 as compared to the same period a
year ago. The total sales increase was a result of opening 39 net new stores
since October 31, 1993 combined with the comparable store sales increase noted
above but partially offset by sales from discontinued seasonal Christmas stores
in the prior year. The comparable store sales increase in turn, was due to a
better assortment of seasonal merchandise combined with improving store
operations. At October 30, 1994, 267 stores were in operation compared to 228
year-round stores and 166 discontinued seasonal Christmas stores at October 31,
1993. The Company opened 10 net new stores during the current quarter.
Total sales and comparable store sales increased 13.3% and 2.8%, respectively,
for the nine months ended October 30, 1994 as compared to the same period a
year ago. These increases are due to the same factors mentioned in the
previous paragraph.
Total sales in the prior year include $4,346,000 from discontinued seasonal
Christmas stores for both the third quarter and first nine months ended October
31, 1993. Excluding these seasonal Christmas store sales from the prior year,
the total sales increase for the third quarter and first nine months ended
October 30, 1994 is 16.3% and 14.6%, respectively.
Sales from the 151 California stores open at October 30, 1994 were
approximately 63% of total sales for both the third quarter and first nine
months of the current year. In addition, California stores produced comparable
store sales increases during the third quarter.
GROSS PROFIT RATE
- -----------------
The gross profit rate of 47.1% and 46.9% for the current year third quarter and
first nine months increased 0.4 percentage points over the same periods in the
prior year. Both increases are primarily due to higher initial markups on
goods acquired and shipped to stores in the current year compared to a year ago
but were partially offset by higher markdowns as a percent of sales in the
current year. The reserve rate for inventory shrinkage was the same for both
the nine month and third quarter periods of both years.
OPERATING EXPENSE RATES
- -----------------------
Operating expenses were 40.2% and 40.6% of sales for the current year third
quarter and first nine months, respectively. Prior year third quarter and
first nine months operating expenses were 41.3% and 40.4% of sales,
respectively. Last year's third quarter and nine month operating expenses
included expenses from the discontinued Christmas stores. These expenses as a
percent of the Christmas store sales were at a higher percentage than the
expense to sales ratio of the combined Mac Frugal's/Pic 'N' Save stores.
8
<PAGE> 9
Store expenses totaled 30.8% and 30.5% of sales for the third quarter and first
nine months of fiscal 1994, respectively, while for the same periods of fiscal
1993 they were 32.0% and 30.3% of sales. Excluding the discontinued seasonal
Christmas stores, store expenses were slightly higher in this year's third
quarter and first nine months than the prior year. The increase was mainly due
to higher rent, payroll and depreciation as a percentage of sales, offset only
partially by lower advertising and supply expenses as a percentage of sales.
These increases are to be expected during a phase of expansion.
Administrative and warehouse expenses as a percentage of sales were slightly
higher for the third quarter and for the first nine months of fiscal 1994, as
compared to the same periods last year. General cost containment at the
warehouses offset the effect of recognizing gains on the sale of land of
$229,000 and $1,786,000 in the prior year third quarter and first nine months,
respectively.
INTEREST EXPENSE
- ----------------
Net interest expense was $2,288,000 and $4,679,000 for the third quarter and
first nine months of fiscal 1994, respectively. This compares to the
$1,670,000 and $4,201,000 incurred during the same periods last year. Interest
amounts are higher than last year due to higher average debt levels and higher
interest rates. The proceeds of these increased borrowings were used to: (1)
repurchase 3,457,400 shares of stock in the open market since October 31, 1993
for a total amount of $65,064,000; and (2) fund higher inventory levels to
stock new stores and for the Christmas selling season.
INCOME TAX RATE
- ---------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", effective February 1, 1993 with no significant
income statement impact. This Statement supersedes APB Opinion No. 11 under
which the Company provided for its income taxes prior to the adoption of SFAS
No. 109.
The income tax rate for the third quarter and first nine months of fiscal 1994
was 40.0%, and for interim reporting purposes, the entire provision for income
tax is classified as current. The current rate of 40.0% reflects an increase
from the fiscal 1993 rate of 39.6% for projected changes in permanent items.
Income taxes were provided at a rate of 40.0% in the prior year third quarter
and the first nine months of fiscal 1993.
The Company had a net deferred tax liability of $770,000 at October 30, 1994
and $915,000 at January 30, 1994. This change in net deferred tax liability is
due to a reclassification from deferred income taxes to current income taxes
payable. Other current assets on the balance sheet includes $5,231,000 and
$5,186,000 of current deferred assets at October 30, 1994 and January 30, 1994,
respectively. Other current assets also includes $927,000 of current
refundable taxes at January 30, 1994.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents increased $7,692,000 in the first nine months of
fiscal 1994 compared to a decrease of $17,716,000 in the first nine months of
fiscal 1993. The major factors influencing the increase of cash and cash
equivalents in the first nine months of the current year were lower income tax
payments and higher net borrowings, partially offset by increased capital
expenditures and continued repurchases of the Company's Common Stock. During
the first nine months ended October 30, 1994, the Company repurchased 3,402,300
shares of its common stock in the open market at a weighted average price of
$18.88 per share.
The Company's long-term debt was 2.1% of equity and its total debt was 77.9% of
equity at the end of the first nine months of fiscal 1994 compared to 1.9% and
37.3%, respectively, at October 31, 1993. At January 30, 1994, long-term debt
was 1.5% of equity and total debt was 15.1% of equity. These changes reflect
the Company's ongoing stock repurchase program, as well as the financing of
higher merchandise inventory levels and capital expenditures for new stores.
In addition, the Company earns most of its annual net income during the fourth
quarter of the year.
During the third quarter the Company amended its credit agreement. Among other
things, the Company increased the size of its committed revolver to $200
million from $150 million, extended the maturity of the agreement by
approximately one year to August 10, 1997, and increased the amount of shares
that it may repurchase.
The Company believes its present lines of credit are adequate to meet any
seasonal or temporary liquidity needs that cannot be met with cash flow from
operating activities. At October 30, 1994, the Company had $157,600,000 of
outstanding revolving debt. Of this outstanding debt, $136,000,000 was
borrowed under committed lines and $21,600,000 was borrowed under uncommitted
credit lines.
A portion of the $157,600,000 outstanding revolving debt, based on a formula
set forth in the amended credit agreement, must be paid down for forty-five
consecutive days each year. The balance matures on August 10, 1997. The
weighted average interest rate on the outstanding revolving debt at October 30,
1994 was 5.92%.
The Company's current ratio at the end of the first nine months was 1.19 versus
1.68 at October 31, 1993. The change is primarily due to the growth in
short-term borrowings to fund share repurchases. At January 30, 1994, the
current ratio was 2.21. The end of the fiscal year generally represents the
lowest inventory and debt positions on an annual basis.
For the nine months ended October 30, 1994, inventory turnover decreased to
1.09 compared to 1.16 for the nine months ended October 31, 1993. The decrease
in inventory turnover is primarily due to the buildup of inventory in
preparation for the opening of new stores.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -- Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K have
been filed during the quarter ended October 30, 1994.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC.
/s/ Leonard S. Williams
------------------------------
Leonard S. Williams
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Philip L. Carter
------------------------------
Philip L. Carter
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
DATE: December 13, 1994
-----------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-START> JAN-31-1994
<PERIOD-END> OCT-30-1994
<CASH> 8,707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 232,973
<CURRENT-ASSETS> 257,048
<PP&E> 273,110
<DEPRECIATION> 100,964
<TOTAL-ASSETS> 434,851
<CURRENT-LIABILITIES> 215,200
<BONDS> 0
<COMMON> 828
0
0
<OTHER-SE> 207,182
<TOTAL-LIABILITY-AND-EQUITY> 434,851
<SALES> 434,279
<TOTAL-REVENUES> 434,279
<CGS> 230,413
<TOTAL-COSTS> 230,413
<OTHER-EXPENSES> 176,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,679
<INCOME-PRETAX> 22,797
<INCOME-TAX> 9,119
<INCOME-CONTINUING> 13,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,678
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0
</TABLE>
