ITEM 1. BUSINESS
GENERAL
Mac Frugal's Bargains o 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.
ITEM 2. PROPERTIES
RETAIL STORES
Permanent Stores -- The Company leases most of the buildings and land that comprise its retail stores. At the end of fiscal 1993, the Company owned the buildings (but not the underlying land) occupied by two stores, and owned the buildings and land occupied by 47 other stores, one of which is a commercial condominium, one of which is located at the Company's corporate office facility in Dominguez, California, one of which is located at the Company's warehousing facility in Rancho Cucamonga, California and one of which is temporarily closed while undergoing either earthquake repair and reconstruction or relocation. The balance of the buildings and land which comprised the Company's 237 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) range from less than one year to 23 years. The termination of any or all of the leases due to expire within the next two years (without renewal options) would not 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 rental within the Company's guidelines and without the need for substantial expenditures to convert the facilities to the Company's needs. In connection with the opening of new stores, the Company generally makes capital investments and incurs expenses (not including land and building or purchase of a leasehold interest) of less than $850,000 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 is for 54 months with an option to extend the term and an option to buy the equipment. 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; the largest selling area in any one store location is approximately 30,390 square feet. For the five-year period from January 1, 1989 through January 30, 1994, gross selling space increased from 3,412,367 square feet to 4,486,953 square feet. As of the end of fiscal 1993, aggregate
retail selling space at the Company's 237 operating store locations and four temporarily closed locations was categorized according to the following real property arrangements:
Christmas Season Stores -- The Company located its Christmas season stores in both malls and strip centers. The size of these stores varied depending on space available during the Christmas season but generally ranged from 3,000 to 5,000 square feet. Because these stores were temporary, the Company minimized its fixtures and leasehold improvement investment. Merchandise remaining unsold at these locations after the Christmas season was transferred to the Company's year-round stores for subsequent sale, or transferred to either of the Company's distribution centers for subsequent distribution, depending on the type of merchandise.
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 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 3,082 square foot office in New York City to facilitate buying operations at that supply source. The Company expects to move this New York office to another location in the City and is presently negotiating for new space arrangements.
The Company owns a 90 acre parcel of land in Rancho Cucamonga, California 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.
In 1988, the Company executed a Lease Agreement with the Industrial Development Board of the City of New Orleans, Louisiana for the construction of a warehouse and distribution facility. The lease provides for an initial term of 10 years, eight 10-year options to extend the term of the lease and an option to buy the land. Rent is nominal. During fiscal 1991, the Company completed construction of this 1,100,000 square feet facility which utilizes advanced technology to conserve space and maximize efficiency. It was completed 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 distribution center was completed in 1991 with a capacity to service approximately 200 year-round stores. The Company is currently servicing 75 stores in the South and Southeastern United States from the New Orleans distribution center. In the third quarter of fiscal 1992, the Company wrote-down the net book value of the New Orleans distribution center (warehouse and equipment) by $36,646,000 to reflect a permanent impairment in its value to the Company. Ongoing under-utilization of the warehouse capacity because of the Company's decision to initially concentrate future expansion plans mainly in western markets as well as management's intention to investigate a sale/leaseback of the facility necessitated a write-down to the Company's recoverable cost. The recoverable cost was determined by fair market value appraisals conducted by independent nationally recognized appraisers.
In October 1993, the Company sold all its interest in the New Orleans distribution center (both real and personal) to TriNet Corporate Realty Trust, Inc. (TriNet) for $23,463,000, the net book value of the interest sold. TriNet is a NYSE listed real estate investment trust. Concurrently with the sale to TriNet, the Company leased the fully equipped distribution center from TriNet. The initial term expires October 31, 2009. The lease contains two options to renew, a two year option followed by a ten year option.
The Company leased approximately 75,000 square feet of the New Orleans distribution center to an unaffiliated third party during fiscal 1991. The lease expired in January 1994. The Company leased an additional 33,340 square feet to an unaffiliated third party during fiscal 1992, and this was expanded to 40,940 square feet in fiscal 1993. That lease expires in 1997.
The Company maintains earthquake insurance for its corporate office and warehouse facilities that it believes is adequate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
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 January 30, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company commenced trading of its Common Stock on the New York Stock Exchange effective June 11, 1992, under the symbol MFI. The Company's Common Stock was traded in the over-the-counter market under the symbol PICN and was reported on the NASDAQ National Market System until June 10, 1992. The following table shows the high and low sales prices as reported on the New York Stock Exchange, and the high and low bids on the NASDAQ National Market System, as appropriate, for the Company's Common Stock.
At April 22, 1994, there were 1,106 stockholders of record.
The closing sale price of the Company's Common Stock on April 22, 1994 was $15.50 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT FOR STORE AND PER SHARE DATA)
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(1) Adjusted for the effect of shares issued pursuant to two stock purchase agreements in 1988 assumed outstanding under the Treasury stock method.
(2) Excludes sales square footage of four stores temporarily closed on January 17, 1994 due to the Southern California earthquake for the year ended January 30, 1994 and excludes sales square footage related to seasonal Christmas stores.
(3) Excludes space and results related to seasonal Christmas stores but includes sales and sales square footage of the four stores temporarily closed on January 17, 1994 for the year ended January 30, 1994.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 30, 1994 ("FISCAL 1993") COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1993 ("FISCAL 1992")
Net sales for fiscal 1993 increased $86,768,000 or 16.1% from fiscal 1992. This increase was the combined result of the opening of 36 net new stores during the year and the full year operation of the twelve new stores opened in the prior year, the operation of 168 seasonal Christmas stores during the third and fourth quarters compared to 25 seasonal Christmas stores operating during the same period of the prior year and a 0.3% increase in comparable store sales. The seasonal Christmas stores accounted for 4.8 percentage points of the 16.1% net sales increase. The 0.3% comparable store sales growth achieved during the year was adversely impacted by the 2.5% decline in comparable California store sales since 64.1% of the Company's sales from year-round stores occurred within California. This decrease resulted from a combination of the continuing poor economic climate in California as well as a sales transfer effect experienced in some of those stores as a result of the Company's expansion strategy of filling in selected Southern California markets.
Gross profit as a percentage of sales was 46.4% in fiscal 1993 compared to 47.9% in fiscal 1992. The decrease was mostly the result of a lower initial markup on beginning store inventory in the current year as a result of higher prices paid to purchase more brandname items in the prior year and was partially offset by lower markdowns taken during the year. The remainder of the decrease resulted from damaged inventory as a result of the January 1994 earthquake. Inventory shrinkage (shrinkage being the difference between the physical inventory on hand at year end and the calculated value of inventory at year end as determined by the retail inventory method) was 3.1% of sales in fiscal 1993 compared to 3.2% of sales in fiscal 1992. The gross profit percentage earned by the seasonal Christmas stores was about the same in fiscal 1993 and higher in fiscal 1992 than that earned by year-round stores during the period of time both types of stores were open. However, the gross profit percentage in the seasonal Christmas stores did not significantly affect the overall gross margin of the Company due to the small percentage of overall sales contributed by these stores in both years.
Operating expenses consist of store, warehouse and administrative expenses. In fiscal 1993 the store expenses component of operating expenses includes $1,179,000 of earthquake expenses from the January 17, 1994 earthquake in Southern California. Fiscal 1992 operating expenses include a separate $36,646,000 warehouse write-down expense which is discussed below. Operating
expenses were 37.2% of sales in fiscal 1993 compared to 43.4% of sales in fiscal 1992. Operating expenses excluding the earthquake expenses and warehouse write-down expense rose to 37.0% in fiscal 1993 from 36.6% in 1992. Store expenses increased due to an addition to the Company's insurance reserves for certain prior year workers' compensation and general liability claims as a result of increasing costs to settle these claims; a full year of lease payments for point-of-sale equipment this year compared to a partial year's payments last year; and grew as a percentage of sales because fixed occupancy costs and payroll expenses associated with the seasonal Christmas stores were higher as a percentage of sales than the same expenses for the year-round stores. Partially offsetting these increases were lower advertising expenses in the current year. Warehouse expenses fell as a percentage of sales primarily as a result of lower depreciation expense from the New Orleans distribution center resulting from its write-down to fair market value last year and the subsequent sale of the facility this year. Except for a slight increase in administrative expenses to support the temporary Christmas stores, administrative expenses as a percentage of sales remained about constant.
Net interest expense decreased $2,068,000 or 30.1% from fiscal 1992 to fiscal 1993. Gross interest expense decreased due to a combination of lower debt levels, lower interest rates and slower amortization of the remaining fees associated with obtaining the 1991 Credit Agreement due to the extended debt maturity of such Credit Agreement as it was amended and restated in 1993. Interest income decreased because fiscal 1992 contained recognition of income upon collection of a stock purchase receivable.
The Company's effective tax rate rose from 34.8% in fiscal 1992 to 39.6% in fiscal 1993. The higher rate in fiscal 1993 was due partially to a 1% increase in the enacted federal income tax rate as well as a smaller favorable impact on the effective tax rate from the targeted jobs tax credit which resulted from both a lower tax credit and higher pre-tax income in fiscal 1993 than in fiscal 1992. Additionally, the fiscal 1992 effective rate was benefitted from a favorable state income tax audit determination.
The Company adopted the Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" (SFAS 109) on the first day of fiscal 1993 with no significant income statement impact. This statement supersedes APB opinion No. 11. SFAS 109 requires a change from the income to the liability method of computing deferred income taxes whereby deferred income taxes result from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
The Company believes that a meaningful assessment of its net earnings performance requires making adjustments for certain unusual items contained in the fiscal 1993 and 1992 results. Net earnings for fiscal 1993 excluding earthquake related expenses would have been $33,776,000 or $1.13 per share as compared to net earnings for fiscal 1992 excluding the warehouse write-down expense of $35,241,000 or $1.16 per share.
FISCAL YEAR ENDED JANUARY 31, 1993 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2, 1992 ("FISCAL 1991")
Net sales for fiscal 1992 decreased $2,283,000 or 0.4% from fiscal 1991. The decline resulted from a decrease in comparable store sales of 3.9% that was partially offset by the addition of twelve new year-round stores and 25 seasonal Christmas stores which were opened, operated and closed during the fourth quarter. Without these seasonal stores, total sales would have declined by 1.2% from fiscal 1991. The decrease in comparable store sales of 3.9% was largely due to a 3.3% decline in comparable sales from California stores since 63.1% of fiscal 1992 sales from year-round stores were generated within California. This decrease was caused for similar reasons as explained for fiscal 1993 compared to fiscal 1992.
Gross profit, as a percentage of sales was 47.9% in fiscal 1992 compared to 48.8% in fiscal 1991. Reductions in inventory shrinkage from 4.8% of sales in fiscal 1991 to 3.2% of sales in fiscal 1992 at the Company's retail stores did not fully offset higher markdowns taken in the second half of fiscal 1992 to attract additional customer traffic and to sell off aged inventory. Further, initial markups were reduced during portions of the year to purchase more brandname items. Higher gross margin percentages in seasonal stores than in year-round stores did not affect the Company's total gross margin percentage.
Operating expenses were 43.4% of sales in fiscal 1992 compared to 37.1% in fiscal 1991. Operating expenses, excluding the warehouse write-down expense, declined to 36.6% in fiscal 1992. Store and warehouse expenses rose as a percent of sales primarily as a result of increased advertising expense and additional fixed costs associated with operating the New Orleans distribution center for a full year in fiscal 1992, compared to four months in fiscal 1991. Administrative expenses were lower as a percent of sales due largely to reductions in general insurance expenses, professional fees and bonus expense.
The $36,646,000 warehouse write-down expense reduced the net book value of the New Orleans distribution center (warehouse and equipment). It reflected the permanent impairment in its value to the Company. Construction commenced on this facility in 1988 when prior management contemplated a major store expansion program in the eastern United States at that time. Ongoing under-utilization of the warehouse capacity was expected because of the Company's decision to initially concentrate future expansion plans mainly in western markets as well as management's intention in the fall of 1992 to investigate a sale/leaseback of the facility. A sale/leaseback was completed in October 1993 and is discussed in the section on Liquidity and Capital Resources.
Net interest expense decreased $1,426,000 or 17.2% from fiscal 1991 to fiscal 1992. Gross interest expense decreased in the current fiscal year due to both lower debt levels and lower interest rates. Additionally, fiscal 1992 did not have the benefit from capitalized interest present in fiscal 1991 as construction on the New Orleans distribution center was completed in 1991. Interest income rose as a result of the Company's recognizing income upon collection of a stock purchase receivable.
The Company's effective tax rate was 34.8% and 37.7% in fiscal 1992 and 1991, respectively. The lower rate in fiscal 1992 resulted from a combination of a favorable state income tax audit determination and greater impact of the federal targeted jobs tax credit on the effective tax rate due to the lower earnings before income taxes that resulted from the warehouse write-down expense. Income taxes were provided for using the income method in both fiscal 1992 and 1991.
RETURN ON ASSETS AND STOCKHOLDERS' EQUITY
Net return on average assets and net return on average stockholders' equity for the past three years are as follows:
As shown above, net return on average assets and net return on average stockholders' equity were 8.8% and 13.3%, respectively, for fiscal 1993. Excluding the earthquake expenses, net return on average assets would have been 9.2% and net return on average stockholders' equity would have been 14.0% for fiscal 1993.
Net return on average assets increased in fiscal 1993 compared to fiscal 1992 due to both an increase in net income over the prior year and a decrease in average assets. The decrease in average assets was primarily the result of selling the New Orleans distribution center and using the proceeds to reduce debt.
Net return on average assets and net return on average stockholders' equity were 3.0% and 5.0%, respectively, for fiscal 1992. Excluding the warehouse write-down expense, net return on average assets would have been 8.8% and net return on average stockholders' equity would have been 14.9% for fiscal 1992.
Net return on average assets decreased in fiscal 1992 compared to fiscal 1991 due to a relatively small increase in net income over the prior year (excluding the warehouse write-down expense) coupled with an 8.6% increase in average asset base (excluding the warehouse write-down expense). The small increase in net income for fiscal 1992 over fiscal 1991 is explained in the previous section on Results of Operations. The increase in average assets in fiscal 1992 versus the previous year was due primarily to increased merchandise inventories necessary to support the opening of twelve new stores in fiscal 1992.
Net return on average stockholders' equity increased in fiscal 1993 over fiscal 1992 due to the increase in net earnings as explained in the previous section on Results of Operations.
Net return on average stockholders' equity decreased in fiscal 1992 compared to fiscal 1991 due to the warehouse write-down expense incurred in fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business generated substantial cash flows from operations which have been sufficient to provide for all of its fiscal 1993 and 1992 capital expenditures, as well as meet all of its current liabilities in both years. During fiscal 1993, the Company sold excess property from two of its stores and applied the proceeds to open two new stores. Additionally, the Company sold and leased back its New Orleans distribution center as discussed in more detail later in this section. The Company's demand for borrowed funds is determined, in part, by the seasonality of its inventory investment relative to the seasonality of its sales, as well as the magnitude and timing of its capital expenditure programs.
Working Capital was $108,323,000 at January 30, 1994 compared to $105,834,000 at January 31, 1993. Inventory levels increased to service the Company's store growth and cash was used to repay the term loan outstanding at the beginning of the year. The Company's usual year end income tax payable was eliminated as a result of selling the New Orleans distribution center in October 1993 and recognizing as an ordinary loss for income tax purposes the impairment in value provided for in the financial statements in fiscal 1992. The sales tax payable increased as a result of waiting until after year end to make the payment of California sales tax collected during December.
Net cash flows from operating activities were $23,816,000 in fiscal 1993 and $25,225,000 in fiscal 1992. Part of these funds were used to acquire ownership or leasehold interests for selected stores, to construct leasehold improvements and acquire fixtures and equipment for the Company's new year-round stores, 39 in fiscal 1993 and 12 in fiscal 1992, and to renovate some of the Company's existing retail locations. The total cost to acquire, improve and fixturize the Company's 39 fiscal 1993 new and relocation sites was approximately $24,000,000. Of this amount, $2,607,000 was funded from the sale of excess land at two stores. The average cost to improve and fixturize each of these 39 sites was approximately $435,000. The cost to acquire, improve and fixturize the twelve new sites opened in fiscal 1992 was $4,884,000 with the average improvement and fixturization costs for each of those twelve stores being approximately $357,000.
During fiscal 1993, the Company sold all its interest in the New Orleans distribution center (both real and personal) for $23,463,000, the net book value of the interests sold. The net proceeds, after transaction costs, were used to repay term debt. The Company immediately leased back the fully equipped distribution center. This transaction significantly reduced bank debt and will improve the liquidity of the Company in fiscal 1994 since elimination of the federal and state income tax payments usually made by the Company on the original due dates of its income tax returns as explained previously in this section will exceed the annual lease payments. Beyond fiscal 1994, the lease creates a demand on the liquidity of the Company by the amount of the annual lease payments which is expected to be met from operating income.
In fiscal 1993 and 1992, the Company repurchased 55,100 and 831,500 shares of its Common Stock, respectively, in open market transactions at an average cost of $15.02 and $10.38 per share, respectively. The fiscal 1993 repurchases were part of a
1,500,000 share repurchase program authorized during the fourth quarter of fiscal 1993 by the Board of Directors. Repurchases under the 1,500,000 share program will continue during fiscal 1994 if and when market prices warrant such repurchases in the Board of Directors' opinion. Finally, in fiscal 1992 the Company repurchased 250,000 shares of its Common Stock in a private transaction at $21.50 per share, which was less than the fair market value on the date the agreement was reached and cancelled certain option rights.
In fiscal 1994, the Company plans to open approximately 40 new stores and expects to continue at this level of expansion in the future. The cost to improve and fixturize these stores is expected to be similar to the $435,000 per store spent during fiscal 1993. While the Company prefers to lease new store locations, it is prepared to acquire ownership or leasehold interests when necessary to acquire desirable locations. The Company cannot predict all of the fiscal 1994 store locations that might require purchase of ownership or leasehold interests. The cost of acquiring leasehold interests generally range between $200,000 and $1,000,000 depending upon the terms of the underlying lease, but the cost of acquiring an ownership interest is unique to the property acquired. The fiscal 1994 capital expenditure program is expected to be financed with internally generated funds and a portion of the inventories for these stores will be financed with the Company's existing revolving lines of credit.
The Company opened 168 seasonal Christmas stores in fiscal 1993 and 25 in fiscal 1992. Capital expenditures for these stores approximated $114,000 in fiscal 1993 and nothing in fiscal 1992. Future development of this concept has been placed on hold because the Company believes it would be difficult to earn greater pre-tax profit contributions as a percentage of sales from these stores than it can from the year-round stores. There are no future liquidity needs as the leases have all expired and staffing requirements were met with seasonal employees.
The Company believes its present committed revolving line of credit is adequate to meet any seasonal or temporary liquidity needs that cannot be met with cash flows from operating activities. At January 30, 1994, $109,891,000 was available to be borrowed under the committed revolving line of credit. The Company uses uncommitted lines of credit, when available, to reduce its costs of borrowing. There was $34,900,000 of outstanding revolving debt at January 30, 1994 of which $22,000,000 and $12,900,000 was outstanding under the committed and uncommitted lines of credit, respectively, and no revolving debt was outstanding at January 31, 1993. The $76,667,000 of term debt outstanding at January 31, 1993 was paid off during fiscal 1993. See Note 2 to Consolidated Financial Statements.
The Company's current ratio was 2.21 and 2.30 at January 30, 1994 and January 31, 1993, respectively. The total debt to equity ratio was reduced by 20.9 percentage points from 36.0% at the end of fiscal 1992 to 15.1% at the end of fiscal 1993.
ITEM 8.
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 of this report and are incorporated herein by reference.
SELECTED QUARTERLY DATA (UNAUDITED)
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(1) A pre-tax charge of $3,046 for operating expenses and inventory write-off related to the January 17, 1994 Southern California earthquake is included in the quarter ended January 30, 1994. The effect of this charge was to reduce the quarterly net earnings per share by $0.06.
(2) The loss for the quarter ended November 1, 1992 includes warehouse write-down expense of $36,646 which represents the difference between the net book value and the estimated net realizable value of the New Orleans distribution center due to the Company's continued and planned under-utilization of the facility. Net earnings, excluding this warehouse write-down expense, would have been $2,977 or $0.10 per share.
(3) The Company repurchased 831,500 shares of its common stock in the third quarter of fiscal 1992. This 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 $0.02.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
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.
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 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 of this Annual Report on Form 10-K.
(a)(3) EXHIBITS. The following documents are exhibits to this Annual Report on Form 10-K.
(b) The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the quarter ended January 30, 1994.
(c) Copies of Exhibits 10.18, 10.19, 10.21, 10.23, 10.24, 10.26, 10.27, 22.1 and 24.1 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.
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: April 29, 1994
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC.
By: /s/ LEONARD S. WILLIAMS ---------------------------------------- Leonard S. Williams President and Chief Executive 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.
(THIS PAGE INTENTIONALLY LEFT BLANK)
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES*
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* 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.
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of Mac Frugal's Bargains o Close-outs Inc. Dominguez, California
We have audited the accompanying consolidated balance sheets of Mac Frugal's Bargains o Close-outs Inc. and subsidiaries as of January 30, 1994 and January 31, 1993 and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended January 30, 1994, January 31, 1993 and February 2, 1992. Our audits also included the financial statement schedules listed in the Index at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 o Close-outs Inc. and subsidiaries at January 30, 1994 and January 31, 1993 and the results of their operations and their cash flows for the years ended January 30, 1994, January 31, 1993 and February 2, 1992, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for income taxes in 1993.
DELOITTE & TOUCHE
Los Angeles, California March 15, 1994
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PAR VALUE)
ASSETS
See Notes to Consolidated Financial Statements.
MAC FRUGALS' BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
See Notes to Consolidated Financial Statements.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
See Notes to Consolidated Financial Statements.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
See Notes to Consolidated Financial Statements.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
Mac Frugal's Bargains o Close-outs Inc. (formerly Pic 'N' Save Corporation) and its wholly-owned subsidiaries (the Company) operate a chain of 237 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 o Close-outs Inc. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated.
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.
Property, Equipment and Improvements
Property, equipment and improvements are recorded at cost unless the Company determines there has been a permanent impairment in value (Note 10). Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the property.
Deferred Expenses
The Company capitalizes costs associated with opening new store and warehouse facilities and amortizes these over six and twenty-four months, respectively.
Income Taxes
The Company changed its method of accounting for income taxes, effective February 1, 1993, to conform with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". The change had no significant income statement impact. The Company provides for deferred income taxes under the asset and liability method, whereby deferred income taxes result from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. For prior years, amounts provided for income taxes were based on income reported for financial statement purposes. Deferred income taxes were provided for timing differences as certain income and expense items were reported for financial statement purposes in periods different from the periods in which such items were recognized for tax purposes.
Capitalization of Interest
The Company has capitalized interest costs associated with the construction of a new distribution center (Note 10) during the period of construction in accordance with Statement of Financial Accounting Standards No. 34. Interest was capitalized using the Company's weighted average interest rate. Capitalization of interest ceased when construction was completed in September 1991.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest January 31 and contains 52 weeks.
Earnings per Common Share
Earnings per Common Share is based on the weighted average number of Common shares and Common Stock equivalents (stock options) outstanding, adjusted for the effect of the shares sold under a purchase agreement (Note 7) of 58,258 shares (1992) utilizing the Treasury stock method.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to current year presentation.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
NOTE 2 -- BANK BORROWINGS AND INTEREST:
In October 1993, the Company repaid its then outstanding term loan and amended its credit agreement (the Current Agreement) with its syndicate of banks. The Current Agreement includes an annually renewable unsecured three-year $150,000,000 revolving loan for seasonal working capital needs, with a $50,000,000 sublimit for commercial and standby letters of credit. The Current Agreement contains certain restrictive covenants requiring the Company to maintain certain financial ratios and limits the payment of dividends based on a formula. At January 30, 1994, $21,171,000 of retained earnings were unrestricted as to the declaration of cash dividends and the acquisition of Common Stock by the Company. Interest rates are prime, LIBOR plus 5/8%, or negotiated at the Company's option. At January 30, 1994, the Company had outstanding borrowings of $22,000,000 under the Current Agreement.
The Company's credit agreement, before the current amendment, (the Secured Agreement) provided for a secured five-year $115,000,000 term loan and a secured five-year $60,000,000 revolving loan for seasonal working capital needs and commercial and standby letters of credit. Related to the Secured Agreement, the Company paid approximately $8,386,000 in financing fees which the Company is amortizing over five years. At January 31, 1993, the Company had outstanding borrowings of $76,667,000 under the term loan of the Secured Agreement (Note 5) and had no outstanding borrowings under the revolving loan of the Secured Agreement.
The Company also has $40,000,000 of unsecured, uncommitted short-term line of credit facilities with three individual banks. Under the terms of the Current Agreement, only $30,000,000 may be outstanding under these facilities at one time. Interest rates are negotiated. At January 30, 1994 and January 31, 1993, $12,900,000 and $0 were outstanding under these facilities, respectively. Interest rates ranged between 3.25% and 3.50% on outstanding borrowings at January 30, 1994.
Commitments under outstanding letters of credit amounted to $18,109,000 and $13,418,000 at January 30, 1994 and January 31, 1993, respectively.
Net interest is summarized as follows (in thousands):
NOTE 3 -- ACCRUED EXPENSES:
Accrued expenses are comprised of the following (in thousands):
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
NOTE 4 -- INCOME TAXES:
The provision for income taxes includes the following (in thousands):
The Company's effective tax rate differs from the statutory federal income tax rate as follows:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes", effective February 1, 1993 with no significant income statement impact. This statement supersedes APB Opinion No. 11.
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.
On August 10, 1993 legislation was enacted that retroactively increased the maximum corporate income tax rate to 35%. The increased income tax rate was retroactive to January 1, 1993. The effect of the rate increase on the Company's accumulated deferred income taxes are deemed immaterial.
Significant components of the Company's net deferred tax liability as of January 30, 1994 are as follows (in thousands):
The Company provided no valuation allowance against the deferred tax assets recorded as of January 30, 1994.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
Other current assets on the balance sheet at January 30, 1994 includes current deferred tax assets of $5,186,000 and current refundable taxes of $927,000.
NOTE 5 -- LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
The aggregate maturities of long-term debt for the years subsequent to January 30, 1994 are as follows (in thousands):
NOTE 6 -- STOCK INCENTIVE PLANS:
In 1990, the Company adopted a new stock incentive plan (the 1990 Employee Stock Incentive Plan) to enable key employees to acquire shares of the Company's Common Stock. The new plan replaced the Company's Stock Incentive Plan and Incentive Stock Option Plan adopted previously. Under the new plan, as amended in fiscal 1993, which provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock, up to 3,200,000 shares of Common Stock may be issued. Prior to the 1993 amendment, up to 1,750,000 shares of Common Stock could be issued. Although stock options and restricted stock granted under the Stock Incentive Plan and Incentive Stock Option Plan remain outstanding, no new options or restricted shares will be granted under such plans. Under the terms of the new 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 nonqualified 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). A portion of the fiscal 1992 grants under the plan were subject to reduction based upon the level of pre-tax earnings for fiscal 1992 compared to a target level established at the date of grant.
In 1992, the Company adopted its Stock Option Plan for Non-Employee Directors to enable non-employee directors to acquire shares of the Company's Common Stock. Each non-employee director receives a nonqualified stock option grant of 2,500 shares upon election or re-election to the board of directors. In addition, each non-employee director may elect, on the date of each annual meeting at which he or she is elected or re-elected, to receive a certain portion of their annual retainer in the form of a nonqualified stock option grant based on a formula. Expense is recognized ratably over the director's term.
The Company awarded 35,830 and 41,830 shares of restricted stock under the old plans in March 1989 and April 1990, respectively. Such shares vested over three-year periods. No stock appreciation rights have been granted under any of the plans to date. The Company has granted options to purchase 25,000 shares outside of these plans.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
Changes for all options are summarized as follows:
At January 30, 1994, there were 1,876,590 and 110,770 shares of the Company's Common Stock available for grant under the 1990 Employee Stock Incentive Plan and Non-Employee Directors Plan, respectively. Options were exercisable for 682,248 shares under all of the Company's four stock option plans and stock option agreements, collectively, at January 30, 1994.
On March 16, 1993, options to purchase 424,250 shares of the 498,000 shares granted subject to reduction were cancelled (options to purchase 30,000 shares having already been cancelled) upon determination of the Company's fiscal 1992 pre-tax earnings.
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 nonqualified options are exercised.
In March 1992, the Company cancelled all option rights (563,700 shares) held by the Company's former president and a potential cash bonus related to certain options was cancelled in exchange for a cash payment of $3,729,000 (Note 7).
NOTE 7 -- STOCKHOLDERS' EQUITY:
In September 1988, the Board approved the sale of 250,000 shares of Common Stock, at the quoted market value on the date of sale ($12 3/8 per share), to the Company's former president under a purchase agreement in exchange for a promissory note in which the face amount increased at 9.08% annually. The $3,087,000 promissory note was originally due five years after issuance.
The shares were voting, collateralized the note until paid, and dividends or other distributions, if any, were to be offset against the note. Upon termination of the former president's employment in fiscal 1990, the Company extended the maturity date of the promissory note to December 31, 1995.
In March 1992, the Company purchased the 250,000 shares related to the promissory note from the former president at $21.50 per share. Of the proceeds, $4,154,000 was applied against the outstanding balance of the promissory note. The remaining proceeds of $1,221,000 were paid in cash to the former president (Note 6).
NOTE 8 -- PROFIT SHARING PLAN:
The Company has a profit sharing plan covering substantially all employees with more than one year of service. Under this plan, the Company contributes a portion of earnings based on a formula. Profit sharing expenses for the years ended January 30, 1994, January 31, 1993 and February 2, 1992 were $1,038,000, $766,000 and $542,000, respectively.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994, JANUARY 31, 1993 AND FEBRUARY 2, 1992
NOTE 9 -- LEASE COMMITMENTS:
The Company has leases outstanding for retail store locations, the New Orleans distribution center and equipment with varying initial expiration dates through 2018; most leases include options to renew. The Company may also be required to pay insurance, taxes and/or additional rents based on a percentage of sales, and, in the case of the New Orleans distribution center, certain executory payments to the ground lessor of the property. Total rental expense was as follows (in thousands):
Aggregate minimum rental commitments under all leases and aggregate minimum rental income from sublease tenants of leased buildings under all noncancellable leases in effect as of January 30, 1994 were as follows (in thousands):
NOTE 10 -- WAREHOUSE WRITE-DOWN EXPENSE:
The Company completed construction of its New Orleans warehouse and distribution center effective September 1991. The facility was completed at a net cost of $58,617,000, of which $32,233,000 was classified as building and building improvements and $26,384,000 was classified as furniture, fixtures and equipment. Furthermore, $7,406,000 of interest expense was capitalized over the three-year construction period.
During fiscal 1992, the Company determined that the value of the facility was permanently impaired based on an assessment of the Company's continued and planned future under-utilization of the facility. Additionally, the Company had decided to pursue a sale and leaseback of the facility.
Accordingly, during fiscal 1992 a charge to operating income was recorded for approximately $36,646,000 which represented the difference between the net book value and the estimated net realizable value at the date of impairment. The estimated net realizable value of the facility was based upon appraisals received by independent nationally recognized appraisal firms.
In October 1993, the Company completed a sale and leaseback of this facility. The sales price of $23,643,000 approximated the recorded net book value.
NOTE 11 -- OTHER COMMITMENTS:
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.
NOTE 12 -- NORTHRIDGE, CALIFORNIA EARTHQUAKE:
On January 17, 1994, a 6.7 magnitude earthquake occurred in the San Fernando Valley of Southern 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 and will remain closed during their reconstruction periods. These four stores are expected to reopen during the second and third quarters of fiscal 1994.
The Company incurred significant costs in connection with the earthquake including approximately $1,867,000 of damaged merchandise, $744,000 of destroyed property, $258,000 of expenses to repair property and $177,000 of other expenses, primarily labor costs associated with removing damaged merchandise and reopening the affected stores.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE II -- AMOUNTS RECEIVABLE FROM EMPLOYEES OTHER THAN RELATED PARTIES (AMOUNTS IN THOUSANDS)
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(1) Mr. Miller, Executive Vice President, General Merchandise Manager of the Company, executed two promissory notes in favor of the Company in the amounts of $100 and $30, respectively. Each of the notes bear interest at the rate of 7% per annum. The principal amount of the $100 note was originally due and payable in three equal annual installments on April 1, 1993, April 1, 1994 and April 1, 1995. It was amended in May 1993 to require a payment of $70 on May 1, 1993 and the remaining $30 on April 1, 1994. The principal amount of the $30 note is due and payable in two equal installments on April 1, 1994 and April 1, 1995.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE V -- PROPERTY, EQUIPMENT AND IMPROVEMENTS(1) (AMOUNTS IN THOUSANDS)
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(1) The average estimated useful lives used for depreciation purposes for Buildings and Improvements, Automotive Equipment and Furniture, Fixtures and Equipment are 33, 5 and 10 years, respectively. Leasehold Improvements are depreciated over 12 years or the life of the lease, if shorter.
(2) Activity for the year ended January 31, 1993 represents a write-down of New Orleans distribution center assets to appraised values which reflect a permanent impairment in their values based on an assessment of the Company's continued and planned future under-utilization of the facility.
Activity for the year ended February 2, 1992 represents net reclassifications of certain deferred expenses related to opening the New Orleans distribution center originally classified as Property, Equipment and Improvements.
(3) $29,954 of the disposals made during the year ended January 30, 1994, and which are related to the sale of the New Orleans distribution center, are valued at appraised values which are lower than cost. See Note (2) above.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, EQUIPMENT AND IMPROVEMENTS (AMOUNTS IN THOUSANDS)
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS (AMOUNTS IN THOUSANDS)
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(1) Average amount outstanding during the period is computed by dividing the total of daily outstanding principal balances by 364.
(2) Weighted average interest rate during the period is computed by dividing the actual short-term interest expense by the average short-term debt outstanding.
MAC FRUGAL'S BARGAINS o CLOSE-OUTS INC. AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION (AMOUNTS IN THOUSANDS)
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(1) All other costs are less than 1% of net sales.
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INDEX TO EXHIBITS
FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 30, 1994
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* By this reference incorporated herein and made a part hereof.
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* By this reference incorporated herein and made a part hereof.
I-2
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