<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 May 4, 1997
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.
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(Exact name of registrant as specified in its charter)
Delaware 95-2745285
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
Mailing and
Street Address: 2430 East Del Amo Boulevard, Dominguez, California 90220-6306
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(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 537-9220
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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 June 1, 1997 25,044,770
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MAC FRUGAL'S BARGAINS -- CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
May 4, February 2,
1997 1997
--------- -----------
ASSETS
Current Assets :
<S> <C> <C>
Cash and cash equivalents $ 11,033 $ 9,639
Merchandise inventories 188,456 182,275
Deferred income tax asset 8,800 8,800
Other current assets 8,013 9,284
--------- ---------
Total current assets 216,302 209,998
Property, Equipment and Improvements :
Land 35,224 35,224
Buildings and improvements 85,938 85,397
Automobiles and trucks 3,003 3,003
Furniture, fixtures and equipment 98,460 96,119
Leasehold improvements 86,060 85,533
Construction in progress 885 912
--------- ---------
309,570 306,188
Less: Accumulated depreciation
and amortization (137,076) (132,693)
--------- ---------
172,494 173,495
--------- ---------
Other Assets 1,494 1,503
--------- ---------
Total Assets $ 390,290 $ 384,996
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities :
Checks outstanding $ 12,900 $ 21,369
Current portion of long-term debt 3,122 3,172
Accounts payable 25,678 18,929
Accrued expenses 52,365 56,306
Income taxes payable 4,365 13,408
Sales tax payable 6,939 3,793
--------- ---------
Total current liabilities 105,369 116,977
--------- ---------
Long-Term Debt 10,925 3,757
Deferred Income Taxes 12,233 12,233
Stockholders' Equity :
Preferred stock, $1 par value;
authorized, 500 shares; issued, none
Common stock, $.02778 par value;
authorized, 100,000 shares;
issued 26,693 shares (May 4, 1997)
and 26,262 shares (February 2, 1997) 741 729
Additional paid-in capital 15,522 9,606
Retained earnings 279,888 273,898
--------- ---------
296,151 284,233
Less: Treasury stock, at cost, 1,676 shares
(May 4,1997) and 1,589 shares ( February
2,1997) (34,388) (32,204)
--------- ---------
Total Stockholders' Equity 261,763 252,029
--------- ---------
Total Liabilities and Stockholders'
Equity $ 390,290 $ 384,996
========= =========
</TABLE>
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See Notes to Consolidated Financial Statements.
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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
--------------------------
May 4, April 28,
1997 1996
-------- --------
<S> <C> <C>
NET SALES $183,464 $159,132
COST OF SALES 104,910 88,726
-------- --------
GROSS PROFIT 78,554 70,406
-------- --------
Store expenses 50,863 47,691
Warehouse and administrative
expenses 17,832 15,329
-------- --------
TOTAL OPERATING EXPENSES 68,695 63,020
OPERATING INCOME 9,859 7,386
INTEREST EXPENSE, NET 198 1,722
-------- --------
EARNINGS BEFORE INCOME TAXES 9,661 5,664
INCOME TAX EXPENSE 3,671 2,152
-------- --------
NET EARNINGS $ 5,990 $ 3,512
======== ========
EARNINGS PER COMMON SHARE $ 0.24 $ 0.14
======== ========
AVERAGE SHARES OUTSTANDING 25,414 25,694
======== ========
</TABLE>
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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 Additional Treasury Stock
----------------- Paid-in Retained -----------------
Shares Amount Capital Earnings Shares Amount Total
------- -------- -------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 2, 1997 26,262 $ 729 $ 9,606 $273,898 1,589 ($32,204) $252,029
Exercise of stock options 431 12 5,912 5,924
Non-cash compensation
expense 4 4
Purchase of Treasury stock, at cost 87 (2,184) (2,184)
Net income for three months 5,990 5,990
------- -------- -------- -------- ----- -------- --------
Balance, May 4, 1997 26,693 $ 741 $ 15,522 $279,888 1,676 ($34,388) $261,763
======= ======== ======== ======== ===== ======== ========
</TABLE>
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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 three months ended
--------------------------
May 4, April 28,
1997 1996
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<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Cash received from customers $ 183,464 $ 159,132
Cash paid to suppliers and employees (176,610) (143,546)
Income taxes paid (12,714) (3,648)
Interest paid (net of amount capitalized) (189) (2,017)
Interest received 18 38
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Net cash (used in) provided by operating activities (6,031) 9,959
Cash flows from investing activities:
Capital expenditures (3,437) (1,916)
Fire related disposals (net) -- 2,456
Proceeds from sale of fixed assets 4 3
--------- ---------
Net cash (used in) provided by investing activities (3,433) 543
Cash flows from financing activities:
Borrowings under line of credit agreements and long-term debt 33,800 221,200
Repayments under line of credit agreements and long-term debt (26,650) (222,000)
Repurchase of treasury stock (2,184) (4,178)
Proceeds from sale of stock options 5,924 230
Other (net) (32) 247
--------- ---------
Net cash provided by (used in) financing activities 10,858 (4,501)
--------- ---------
Increase in cash and cash equivalents 1,394 6,001
Cash and cash equivalents, beginning of period 9,639 7,285
--------- ---------
Cash and cash equivalents, end of period $ 11,033 $ 13,286
========= =========
</TABLE>
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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 three months ended
--------------------------
May 4, April 28,
1997 1996
-------- --------
Reconciliation of Net Income to Net Cash (Used In)
Provided By Operating Activities:
- ------------------------------------------------------
<S> <C> <C>
Net income $ 5,990 $ 3,512
-------- --------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,432 4,673
Loss on sale of fixed assets 2 --
Non-cash compensation expense 4 23
Changes in assets and liabilities:
(Increase) decrease in inventory (6,181) 29,099
Increase in insurance receivable -- (30,125)
Decrease in other assets 1,280 967
(Decrease) increase in checks outstanding, accounts payable,
accrued expenses and sales tax payable (2,515) 3,306
Decrease in federal and state income taxes (9,043) (1,496)
-------- --------
Total adjustments (12,021) 6,447
-------- --------
Net cash (used in) provided by operating activities ($ 6,031) $ 9,959
======== ========
</TABLE>
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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
MacFrugal'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 February 2, 1997 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 1996 and the quarter
ended May 4, 1997 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 liability of $3,433 at May
4, 1997 and February 2, 1997.
The Company provided no valuation allowance against its deferred tax
assets recorded as of May 4, 1997 and February 2, 1997 because
management believes it is more likely than not that the deferred income
tax assets will be realized.
Note 4 At May 4, 1997, the Company classified that portion of its revolving
debt as long-term that is not required to be repaid at its next annual
clean-down date of February 28, 1998.
Note 5 In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
The statement establishes standards for computing and presenting
earnings per share and will require additional earnings per share
disclosures within the financial statements issued after the effective
date. The adoption of SFAS 128 will be reflected in the Company's 1997
consolidated financial statements. The adoption of SFAS 128 will not
impact the Company's results of operations or financial position.
<PAGE> 8
PART I - ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND INTERIM RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE, GOVERNMENTAL
AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S OPERATIONS, MARKETS, PRODUCTS,
SERVICES AND PRICES, AND OTHER FACTORS DISCUSSED IN THE COMPANY'S FILINGS WITH
SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MAY 4, 1997 ("FIRST QUARTER 1997") COMPARED WITH
THIRTEEN WEEK PERIOD ENDED APRIL 28, 1996 ("FIRST QUARTER 1996").
Net sales increased 15.3% for the First Quarter 1997 compared to the First
Quarter 1996. The sales increase was the combined result of opening 7 net new
stores since April 28, 1996, and the positive impact of a 13.4% increase in
comparable store sales. At May 4, 1997, 320 stores were in operation compared to
313 stores at April 28, 1996. The Company believes that the comparable sales
increase was primarily attributable to the Company's strategic objective to
increase sales and customer count by offering more branded products at more
competitive prices. The Company believes that the Company's comparable store
sales increase for the First Quarter 1997 was driven primarily by increases in
consumables and softlines.
Sales from the 167 California stores open at May 4, 1997, were approximately 58%
of the Company's total sales for the First Quarter 1997. California stores
experienced a comparable store sales increase for the First Quarter 1997,
similar to that of the Company-wide experience.
The gross profit margin of 42.8% for the First Quarter 1997, decreased from
44.2% for the First Quarter 1996. The decrease in the gross profit margin was
primarily attributed to a change in the merchandise mix towards more branded
consumable products and an increase in markdowns to clear old aged inventory
which is consistent with the Company's strategy to increase inventory turnover.
Operating expenses were 37.4% of sales for the First Quarter of 1997 compared to
39.6% for the First Quarter 1996. The Company's sales increases in the First
Quarter 1997 translated into lower total operating expenses as a percent of
sales.
Store expenses were 27.7% and 30.0% of sales for the First Quarter 1997 and the
First Quarter 1996, respectively. General cost containment, leveraging of
expenses, and increased sales in the First Quarter 1997 resulted in a reduction
in expenses as a percent of sales in almost every expense category.
<PAGE> 9
Warehouse and administrative expenses remained stable at 9.7% and 9.6% of sales
for the First Quarter 1997 and the First Quarter 1996, respectively. Increased
truck and labor expenses due to increased receipts and shipments to meet the
accelerated sales volume in the First Quarter 1997 were offset by decreased
occupancy expenses. On March 21, 1996, the New Orleans facility and its contents
were destroyed by fire. Since then, all of the Company's stores have been
serviced by the Company's warehouse and distribution facility in Rancho
Cucamonga, California. The Company believes it can operate its warehouse
operations more efficiently in the immediate future through its West Coast
distribution facility. Through continued control over buying and inventory
receipt management, the Company believes it has adequate capacity to service the
Company's distribution needs in the immediate future.
The $1,524 decrease in interest expense for the First Quarter 1997 compared to
the First Quarter 1996 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 average inventories
encompassing the last four quarters ended May 4, 1997 compared to the same time
period in the prior year, earnings generated from operations during the last
twelve months and proceeds from the insurance settlement on the New Orleans
distribution center received in the second and fourth quarters of fiscal 1996,
partially offset by the repurchase of $28,637 in stock during the last four
quarters ended May 4, 1997.
The income tax rate for the First Quarter 1997 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 rate for fiscal 1996 and for the
First Quarter 1996.
The Company had a net deferred tax liability of $3,433 at May 4, 1997 and
February 2, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $1,394 in the First Quarter 1997 compared to
an increase of $6,001 in the First Quarter 1996. The decrease of cash and cash
equivalents in the First Quarter 1997 compared to the same period last year
related primarily to the impact last year of a large decrease in inventory
offset by an increase in an insurance receivable related to the fire at the New
Orleans distribution center on March 21, 1996, coupled with an associated
increase in accounts payable in the First Quarter 1996. This compares to the
first quarter 1997 which reflects an increase in income tax payments related to
the increase in earnings in the First Quarter 1997, partially offset by the
proceeds from the sale of stock options and increase in associated debt.
As of May 4, 1997, the Company's long-term debt was 4.2% of equity and total
debt was 5.4% of equity. At April 28, 1996, long-term debt and total debt were
both 41.7% of equity. At February 2, 1997, long term debt was 1.5% of equity and
total debt was 2.7% of equity. The improvement in both leverage ratios at May 4,
1997 compared to April 28, 1996 reflects the decrease in average inventories
encompassing the last four quarters ended May 4, 1997 and the borrowings
necessary to finance them. The improvement also reflects the cash infusion of
the insurance proceeds from the New Orleans distribution center settlement
received in the second and fourth quarters of fiscal 1996 and the Company's
earnings over the last four quarters, offset in part by the repurchase of stock
during the last four quarters ended May 4, 1997. The increase in the level of
long-term debt and total debt compared to February 2, 1997 reflects the building
<PAGE> 10
of the Company's inventories to meet increased operational needs due to sales
demands and to meet seasonal needs.
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 May 4, 1997, the Company had no outstanding revolving
debt under the Company's $175,000 committed credit facility. There was $7,200
outstanding under the Company's uncommitted credit lines at May 4, 1997.
The Company's current ratio as of May 4, 1997 was 2.05 versus 1.80 at fiscal
year end 1996 and 2.69 at April 28, 1996. The decrease in the Company's current
ratio at May 4, 1997 compared to April 28, 1996 is due primarily to the
recording of certain balance sheet items at May 4, 1997 and April 28, 1996
related to the fire at the New Orleans distribution center.
For the three months ended May 4, 1997, inventory turnover improved to .57 from
.48 for the three months ended April 28, 1996. This improvement in inventory
turnover reflects the Company's improved sales performance for the First Quarter
1997 versus the First Quarter 1996.
<PAGE> 11
PART II - OTHER INFORMATION
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 May 4, 1997.
<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: June 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-1-1998
<PERIOD-START> FEB-3-1997
<PERIOD-END> MAY-4-1997
<CASH> 11,033
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 188,456
<CURRENT-ASSETS> 216,302
<PP&E> 309,570
<DEPRECIATION> 137,076
<TOTAL-ASSETS> 390,290
<CURRENT-LIABILITIES> 105,369
<BONDS> 0
0
0
<COMMON> 741
<OTHER-SE> 261,022
<TOTAL-LIABILITY-AND-EQUITY> 390,290
<SALES> 183,464
<TOTAL-REVENUES> 183,464
<CGS> 104,910
<TOTAL-COSTS> 104,910
<OTHER-EXPENSES> 68,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> 9,661
<INCOME-TAX> 3,671
<INCOME-CONTINUING> 5,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,990
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
</TABLE>
