<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 July 28, 1996
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
incorporation or organization) number)
Mailing and
Street Address: 2430 East Del Amo Boulevard, Dominguez, California 90220-6306
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 537-9220
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Former name, if changed since last report.
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 August 25, 1996: 25,933,505
- -------------------------------------------------------------------------------
<PAGE> 2
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
July 28, January 28,
1996 1996
--------- ----------
<S> <C> <C>
Assets
Current Assets :
Cash and cash equivalents $ 10,868 $ 7,285
Merchandise inventories 214,995 200,616
Current deferred income tax asset 13,003 13,003
Insurance receivable 5,499 --
Other current assets 8,737 9,965
--------- ---------
Total current assets 253,102 230,869
Property, Equipment and Improvements :
Land 35,224 35,195
Buildings and improvements 85,054 84,054
Automobiles and trucks 3,019 3,040
Furniture, fixtures and equipment 98,391 99,966
Leasehold improvements 84,939 84,127
Construction in progress 929 635
--------- ---------
307,556 307,017
Less: Accumulated depreciation
and amortization (128,302) (121,106)
--------- ---------
179,254 185,911
--------- ---------
Deferred Income Tax Asset 604 604
Deferred Financing Costs and Other Assets 1,857 1,688
--------- ---------
Total Assets $ 434,817 $ 419,072
========= =========
Liabilities and Stockholders' Equity
Current Liabilities :
Checks outstanding $ 15,719 $ 16,704
Current portion of long-term debt 73 69
Accounts payable 28,528 14,781
Accrued expenses 39,716 40,605
Income taxes payable 3,203 4,664
Sales tax payable 5,115 9,527
--------- ---------
Total current liabilities 92,354 86,350
--------- ---------
Long-Term Debt 101,167 96,435
Deferred Income Taxes 5,888 5,888
Stockholders' Equity :
Preferred stock, $1 par value;
authorized, 500 shares; issued, none
Common stock, $.02778 par value;
authorized, 100,000 shares;
issued 25,917 shares (July 28, 1996)
and 25,582 shares (January 28, 1996) 720 711
Additional paid-in capital 3,691 512
Retained earnings 237,274 230,749
--------- ---------
241,685 231,972
Less: Treasury stock, at cost, 469 shares
(July 28, 1996) and 119 shares (January
28, 1996) (6,277) (1,573)
--------- ---------
Total Stockholders' Equity 235,408 230,399
--------- ---------
Total Liabilities and Stockholders' Equity $ 434,817 $ 419,072
========= =========
</TABLE>
______________
See Notes to Consolidated Financial Statements.
<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 six months ended
-------------------------- -------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $157,952 $146,754 $317,084 $301,004
COST OF SALES 92,525 78,281 181,251 161,816
-------- -------- -------- --------
GROSS PROFIT 65,427 68,473 135,833 139,188
-------- -------- -------- --------
Store expenses 46,567 46,410 94,258 92,628
Warehouse and administrative
expenses 12,417 13,238 27,746 30,025
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 58,984 59,648 122,004 122,653
OPERATING INCOME 6,443 8,825 13,829 16,535
INTEREST EXPENSE, NET 1,583 3,387 3,305 5,618
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 4,860 5,438 10,524 10,917
INCOME TAX EXPENSE 1,847 2,148 3,999 4,312
-------- -------- -------- --------
NET EARNINGS $ 3,013 $ 3,290 $ 6,525 $ 6,605
======== ======== ======== ========
EARNINGS PER COMMON SHARE $ 0.12 $ 0.13 $ 0.25 $ 0.26
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING 25,721 25,833 25,707 25,778
======== ======== ======== ========
</TABLE>
_____________
See Notes to Consolidated Financial Statements.
<PAGE> 4
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- Additional -------------------
Paid-in Retained
Shares Amount Capital Earnings Shares Amount Total
------ ------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1996 25,582 $ 711 $ 512 $230,749 119 $(1,573) $230,399
Exercise of stock options 335 9 3,136 3,145
Non-cash compensation
expense 43 43
Purchase of Treasury stock, at cost 350 (4,704) (4,704)
Net income for six months 6,525 6,525
------ ------- ------- -------- --- ------- --------
Balance, July 28, 1996 25,917 $ 720 $ 3,691 $237,274 469 $(6,277) $235,408
====== ======= ======= ======== === ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months ended
--------------------------
July 28, July 30,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Cash received from customers $ 317,084 $ 301,004
Cash paid to suppliers and employees (305,924) (381,825)
Income taxes paid (5,460) (16,078)
Interest paid (net of amount capitalized) (3,518) (4,559)
Interest received 85 75
--------- ---------
Net cash provided by (used in) operating activities 2,267 (101,383)
Cash flows from investing activities:
Capital expenditures (5,859) (13,379)
Insurance receivable related to property, equipment and improvements 2,473 --
Proceeds from sale of fixed assets 1,525 6
--------- ---------
Net cash used in investing activities (1,861) (13,373)
Cash flows from financing activities:
Net borrowings of long-term debt 4,166 114,870
Net repayments under line of credit agreements -- (200)
Repurchase of treasury stock (4,704) --
Proceeds from sale of stock options 3,145 83
Other (net) 570 614
--------- ---------
Net cash provided by financing activities 3,177 115,367
--------- ---------
Increase in cash and cash equivalents 3,583 611
Cash and cash equivalents, beginning of period 7,285 6,674
--------- ---------
Cash and cash equivalents, end of period $ 10,868 $ 7,285
========= =========
</TABLE>
______________
See Notes to Consolidated Financial Statements.
<PAGE> 6
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
(continued)
<TABLE>
<CAPTION>
For the six months ended
-------------------------
July 28, July 30,
1996 1995
-------- ---------
<S> <C> <C>
Reconciliation of Net Income to Net Cash Provided
By (Used in) Operating Activities:
- ------------------------------------------------------------------
Net income $ 6,525 $ 6,605
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,320 8,939
(Gain) loss on sale of fixed assets (802) 10
Non-cash compensation expense 43 41
Decrease in net deferred income taxes -- (2)
Changes in assets and liabilities:
Increase in inventory (14,379) (104,630)
Increase in insurance receivable (5,499) --
Decrease (increase) in other assets 1,059 (409)
Increase (decrease) in checks outstanding, accounts payable,
accrued expenses and sales tax payable 7,461 (174)
Decrease in federal and state income taxes (1,461) (11,763)
Total adjustments (4,258) (107,988)
-------- ---------
Net cash provided by (used in) operating activities $ 2,267 $(101,383)
======== =========
</TABLE>
_________________
See Notes to Consolidated Financial Statements.
<PAGE> 7
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PART I - ITEM I - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1 The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, by
Mac Frugal's Bargains - Close-outs Inc., without audit. Pursuant to the
rules and regulations of the Securities and Exchange Commission,
certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted or condensed. It is
management's belief that the disclosures made are adequate to make the
information presented not misleading and reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations for the
periods presented. The results of operations of the periods presented
should not be considered as necessarily indicative of operations for
the full year. It is recommended that these condensed consolidated
financial statements be read in conjunction with the consolidated
financial statements for the year ended January 28, 1996 and the notes
thereto included in the Company's 10-K.
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's effective tax rate for fiscal 1995 and the first half
of fiscal 1996 was 38.0%. 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 asset of $7,719 at July
28, 1996 and January 28, 1996.
The Company provided no valuation allowance against its deferred tax
assets recorded as of July 28, 1996 and January 28, 1996 because
management believes it is more likely than not that the deferred income
tax asset will be realized.
Note 4 At July 28, 1996, the Company classified that portion of its
revolving debt as long-term debt that is not required to be repaid at
its next annual clean-down date of September 30, 1997.
Note 5 On March 21, 1996 the New Orleans Distribution Center and its
contents were destroyed by fire. The Company's lease with an unrelated
third party obligates the Company to rebuild the distribution center.
All of the Company's stores are currently being serviced by the
Company's remaining distribution center in Southern California.
The insurance receivable at July 28, 1996 represents the remaining
expected insurance proceeds related to the destruction of inventory and
property, plant and equipment in the fire. The Company received an
initial payment for the destruction of inventory of approximately
$25.6 million during the current quarter ended July 28, 1996.
The insurance receivable is subject to adjustment since the final
insurance claim has not been concluded.
The Company believes that its insurance proceeds will adequately cover
all losses and that the temporary loss of inventory and equipment will
not have a material adverse impact on the Company's operations.
However, the Company is unable to predict with certainty what the
ultimate outcome will be.
Note 6 Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
<PAGE> 8
PART I - ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND INTERIM RESULTS OF OPERATIONS
(Dollar amounts in thousands)
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED JULY 28, 1996 ("SECOND QUARTER 1996") COMPARED WITH
THIRTEEN WEEK PERIOD ENDED JULY 30, 1995 ("SECOND QUARTER 1995").
Total sales and comparable store sales increased 7.6% and 3.1%, respectively,
for the Second Quarter 1996 compared to the Second Quarter 1995. The total sales
increase was a result of opening 19 net new stores since July 30, 1995, combined
with the comparable store sales increase noted above. The comparable sales
increase was driven by increases in customer traffic, and increases in sales of
food and hardlines, partially offset by the weakness in apparel sales. At
July 28, 1996, 315 stores were in operation compared to 296 stores at
July 30, 1995.
Sales from the 165 California stores open at July 28, 1996, were approximately
59% of the Company's total sales for the Second Quarter 1996 as compared to 63%
in the Second Quarter of 1995. California stores experienced a comparable
store sales increase for the Second Quarter 1996, similar to that of the
Company-wide trend.
The Company is continuing to execute the components of its new strategic
direction which was announced in November 1995. It is anticipated that this plan
will continue to be implemented throughout fiscal 1996.
The gross profit margin of 41.4% for the Second Quarter 1996, decreased from
46.7% for the Second Quarter 1995. The decrease in the gross profit margin for
the Second Quarter 1996 versus the Second Quarter 1995 is due to more
competitive pricing of merchandise and a change in merchandise mix as part of
the implementation of the Company's new strategic plan; combined with the
margin changes resulting from the business interruption and inventory
imbalances caused by the destruction of the inventory at the New Orleans
Distribution Center ("NODC") on March 21, 1996.
Operating expenses were 37.3% of sales for the Second Quarter of 1996 compared
to 40.6% for the Second Quarter 1995. The improvement in operating expenses was
the result of a decrease in administrative and store expenses, offset partially
by a slight increase in warehouse expenses as a percent of sales.
General cost containment and controls resulted in store expenses of 29.5% of
sales for the Second Quarter 1996 compared to 31.6% of sales for the Second
Quarter 1995. Reduced expenses in payroll and workers' compensation were only
partially offset by increases in occupancy cost, depreciation expense and
advertising expense. The increases in occupancy, depreciation and advertising
expenses are primarily the result of opening new stores.
Warehouse and administrative expenses were 7.9% and 9.0% of sales for the Second
Quarter 1996 and the Second Quarter 1995, respectively. Expense controls in the
administrative area resulted in lower expenses in both dollars and as a percent
of sales for the Second Quarter 1996 compared to the Second Quarter 1995.
Temporary operating expenses associated with the
<PAGE> 9
consolidation of receipts and shipments from one centralized warehouse, as a
result of the NODC fire, slightly increased warehouse expenses for the Second
Quarter 1996 as a percent of sales over the Second Quarter 1995. However, the
Company believes that its insurance proceeds will adequately cover these
increased expenses related to the NODC fire. Expense containment in the
warehouse is still in effect.
The $1,804 decrease in interest expense for the Second Quarter 1996 compared to
the Second Quarter 1995 resulted from both a decrease in the average amount of
debt outstanding and lower interest rates. The decrease in the average amount of
debt outstanding is the combined result of a decrease in inventories and capital
expenditures during the Second Quarter 1996 compared to the Second Quarter 1995.
The income tax rate for the Second Quarter 1996 was 38.0%, and for interim
purposes, the entire provision for income taxes is classified as current. The
current rate of 38.0% is consistent with the fiscal 1995 rate. Income taxes were
provided at a rate of 39.5% in the Second Quarter 1995.
The Company had a net deferred tax asset of $7,719 at July 28, 1996 and January
28, 1996.
THIRTY-SIX WEEK PERIOD ENDED JULY 28, 1996 ("YEAR-TO-DATE 1996") COMPARED WITH
THIRTY-SIX WEEK PERIOD ENDED JULY 30, 1995 ("YEAR-TO-DATE 1995").
Total sales increased 5.3% and comparable store sales decreased 0.6% for the
Year-to-Date 1996 compared to the Year-to-Date 1995. The total sales increase
was a result of opening 19 net new stores since July 30, 1995, partially offset
by the comparable store sales decrease noted above. The comparable sales
decrease was due to the weakness in apparel sales and business interruption
caused by the fire at NODC, partially offset by increases in customer traffic,
and increases in sales of food and hardlines.
Sales from the 165 California stores open at July 28, 1996, were approximately
59% of the Company's total sales for the Year-to-Date 1996 as compared to 63%
for the Year-to-Date 1995. California stores experienced a comparable store
sales decrease for the Year-to-Date 1996, similar to that of the Company-wide
trend.
The gross profit margin of 42.8% for the Year-to-Date 1996, decreased from 46.2%
for the Year-to-Date 1995. The decrease in the gross profit margin for the
Year-to-Date 1996 versus the Year-to-Date 1995 is due to more competitive
pricing of merchandise and a change in merchandise mix as part of the
implementation of the Company's new strategic plan; combined with the margin
changes resulting from the business interruption and inventory imbalances caused
by the destruction of inventory at NODC.
Operating expenses were 38.5% of sales for the Year-to-Date 1996 compared to
40.7% for the Year-to-Date 1995. The improvement in operating expenses was the
result of decreases in all areas: warehouse, administration and stores.
General cost containment resulted in store expenses of 29.7% of sales for the
Year-to-Date 1996 compared to 30.8% of sales for the Year-to-Date 1995. Reduced
expenses in payroll and workers' compensation were only partially offset by
increases in occupancy cost, depreciation expense and advertising expense.
Increases in occupancy, depreciation and advertising expenses are primarily the
result of opening new stores.
<PAGE> 10
Warehouse and administrative expenses were 8.8% and 10.0% of sales for the
Year-to-Date 1996 and the Year-to-Date 1995, respectively. Expense controls in
the warehouse and administrative areas resulted in lower expenses in both
dollars and as a percent of sales for the Year-to-Date 1996 compared to the
Year-to-Date 1995.
The $2,313 decrease in interest expense for the Year-to-Date 1996 compared to
the Year-to-Date 1995 resulted from both a decrease in the average amount of
debt outstanding and lower interest rates. The decrease in the average amount of
debt outstanding is the combined result of a decrease in inventories and capital
expenditures during the Year-to-Date 1996 compared to the Year-to-Date 1995.
The income tax rate for the Year-to-Date 1996 was 38.0%, and for interim
purposes, the entire provision for income taxes is classified as current. The
current rate of 38.0% is consistent with the fiscal 1995 rate. Income taxes were
provided at a rate of 39.5% for the Year-to-Date 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $3,583 in the first half of 1996 compared to
an increase of $611 in the first half of 1995. The increase of cash and cash
equivalents in the first half of 1996 compared to the same period last year
related primarily to reduced inventory purchases and associated debt; and
lower income tax payments and capital expenditures partially offset by a stock
repurchase program of $4,704 in the first half of 1996.
As of July 28, 1996, the Company's long-term debt and total debt were both 43.0%
of equity compared to 53.7% and 89.6%, respectively, at July 30, 1995. At
January 28, 1996, long-term debt and total debt were both 41.9% of equity. The
decrease in the level of debt at July 28, 1996 compared to July 30, 1995
reflects the Company's strategic direction to reduce inventory levels and the
borrowings necessary to finance them, the planned reduction in capital
expenditures, offset in part by a minor stock repurchase program in fiscal 1995
and the first six months of 1996. The slight increase in the level of debt at
July 28, 1996 compared to January 28, 1996 reflects the Company's normal trend
of increasing inventory levels in preparation for seasonal needs during this
period of the year, offset in large, by the Company's direction of reducing
inventory levels in the stores and warehouse.
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 July 28, 1996, the Company had $95,000 of outstanding
revolving debt borrowed under the Company's $200,000 committed credit line.
There were no borrowings under the Company's uncommitted credit lines at July
28, 1996.
The Company's current ratio as of July 28, 1996 was 2.74 versus 2.67 at fiscal
year end 1996 and 2.09 at July 30, 1995. The improvement in the Company's
current ratio compared to July 30, 1995 is due primarily to reduced inventory
levels.
For the six months ended July 28, 1996, inventory turnover improved to .93 from
.68 for the six months ended July 30, 1995. This improvement in inventory
turnover reflects the Company's commitment to reduce inventory levels and
streamline the merchandise flow process from its vendors to its stores.
<PAGE> 11
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting of Stockholders on June 19,
1996 (the "Annual Meeting"). At the Annual Meeting, shareholders
elected all seven directors nominated. The following table sets forth
the number of votes cast for and against each nominee. There were no
broker non-votes for any nominee.
<TABLE>
<CAPTION>
Nominee For Against
-------------------- ---------- -------
<S> <C> <C>
Peter S. Willmott 21,910,983 54,430
Philip L. Carter 21,908,835 56,578
Mark J. Miller 21,908,685 56,728
David H. Batchelder 21,910,905 54,508
Anthony Luiso 21,912,435 52,978
Ronald P. Spogli 21,911,795 53,618
James J. Zehentbauer 21,909,820 55,593
</TABLE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K have
been filed during the quarter ended July 28, 1996.
<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/ Philip L. Carter
--------------------------------------------------
Philip L. Carter
Director, President and Chief Executive Officer
/s/ Neil T. Watanabe
--------------------------------------------------
Neil T. Watanabe
Senior Vice President and Chief Financial Officer
DATE: September 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> JUL-28-1996
<CASH> 10,868
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 214,995
<CURRENT-ASSETS> 253,102
<PP&E> 307,556
<DEPRECIATION> 128,302
<TOTAL-ASSETS> 434,817
<CURRENT-LIABILITIES> 92,354
<BONDS> 0
0
0
<COMMON> 720
<OTHER-SE> 234,688
<TOTAL-LIABILITY-AND-EQUITY> 434,817
<SALES> 317,084
<TOTAL-REVENUES> 317,084
<CGS> 181,251
<TOTAL-COSTS> 181,251
<OTHER-EXPENSES> 122,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,305
<INCOME-PRETAX> 10,524
<INCOME-TAX> 3,999
<INCOME-CONTINUING> 6,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,525
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
