1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-6672
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR 95-2745285
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -----------------------------------------------------------------------------------------------------------
COMMON STOCK ($.02778 PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NOT APPLICABLE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of shares of the voting stock held by
non-affiliates of the Company, based on the closing sale price of such stock on
the New York Stock Exchange on April 17, 1997 was approximately $710,797,693.
The number of shares of Common Stock outstanding as of April 17, 1997
was 24,997,038.
Documents Incorporated By Reference
Portions of the Company's definitive proxy statement relating to the
1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III hereof.
================================================================================
2
TABLE OF CONTENTS
ITEM NO. IN
FORM 10-K PAGE
----------- -----
PART I
1. BUSINESS........................................................................... 1
General............................................................................ 1
Merchandise and Suppliers.......................................................... 1
Warehousing and Distribution....................................................... 2
Retail Stores...................................................................... 2
Marketing.......................................................................... 2
Employees.......................................................................... 2
Competition........................................................................ 2
Trademarks......................................................................... 3
Restrictions on Imports............................................................ 3
2. PROPERTIES......................................................................... 3
Retail Stores...................................................................... 3
Corporate Offices and Warehouse Facilities......................................... 4
3. LEGAL PROCEEDINGS.................................................................. 5
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 5
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................ 6
6. SELECTED FINANCIAL DATA............................................................ 7
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 8
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................ 12
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................................... 12
PART III
10.-13. THE INFORMATION REQUIRED BY ITEMS 10-13 OF FORM 10-K IS INCORPORATED BY REFERENCE
FROM THE COMPANY'S DEFINITIVE PROXY MATERIALS FOR ITS ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD IN 1997.................................................... 12
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................... 12
3
PART I
ITEM 1. BUSINESS
GENERAL
Mac Frugal's Bargains - Close-outs Inc. (collectively with its
subsidiaries, the "Company") was incorporated under the laws of the State of
Delaware in 1971 as successor to a number of entities, the first of which was
founded in 1950. The Company's principal executive offices are located at 2430
E. Del Amo Boulevard in Dominguez, California, a suburb of Los Angeles. The
Company maintains centralized buying, personnel, systems, pricing, advertising,
merchandising, real estate and accounting functions at its principal executive
offices. See ITEM 2. "Properties -- Corporate Offices and Warehouse Facilities."
At February 2, 1997, the Company operated a chain of 319 retail stores
that specialize in the sale of new "close-out" merchandise which is purchased
from manufacturers and wholesalers at prices less than initial wholesale prices
and is sold at prices below normal retail prices. The Company's stores are
operated under the names "Pic 'N' Save" and "Mac Frugal's Bargains - Close-outs"
and collectively offer, on a self-service basis, a wide selection of close-out
merchandise, including apparel and accessories, notions, novelties, toys, games,
stationery, greeting cards, books, candles, luggage, artificial flowers, beauty
aids, candy, snacks, beverages, housewares, household supplies, domestics,
seasonal theme items and giftwares. The Company targets value-oriented
consumers, and merchandise is currently sold on a cash-and-carry basis, with
certain credit cards accepted.
During 1993, the Company developed a seasonal store concept that
operated under the names "Christmas Close-outs" and "Christmas Enchantments."
The Company operated 168 of these seasonal stores in 1993. These seasonal stores
offered new Christmas theme merchandise purchased from manufacturers at prices
less than initial wholesale prices and sold at prices below normal retail
prices. Categories of merchandise available in these stores were similar to the
Christmas seasonal merchandise offered in the year-round stores. The Christmas
Close-outs and Christmas Enchantments stores were generally operated for the
three months from October through Christmas. The Company has discontinued this
concept.
At February 2, 1997, 198 of the Company's retail stores operated under
the name "Mac Frugal's Bargains - Close-outs." The remaining 121 stores, located
in Southern California, operated under the name "Pic 'N' Save."
For the year ended February 2, 1997 (fiscal 1996), approximately 52% of
the Company's stores were located in California and generated approximately 59%
of the sales. In 1996, growth in the California economy resulted in a more
favorable retail sales environment than in the two previous fiscal years. During
fiscal 1995 and 1994, cutbacks in federal defense spending and aerospace, as
well as a number of companies relocating, caused a regional recession and
adversely affected California's unemployment rates relative to national
unemployment rates. The economic hardship resulting from the high unemployment
led to a general reduction of retail sales in California, which impacted the
Company's California sales during fiscal 1995 and fiscal 1994.
Seasonal fluctuations in the Company's sales have followed the
traditional trend in the retail industry, with a substantial portion of its
annual sales volume and annual earnings occurring during the fourth quarter of
its fiscal year. The Company expects this pattern to continue in the future.
MERCHANDISE AND SUPPLIERS
Close-out merchandise is new merchandise that is available to the
Company at prices less than initial wholesale prices for a variety of reasons,
including the inability of a manufacturer or wholesaler to dispose of a larger
supply of merchandise through normal channels, the discontinuance of merchandise
due to a change in style, color, shape or packaging, the insufficiency of sales
to justify continued production of an item, or the termination of business by a
manufacturer or wholesaler.
The Company purchases merchandise at prices less than initial wholesale
prices, allowing the Company to sell its merchandise to customers at what the
Company believes are below normal retail prices. Therefore, although general
categories of merchandise are usually available, specific lines, items and
manufacturers frequently change. In order to ensure supply and attractive
pricing, the Company will often purchase close-out merchandise in large
quantities and some seasonal merchandise out of season.
The Company buys merchandise, including numerous national brands, from
more than 2,500 suppliers. Due to its long-term association in the close-out
industry, the Company has developed good relationships with numerous
manufacturers and wholesalers that offer some or all of their close-out
merchandise to the Company prior to attempting to dispose of it through other
channels. By selling close-out merchandise only through its own retail stores,
the Company is able to assure suppliers that close-out merchandise will not be
sold through the same channels of distribution as the supplier's current
merchandise.
The Company also special-orders and reorders merchandise from offshore
manufacturers primarily in Asia at purchase prices consistent with its general
merchandising philosophy of offering merchandise to customers at prices below
normal retail prices. Purchases are made either through a trading company or
direct from the manufacturer, often early in the purchasing season. The
continuation of the Company's purchasing of such merchandise is dependent upon
the continuation of the Company's ability to obtain such advantageous pricing.
Offshore purchases did not account for more than 24% of the Company's total
purchases in any year during the three years ended February 2, 1997.
1
4
WAREHOUSING AND DISTRIBUTION
Merchandise purchased for sale through the Company's retail stores is
centrally received at the Company's warehouse and distribution center located in
Rancho Cucamonga, California. The Rancho Cucamonga facility opened in August
1984 and consists of 1,431,000 square feet. The Company leased a warehouse and
distribution center located in New Orleans, Louisiana. The New Orleans facility,
which contained 1,100,000 square feet and was opened in September 1991, was
destroyed by fire on March 21, 1996. In fiscal 1996, the Company decided not to
rebuild this facility and has been servicing all stores from the warehouse
located in Rancho Cucamonga. To support the receipt and distribution from one
facility, the Company leased 225,000 square feet of additional warehouse space
near the Rancho Cucamonga distribution center in May 1996. This lease expires on
May 29, 1999 with options to renew until August 28, 2002. See ITEM 2.
"Properties -- Corporate Offices and Warehouse Facilities." Merchandise is
distributed to retail outlets either by Company-operated tractors and trailers,
or to locations more distant from the warehouse, by contract carriers. Inventory
control functions are conducted at the Rancho Cucamonga facility.
RETAIL STORES
The Company's retail stores are principally located in the Western,
Southwestern, Southern and Southeastern United States, with 121 stores located
in Southern California at February 2, 1997. Stores in Southern California are
currently operated under the name "Pic 'N' Save" and all other stores are
operated under the name "Mac Frugal's Bargains - Close-outs." The following
table provides a state by state breakdown of the Company's retail store
locations at the end of the five most recent fiscal years.
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
TOTAL NUMBER OF STORES AT FISCAL YEAR END
1992-1996
FISCAL
YEAR CA TX AZ FL CO IL LA NV UT NM GA IN TN ID AL KY MO OK
- ---- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
1996 167 43 21 16 12 9 9 9 9 6 5 4 3 2 1 1 1 1
1995 165 39 21 16 12 9 9 9 9 6 5 4 2 2 1 1 0 1
1994 157 37 20 16 11 0 9 8 7 6 5 0 0 1 1 0 0 0
1993 133 36 16 11 7 0 9 7 6 5 5 0 0 1 1 0 0 0
1992 109 36 11 10 7 0 9 5 6 5 5 0 0 1 1 0 0 0
FISC
YEAR TOTAL
- ---- -----
<
1996 319
1995 311
1994 278
1993 237
1992 205
During fiscal 1996, the Company opened eight stores and relocated two
stores. Of the eight net new stores, four are located in Texas, two in Northern
California, and one each in Tennessee and Missouri.
In fiscal 1996, the Company continued to expand in its existing markets.
The Company believes that concentrating on existing markets when quality real
estate is available at reasonable prices and filling demand between existing
stores without cannibalizing will provide growth opportunities and leverage the
Company's selling and administrative expenses.
During the five year period February 3, 1992 through February 2, 1997,
the Company opened 139 new stores, permanently closed 13 stores and temporarily
closed and reopened three stores, increasing its chain of retail stores from 193
to 319. Of the 13 closed stores, nine were replaced by upgraded facilities
located in the same geographical area; three were closed due to earthquake
damage; and one owned store was closed, put up for sale and subsequently
reopened.
No store accounts for more than 2% of the Company's revenues.
MARKETING
The Company's primary marketing strategy is to distribute color
circulars within a targeted radius surrounding substantially all of its stores.
These circulars communicate selected product offerings to customers within each
store's primary trade area. To a lesser extent, the Company employs electronic
media or newspaper advertising, which supplements circular advertising. The
Company also utilizes various special promotions throughout the year. The
Company also conducts ongoing customer research and surveys which are designed
to ensure that customers' expectations are being met.
EMPLOYEES
At February 2, 1997, the Company had 9,586 employees. Temporary
personnel are employed in the stores during the Christmas holiday season.
Management believes its employee relations are generally good.
COMPETITION
The Company faces competition for patronage of customers in varying
degrees from national, regional and local retailers. Many of these retail
establishments offer merchandise similar to that available from the Company,
including close-out merchandise at discount prices. However, unlike the
Company's stores, most retail outlets, including discount stores, primarily
offer continuing lines of merchandise. The Company competes with other retail
establishments, including discount stores, by offering new close-out merchandise
at significant reductions from original retail prices. Some of the Company's
competitors have greater financial resources than those available to the
Company.
2
5
During the past several years, there have been a number of off-price
retailers entering the retail consumer market. These retailers generally carry
fashion-oriented soft goods sold at higher price points than the soft goods sold
by the Company's stores and do not generally carry lines of close-out hard
goods. Recently, stores that sell all or substantially all of their merchandise
at a single price point have entered the market selling close-out goods.
Competition for close-out merchandise has increased over the years. The
Company, however, has not experienced, and does not anticipate experiencing, any
difficulty in obtaining close-out merchandise in adequate volume and at suitable
prices. The Company competes for quality close-out merchandise primarily with
wholesalers and other close-out retailers, some of which are larger than the
Company. Unlike most of these wholesalers, however, the Company disposes of the
merchandise through its own retail stores, which specialize in close-out
merchandise. The Company is thus able to assure a supplier that its close-out
merchandise will not compete in the supplier's normal channels of distribution.
In addition to competing for customers and merchandise, the Company also
competes with a wide range of other entities to obtain suitable locations for
new stores.
TRADEMARKS
The Company employs the service marks "Pic 'N' Save" and "Mac Frugal's
Bargains - Close-outs" in connection with its stores. The Company has registered
its service mark "Mac Frugal's Bargains - Close-outs" with the U.S. Patent and
Trademark Office and the Company has common law rights in the Southern
California area to the service mark "Pic 'N' Save." The Company does not believe
that loss of any of the Company's service marks would have a material adverse
impact upon the Company.
RESTRICTIONS ON IMPORTS
The Company's operations are subject to the customary risks of doing
business abroad, including fluctuation in the value of currencies, customs
duties and related fees, import controls and trade barriers (including quotas),
restrictions on the transfer of funds, work stoppages and, in certain parts of
the world, political instability. The Company believes that it has reduced these
risks by diversifying its offshore purchases among various countries and
factories. These factors have not had a material adverse impact upon the
Company's operations to date. Imports into the United States are also affected
by the cost of transportation, the imposition of import duties and increased
competition from greater production demands abroad. The countries from which the
Company's products are imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duty or tariff levels, which could affect the Company's operations and its
ability to import products at current or increased levels. The Company cannot
predict the likelihood or frequency of any such events occurring.
The Company's imported products are subject to United States customs
duties and, in the ordinary course of its business, the Company may, from time
to time, be subject to claims for duties and other charges. United States
customs duties currently are between 3.4% and 30.0% of the customs value on the
vast majority of products imported by the Company, as classified pursuant to the
Harmonized Tariff Schedule of the United States. All goods imported by the
Company are finished products.
A substantial portion of the Company's imported products come from
China. China currently enjoys "Most Favored Nation ("MFN") status under U.S.
tariff laws. As a result, products imported from China are subject to normal
import duties. China's MFN status is reviewed annually by Congress, and the
renewal of such status may be subject to significant political uncertainties,
with the possibility of non-renewal. Furthermore, the United States has in the
past threatened the imposition of punitive 100% tariffs on selected goods and
withdrawn the threat of sanctions only days before sanctions were to take
affect.
The Company is unable to predict whether the United States will revoke
the People's Republic of China MFN status, but any such revocation of MFN status
would result in significantly higher tariffs on Chinese imports. In addition,
the Company is unable to predict whether the United States will retaliate
against the People's Republic of China or any other country from which the
Company imports goods for trade practices which the United States may consider
unfair, or whether any such retaliation would include products imported by the
Company or otherwise result in increases in the cost or restrictions in the
supply of products imported by the Company.
ITEM 2. PROPERTIES
RETAIL STORES
The Company leases most of the buildings and land for its retail stores.
At the end of fiscal 1996, the Company owned the buildings (but not the
underlying land) occupied by two stores, and owned the buildings and land
occupied by 54 other stores, one of which is a commercial condominium, one of
which is located at the Company's corporate office facility in Dominguez,
California, and one of which is located at the Company's warehousing facility in
Rancho Cucamonga, California. The balance of the buildings and land which
comprised the Company's 319 operating store locations at fiscal year end were
leased.
The leases for the store premises vary as to their terms, rental
provisions, expiration dates, and the existence of renewal options. The number
of years remaining on leases for the Company's stores (excluding unexercised
options) ranges from less than one year to 24 years. Lease expirations within
the next two years (without renewal options) are not expected to
3
6
have a material adverse effect on the operations of the Company. Most of the
leases are fixed minimum rentals, and some provide for additional rental based
upon a percentage of total store sales in excess of certain amounts. Most leases
also require the Company to pay all or a portion of the real estate taxes,
insurance charges and maintenance expenses relating to the leased premises. The
Company generally does not maintain earthquake insurance for its retail stores.
The Company acquires sites for new stores by a variety of methods,
including lease, purchase, assignment or sublease of existing facilities,
build-to-suit leases, or purchase and development of sites which may be owned by
the Company or sold by the Company under leaseback arrangements. In many cases,
the Company is able to lease or sublease existing buildings that have been
previously used for other purposes, such as for supermarkets, drug stores or
home improvement centers, which are suitable for the Company's needs at a lease
rate which is within the Company's guidelines and without the need for
substantial expenditures to convert the facilities to the Company's store
format. In connection with the opening of new stores, the Company generally
makes capital investments and incurs expenses (excluding expenditures to
purchase land, buildings or leasehold interest) of less than $700,000 per store.
These costs consist of inventory, fixtures and equipment, signs and pre-opening
costs.
The Company's retail stores are located in concrete or masonry buildings
and are mostly furnished with inexpensive store fixtures. During fiscal 1992,
the Company installed point-of-sale and scanning equipment in all of its stores
pursuant to an equipment lease entered into in 1991. The equipment lease expires
with respect to various equipment on October 31, 1999, and contains options to
extend the terms and options to buy the equipment. Point-of-sale and scanning
equipment needed for new stores opened after fiscal 1992 was purchased. Except
for this leased equipment, the Company owns all of its store fixtures and
equipment.
The majority of the Company's stores are located in or adjacent to
shopping centers of various sizes and have adjacent parking facilities. The
stores generally offer air-conditioned shopping from 9:00 a.m. to 9:00 p.m.,
Monday through Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday. Particular
location schedules may vary slightly.
Selling space in the Company's stores generally is between 17,000 and
23,000 square feet, depending on the particular location. Currently, the
smallest selling area in any one store location is approximately 4,427 square
feet and the largest selling area in any one store location is approximately
28,060 square feet. For the period from February 2, 1992 through February 2,
1997, gross selling space increased from 3,607,300 square feet to 5,631,771
square feet. As of the end of fiscal 1996, aggregate retail selling space at the
Company's 319 operating store locations was categorized according to the
following real property arrangements:
RETAIL
SELLING
SPACE
NUMBER OF (IN SQ.
OPERATING STORES LOCATIONS FT.)
---------------- --------- ---------
Owned 54 984,539
Leased 263 4,606,782
Owned, Subject to Ground Lease 2 40,450
--- ---------
Total Operating Stores 319 5,631,771
=== =========
CORPORATE OFFICES AND WAREHOUSE FACILITIES
The Company owns its corporate offices, located at 2430 East Del Amo
Boulevard, Dominguez, California 90220-6306. Construction of the facility was
completed in November 1973, and comprises approximately 250,000 square feet of
ground floor space and 18,000 square feet of second floor office space.
Approximately 202,000 square feet of warehouse/distribution space (formerly used
by the Company) at this facility has been leased to an unaffiliated third party
pursuant to a lease expiring December 31, 1998, and the remainder houses the
Company's corporate offices of 38,000 square feet, a Pic 'N' Save retail store
and corporate warehousing space. The Company also leases a 1,350 square foot
office in New York City.
The Company owns a 90 acre parcel of land in Rancho Cucamonga,
California, and owns and operates a 1,431,000 square foot central warehousing
and distribution center on this location as well as a store containing 19,000
square feet of retail selling space.
Following the destruction of the Company's warehouse and distribution
facility in New Orleans and the Company's decision not to rebuild, but instead
to service all stores from its Rancho Cucamonga facility as described below, in
May 1996 the Company leased 225,000 square feet of additional warehouse space
near the Rancho Cucamonga facility. The lease for this additional warehouse
space expires on May 29, 1999 with options to renew until August 28, 2002.
In 1988, the Company entered into a long-term Lease Agreement with the
Industrial Development Board of the City of New Orleans, Louisiana, for a parcel
of land containing approximately 80 acres in New Orleans. The Lease Agreement
obligated the Company to construct a warehouse and distribution center, and
entitled the Company to purchase the land and improvements at any time for a
fixed price plus reimbursement to the City of New Orleans of monies expended by
the City for certain site improvements. The Company completed construction of
the 1,100,000 square foot facility in fiscal 1991 at a net cost of $58,617,000,
of which $32,233,000 was classified as building and improvements and $26,384,000
was classified as fixtures and equipment. In addition, $7,406,000 of interest
expense was capitalized over the three-year construction period. The New Orleans
facility had the capacity to service approximately 200 stores. However, the
ongoing under-utilization of the facility because of the Company's decision to
concentrate store expansion mainly in western markets, as well as management's
4
7
intention to investigate a sale/leaseback of the facility, necessitated a
write-down of the facility to the Company's recoverable cost. The recoverable
cost was determined by fair market value appraisals conducted by independent
nationally recognized appraisers. As a result, in the third quarter of fiscal
1992, the Company wrote down the net book value of the facility (warehouse and
equipment) by $36,646,000 to reflect a permanent impairment in its value to the
Company.
In October 1993, the Company sold all its interest in the New Orleans
facility (including both its leasehold estate and its personal property) to
TriNet Corporate Realty Trust, Inc. (TriNet) for $23,463,000, the then net book
value of the interest sold. Concurrently with the sale to TriNet, the Company
subleased the fully equipped facility from TriNet. The Company's sublease with
TriNet required the Company to maintain certain property insurance coverage and
obligated the Company to rebuild the facility in the event of destruction.
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. Following the fire, the Company decided not to rebuild the New
Orleans facility. To achieve that objective, the Company reached an agreement
with TriNet during fiscal 1996 pursuant to which the Company's sublease with
TriNet was terminated and the Company was relieved of all obligations thereunder
in exchange for $30,000,000. Also in fiscal 1996, the Company exercised its
right under the Lease Agreement with the Industrial Development Board of the
City of New Orleans, Louisiana, to purchase the land and related land
improvements. The purchase price for the land and related land improvements is
approximately $1,900,000 and $1,000,000, respectively. At February 2, 1997, the
Company has recorded within accrued expenses the purchase price for the land
improvements, and has recorded them as a component of the gain on the
distribution center settlement. The land purchase remains as a commitment at
February 2, 1997. In connection with the purchase, the Company has recorded
$3,400,000 within accrued expenses to cover the cost to demolish the structure
and restore the land to its original condition. Following the closing of the
purchase, the Company currently intends to hold the land for resale. However, no
assurances can be made as to when, or on what terms, the Company will be able to
sell the property. Additionally, certain long-term debt financed through the
City of New Orleans contains acceleration clauses that require the repayment of
such amounts upon demand by the City of New Orleans.
By December 12, 1996, the Company reached comprehensive settlements with
all of its commercial property insurance carriers. Pursuant to these settlements
and the Company's salvage efforts, the Company received a total of $90,500,000
for all physical property losses and certain incremental costs associated with
the replenishment of the destroyed merchandise inventories and operating from
one distribution center. The following summarizes the significant components of
the net gain recognized:
Insurance Proceeds............................................................ $90,500,000
-----------
Less expenses/losses:
Landlord lease settlement................................................... 30,000,000
Inventories and supplies destroyed.......................................... 29,463,000
Fire related inventory markdowns............................................ 5,873,000
Demolition and purchase of land improvements................................ 4,400,000
Incremental freight costs................................................... 4,264,000
Property, equipment and improvements destroyed.............................. 4,057,000
Landlord lease payments up to settlement date............................... 1,821,000
Incremental labor costs up to settlement date............................... 1,620,000
Taxes and interest.......................................................... 1,091,000
Miscellaneous other expenses................................................ 1,760,000
-----------
Total expenses/losses....................................................... $84,349,000
-----------
Net gain on distribution center settlement.................................. $ 6,151,000
===========
At February 2, 1997, a total of $7,850,000 of the expenses recognized
above remain unpaid and has been recorded within accrued expenses in the
Company's financial statements.
The Company maintains casualty and property insurance, including fire
and earthquake coverage for its corporate office and warehouse facilities, that
it believes is adequate.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings
incidental to its business operations. None of the proceedings to which it is
currently a party are expected to have a material impact on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security holders during
the fourth quarter of the fiscal year ended February 2, 1997.
5
8
EXECUTIVE OFFICERS OF THE REGISTRANT
Philip L. Carter 48 President and Chief Executive Officer since March 1995; Executive Vice
President, Chief Financial Officer since August 1993, Senior Vice President,
Chief Financial Officer since October 1991.
Mark J. Miller 45 Executive Vice President, Merchandising and Stores since March 1995; Executive
Vice President, General Merchandise Manager since September 1992; Vice President
of Merchandising/General Merchandise Manager 1991-1992, The Disney Store, Inc.
Frank C. Bianchi 52 Senior Vice President, Human Resources since December 1996; Vice President,
Human Resources since June 1989.
Earl C. Bonnecaze 47 Senior Vice President, Stores since July 1995; Regional Manager 1994-1995,
Dollar General Corporation; Vice President Regional Manager 1989-1993, Mac
Frugal's Bargains - Close-outs Inc.
Michael R. Dobbs 47 Senior Vice President, Distribution since December 1996; Vice President,
Distribution since February 1992; General Manager, Distribution since August
1991.
Neil T. Watanabe 43 Senior Vice President, Chief Financial Officer since July 1996; Vice President,
Finance & Controller 1995-1996 Kay Bee Toys; Chief Financial and Operating
Officer 1994-1995 Motherhood Maternity; Vice President, Controller 1987-1994
Filene's Basement.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange under
the symbol MFI. The following table shows the high and low sales prices as
reported on the New York Stock Exchange for the Company's Common Stock for
fiscal 1996 and fiscal 1995:
FISCAL YEAR QUARTER HIGH LOW
- ----------- --------------- ------ ------
1996 First Quarter $16.88 $12.38
Second Quarter 19.50 13.38
Third Quarter 25.13 18.38
Fourth Quarter 27.00 21.50
1995 First Quarter $17.38 $12.94
Second Quarter 18.38 14.38
Third Quarter 18.50 11.63
Fourth Quarter 15.00 11.50
At April 17, 1997, there were 740 stockholders of record.
The closing sale price of the Company's Common Stock on April 17, 1997
was $28.75 per share.
DIVIDENDS
The Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. Payment of dividends is within the discretion of the Company's Board of
Directors and will depend upon, among other factors, the Company's earnings,
financial condition and capital requirements.
6
9
ITEM 6. SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT FOR CURRENT RATIO, STORES AND PER SHARE DATA)
YEAR ENDED
-------------------------------------------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29, JANUARY 30, JANUARY 31,
1997(7) 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Net Sales.............................. $ 772,648 $ 704,934 $ 682,083 $ 627,063 $ 540,295
Operating Income....................... $ 75,826(8) $ 35,867(9) $ 70,645 $ 57,667(10) $ 24,268(11)
Earnings Before Income Taxes........... $ 69,594(8) $ 23,482(9) $ 64,272 $ 52,875(10) $ 17,408(11)
Net Earnings........................... $ 43,149(8) $ 14,559(9) $ 38,884 $ 31,937(10) $ 11,348(11)
Net Earnings Per Common Share.......... $ 1.67(8) $ 0.56(9) $ 1.37 $ 1.07(10) $ 0.37(11)
Net Earnings as a Percent of Sales..... 5.6%(8) 2.1%(9) 5.7% 5.1%(10) 2.1%(11)
Average Shares Outstanding............. 25,915 25,782 28,353 29,931 30,295(1)
Cash Dividends Per Common Stock........ None None None None None
At Year End:
Total Assets......................... $ 384,996 $ 419,072 $ 386,376 $ 369,563(2) $ 382,621(2)
Long-Term Debt....................... $ 3,757 $ 96,435 $ 4,491 $ 3,869 $ 54,475
Stockholders' Equity................. $ 252,029(8) $ 230,399(9) $ 216,881 $ 257,350(10) $ 224,447(11)
Working Capital...................... $ 93,021 $ 144,519 $ 44,012 $ 108,323 $ 105,834
Current Ratio........................ 1.8 2.7 1.3 2.1 2.3
Number of Stores (End of Year)....... 319 311 278 237 205
Number of Stores Opened(6)........... 10 35(5) 43(5) 39(5) 12
Number of Stores Closed(6)........... 2 2 2 7(5) 0
Selling Square Footage............... 5,632 5,511 5,008 4,409(3) 3,869(3)
Net Sales Per Avg. Sq. Footage....... $ 139 $ 134 $ 145 $ 144(4) $ 143(4)
Net Return on Avg. Assets............ 10.7% 3.6% 10.3% 8.5% 3.0%
Net Return on Avg. Stockholders'
Equity............................ 17.9% 6.5% 16.4% 13.3% 5.0%
- ---------------
(1) Adjusted for the effect of shares issued pursuant to two stock purchase
agreements in 1988 assumed outstanding under the Treasury stock method.
(2) Total assets reflect certain balance sheet reclassifications to conform to
the January 29, 1995 balance sheet presentation.
(3) Excludes selling square footage of four stores closed on January 17, 1994
due to the Southern California earthquake (see footnote 10) for the year
ended January 30, 1994 (3 of the 4 stores were subsequently reopened in the
year ended January 29, 1995).
(4) Excludes space and results related to seasonal Christmas stores (see Item
1. Business), but includes sales and selling square footage of the four
stores closed on January 17, 1994 for the year ended January 30, 1994 (3 of
the 4 stores were subsequently reopened in the year ended January 29,
1995).
(5) Includes one permanently and three temporarily closed stores on January 17,
1994. The permanently closed store was reopened at a new location in the
year ended January 28, 1996 and the three temporarily closed stores were
reopened at the same sites in the year ended January 29, 1995.
(6) Includes relocation stores.
(7) Includes 53 weeks of sales in the fiscal year.
(8) Includes the gain on the distribution center settlement of $6,151,000 (see
Item 2. Properties-Corporate Offices and Warehouse Facilities).
(9) Includes a $35,000,000 markdown reserve (see Item 7. Results of
Operations -- Fiscal 1995 compared to Fiscal 1994).
(10) Includes costs associated with the Northridge, California, earthquake of
approximately $3,046,000. On January 17, 1994, a 6.7 magnitude earthquake
occurred in Northridge, California. Twenty-five stores experienced
relatively minor merchandise and physical damage requiring closures that
varied from a few hours to one week. Four stores experienced substantial
merchandise and physical damage. Three stores reopened during fiscal 1994.
The fourth store has been permanently closed and was relocated during
fiscal 1995 (see footnote 3).
(11) Includes a warehouse write-down expense of $36,646,000 associated with the
New Orleans distribution center (see Item 2. Properties -- Corporate
Offices and Warehouse Facilities).
7
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT ON FORM 10-K 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
The following table presents for the periods indicated certain items in
the consolidated statements of earnings as a percentage of net sales (except as
otherwise provided).
FOR THE FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
Net Sales............................................... 100.0% 100.0% 100.0%
Costs of Sales.......................................... 56.7 58.8 52.5
----- ----- -----
Gross Profit............................................ 43.3 41.2 47.5
----- ----- -----
Store Expenses.......................................... 27.1 28.0 28.1
Warehouse and Administrative Expenses................... 7.2 8.1 9.0
Gain on distribution center settlement.................. (0.8) -- --
----- ----- -----
Total Expenses.......................................... 33.5 36.1 37.1
Operating Income........................................ 9.8 5.1 10.4
Interest Expense, Net................................... 0.8 1.8 0.9
----- ----- -----
Earnings Before Income Taxes............................ 9.0 3.3 9.4
Income Taxes............................................ 3.4 1.2 3.7
----- ----- -----
Net Earnings............................................ 5.6% 2.1% 5.7%
===== ===== =====
FISCAL YEAR ENDED FEBRUARY 2, 1997 ("FISCAL 1996") COMPARED TO FISCAL YEAR ENDED
JANUARY 28, 1996 ("FISCAL 1995")
Net sales for fiscal 1996 increased $67,714,000 or 9.6% from fiscal
1995. This increase was the combined result of 8 net new store openings during
the year, the full year operations of the 33 net new stores opened in the prior
year and the positive impact of a 4.2% increase in comparable store sales.
Additionally, fiscal 1996 contained 53 weeks versus 52 weeks in fiscal 1995.
Fiscal 1995 sales have been adjusted to include 53 weeks for the purpose of
computing comparable store sales. Sales from the California stores accounted for
59% of net sales in fiscal 1996 compared to 61% in fiscal 1995.
In the first quarter of fiscal 1996, the Company continued to execute
the new strategic plan initiated in the third quarter of fiscal 1995. As a
result of these initiatives which are described below, the Company began seeing
positive comparable store sales increases in the second quarter of fiscal 1996.
This favorable trend continued into the third and fourth quarter of 1996 as
reflected by increases in comparable store sales of 11.1% and 5.4%,
respectively. The increases in comparable store sales were driven by more
competitive pricing, increased assortment in some categories and increased
customer traffic. Increased competitive pricing caused a decrease in the gross
margin in fiscal 1996 as explained in detail below. The customer count for the
third and fourth quarter of fiscal 1996 increased 6.5% and 1.9%, respectively
over the prior year.
Because of the Company's positive sales results explained above, the
Company experienced increases in inventory turnover and thereby reduced
inventory levels in fiscal 1996. Inventory turnover was 2.29 and 2.17 at the end
of fiscal 1996 and fiscal 1995, respectively. Merchandise inventories decreased
9.14% between the two years. However, the continued success of the Company's
strategic initiative will be somewhat dependent upon a number of external
factors including competition, economic conditions, any changes in customer
shopping behavior and the availability of appropriate merchandise at reasonable
prices.
Gross profit as a percentage of sales was 43.3% in fiscal 1996 compared
to 41.2% in fiscal 1995. The gross profit in fiscal 1995 reflects the recording
of a $35,000,000 non-cash charge in connection with the Company's new strategic
direction to reduce retail prices in order to hasten the liquidation of aged
inventory. The $35,000,000 charge decreased the gross profit margin for fiscal
1995 by 5.0%. The majority of these markdowns were taken in the fourth quarter
of 1995 and the first quarter of 1996.
The decrease in gross profit margin in 1996 (compared to the gross
profit margin in 1995 without the $35,000,000 non-cash charge) reflects the
Company's strategic direction to drive sales and improve inventory turnover
through an ever changing merchandise mix of branded merchandise at more
competitive pricing. The gross profit margin for 1996 also reflects a $3,800,000
markdown reserve at February 2, 1997. The Company established this reserve for
old aged inventory and fire related
8
11
purchases that are expected to be sold subsequent to the fiscal year end at
prices below its current recorded carrying value. This reserve is consistent
with the Company's strategic plan to increase inventory turnover and thereby
reduce inventory levels.
Operating expenses consist of store, warehouse and administration
expenses and the gain on the distribution center settlement. Operating expenses
were 34.3% (excluding the gain on the distribution center settlement) of sales
in fiscal 1996 compared to 36.1% in fiscal 1995. The decrease in operating
expenses was due to decreases in components of operating expenses as described
below.
General cost containment resulted in store expenses of 27.1% of sales
for fiscal 1996 compared to 28.0% of sales for fiscal 1995. Reductions in
payroll, utilities, group and workers' compensation insurances were partially
offset by higher advertising expenses as a percent of sales. Increased
advertising expenses were due to advertising in additional markets and a fall
promotion inviting customers to see the changes made in the stores.
Warehouse and administration expenses totaled 7.2% and 8.1% of sales for
fiscal 1996 and 1995, respectively. The primary reduction in expenses as a
percentage of sales was due to the consolidation of receipts and shipments into
one centralized warehouse and controlled buying patterns since March 21, 1996
(the date of the fire at the New Orleans distribution center). The Company
believes it can operate its warehouse operations more efficiently in the future
through one consolidated warehouse and by the continued control of buying
patterns.
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. Following the fire, the Company decided not to rebuild the New
Orleans facility. To achieve that objective, the Company reached an agreement
with TriNet during fiscal 1996 pursuant to which the Company's sublease with
TriNet was terminated and the Company was relieved of all obligations thereunder
in exchange for $30,000,000. Also in fiscal 1996, the Company exercised its
right under the Lease Agreement with the Industrial Development Board of the
City of New Orleans, Louisiana, to purchase the land and related land
improvements. The purchase price for the land and related land improvements is
approximately $1,900,000 and $1,000,000, respectively. At February 2, 1997, the
Company has recorded within accrued expenses the purchase price for the land
improvements, and has recorded them as a component of the gain on the
distribution center settlement. The land purchase remains as a commitment of
February 2, 1997. In connection with the purchase, the Company has recorded
$3,400,000 within accrued expenses to cover the cost to demolish the structure
and restore the land to its original condition. Following the closing of the
purchase, the Company currently intends to hold the land for resale. However, no
assurances can be made as to when, or on what terms, the Company will be able to
sell the property. Additionally, certain long-term debt financed through the
City of New Orleans contains accelerated clauses that require the repayment of
such amounts upon demand by the City of New Orleans.
By December 12, 1996, the Company reached comprehensive settlements with
all of its commercial property insurance carriers. Pursuant to these settlements
and the Company's salvage efforts, the Company received a total of $90,500,000
for all physical property losses and certain incremental costs associated with
the replenishment of the destroyed merchandise inventories and operating from
one distribution center. A net gain of $6,151,000 was recognized on the
settlements. Significant components of the settlements include:
- Payment of $30,000,000 to landlord for the lease settlement.
- Recognition of all incremental expenses due to the loss of the
warehouse. Incremental expenses include primarily fire related
inventory markdowns, excess freight, excess rent and increased labor.
- Write-off of all merchandise and non-merchandise assets destroyed in
the fire.
- Payment of all rent, taxes and interest expense required as part of
the lease termination.
- Cost required to demolish the site and reimburse the City of New
Orleans for improvements made.
At February 2, 1997, a total of $7,850,000 of the expenses recognized
above remain unpaid and have been recorded within accrued expenses in the
Company's financial statements.
Interest expense was 0.8% of sales in fiscal 1996 compared to 1.8% of
sales in fiscal 1995. The decrease in interest expense resulted from a decrease
in the average balance of debt outstanding because of lower average inventory
levels during fiscal 1996 as compared to fiscal 1995 and proceeds from the
distribution center settlement received in fiscal 1996, offset by the repurchase
of approximately $30,600,000 in stock in fiscal 1996.
The Company's effective tax rate was 38.0% in fiscal 1996 and fiscal
1995. The Company has been able to decrease the effective tax rate in fiscal
1996 and 1995 from prior fiscal years due to the benefits from certain federal
or state tax credits.
FISCAL YEAR ENDED JANUARY 28, 1996 ("FISCAL 1995") COMPARED TO FISCAL YEAR ENDED
JANUARY 29, 1995 ("FISCAL 1994")
Net sales for fiscal 1995 increased $22,851,000 or 3.4% from fiscal
1994. This increase was the combined result of 33 net new stores opened during
the year plus the full year operation of the 41 net new stores opened in the
prior year partially offset by a 6.8% decline in same store sales. Sales from
California stores accounted for 61.1% of net sales in fiscal 1995 compared to
62.8% of net sales in fiscal 1994.
9
12
In the third quarter of fiscal 1995 the Company adopted a new strategic
plan in response to a difficult retail climate in order to strengthen the
business. This new strategic direction involves offering more competitive
pricing; increasing assortment in some areas; reducing inventory levels;
increasing inventory turnover; enhancing store layouts for shopping convenience;
implementing an extensive customer service program; utilizing more television
advertising while maintaining advertising expenses at approximately 2% of sales;
and limiting store expansion to not more than ten stores in fiscal 1996 in order
for the Company's management to focus on its new strategic initiatives.
Gross profit as a percentage of sales was 41.2% in fiscal 1995 compared
to 47.5% for the Company in fiscal 1994. The decrease was primarily due to the
Company's recording a $35 million non-cash charge in connection with the
Company's new strategic direction to reduce retail prices in order to hasten the
liquidation of aged inventory. The charge related primarily to old aged
inventory in the Company's stores with a small portion of the charge related to
competitive price reductions. The breakdown of the charge by merchandise
category is as follows: (1) Christmas -- 31%; (2) Clearance merchandise, various
departments -- 19%; (3) Apparel -- 15%; (4) Hosiery and lingerie -- 7%; (5)
Toys -- 6%; (6) Gifts -- 5%; (7) Domestics -- 4%; (8) Easter -- 2%; and (9)
Other -- 11%. The charge was necessary to clear various categories of
merchandise and provide space for fresh and more competitive merchandise. This
charge decreased the gross profit margin for fiscal 1995 by 5.0%. The remaining
decrease in the gross profit margin for the year is due to a change in the
merchandise mix and is part of the Company's new strategic plan.
Operating expenses consist of store, warehouse and administrative
expenses. Operating expenses were 36.1% of sales in fiscal 1995 compared to
37.1% of sales in fiscal 1994. The decrease in operating expenses was due to
decreases in the components as described below.
Store expenses were 28.0% of sales for fiscal 1995 compared to 28.1% of
sales for fiscal 1994. The decrease in store expenses as a percent of sales for
fiscal 1995 versus 1994 was largely due to lower payroll expense, lower
equipment rentals and lower worker's compensation expense partially offset by
higher occupancy, advertising and depreciation expenses.
Warehouse and administrative expenses totaled 8.1% and 9.0% of sales for
fiscal 1995 and 1994, respectively. Expense controls in the warehouse and
administrative areas resulted in a decrease in these expenses as a percent of
sales.
Interest expense was 1.8% of sales in fiscal 1995 compared to 0.9% of
sales in fiscal 1994. The increase in interest expense resulted from both an
increase in the average balance of debt outstanding during the year and higher
interest rates. The increase in the average amount of debt outstanding is the
combined result of higher average inventory levels during fiscal 1995 compared
to fiscal 1994 and the repurchase of stock in the fourth quarter of 1994.
The Company's effective tax rate was 38.0% in fiscal 1995 compared to
39.5% in fiscal 1994. The decrease in the effective tax rate in fiscal 1995 is
due to increased benefits from the federal Targeted Job Tax Credit and certain
state incentive programs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise principally from the need to
purchase inventory in advance of the selling season, particularly for the fourth
quarter, and to acquire, construct, equip and purchase inventory for new stores.
Repurchase of the Company's stock represents a secondary use for cash.
Accordingly, the Company's demand for borrowed funds is determined largely from
the timing of its inventory investment relative to the seasonality of its sales,
the magnitude and timing of its capital expenditure programs and size of stock
repurchase programs.
The Company opened, including relocations, 10 stores in fiscal 1996, 35
stores in fiscal 1995, and 43 stores (including three temporarily closed stores)
in fiscal 1994. In fiscal 1996, with decreased levels of capital expenditures,
proceeds from the distribution center settlement, partially offset by a stock
repurchase program, the Company decreased its debt by $89,575,000. In fiscal
1995, with increased inventory levels and a minor repurchase program, offset in
part by decreased levels of capital expenditures, the Company increased its debt
by $11,450,000. In fiscal 1994, with increased levels of capital expenditures
due to the accelerating store expansion program, combined with two stock
repurchase programs, the Company increased its debt by $46,188,000.
As part of its change in strategic direction, the Company reduced its
total inventories during fiscal 1996 compared to fiscal 1995. Controlled buying
patterns during fiscal 1996 resulted in a more predictable warehouse inventory
level. During fiscal 1995 the Company reduced the average level of store
inventories compared to fiscal 1994. During fiscal 1994, store inventories
remained relatively stable compared to the previous year. Warehouse inventories
for fiscal 1995, fiscal 1994 and previous years have increased or decreased
depending upon the availability for close-out merchandise during the last
several months of the fiscal year as well as changing internal buying patterns.
Since March 21, 1996 (the date of the New Orleans distribution center
fire), all of the Company's stores have been serviced by the Company's
distribution center in Rancho Cucamonga, California. The Company believes that
it will experience operational efficiencies through the consolidation of
receipts and shipments from one centralized warehouse and through continued
controlled buying patterns. Also, the Company believes it currently has adequate
capacity to service its existing stores
10
13
as well as its immediate expansion plans. Short-term leasing could also provide
the Company with additional warehouse space, if needed.
The Company presently plans to open 8 to 10 stores in fiscal 1997, all
in existing markets. Management estimates that the cost to open these stores
plus capital expenditures in its existing stores, warehouse and corporate office
during fiscal 1997 will be approximately $16,000,000. Additionally, the Company
has authorization to repurchase an additional $37,700,000 of its stock if and
when the Board of Directors believes market prices warrant such repurchase.
Funds required to finance new stores and stock repurchases are expected to come
from operating activities with the remainder, if necessary, provided by unused
bank lines of credit.
With approval from the Board of Directors, the Company has repurchased
its stock from time to time in the open market to enhance shareholder value. In
fiscal 1996, 1995 and 1994, the Company repurchased 1,470,100, 118,800 and
4,258,100 shares of its Common Stock, respectively, in open market transactions
at an average cost of $20.84, $13.24 and $19.08 per share, respectively. Of the
shares repurchased in fiscal 1994, 1,280,400 were part of a 1,500,000 share
repurchase program authorized by the Board of Directors in the last quarter of
fiscal 1993. The remaining 2,977,700 shares repurchased in fiscal 1994 were made
under a 3,000,000 share repurchase program authorized by the Board of Directors
in fiscal 1994. The shares repurchased in fiscal 1995 and the first three
quarters of fiscal 1996 were made under a $10,000,000 repurchase program
authorized by the Board of Directors in fiscal 1994. In fiscal 1996, the Board
of Directors authorized an additional $60,000,000 share repurchase program, of
which $22,349,000 was used in fiscal 1996.
The Company currently has in place a $175,000,000 unsecured revolving
credit facility (the "Revolver") with a maturity date of April 30, 2000. This
credit facility will be reduced to a limit of $150,000,000 on January 31, 1999.
The Revolver includes a $50,000,000 sublimit for commercial and standby letters
of credit. At February 2, 1997, the Company had no outstanding balance under the
Revolver and $156,497,000 was available to be borrowed, of which $31,497,000 was
available for letters of credit. Amounts outstanding under the Revolver bear
interest at the agent bank's prime rate, which at February 2, 1997 was 8.25%, or
LIBOR plus 5/8%, which at February 2, 1997 was 6.19%, or other negotiated rates,
all at the Company's option. In addition, the Company has in place $40,000,000
of other unsecured revolving credit facilities with three individual banks
(collectively the "Other Credit Facilities"). The banks providing the Other
Credit Facilities are not obligated to advance funds when requested by the
Company. At February 2, 1997, the Company had no outstanding balances under the
Other Credit Facilities. The weighted average interest rate for borrowings
during fiscal 1996 under the Revolver and Other Credit Facilities was 6.09%. The
Company believes the Revolver is adequate to meet any seasonal or temporary
liquidity needs that cannot be met with cash flow from operating activities.
Working capital was $93,021,000 and $144,519,000 at February 2, 1997 and
January 28, 1996, respectively. The Company's current ratio was 1.8 and 2.7 at
February 2, 1997 and January 28, 1996, respectively. The total debt to equity
ratio decreased from 41.9% at January 28, 1996 to 2.7% at February 2, 1997. The
decrease in working capital and the current ratio in fiscal 1996 is primarily
the result of a reduction in inventory levels consistent with the Company's
strategic direction and an increase in current liabilities associated with the
increase in the Company's operations and earnings in the current fiscal year.
The decrease in the total debt to equity ratio reflects the Company's strategic
direction to reduce inventory levels and the borrowings necessary to finance
them. The decrease also reflects the planned reduction in capital expenditures,
the insurance proceeds from the distribution center settlement, and the
Company's current year earnings, offset in part by the repurchase of $30,631,000
in stock in fiscal 1996.
11
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Except for the following Selected Quarterly Data, the financial
statements and related financial information required to be filed hereunder are
indexed on Page F-1 of this report.
SELECTED QUARTERLY DATA (UNAUDITED)
NET NET EARNINGS PER
SALES GROSS PROFIT NET EARNINGS COMMON SHARE
-------- ------------ ------------ ----------------
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1996
Quarter Ended
April 28................................. $159,132 $ 70,406 $ 3,512 $ 0.14
July 28.................................. 157,952 65,427 3,013 0.12
October 27............................... 174,488 74,960 5,109 0.20
February 2, 1997(2)...................... 281,076 123,553 31,515(3) 1.21(3)
-------- -------- ------- -----
$772,648 $334,346 $ 43,149 $ 1.67
======== ======== ======= =====
1995
Quarter Ended
April 30................................. $154,250 $ 70,715 $ 3,315 0.13
July 30.................................. 146,754 68,473 3,290 0.13
October 29............................... 152,353 37,612(4) (16,003)(4) (0.62)(4)
January 28, 1996......................... 251,577 113,494 23,957 0.93(1)
-------- -------- ------- -----
$704,934 $290,294 $ 14,559 $ 0.56
======== ======== ======= =====
- ---------------
(1) The Company repurchased 118,800 shares of its common stock in the fourth
quarter of fiscal 1995. These repurchases 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.
(2) Contains five weeks in fiscal 1996 versus four weeks in fiscal 1995.
(3) Includes gain on the distribution center settlement of $6,151,000 (see Item
2. Properties-Corporate Offices and Warehouse Facilities).
(4) Includes a $35,000,000 markdown reserve (see Item 7. Results of
Operations -- Fiscal 1995 Compared to Fiscal 1994).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, the information
required by Items 10-13 of Part III of Form 10-K is incorporated herein by
reference from the Company's definitive proxy materials to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's most recent fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index to Financial
Statements and Schedules of the Company on Page F-1 of this Annual Report
on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index to
Financial Statements and Schedules of the Company on page F-1 of this
Annual Report on Form 10-K.
12
15
(a)(3) EXHIBITS. The following documents are exhibits to this Annual Report on
Form 10-K.
NUMBER DESCRIPTION
------ ---------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, as amended, filed as Exhibit 6.1 to the
Company's Registration Statement on Form 8-A dated May 22, 1992 and incorporated herein
by this reference.
3.2 By-Laws of the Company, as amended, filed as Exhibit 6.2 to the Company's Registration
Statement on Form 8-A dated May 22, 1992 and incorporated herein by this reference.
10.1 Incentive Stock Option Plan filed as Exhibit A to the Company's definitive Proxy
Statement for 1982 and incorporated herein by this reference.
10.2 Amendment to Incentive Stock Option Plan filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 1992 and incorporated herein
by this reference.
10.3 Common Stock Incentive Plan filed as Appendix C to the Company's definitive Proxy
Statement for 1979 and incorporated herein by this reference.
10.4 Amendment to the Common Stock Incentive Plan filed as Exhibit 10.3(3) to the Company's
Annual Report on Form 10-K for fiscal year ended December 31, 1982 and incorporated
herein by this reference.
10.5 Amendment to the Common Stock Incentive Plan filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 2, 1992 and incorporated
herein by this reference.
10.6 Form of Non-Qualified Stock Option Agreement dated December 26, 1985 filed as Exhibit
10.3(3) to the Company's Annual Report on Form 10-K for fiscal year ended December 31,
1985 and incorporated herein by this reference.
10.7 Form of Amended Stock Option Agreement used in connection with the Incentive Stock
Option Plan filed as Exhibit 10.6(1) to the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1989 and transition period ended January 28, 1990 and
incorporated herein by this reference.
10.8 Form of Restricted Stock Agreement used in connection with the Incentive Stock Option
Plan filed as Exhibit 10.6(2) to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1989 and transition period ended January 28, 1990 and
incorporated herein by this reference.
10.9 1990 Employee Stock Incentive Plan filed as Annex B to the Company's definitive Proxy
Statement for the 1990 Annual Meeting of Stockholders and incorporated herein by this
reference.
10.10 Amendments No. 1 and No. 2 to 1990 Employee Stock Incentive Plan filed as Exhibit 10.10
to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1992
and incorporated herein by this reference.
10.11 Form of Stock Option Agreement used in connection with the 1990 Employee Stock
Incentive Plan for options subject to staggered vesting filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991 and
incorporated herein by this reference.
10.12 Form of Stock Option Agreement used in connection with the 1990 Employee Stock
Incentive Plan for immediately exercisable options filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991 and
incorporated herein by this reference.
10.13 Form of Restricted Stock Agreement used in connection with the 1990 Employee Stock
Incentive Plan filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
fiscal year ended February 3, 1991 and incorporated herein by this reference.
10.14 Amendment No. 2 to Stock Option Plan for Non-Employee Directors.
10.15 Stock Option Plan for Non-Employee Directors filed as Annex B to the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders held in 1992 and
incorporated herein by this reference.
10.16 Employment Agreement dated as of July 18, 1996 between the Company and Neil T.
Watanabe.
10.17 Employment Agreement dated as of December 11, 1996 between the Company and Frank C.
Bianchi.
10.18 Employment Agreement dated as of December 11, 1996 between the Company and Michael
Dobbs.
10.19 Employment Agreement dated as of March 15, 1995 between the Company and Mark J. Miller
filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996 and incorporated herein by this reference.
13
16
NUMBER DESCRIPTION
------ ---------------------------------------------------------------------------------------
10.20 Employment Agreement dated as of July 17, 1995 between the Company and Earl C.
Bonnecaze filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996 and incorporated herein by this reference.
10.21 Amended and Restated Employment Agreement dated as of March 12, 1997 by and between the
Company and Philip L. Carter.
10.22 Lease dated August 1, 1988 between the Company, the City of New Orleans, State of
Louisiana Inc., and the City of New Orleans, Louisiana Industrial Development Board re
New Orleans Distribution Center filed as Exhibit 10.5(1) to the Company's Annual Report
on Form 10-K for fiscal year ended January 1, 1989 and incorporated herein by this
reference.
10.23 Long Term Cash Incentive Plan dated as of January 13, 1997.
10.24 First Amendment to Second Amended and Restated Credit Agreement dated as of April 22,
1997 among the Company, its subsidiaries, the lenders listed therein, and Bank of
America National Trust and Savings Association, as Administrative Agent.
10.25 Amendment No. 3 to 1990 Employee Stock Incentive Plan filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996 and
incorporated herein by this reference.
10.26 Lease dated as of September 25, 1993 between TriNet Essential Facilities X, Inc. and
West Coast Liquidators, Inc. filed as Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 30, 1994 and incorporated herein by this
reference.
10.27 Settlement Agreement dated August 9, 1990 among the Company, Batchelder Co., DHB
Partners, L.P., David H. Batchelder, Batchelder & Partners, Inc. and Girard Partners,
L.P. filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1991 and incorporated herein by this reference.
10.28 Master Lease dated December 27, 1991 between the Company and Comdisco, Inc. filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 1992 and incorporated herein by this reference.
10.29 Mac Frugal's Bargains - Close-outs Inc. Savings and Retirement Plan dated as of January
1, 1995 filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 1995 and incorporated herein by this reference.
10.30 Form of Stock Option Agreement used in connection with grants on December 11, 1996 and
January 1, 1997 to non-employee members of the Board of Directors.
10.31 Second Amended and Restated Reducing Revolving Credit Agreement dated as of December
16, 1996 among the Company, its subsidiaries, the lenders listed therein, and Bank of
America National Trust and Savings Association, as Administrative Agent.
10.32 Amendment No. 1 to Stock Option Plan for Non-Employee Directors filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996
and incorporated herein by this reference.
22.1 Subsidiaries of Company.
24.1 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended February 2, 1997.
(c) Copies of Exhibits 10.14, 10.16, 10.17, 10.18, 10.21, 10.23, 10.24, 10.30,
10.31, 22.1, 24.1 and 27 are attached hereto. Reference is made to the
Exhibit Index for an indication of the availability of other exhibits
identified at Item 14(a)(3) above.
(d) Not applicable.
14
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 1, 1997
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
By: /s/ Neil T. Watanabe By: /s/ Philip L. Carter
------------------------------------------------ ------------------------------------------------
Neil T. Watanabe Philip L. Carter
Senior Vice President and Chief Financial President and Chief Executive Officer
Officer (Principal Executive Officer)
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of this
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------------------- ---------------
/s/ PHILIP L. CARTER President and Chief Executive Officer May 1, 1997
- ----------------------------------------------- (Principal Executive Officer)
Philip L. Carter
/s/ DAVID H. BATCHELDER Chairman of the Board May 1, 1997
- -----------------------------------------------
David H. Batchelder
/s/ PETER C. COOPER Director May 1, 1997
- -----------------------------------------------
Peter C. Cooper
/s/ I. T. CORLEY Director May 1, 1997
- -----------------------------------------------
I. T. Corley
/s/ ANTHONY LUISO Director May 1, 1997
- -----------------------------------------------
Anthony Luiso
/s/ MARK J. MILLER Director May 1, 1997
- -----------------------------------------------
Mark J. Miller
/s/ JAMES J. ZEHENTBAUER Director May 1, 1997
- -----------------------------------------------
James J. Zehentbauer
15
18
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES*
PAGE
-----
Independent Auditors' Report........................................................................ F-2
Consolidated balance sheets -- February 2, 1997, and January 28, 1996............................... F-3
Consolidated statements of earnings -- years ended February 2, 1997, January 28, 1996 and January
29, 1995.......................................................................................... F-4
Consolidated statements of stockholders' equity -- years ended February 2, 1997, January 28, 1996
and January 29, 1995.............................................................................. F-5
Consolidated statements of cash flows -- years ended February 2, 1997, January 28, 1996 and January
29, 1995.......................................................................................... F-6
Notes to consolidated financial statements.......................................................... F-7
Schedule II -- Valuation and Qualifying Accounts.................................................... F-15
- ---------------
* Schedules other than those listed above have been omitted because they are not
applicable or because the required information is shown in the consolidated
financial statements or notes to consolidated financial statements.
F-1
19
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Mac Frugal's Bargains - Close-outs Inc.
Dominguez, California
We have audited the accompanying consolidated balance sheets of Mac
Frugal's Bargains - Close-outs Inc. and subsidiaries as of February 2, 1997 and
January 28, 1996 and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the years ended February 2, 1997,
January 28, 1996 and January 29, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mac Frugal's
Bargains - Close-outs Inc. and subsidiaries at February 2, 1997 and January 28,
1996 and the results of their operations and their cash flows for the years
ended February 2, 1997, January 28, 1996 and January 29, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Los Angeles, California
March 12, 1997
F-2
20
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PAR VALUE)
ASSETS
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
Current Assets:
Cash and cash equivalents.................................................. $ 9,639 $ 7,285
Merchandise inventories (Notes 3 and 9).................................... 182,275 200,616
Deferred income taxes (Note 5)............................................. 8,800 13,003
Other current assets....................................................... 9,284 9,965
--------- ---------
Total current assets............................................... 209,998 230,869
Property, Equipment and Improvements (Notes 9):
Land....................................................................... 35,224 35,195
Building and improvements.................................................. 85,397 84,054
Automobiles and trucks..................................................... 3,003 3,040
Furniture, fixtures and equipment.......................................... 96,119 99,966
Leasehold improvements..................................................... 85,533 84,127
Construction in progress................................................... 912 635
--------- ---------
306,188 307,017
Less: Accumulated depreciation and amortization............................ (132,693) (121,106)
--------- ---------
173,495 185,911
Deferred Income Taxes (Note 5)............................................... -- 604
Other Assets................................................................. 1,503 1,688
--------- ---------
Total Assets....................................................... $ 384,996 $ 419,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks outstanding......................................................... $ 21,369 $ 16,704
Current portion of long-term debt (Note 2)................................. 3,172 69
Accounts payable........................................................... 18,929 16,602
Accrued expenses (Note 4).................................................. 56,306 38,784
Income taxes payable (Note 5).............................................. 13,408 4,664
Sales tax payable.......................................................... 3,793 9,527
--------- ---------
Total current liabilities.......................................... 116,977 86,350
Long-Term Debt (Note 2)...................................................... 3,757 96,435
Deferred Income Taxes (Note 5)............................................... 12,233 5,888
Commitments (Notes 2, 7 and 8)
Stockholders' Equity (Notes 2 and 6):
Preferred stock, $1 par value; authorized, 500 shares;
issued, none
Common stock, $.02778 par value; authorized, 100,000 shares; issued 26,262
shares (1997) and 25,582 shares (1996).................................. 729 711
Additional paid-in capital................................................. 9,606 512
Retained earnings.......................................................... 273,898 230,749
--------- ---------
284,233 231,972
Less: Treasury stock, at cost, 1,589 shares (1997) and 119 shares (1996)... (32,204) (1,573)
--------- ---------
Total Stockholders' Equity......................................... 252,029 230,399
--------- ---------
Total Liabilities and Stockholders' Equity.................... $ 384,996 $ 419,072
========= =========
See Notes to Consolidated Financial Statements.
F-3
21
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
---------------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
Net Sales....................................................... $ 772,648 $ 704,934 $ 682,083
Cost of Sales (Note 3).......................................... 438,302 414,640 358,338
-------- -------- --------
Gross Profit.................................................... 334,346 290,294 323,745
-------- -------- --------
Expenses:
Store expenses................................................ 208,920 197,270 191,496
Warehouse and administrative expenses......................... 55,751 57,157 61,604
Gain on distribution center settlement (Note 9)............... (6,151) -- --
-------- -------- --------
Total Expenses........................................ 258,520 254,427 253,100
-------- -------- --------
Operating Income................................................ 75,826 35,867 70,645
Interest Expense, net (Note 2).................................. 6,232 12,385 6,373
-------- -------- --------
Earnings Before Income Taxes.................................... 69,594 23,482 64,272
Income Taxes (Note 5)........................................... 26,445 8,923 25,388
-------- -------- --------
Net Earnings.................................................... $ 43,149 $ 14,559 $ 38,884
======== ======== ========
Average Shares Outstanding...................................... 25,915 25,782 28,353
======== ======== ========
Net Earnings Per Common Share................................... $ 1.67 $ 0.56 $ 1.37
======== ======== ========
Dividends Per Common Share...................................... None None None
See Notes to Consolidated Financial Statements.
F-4
22
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------- PAID-IN RETAINED -------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ----- ---------- -------- ------ -------- --------
BALANCE, January 30, 1994.................... 29,727 $ 825 $ 1,319 $256,033 55 $ (827) $257,350
Exercise of stock options.................... 127 4 1,510 -- -- -- 1,514
Non-cash compensation expense................ -- -- 75 -- -- -- 75
Purchase of Treasury stock, at cost.......... -- -- -- -- 4,258 (81,254) (81,254)
Tax benefit from disqualifying dispositions
of stock options (Note 6).................. -- -- 312 -- -- -- 312
Net earnings for the year.................... -- -- -- 38,884 -- -- 38,884
------ ----- ------- -------- ------ -------- --------
BALANCE, January 29, 1995.................... 29,854 829 3,216 294,917 4,313 (82,081) 216,881
Exercise of stock options.................... 41 1 431 -- -- -- 432
Non-cash compensation expense................ -- -- 86 -- -- -- 86
Treasury stock retired....................... (4,313) (119) (3,235) (78,727) (4,313) 82,081 --
Purchase of Treasury stock, at cost.......... -- -- -- -- 119 (1,573) (1,573)
Tax benefit from disqualifying dispositions
of stock options (Note 6).................. -- -- 14 -- -- -- 14
Net earnings for the year.................... -- -- -- 14,559 -- -- 14,559
------ ----- ------- -------- ------ -------- --------
BALANCE, January 28, 1996.................... 25,582 711 512 230,749 119 (1,573) 230,399
Exercise of stock options.................... 680 18 8,222 -- -- -- 8,240
Non-cash compensation expense................ -- -- 81 -- -- -- 81
Purchase of Treasury stock, at cost.......... -- -- -- -- 1,470 (30,631) (30,631)
Tax benefit from disqualifying dispositions
of stock options (Note 6).................. -- -- 791 -- -- -- 791
Net earnings for the year.................... -- -- -- 43,149 -- -- 43,149
------ ----- ------- -------- ------ -------- --------
BALANCE, February 2, 1997.................... 26,262 $ 729 $ 9,606 $273,898 1,589 $(32,204) $252,029
====== ===== ======= ======== ====== ======== ========
See Notes to Consolidated Financial Statements.
F-5
23
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED
---------------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Cash received from customers................................. $ 772,648 $ 704,934 $ 682,083
Cash paid to suppliers and employees......................... (640,675) (653,184) (594,293)
Income taxes paid............................................ (5,758) (23,318) (13,709)
Interest paid (net of amount capitalized).................... (7,319) (12,369) (6,579)
Interest received............................................ 662 149 621
---------- ---------- ----------
Net cash provided by operating activities................. 119,558 16,212 68,123
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures......................................... (11,170) (26,117) (40,814)
Fire-related disposals (net) (Note 9)........................ 4,028 -- --
Proceeds from sale of fixed assets........................... 1,904 207 473
---------- ---------- ----------
Net cash used in investing activities..................... (5,238) (25,910) (40,341)
---------- ---------- ----------
Cash flow from financing activities:
Borrowings under line of credit agreements and long-term 785,900 928,200 545,800
debt......................................................
Repayments under line of credit agreements and long-term (876,813) (917,963) (500,296)
debt......................................................
Repurchase of Treasury stock................................. (30,631) (1,573) (81,254)
Proceeds from exercise of stock options...................... 8,240 432 1,514
Other, net................................................... 1,338 1,213 683
---------- ---------- ----------
Net cash (used in) provided by financing activities....... (111,966) 10,309 (33,553)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.......... 2,354 611 (5,771)
Cash and cash equivalents, beginning of period................. 7,285 6,674 12,445
---------- ---------- ----------
Cash and cash equivalents, end of period....................... $ 9,639 $ 7,285 $ 6,674
========== ========== ==========
YEAR ENDED
---------------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income..................................................... $ 43,149 $ 14,559 $ 38,884
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 18,256 18,215 16,000
(Increase) decrease in net deferred income taxes............. 11,152 (6,919) (1,715)
Tax benefit from disqualifying dispositions of stock options 791 14 312
(Note 6)..................................................
(Gain) loss on sale of fixed assets.......................... (602) 4 (58)
Non-cash compensation expense................................ 81 86 75
Changes in assets and liabilities:
Decrease (increase) in merchandise inventories............ 18,341 (18,514) (347)
Decrease in other assets.................................. 866 1,570 1,882
Increase in checks outstanding, accounts payable, accrued 18,780 14,687 936
expenses and sales tax payable..........................
Increase (decrease) in income taxes payable............... 8,744 (7,490) 12,154
---------- ---------- ----------
76,409 1,653 29,239
---------- ---------- ----------
$ 119,558 $ 16,212 $ 68,123
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-6
24
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
Mac Frugal's Bargains - Close-outs Inc. (formerly Pic 'N' Save
Corporation) and its wholly owned subsidiaries (the "Company") operate a chain
of 319 retail stores which offer a broad range of new close-out merchandise on a
self-service, cash-and-carry basis.
The consolidated financial statements include the accounts of Mac
Frugal's Bargains - Close-outs Inc. and its wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year is the fifty-two or fifty-three week period
ending on the Sunday nearest January 31. Fiscal year 1996 represents the fifty
three weeks ended February 2, 1997, while fiscal years 1995 and 1994 both
contain fifty two weeks.
Cash and Cash Equivalents
All highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. Cost
is determined on the first-in, first-out method for individual items of
warehouse stock and by the retail inventory method for retail stores.
Deferred Expenses
The Company capitalizes direct incremental costs associated with opening
new stores and amortizes these costs, from the date the store opens, over six
months.
Property, Equipment and Improvements
Property, equipment and improvements are recorded at cost. Depreciation
and amortization are provided for by the straight-line method over the estimated
useful lives of the property.
Capitalization of Interest
The Company capitalizes interest in connection with the construction of
certain facilities and other assets. Interest was capitalized using the
Company's weighted average interest rate (Note 2).
Deferred Financing Costs
Deferred financing costs are amortized using the straight-line method
over the terms of the related debt agreements.
Interest Rate Swap
Amounts receivable or payable under the interest rate swap used to
manage interest rate risks arising from the Company's debt are recognized as
interest income or expense over the life of the agreement.
Fair Market Value of Financial Instruments
The carrying value of financial assets and liabilities approximates fair
value due to the short maturity for financial assets and the short-term
repricing of the underlying tranches for financial liabilities.
Income Taxes
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.
F-7
25
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
Discounts and Allowances
The Company has entered into certain purchase contracts in the ordinary
course of business. Associated with these contracts, the Company receives
certain allowances and discounts (primarily related to retail shelf space and
purchase discounts). These allowances are recognized when earned and, in some
cases, the retail shelf space allowances are recognized upon receipt if the
contracts do not include any future purchase commitments for the Company.
Impairment of Long-Lived Assets
During fiscal 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company
evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, a
write-down would be recorded to reduce the related asset to its estimated fair
value. The adoption had no effect on the Company's financial position or
operating results.
Stock Incentive Plans
During fiscal 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages but does not require companies to record
compensation cost for stock-based compensation at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
SFAS No. 123 requires that companies electing to continue using the intrinsic
value method must make pro forma disclosures of net income and earnings per
share as if the fair-value-based method of accounting had been applied (see Note
6). Since the Company continues to account for stock-based compensation using
the intrinsic value method, SFAS No. 123 will not have an impact on the
Company's results of operations or financial position.
Earnings per Common Share
Earnings per Common Share are based on the weighted average number of
Common shares and Common Stock equivalents (stock options) outstanding.
Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
NOTE 2 -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
FEBRUARY 2, 1997 JANUARY 28, 1996
---------------- ----------------
Revolving note payable, under a line of credit
agreement bearing interest at the bank's prime rate
or LIBOR plus 5/8%, or other negotiated rates, all
at the Company's option. Final maturity is April 30,
2000................................................. $ -- $ 75,000
Other revolving notes payable, under various lines of
credit agreements at negotiated rates................ -- 15,800
Industrial Development Revenue Bonds with interest
payable quarterly based on the current prime rate,
next redeemable August 1998, due August 2028......... 2,000 2,000
Non interest-bearing construction loan, due in
quarterly installments beginning May 1, 1991 through
May 1, 2006, net of discount based on imputed
interest rate of 10% ($628 in fiscal 1996, $715 in
fiscal 1995)......................................... 1,172 1,285
Other, primarily deferred rent......................... 3,757 2,419
------- -------
6,929 96,504
Less current portion of long-term debt................. (3,172) (69)
------- -------
Long-term debt......................................... $ 3,757 $ 96,435
======= =======
F-8
26
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
The aggregate maturities of long-term debt for the years subsequent to February
2, 1997 are as follows (in thousands):
1997............................................................... $3,172
1998............................................................... --
1999............................................................... --
2000............................................................... --
2001............................................................... --
Thereafter......................................................... 3,757
------
$6,929
======
During fiscal 1996, the Company had available from a syndicate of banks
an annually renewable unsecured revolving line of credit (the "Revolver") in the
amount of $200,000,000 for seasonal working capital needs with a $50,000,000
sublimit for commercial and standby letters of credit with a maturity date of
August 10, 1998. In December 1996, the Company amended the Revolver to reduce
the available commitment to $175,000,000 (with a further reduction to
$150,000,000 on January 31, 1999), extend the maturity date to April 30, 2000
and modify interest rates and other certain terms.
As of February 2, 1997, $156,497,000 was available for working capital
requirements, including $31,497,000 for letters of credit. The Revolver bears
interest at the agent bank's prime rate, which at February 2, 1997 was 8.25% or
LIBOR plus 5/8%, which at February 2, 1997 was 6.19%, or other negotiated rates,
all at the Company's option. The Revolver contains certain restrictive covenants
requiring the Company to maintain certain financial ratios and limiting the
payment of dividends to an amount based on a formula. The Company had
outstanding borrowings of $0 and $75,000,000 at February 2, 1997 and January 28,
1996, respectively, under the Revolver. At February 2, 1997, $37,651,000 of
retained earnings was unrestricted as to the declaration of cash dividends and
the acquisition of Common Stock by the Company. Commitments under outstanding
letters of credit amounted to $18,503,000 and $18,306,000 at February 2, 1997
and January 28, 1996, respectively.
At the end of fiscal 1996, the Company had in place $40,000,000 of
unsecured revolving credit facilities with three individual banks (the "Other
Credit Facilities"). The banks providing the Other Credit Facilities are not
obligated to advance funds when requested by the Company. At February 2, 1997
and January 28, 1996, $0 and $15,800,000, respectively, were outstanding under
these credit facilities. Interest rates under these credit facilities fluctuate
based on general market conditions and ranged between 5.20% and 6.48% for
borrowings throughout the year. The weighted average interest rate for both the
Revolver and the Other Credit Facilities during fiscal 1996 was 6.09%.
In connection with the Company's exercise of its right to purchase the
land and land improvements from the City of New Orleans (see Note 9), the
related loan balances under the Industrial Development Revenue Bonds and the non
interest-bearing construction loan became due upon exercise of such right by the
Company. As such, the Company has classified the related debt outstanding of
$3,172,000 at February 2, 1997 as currently payable.
To hedge against fluctuations in interest rates on the Revolver, the
Company entered into an interest rate swap agreement with a major United States
bank for $40,000,000. According to the swap agreement, which expires in July
1998, the Company pays interest based upon fixed interest payments of 5.915% and
receives interest based upon a variable three-month LIBOR rate. The Company
monitors its position with the financial institution which is the counterparty
to this financial instrument and does not anticipate non-performance by this
counterparty. The impact of interest rate risk management activities on income
in fiscal 1996 and 1995 and the amount of deferred gains and losses from
interest rate risk management transactions at February 2, 1997 were not
material. Additionally, during fiscal 1996, the Company repaid the underlying
debt of the interest rate swap agreement resulting in an unmatched swap
agreement. As the swap is not matched to specific liabilities or anticipated
transactions, the swap is marked-to-market as of February 2, 1997. The resulting
unrealized gain was not material.
Net interest expense on bank borrowings and long-term debt is summarized
as follows (in thousands):
YEAR ENDED
-----------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ------------- -------------
Expense.............................................. $ 6,894 $ 12,568 $ 6,997
Income............................................... (640) (149) (389)
Capitalized Interest................................. (22) (34) (235)
------ ------- ------
Net Interest Expense................................. $ 6,232 $ 12,385 $ 6,373
====== ======= ======
F-9
27
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 3 -- MARKDOWN RESERVE
In November 1995, the Company announced a change in its strategic
direction. As part of the new strategy, the Company recognized a $35,000,000
pre-tax markdown reserve to reduce retail prices on merchandise in order to
liquidate aged inventory. The Company utilized $15,400,000 of this markdown
reserve in fiscal 1995 and the remaining $19,600,000 was utilized in fiscal
1996. At February 2, 1997, the Company established a $3,800,000 markdown reserve
for old aged inventory and fire related purchases that are expected to be sold
subsequent to the fiscal year end at prices below its current recorded carrying
value.
NOTE 4 -- ACCRUED EXPENSES
Accrued expenses are comprised of the following (in thousands):
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
Insurance........................................................... $17,459 $18,893
Distribution center fire related expenses (Note 9).................. 7,850 --
Salaries............................................................ 5,845 3,184
Profit sharing and 401(k)........................................... 911 622
Percentage rent..................................................... 840 651
Other expenses...................................................... 23,401 15,434
------- -------
$56,306 $38,784
======= =======
NOTE 5 -- INCOME TAXES
The provision for income taxes includes the following (in thousands):
YEAR ENDED
-------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
Current:
Federal............................................... $12,879 $13,215 $22,673
State................................................. 2,414 2,627 4,430
------- ------- -------
15,293 15,842 27,103
Deferred:
Federal............................................... 9,114 (5,812) (1,996)
State................................................. 2,038 (1,107) 281
------- ------- -------
11,152 (6,919) (1,715)
------- ------- -------
$26,445 $ 8,923 $25,388
======= ======= =======
The Company's effective tax rate differs from the statutory federal
income tax rate as follows:
YEAR ENDED
-------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
Statutory federal tax rate.............................. 35.0% 35.0% 35.0%
State income tax, net of federal benefit................ 4.9 3.4 4.7
Rate benefit from federal targeted jobs tax credit...... -- (1.6) (0.8)
Other, net.............................................. (1.9) 1.2 0.6
---- ---- ----
38.0% 38.0% 39.5%
==== ==== ====
F-10
28
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
Significant components of the Company's net deferred income taxes are as
follows (in thousands):
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
Deferred Income Tax Assets:
Inventories.................................................... $ 4,040 $ 12,151
Accrued Expenses............................................... 3,819 --
State Franchise Taxes.......................................... 465 (134)
Insurance Reserves............................................. -- 1,094
Deferred Expenses.............................................. 727 870
Other............................................................ (251) (374)
-------- --------
8,800 13,607
-------- --------
Deferred Income Tax Liabilities:
Excess of Tax Over Book Depreciation........................... (13,108) (14,069)
Insurance Reserves............................................. 7,419 7,018
Deferred Gain.................................................. (7,202) --
Other.......................................................... 658 1,163
-------- --------
(12,233) (5,888)
-------- --------
Net Deferred Income Tax (Liability) Asset........................ $ (3,433) $ 7,719
======== ========
The Company provided no valuation allowance against the deferred income
tax assets recorded as of February 2, 1997 and January 28, 1996 because it is
more likely than not that the deferred income tax assets will be realized.
NOTE 6 -- STOCK INCENTIVE PLANS
In 1990, the Company adopted a new stock incentive plan ("the Plan") to
enable key employees to acquire shares of the Company's common stock. The Plan,
as amended in fiscal 1993, replaced two previous plans ("the Old Plans") and
provides for the grant of incentive stock options, non-qualified stock options,
stock appreciation rights and restricted stock. Up to 3,200,000 shares may be
issued under the Plan. Although stock options and restricted stock granted under
the Old Plans remain outstanding, no new options or restricted shares will be
granted under the Old Plans. Under the terms of the Plan, incentive stock
options may be granted at not less than 100% of fair market value at the date of
grant (110% in the case of 10% stockholders) and non-qualified stock options may
be granted at not less than par value (or, in the case of officers of the
Company, not less than the greater of par value or 50% of fair market value on
the date of grant).
The Company also has a stock option plan for non-employee directors
("the Non-Employee Plan") to enable non-employee directors to acquire shares of
the Company's Common Stock. As amended, the Non-Employee Plan provides for each
non-employee director to receive a stock option for 2,250 shares upon his
election and re-election at the Company's annual meeting of stockholders. The
exercise price of each such option is the fair market value of the common stock
on the date of grant. In addition, each non-employee director may elect, on the
date of each annual meeting at which he is elected or re-elected subsequent to
1999, to receive his annual retainer in the form of a stock option to purchase a
number of shares of the Common Stock determined by a formula. The expense to the
Company associated with these grants is recognized ratably over the director's
term. The Company has granted options to its non-employee directors to purchase
250,000 shares outside the Non-Employee Plan.
F-11
29
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
The status of the Company's options outstanding for the last three
fiscal years is summarized below:
STOCK OPTIONS
-----------------------------
PER SHARE
SHARES PRICE RANGE
--------- ---------------
Outstanding, January 30, 1994................................. 1,405,525 $ 6.63 - $23.00
Granted....................................................... 39,856 $16.10 - $16.88
Exercised..................................................... (126,318) $ 9.00 - $16.00
Cancelled..................................................... (103,142) $10.50 - $22.13
--------- --------------
Outstanding, January 29, 1995................................. 1,215,921 $ 6.63 - $23.00
Granted....................................................... 1,054,130 $11.10 - $17.50
Exercised..................................................... (41,404) $ 6.63 - $16.00
Cancelled..................................................... (139,511) $10.50 - $22.13
--------- --------------
Outstanding, January 28, 1996................................. 2,089,136 $ 6.63 - $23.00
Granted....................................................... 1,332,730 $19.00 - $25.50
Exercised..................................................... (679,980) $ 6.63 - $22.63
Cancelled..................................................... (186,039) $11.63 - $16.63
--------- --------------
Outstanding, February 2, 1997................................. 2,555,847 $ 8.38 - $25.50
=========
Options exercisable for shares at February 2, 1997............ 690,566
=========
At February 2, 1997, there were 295,731 and 150,004 shares of the
Company's Common Stock available for grant under the Plan and the Non-Employee
Plan, respectively.
Although most of the stock options granted under the Plans are intended
to be incentive stock options, the Company will be entitled to a tax deduction
for the excess (if any) of the aggregate market price over the aggregate
exercise price at such time as non-qualified options are exercised. The
recognition of such tax benefits, if any, is recorded directly to additional
paid-in capital.
A summary of the outstanding and exercisable options by price range as
of February 2, 1997 is listed below:
OPTIONS OUTSTANDING
- ------------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- ----------------- -------- ----------- --------
$ 8.38 - $10.50 33,667 3.9 $ 8.92 33,667 $ 8.92
$10.60 - $14.25 526,171 8.0 $11.70 204,153 $11.72
$14.75 - $19.00 707,529 7.6 $15.90 423,746 $15.58
$19.13 - $23.00 78,480 7.8 $21.75 29,000 $22.16
$23.63 - $25.50 1,210,000 9.9 $25.34 -- $ --
--------- --- ------ ------- ------
2,555,847 8.7 $19.59 690,566 $14.39
========= === ====== ======= ======
The estimated weighted average fair value of options granted during
fiscal 1996 was $24.96. The Company applies Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for its stock option plans.
Accordingly, no compensation expense has been recorded for its stock option
plans. Had compensation expense been determined based on the fair market value
at the grant dates for awards under the Plans consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
Net Income
As reported....................................................... $43,149 $14,559
Pro Forma......................................................... $42,807 $13,945
Earnings Per Share
As reported....................................................... $ 1.67 $ 0.56
Pro Forma......................................................... $ 1.63 $ 0.54
F-12
30
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
The fair value of each option granted during fiscal 1996 was estimated
on the date of the grant using the Black-Scholes options pricing model with the
following assumptions: risk-free interest rate of 6.5%; expected dividend yield
of 0%; expected life of 5 years for options; and expected stock price volatility
of 35.65%.
NOTE 7 -- DEFINED CONTRIBUTION PLANS
The Company has a profit sharing plan covering substantially all
employees with more than one year of service. Under this plan, the Company
contributed a portion of earnings based on a formula. Effective January 1, 1995,
the Company amended and restated this plan to include a 401(k) employee deferral
and Company matching feature. The Company's match is determined each year by the
Board of Directors. Profit Sharing and 401(k) expenses for the plan for the
years ended February 2, 1997, January 28, 1996 and January 29, 1995 were
$911,000, $515,000 and $1,050,000, respectively.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company has leases outstanding for retail store and warehouse
locations with varying initial expiration dates through 2020; most leases
include options to renew and many have rent escalations. The Company may also be
required to pay insurance, taxes and/or additional rents based on a percentage
of sales. Total rental expense was as follows (in thousands):
YEAR ENDED
---------------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
Base rental expense............................. $41,207 $39,735 $34,858
Contingent rental expense....................... 637 627 416
------- ------- -------
$41,844 $40,362 $35,274
======= ======= =======
Aggregate minimum rental commitments under all leases and aggregate
minimum rental income from sublease tenants of leased buildings under all
non-cancelable leases in effect as of February 2, 1997 were as follows (in
thousands):
FISCAL YEAR EXPENSE INCOME NET
--------------------------------------------------- -------- ------- --------
1997............................................... $ 37,568 $ 2,408 $ 35,160
1998............................................... 37,093 1,644 35,449
1999............................................... 35,625 1,485 34,140
2000............................................... 33,556 1,251 32,305
2001............................................... 32,395 1,065 31,330
Thereafter......................................... 188,647 4,507 184,140
-------- ------- --------
$364,884 $12,360 $352,524
======== ======= ========
At February 2, 1997, the Company had a commitment to purchase the land
to its former leased New Orleans distribution center for approximately
$1,900,000 from the City of New Orleans. Management anticipates that such
purchase will be consummated during fiscal 1997.
The Company is a defendant in certain legal actions. While management
and legal counsel are presently unable to predict the outcome or to estimate the
amount of any liability the Company may have with respect to these lawsuits, it
is not expected that these matters will have a material adverse effect on the
Company.
F-13
31
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 9 -- DISTRIBUTION CENTER SETTLEMENT
On March 21, 1996, the New Orleans distribution center and its contents
were destroyed by fire. The Company's lease of this facility, with an unrelated
third party, required the Company to maintain certain property insurance
coverage and obligated the Company to rebuild the facility in the event of
destruction. During fiscal 1996, the Company reached an agreement with its
landlord whereby the Company was relieved of its obligation to rebuild and any
other obligations in exchange for $30,000,000.
Pursuant to the ground lease agreement between the Company and the City
of New Orleans, the Company has the right to purchase the land and related land
improvements for approximately $1,900,000 and $1,000,000, respectively, as of
February 2, 1997. During fiscal 1996, the Company exercised this right. The land
improvements were originally paid for by the City of New Orleans and consist of
site access and other civic improvements. At February 2, 1997, the Company has
recorded within accrued expenses the obligation to reimburse the City of New
Orleans for such improvements. The land purchase remains as a commitment at
February 2, 1997 (see Note 8). The Company intends to hold this land for resale,
but future circumstances may alter the Company's intentions. In connection with
the land purchase, the Company has recorded $3,400,000 within accrued expenses
to cover demolition costs to restore the land to its original state.
Additionally, certain long-term debt financed through the City of New Orleans
contains acceleration clauses that require the repayment of such amounts upon
demand by the City of New Orleans (see Note 2).
By December 12, 1996, the Company reached comprehensive settlements with
all of its commercial property insurance carriers. Pursuant to these settlements
and the Company's salvage efforts, the Company received a total of $90,500,000
for all physical property losses and certain incremental costs associated with
the replenishment of the destroyed merchandise inventories and operating from
one distribution center. The following summarizes the significant components of
the net gain recognized:
Insurance Proceeds.......................................................... $90,500,000
-----------
Less expenses/losses:
Landlord lease settlement................................................. 30,000,000
Inventories and supplies destroyed........................................ 29,463,000
Fire related inventory markdowns.......................................... 5,873,000
Demolition and purchase of land improvements.............................. 4,400,000
Incremental freight costs................................................. 4,264,000
Property, equipment and improvements destroyed............................ 4,057,000
Landlord lease payments up to settlement date............................. 1,821,000
Incremental labor costs up to settlement date............................. 1,620,000
Taxes and interest........................................................ 1,091,000
Miscellaneous other expenses.............................................. 1,760,000
-----------
Total expenses/losses..................................................... $84,349,000
-----------
Net gain on distribution center settlement................................ $ 6,151,000
===========
At February 2, 1997, a total of $7,850,000 of the expenses recognized
above remains unpaid and has been recorded within accrued expenses in the
accompanying consolidated balance sheet (see Note 4).
F-14
32
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Fiscal year ended February 2, 1997:
Inventory valuation allowance(2)................. $ 19,600 $ 3,800 $ -- $ 19,600 $ 3,800
Fiscal year ended January 28, 1996:
Inventory valuation allowance(1)................. $ -- $ 35,000 $ -- $ 15,400 $ 19,600
Fiscal year ended January 29, 1995:
Inventory valuation allowance.................... $ -- $ -- $ -- $ -- $ --
- ---------------
(1) Consists of reserve for markdowns of aged goods.
(2) Consists of reserve for markdowns of aged goods and fire related purchases.
F-15
33
INDEX TO EXHIBITS
FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR PAGE
NUMBER THE FISCAL YEAR ENDED FEBRUARY 2, 1997 NUMBER
------ --------------------------------------------------------------------------------------- ------
3.1 Certificate of Incorporation of the Company, as amended, filed as Exhibit 6.1 to the
Company's Registration Statement on Form 8-A dated May 22, 1992........................ *
3.2 By-Laws of the Company, as amended, filed as Exhibit 6.2 to the Company's Registration
Statement on Form 8-A dated May 22, 1992............................................... *
10.1 Incentive Stock Option Plan filed as Exhibit A to the Company's definitive Proxy
Statement for 1982..................................................................... *
10.2 Amendment to Incentive Stock Option Plan filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended February 2, 1992................................ *
10.3 Common Stock Incentive Plan filed as Appendix C to the Company's definitive Proxy
Statement for 1979..................................................................... *
10.4 Amendment to the Common Stock Incentive Plan filed as Exhibit 10.3(3) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1982................. *
10.5 Amendment to the Common Stock Incentive Plan filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 2, 1992.................. *
10.6 Non-Qualified Stock Option Agreement dated December 26, 1985 filed as Exhibit 10.3(3)
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1985................................................................................... *
10.7 Form of Amended Stock Option Agreement used in connection with the Incentive Stock
Option Plan filed as Exhibit 10.6(1) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989 and transition period ended January 28, 1990... *
10.8 Form of Restricted Stock Agreement used in connection with the Incentive Stock Option
Plan filed as Exhibit 10.6(2) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and transition period ended January 28, 1990....... *
10.9 1990 Employee Stock Incentive Plan filed as Annex B to the Company's definitive Proxy
Statement for the 1990 Annual Meeting of Stockholders.................................. *
10.10 Amendments No. 1 and No. 2 to 1990 Employee Stock Incentive Plan filed as Exhibit 10.10
to the Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1992................................................................................... *
10.11 Form of Stock Option Agreement used in connection with the 1990 Employee Stock
Incentive Plan for options subject to staggered vesting filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991........ *
10.12 Form of Stock Option Agreement used in connection with the 1990 Employee Stock
Incentive Plan for immediately exercisable options filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991........ *
10.13 Form of Restricted Stock Agreement used in connection with the 1990 Employee Stock
Incentive Plan filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 3, 1991................................................. *
10.14 Amendment No. 2 to Stock Option Plan for Non-Employee Directors........................
10.15 Stock Option Plan for Non-Employee Directors filed as Annex B to the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders held in 1992......... *
10.16 Employment Agreement dated as of July 18, 1996 between the Company and Neil T.
Watanabe...............................................................................
10.17 Employment Agreement dated as of December 11, 1996 between the Company and Frank C.
Bianchi................................................................................
10.18 Employment Agreement dated as of December 11, 1996 between the Company and Michael
Dobbs..................................................................................
10.19 Employment Agreement dated as of March 15, 1995 between the Company and Mark J. Miller
filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996................................................................. *
10.20 Employment Agreement dated as of July 17, 1995 between the Company and Earl C.
Bonnecaze filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996..................................................... *
10.21 Amended and Restated Employment Agreement dated as of March 12, 1997 between the
Company and Philip L. Carter...........................................................
34
FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR PAGE
NUMBER THE FISCAL YEAR ENDED FEBRUARY 2, 1997 NUMBER
------ --------------------------------------------------------------------------------------- ------
10.22 Lease dated August 1, 1988 between the Company, the City of New Orleans, State of
Louisiana Inc., and the City of New Orleans, Louisiana Industrial Development Board re
New Orleans Distribution Center filed as Exhibit 10.5(1) to the Company's Annual Report
on Form 10-K for the fiscal year ended January 1, 1989................................. *
10.23 Long Term Cash Incentive Plan dated as of January 13, 1997.............................
10.24 First Amendment to Second Amended and Restated Credit Agreement dated as of April 22,
1997 among the Company, its subsidiaries, the lenders listed therein, and Bank of
America National Trust and Savings Association, as Administrative Agent................
10.25 Amendment No. 3 to 1990 Employee Stock Incentive Plan filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996........ *
10.26 Lease dated as of September 25, 1993 between TriNet Essential Facilities X, Inc. and
West Coast Liquidators, Inc. filed as Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 30, 1994................................... *
10.27 Settlement Agreement dated August 9, 1990 among the Company, Batchelder Co., DHB
Partners, L.P., David H. Batchelder, Batchelder & Partners, Inc. and Girard Partners,
L.P. filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1991............................................................ *
10.28 Master Lease dated December 27, 1991 between the Company and Comdisco, Inc. filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 1992....................................................................... *
10.29 MacFrugal's Bargains - Close-outs Inc. Savings and Retirement Plan dated as of January
1, 1995, filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 1995..................................................... *
10.30 Form of Stock Option Agreement used in connection with grants on December 11, 1996 and
January 1, 1997 to non-employee members of the Board of Directors......................
10.31 Second Amended and Restated Reducing Revolving Credit Agreement dated as of December
16, 1996 among the Company, its subsidiaries, the lenders listed therein, and Bank of
America National Trust and Savings Association, as Administrative Agent................
10.32 Amendment No. 1 to Stock Option Plan for Non-Employee Directors filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year ended January 28,
1996................................................................................... *
22.1 Subsidiaries of the Company............................................................
24.1 Consent of Independent Auditors........................................................
27 Financial Data Schedule................................................................
- ---------------
* By this reference incorporated herein and made a part hereof.