<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 November 2, 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 o 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
incorporation or organization) number)
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 November 30, 1997 24,834,734
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<PAGE> 2
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value)
<TABLE>
<CAPTION>
November 2, February 2,
(Unaudited) (Audited)
1997 1997
--------- ---------
<S> <C> <C>
Assets
Current Assets :
Cash and cash equivalents $ 12,582 $ 9,639
Merchandise inventories 246,642 182,275
Deferred income tax asset 8,800 8,800
Other current assets 7,968 9,284
--------- ---------
Total current assets 275,992 209,998
Property, Equipment and Improvements :
Land 34,505 35,224
Buildings and improvements 86,333 85,397
Automobiles and trucks 3,003 3,003
Furniture, fixtures and equipment 102,032 96,119
Leasehold improvements 89,245 85,533
Construction in progress 212 912
--------- ---------
315,330 306,188
Less: Accumulated depreciation
and amortization (145,611) (132,693)
--------- ---------
169,719 173,495
--------- ---------
Other Assets 2,640 1,503
--------- ---------
Total Assets $ 448,351 $ 384,996
========= =========
Liabilities and Stockholders' Equity
Current Liabilities :
Checks outstanding $ 16,568 $ 21,369
Current portion of long-term debt 3,072 3,172
Accounts payable 32,553 18,929
Accrued expenses 53,360 56,306
Income taxes payable 1,750 13,408
Sales tax payable 7,727 3,793
--------- ---------
Total current liabilities 115,030 116,977
--------- ---------
Long-Term Debt 61,730 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 25,097 shares (November 2, 1997)
and 26,262 shares (February 2, 1997) 697 729
Additional paid-in capital 582 9,606
Retained earnings 277,116 273,898
--------- ---------
278,395 284,233
Less: Treasury stock, at cost, 662 shares
(November 2, 1997) and 1,589 shares
(February 2,1997) (19,037) (32,204)
--------- ---------
Total Stockholders' Equity 259,358 252,029
--------- ---------
Total Liabilities and Stockholders' Equity $ 448,351 $ 384,996
========= =========
</TABLE>
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See Notes to Consolidated Financial Statements.
<PAGE> 3
MAC FRUGAL'S BARGAINS o 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
-------------------------- -------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $189,733 $174,488 $550,177 $491,572
COST OF SALES 107,583 99,528 315,212 280,779
-------- -------- -------- --------
GROSS PROFIT 82,150 74,960 234,965 210,793
-------- -------- -------- --------
Store expenses 51,095 52,315 154,578 146,573
Warehouse and administrative
expenses 13,099 12,569 43,768 40,315
-------- -------- -------- --------
TOTAL EXPENSES 64,194 64,884 198,346 186,888
OPERATING INCOME 17,956 10,076 36,619 23,905
INTEREST EXPENSE, NET 867 1,836 1,512 5,141
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 17,089 8,240 35,107 18,764
INCOME TAX EXPENSE 6,665 3,131 13,692 7,130
-------- -------- -------- --------
NET EARNINGS $ 10,424 $ 5,109 $ 21,415 $ 11,634
======== ======== ======== ========
EARNINGS PER COMMON SHARE $ 0.42 $ 0.20 $ 0.85 $ 0.45
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING 25,062 26,069 25,298 25,856
======== ======== ======== ========
</TABLE>
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See Notes to Consolidated Financial Statements.
<PAGE> 4
MAC FRUGAL'S BARGAINS o 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, February 2, 1997 26,262 $ 729 $ 9,606 $ 273,898 1,589 ($ 32,204) $ 252,029
Exercise of stock options 511 14 7,093 7,107
Non-cash compensation
expense 43 43
Purchase of Treasury stock, at cost 749 (21,236) (21,236)
Treasury stock retired (1,676) (46) (16,160) (18,197) (1,676) 34,403 0
Net income for nine months 21,415 21,415
--------- --------- --------- --------- --------- --------- ---------
Balance, November 2, 1997 25,097 $ 697 $ 582 $ 277,116 662 ($ 19,037) $ 259,358
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ------------
See Notes to Consolidated Financial Statements.
<PAGE> 5
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months ended
--------------------------
November 2, October 27,
1997 1996
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<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Cash received from customers $ 550,177 $ 491,572
Cash paid to suppliers and employees (555,297) (477,081)
Income taxes paid (25,350) (5,894)
Interest paid (net of amount capitalized) (1,362) (5,860)
Interest received 20 212
--------- ---------
Net cash (used in) provided by operating activities (31,812) 2,949
Cash flows from investing activities:
Capital expenditures (11,288) (8,574)
Fire related disposals (net) -- 2,474
Proceeds from sale of fixed assets 2,299 1,525
--------- ---------
Net cash used in investing activities (8,989) (4,575)
Cash flows from financing activities:
Borrowings under line of credit agreements and long-term debt 342,400 659,900
Repayments under line of credit agreements and long-term debt (284,900) (621,985)
Repurchase of treasury stock (21,236) (8,283)
Proceeds from sale of stock options 7,107 5,313
Other (net) 373 844
--------- ---------
Net cash provided by financing activities 43,744 35,789
--------- ---------
Increase in cash and cash equivalents 2,943 34,163
Cash and cash equivalents, beginning of period 9,639 7,285
--------- ---------
Cash and cash equivalents, end of period $ 12,582 $ 41,448
========= =========
</TABLE>
- --------------
See Notes to Consolidated Financial Statements.
<PAGE> 6
MAC FRUGAL'SR BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
(continued)
<TABLE>
<CAPTION>
For the nine months ended
---------------------------
November 2, October 27,
1997 1996
-------- --------
<S> <C> <C>
Reconciliation of Net Income to Net Cash (Used In)
Provided By Operating Activities:
Net income $ 21,415 $ 11,634
-------- --------
Adjustments to reconcile net income to net cash
(used in) provided by operating
activities:
Depreciation and amortization 13,282 13,810
Gain on sale of fixed assets (517) (802)
Non-cash compensation expense 43 61
Changes in assets and liabilities:
Increase in inventory (64,367) (23,606)
Increase in insurance receivable -- (8,160)
Decrease in other assets 179 1,578
Increase in checks outstanding, accounts payable,
accrued expenses and sales tax payable 9,811 7,198
(Decrease) increase in federal and state income taxes (11,658) 1,236
-------- --------
Total adjustments (53,227) (8,685)
-------- --------
Net cash (used in) provided by operating activities ($31,812) $ 2,949
======== ========
</TABLE>
- --------------
See Notes to Consolidated Financial Statements.
<PAGE> 7
MAC FRUGAL'S BARGAINS O 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 o Close-outs Inc. and subsidiaries (the "Company")
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.
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
fiscal 1997 consolidated financial statements. The adoption of SFAS 128
will not impact the Company's results of operations or financial
position.
Note 3 The Company's effective tax rate for fiscal 1996 and the first three
quarters of fiscal 1997 was 38.0% and 39.0%, 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 $3,433 at
November 2, 1997 and February 2, 1997.
The Company provided no valuation allowance against its deferred tax
assets recorded as of November 2, 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 November 2, 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.
<PAGE> 8
Note 5 In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about
segments of an Enterprise and Related Information (SFAS 131), which
will be effective for the Company beginning February 2, 1998. SFAS 131
redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about a company's
operating segments. The Company does not believe adoption of this
statement will have a material impact on current disclosures.
Note 6 On November 5, 1997 the Company announced that it had entered into a
definitive agreement with Consolidated Stores Corporation,
("Consolidated") the nation's largest close-out retailer, to be
acquired in a stock for stock merger.
At the effective time of the merger, all issued and outstanding Company
shares of common stock will be canceled and converted automatically
into the right to receive a number of duly authorized shares of
Consolidated's common stock.
Under the terms of the merger agreement, Consolidated will issue
between 0.88 and 1.00 shares of stock for each share. The final
exchange ratio will be based upon the average closing price per share
of Consolidated's stock during a twenty day period prior to the
effective time of the merger. Based on Consolidated's twenty day
average closing price through November 4, 1997, the exchange ratio
would be .99. The transaction is expected to close in January 1998.
Consolidated expects to take an estimated pre-tax charge to earnings of
approximately $75 million to $100 million relating to the cost of
integrating the two companies.
The merger will be accounted for as a pooling of interests and will be
tax free to the Company's shareholders. The transaction is subject to
customary conditions, including approval by both companies'
shareholders and regulatory agencies.
The merger is described in greater detail in the Company's Current
Report on Form 8-K dated November 7, 1997 filed with the Securities and
Exchange Commission (the "SEC"). In connection with the transaction, a
joint proxy statement and prospectus (the "Prospectus/Proxy Statement")
has been filed with the SEC and is expected to be mailed to
stockholders of both companies in December.
<PAGE> 9
PART I - ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND INTERIM RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
THIS QUARTERLY REPORT (INCLUDING THE PRECEDING NOTES) MAY CONTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S OPERATIONS
AND FINANCIAL PERFORMANCE. ALTHOUGH THE COMPANY BELIEVES THAT SUCH STATEMENTS
REFLECT REASONABLE EXPECTATIONS OF FUTURE EVENTS, NO ASSURANCES CAN BE GIVEN
THAT SUCH STATEMENTS WILL PROVE TO HAVE BEEN CORRECT. ACTUAL RESULTS MAY DIFFER
MATERIALLY DUE TO GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER DEMAND AND
PREFERENCES; ADVERSE WEATHER PATTERNS; COMPETITIVE FACTORS INCLUDING PRICING AND
PROMOTIONAL ACTIVITIES OF MAJOR COMPETITORS; THE AVAILABILITY OF MERCHANDISE ON
FAVORABLE TERMS; IMPORT RISKS INCLUDING POTENTIAL POLITICAL OR SOCIAL UNREST,
DUTIES, TARIFFS AND QUOTAS; AND OTHER FACTORS DESCRIBED IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 2, 1997 ("THIRD QUARTER 1997") COMPARED WITH
THIRTEEN WEEK PERIOD ENDED OCTOBER 27, 1996 ("THIRD QUARTER 1996").
Net sales increased 8.7% for the Third Quarter 1997 compared to the Third
Quarter 1996. The sales increase was the combined result of opening 8 net new
stores since October 27, 1996, and the positive impact of a 6.8% increase in
comparable store sales. At November 2, 1997, 325 stores were in operation
compared to 317 stores at October 27, 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 comparable store sales increase for the Third
Quarter 1997 was driven primarily by increases in consumables, toys and seasonal
merchandise, offset in part by a decrease in electronics and housewares. The
customer count for the Third Quarter 1997 increased 2.6% over the same period in
the prior year.
Sales from the 169 California stores open at November 2, 1997, were
approximately 59% of the Company's total sales for both the Third Quarter 1997
and the Third Quarter 1996. California stores experienced a comparable store
sales increase of 5.9% for the Third Quarter 1997.
The gross profit margin of 43.3% for the Third Quarter 1997, increased from
43.0% for the Third Quarter 1996. The increase in the gross profit margin was
primarily attributed to a decrease in markdowns, partially offset by a lower
markup on shipments which is attributed to a change in merchandise mix towards
more branded consumable products.
Operating expenses were 33.8% of sales for the Third Quarter 1997 compared to
operating expenses of 37.2% for the Third Quarter 1996. The Company's sales
increases in the Third Quarter 1997 translated into lower total operating
expenses as a percent of sales.
<PAGE> 10
Store expenses were 26.9% and 30.0% of sales for the Third Quarter 1997 and the
Third Quarter 1996, respectively. General cost containment, leveraging of
expenses, and increased sales in the Third Quarter 1997 continued to reduce
expenses as a percent of sales. Specific decreases were realized in: advertising
which included a one-time fall promotion in the Third Quarter 1996; workers'
compensation which included a benefit in the Third Quarter 1997 from favorable
actuarial results; and utility expense which continued to decline as a result of
savings achieved from energy efficiency programs. Store payroll remained
relatively constant as a percent of sales in spite of the state and federal
minimum wage increases in March 1997 and September 1997.
Warehouse and administrative expenses were 6.9% and 7.2% of sales for the Third
Quarter 1997 and the Third Quarter 1996, respectively. Operating efficiencies in
the warehouse in addition to leveraging a relatively fixed administrative
expense structure with increased sales resulted in a decrease in expenses as a
percent of sales. The Company continues to operate from one distribution center
as a result of the loss of the New Orleans distribution facility which was
destroyed by fire in fiscal 1996. 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 $969 decrease in interest expense for the Third Quarter 1997 compared to the
Third 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 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 $43,584 in stock during the last
four quarters ended November 2, 1997.
The income tax rate for the Third Quarter 1997 was 39.0%, and for interim
purposes, the entire provision for income taxes is classified as current. The
income tax rate of 39.0% versus 38.0% for the prior year reflects certain
projected changes in permanent items relative to pre-tax earnings.
The Company had a net deferred tax liability of $3,433 at November 2, 1997 and
February 2, 1997.
THIRTY-NINE WEEK PERIOD ENDED NOVEMBER 2, 1997 ("YEAR-TO-DATE 1997") COMPARED
WITH THIRTY-NINE WEEK PERIOD ENDED OCTOBER 27, 1996 ("YEAR-TO-DATE 1996").
Net sales increased 11.9% for the Year-to-Date 1997 compared to the Year-to-Date
1996. The total sales increase was a result of opening 8 net new stores since
October 27, 1996 and the positive impact of a 10.1% increase in comparable store
sales. 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 sales
increase for the Year-to-Date 1997 was driven primarily by increases in
consumables, toys and seasonal merchandise, offset in part by a decrease in
electronics, housewares and apparel. The customer count for the Year-to-Date
1997 increased 5.6% over the same period in the prior year.
<PAGE> 11
Sales from the 169 California stores open at November 2, 1997, were
approximately 58% of the Company's total sales for the Year-to-Date 1997 as
compared to 59% for the Year-to-Date 1996. California stores experienced a
comparable store sales increase of 8.7% for the Year-to-Date 1997.
The gross profit margin of 42.7% for the Year-to-Date 1997, decreased from 42.9%
for the Year- to-Date 1996. The decrease in the gross profit margin for the
Year-to-Date 1997 versus the Year- to-Date 1996 was primarily attributed to an
increase in markdowns to clear old aged inventory which is consistent with the
Company's strategy to increase inventory turnover, offset in part by a higher
initial markup on shipments to the stores during the Year-to-Date 1997 versus
the Year- to-Date 1996. This higher initial markup on shipments was primarily
attributed to a change in merchandise mix towards more branded consumable
products during the Year-to-Date 1997 versus a concentration in lower margin
electronics during the Year-to-Date 1996.
Operating expenses were 36.1% of sales for the Year-to-Date 1997 compared to
operating expenses of 38.0% for the Year-to-Date 1996. The Company's sales
increases during the Year- to-Date 1997 in conjunction with leveraging of
expenses translated into lower total operating expenses as a percent of sales.
Store expenses were 28.1% and 29.8% of sales for the Year-to-Date 1997 and the
Year-to-Date 1996, respectively. General cost containment, leveraging of
expenses, and increased sales for the Year-to-Date 1997 continued to reduce
expenses as a percent of sales. Specific decreases were realized in: advertising
which included a one-time fall promotion in the Third Quarter 1996, and utility
expense which continued to decline as a result of savings achieved from energy
efficiency programs. Store payroll declined as a percent of sales in spite of
the state and federal minimum wage increases in March 1997 and September 1997.
Warehouse and administrative expenses were 8.0% and 8.2% of sales for the
Year-to-Date 1997 and the Year-to-Date 1996, respectively. Operating
efficiencies in the warehouse in addition to leveraging a relatively fixed
administrative expense structure resulted in a decrease in expenses as a percent
of sales. The Company continues to operate from one distribution center as a
result of the loss of the New Orleans distribution facility which was destroyed
by fire in fiscal 1996. 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 $3,629 decrease in interest expense for the Year-to-Date 1997 compared to
the Year-to-Date 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 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 $43,584 in stock during the
last four quarters ended November 2, 1997.
<PAGE> 12
The income tax rate for the Year-to-Date 1997 was 39.0% and for interim
purposes, the entire provision for income taxes is classified as current. The
income tax rate of 39.0% versus 38.0% for the prior year reflects certain
projected changes in permanent items relative to pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $2,943 for the Year-to-Date 1997 compared to
an increase of $34,163 for the Year-to-Date 1996. The decrease of cash and cash
equivalents for the Year-to-Date 1997 compared to the Year-to-Date 1996 related
primarily to an escrow fund established in the prior year related to the fire at
the New Orleans distribution center on March 21, 1996.
As of November 2, 1997, the Company's long-term debt was 23.8% of equity and
total debt was 25.0% of equity. At October 27, 1996, long-term debt was 47.4%
and total debt was 56.6% 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 November 2, 1997 compared to October 27, 1996 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 November 2, 1997. The increase in
the level of long-term debt and total debt compared to February 2, 1997 reflects
the building of the Company's inventories to meet increased operational and
inventory needs due to strong sales demands and in preparation of the peak
seasonal selling period.
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 November 2, 1997, the Company had $30,000 outstanding
revolving debt under the Company's $175,000 committed credit facility. There was
$27,600 outstanding under the Company's uncommitted credit lines at November 2,
1997.
The Company's current ratio as of November 2, 1997 was 2.40 versus 1.80 at
fiscal year end 1996 and 2.53 at October 27, 1996. The decrease in the Company's
current ratio at November 2, 1997 compared to October 27, 1996 is due primarily
to an escrow account and an insurance receivable recorded in current assets as
of October 27, 1996 and accrued liabilities recorded as of November 2, 1997, all
related to the fire at the New Orleans distribution center.
For the nine months ended November 2, 1997, inventory turnover improved to 1.52
from 1.38 for the nine months ended October 27, 1996. This improvement in
inventory turnover reflects the Company's improved sales performance for the
first nine months of 1997 versus the first nine months of 1996.
MERGER AGREEMENT
On November 5, 1997 the Company announced that it had entered into a definitive
agreement with Consolidated to be acquired in a stock for stock merger.
<PAGE> 13
At the effective time of the merger all issued and outstanding Company shares of
common stock will be canceled and converted automatically into the right to
receive a number of duly authorized shares of Consolidated's common stock.
Under the terms of the merger agreement, Consolidated will issue between 0.88
and 1.00 shares of stock for each Company share. The final exchange ratio will
be based upon the average closing price per share of Consolidated's stock during
the twenty day period prior to the effective time of the merger. The transaction
is expected to close in January 1998.
Consolidated's management believes the merger will result in a number of
important synergies and it is expected that certain business functions of the
Company will be integrated into the operations of Consolidated following the
merger. Consolidated expects to take an estimated pre-tax charge to earnings of
approximately $75 million to $100 million relating to the cost of integrating
the two companies.
The merger will be accounted for as a pooling of interests and will be tax free
to the Company's shareholders. The transaction is subject to customary
conditions, including approval by both companies' shareholders and regulatory
agencies.
The merger is described in greater detail in the Company's Current Report on
Form 8-K dated November 7, 1997 filed with the Securities and Exchange
Commission (the "SEC"). In connection with the transaction, a joint proxy
statement and prospectus (the "Prospectus/Proxy Statement") has been filed with
the SEC and is expected to be mailed to the stockholders of both companies in
December. This Form 10-Q does not constitute an offer of any securities offered
in the Prospectus/Proxy Statement nor a solicitation of votes by any
stockholder.
<PAGE> 14
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 November 2, 1997.
<PAGE> 15
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 o 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: December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> NOV-02-1997
<CASH> 12,582
<SECURITIES> 0
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0
0
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</TABLE>
