-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UMnkgk9y3hMKHGbA/NvHWfoGv+VIzv+SA5TZdONAfgj9LomZIw+6oMo4m++ihR5N 3OulNC2sLRgIiJC70g3aPA== 0000950148-96-000655.txt : 19960429 0000950148-96-000655.hdr.sgml : 19960429 ACCESSION NUMBER: 0000950148-96-000655 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960426 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAC FRUGALS BARGAINS CLOSE OUTS INC CENTRAL INDEX KEY: 0000078384 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 952745285 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11164 FILM NUMBER: 96551505 BUSINESS ADDRESS: STREET 1: 2430 E DEL AMO BLVD CITY: DOMINGUEZ STATE: CA ZIP: 90220-6306 BUSINESS PHONE: 3105379220 MAIL ADDRESS: ZIP: ***** FORMER COMPANY: FORMER CONFORMED NAME: PIC N SAVE CORP DATE OF NAME CHANGE: 19920610 10-K 1 FORM 10-K 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 JANUARY 28, 1996 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 95-2745285 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) 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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS 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 19, 1996, was approximately $309,290,576. The number of shares of Common Stock outstanding as of April 19, 1996 was 25,259,347. Documents Incorporated by Reference Portions of the Company's definitive proxy statement relating to the 1996 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................................................................................... 3 Trademarks.................................................................................... 3 Restrictions on Imports....................................................................... 3 2. PROPERTIES.................................................................................... 4 Retail Stores................................................................................. 4 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................................................... 11 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 11 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 1996.......................................................................................... 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 January 28, 1996, the Company operated a chain of 311 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, 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 put further development of this concept on hold for the reasons discussed later in this section under "Retail Stores." At January 28, 1996, 190 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 January 28, 1996 (fiscal 1995), approximately 53% of the Company's stores were located in California and generated approximately 61% of the sales. The cutbacks in federal defense spending and aerospace as well as a number of companies relocating caused a regional recession and has adversely affected California's unemployment rates relative to national unemployment rates. The economic hardship resulting from the high unemployment has led to a general reduction of retail sales in California, which has impacted the Company's California sales during fiscal 1995, 1994 and 1993. 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 but with less of the extreme experienced in fiscal 1993 as a result of putting the Christmas season store concept on hold. 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, depending upon the availability of close-out merchandise at suitable prices. 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 January 28, 1996. 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. 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 Permanent Stores -- The Company's retail stores are principally located in the Western, Southwestern, Midwestern, Southern and Southeastern United States, with 121 stores located in Southern California at January 28, 1996. 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 table below provides a state-by-state breakdown of the Company's year-round retail store locations at the end of the five most recent fiscal years. MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. TOTAL NUMBER OF YEAR-ROUND STORES AT FISCAL YEAR END 1991-1995
FISCAL YEAR CA AZ TX NV NM UT CO ID LA GA FL AL IL TN KY IN OK TOTAL - --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ----- 1995 165 21 39 9 6 9 12 2 9 5 16 1 9 2 1 4 1 311 1994 157 20 37 8 6 7 11 1 9 5 16 1 0 0 0 0 0 278 1993 133 16 36 7 5 6 7 1 9 5 11 1 0 0 0 0 0 237 1992 109 11 36 5 5 6 7 1 9 5 10 1 0 0 0 0 0 205 1991 98 11 35 5 5 6 7 1 9 5 10 1 0 0 0 0 0 193
During fiscal 1995, the Company opened 34 stores, relocated one store and closed one store due to its lease expiring with no options and no relocation opportunities. Of the 33 net new stores, nine are located in Illinois, seven in Southern California, four in Indiana, two each in Texas, Utah and Tennessee, and one each in Northern California, Arizona, Nevada, Colorado, Idaho, Kentucky and Oklahoma. In fiscal 1995, the Company continued to expand in the California market. California is the Company's largest market for sales and earnings. The Company believes that concentrating on this market at a time when quality real estate is readily available at lower prices than in the past will provide growth opportunities as the California economy strengthens over time. During the five-year period from February 3, 1991 through January 28, 1996, the Company (excluding five relocations) opened 124 new stores, permanently closed four stores and temporarily closed then reopened three stores, increasing its chain of retail stores from 191 to 311. Five of the stores (relocations) were replaced by upgraded facilities located in the same geographic area. The relocations were due to either the inability to renew the lease or to position the store in a more desirable location. No store accounts for more than 2% of the Company's revenues. Seasonal Stores -- In addition to the "Pic 'N' Save" and "Mac Frugal's Bargains * Close-outs" stores, which are open year-round, the Company opened temporary retail locations during the Christmas season for the first time in fiscal 1992 and again in fiscal 1993. The Christmas season stores were designed to allow the Company to generate additional revenues and profits through sales during the peak Christmas selling season while avoiding related costs associated with maintaining such locations on a year-round basis. During fiscal 1992 the Company had 25 Christmas season stores and in fiscal 1993 the Company had 168 Christmas season stores. At the end of the 1993 Christmas shopping season, the Company reassessed the performance of its Christmas season stores and determined that the stores did not meet the Company's investment criteria. Subsequent to this evaluation, the concept was put on hold, and no Christmas season stores were opened in subsequent years. MARKETING The Company's primary marketing strategy is to distribute color circulars within a radius surrounding substantially all of its stores. These circulars communicate selected product offerings to targeted customers within each store's primary trade area. To a lesser extent, the Company employs electronic media or newspaper advertising, usually to supplement circular advertising. The Company also utilizes various special promotions and celebrity appearances in conjunction with the grand openings of its stores. EMPLOYEES At January 28, 1996, the Company had approximately 7,325 employees. Temporary personnel are employed in the stores during the Christmas holiday season. Management believes its employee relations are generally good. 2 5 COMPETITION The Company faces competition for patronage of customers in varying degrees from national, regional and local areas in which the Company's stores are located. 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. 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 principally 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 U.S. 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. U.S. 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. On March 3, 1994, the President reinstated, by Executive Order, the "Special 301" provisions of the Omnibus Trade and Competitiveness Act of 1988. On April 30, 1994, the United States Trade Representative ("USTR") designated China as a priority foreign country for purposes of "Special 301" because it concluded that China was failing to provide adequate and effective protection of intellectual property rights and denying fair and equitable market access to persons that rely on intellectual property protection. As required by law, an investigation was initiated and consultations were undertaken between the governments of the United States and China. On February 5, 1995, the USTR determined that China's enforcement of intellectual property rights and provisions for market access to persons that rely on intellectual property protection were unreasonable and constituted a burden or restriction on U.S. commerce. As such, the USTR determined to increase duties on certain products to 100% ad valorem. Pursuant to an agreement reached between China and the United States, effective February 26, 1995, the USTR terminated its "Special 301" investigation, rescinded China's designation as a priority country and rescinded the increased tariffs. The USTR will continue to monitor the implementation of this agreement to determine whether further action is required under "Special 301." The Company is unable to predict whether China will comply with the terms of the agreement or whether USTR will propose additional sanctions against China in the future. On June 2, 1995, the President renewed the People's Republic of China's most-favored nation ("MFN") status for another year. In 1994, the President indicated that China's MFN status would no longer be conditioned upon progress in the area of human rights. Other conditions, such as freedom of emigration goals, continue to be in force. The decision to extend China's MFN status for another year must be taken by June 3, 1996. 3 6 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 People's Republic of China or any other country from which the Company imports goods will be investigated under "Special 301" provisions, whether the United States will retaliate against the People's Republic of China or any such other country, 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 1995, the Company owned the buildings and land occupied by 56 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 311 operating store locations at fiscal year end was 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 1 year to 25 years. Lease expirations within the next two years (without renewal options) are not expected to 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 that 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 that is 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 (excluding expenditures to purchase land, buildings or leasehold interest) of less than $800,000 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. 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 28,060 square feet. For the period from February 3, 1991 through January 28, 1996, gross selling space increased from 3,568,000 square feet to 5,511,377 square feet. As of the end of fiscal 1995, aggregate retail selling space at the Company's 311 operating store locations was categorized according to the following real property arrangements:
RETAIL SELLING NUMBER OF SPACE OPERATING STORES LOCATIONS (IN SQ. FT.) ---------------- --------- ------------ Owned 56 1,024,989 Leased 255 4,486,388 --- --------- Total Operating 311 5,511,377 === =========
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, 1996, 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 buying office in New York city. 4 7 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 a 1,100,000 square feet facility that utilized 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 stores. At the end of fiscal 1995, the Company was servicing 82 stores in the South, Southeastern and Midwestern 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 concentrate 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 subleased approximately 48,840 square feet of the New Orleans distribution center to an unaffiliated third party pursuant to a lease that expires in 1997. On March 21, 1996, the New Orleans distribution center and its contents were destroyed by fire. The Company's lease with TriNet obligates the Company to rebuild the distribution center. All of the Company's stores are currently being serviced by the Rancho Cucamonga distribution center. The Company believes that its insurance proceeds will adequately cover all losses and that the loss of inventory and equipment from the fire is not expected to have a material adverse impact on the Company's operations. However, the Company is unable to predict with certainty what the ultimate outcome will be. The Company maintains earthquake insurance 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 January 28, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT Philip L. Carter 47 Director, 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; Vice President Finance and Distribution since 1991. Mark J. Miller 44 Director and 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.; Vice President, Merchandise Manager, Hardlines 1988-1991, Pic 'N' Save Corporation. Earl C. Bonnecaze 46 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.
5 8 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 1995 and fiscal 1994:
FISCAL YEAR QUARTER HIGH LOW - ----------- --------------- ------- ------- 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 1994 First Quarter $ 18.50 $ 14.50 Second Quarter 18.75 15.63 Third Quarter 21.13 17.25 Fourth Quarter 21.25 16.38
At April 19, 1996, there were 876 stockholders of record. The closing sale price of the Company's Common Stock on April 19, 1996 was $12.88 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 ------------------------------------------------------------------------------ JANUARY 28, JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 2, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net Sales................................... $ 704,934 $ 682,083 $ 627,063 $ 540,295 $ 542,578 Operating Income............................ $ 35,867 $ 70,645 $ 57,667 $ 24,268 $ 63,163 Earnings Before Income Taxes................ $ 23,482 $ 64,272 $ 52,875 $ 17,408 $ 54,877 Net Earnings................................ $ 14,559 $ 38,884 $ 31,937 $ 11,348 $ 34,215 Net Earnings Per Common Share............... $ 0.56 $ 1.37 $ 1.07 $ 0.37 $ 1.12 Net Earnings as a Percent of Sales.......... 2.1% 5.7% 5.1% 2.1% 6.3% Average Shares Outstanding.................. 25,782 28,353 29,931 30,295(1) 30,649(1) Cash Dividends Per Common Stock............. None None None None None At Year End: Total Assets................................ $ 419,072 $ 386,376 $ 369,563(2) $ 382,621(2) $ 410,425(2) Long-Term Debt.............................. $ 96,435 $ 4,491 $ 3,869 $ 54,475 $ 81,567 Stockholders' Equity........................ $ 230,399 $ 216,881 $ 257,350 $ 224,447 $ 226,038 Working Capital............................. $ 144,519 $ 44,012 $ 108,323 $ 105,834 $ 104,422 Current Ratio............................... 2.7 1.3 2.1 2.3 2.3 Number of Stores (End of Year).............. 311 278 237 205 193 Number of Stores Opened(6).................. 35(5) 43(5) 39 12 3 Number of Stores Closed(6).................. 2 2 7(5) 0 1 Sales Square Footage........................ 5,511 5,008 4,409(3) 3,869(3) 3,607 Net Sales Per Avg. Sq. Footage.............. $ 134 $ 145 $ 144(4) $ 143(4) $ 151
- --------------- (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 sales square footage of four stores closed on January 17, 1994 due to the Southern California earthquake 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 but includes sales and sales 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 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 ------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- Permanent Store Sales...................................... 100.0% 100.0% 95.8% Seasonal Store Sales....................................... -- -- 4.2 ----- ----- ----- Net Sales.................................................. 100.0 100.0 100.0 ----- ----- ----- Costs of Permanent Store Sales(1).......................... 58.8 52.5 53.6 Costs of Seasonal Store Sales(2)........................... -- -- 52.8 ----- ----- ----- Total Costs of Sales....................................... 58.8 52.5 53.6 ----- ----- ----- Gross Profit from Permanent Store Sales(1)................. 41.2 47.5 46.4 Gross Profit from Seasonal Store Sales(2).................. -- -- 47.2 ----- ----- ----- Total Gross Profit......................................... 41.2 47.5 46.4 ----- ----- ----- Store Expenses............................................. 28.0 28.1 28.7 Warehouse and Administrative Expenses...................... 8.1 9.0 8.5 ----- ----- ----- Total Expenses............................................. 36.1 37.1 37.2 ----- ----- ----- Operating Income........................................... 5.1 10.4 9.2 Interest Expense, Net...................................... 1.8 0.9 0.8 ----- ----- ----- Earnings Before Income Taxes............................... 3.3 9.4 8.4 Income Taxes............................................... 1.2 3.7 3.3 ----- ----- ----- Net Earnings............................................... 2.1% 5.7% 5.1% ===== ===== =====
- --------------- (1) As a percentage of Permanent Store Sales. (2) As a percentage of Seasonal Store Sales. 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 comparable 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. In the third quarter of fiscal 1995 the Company adopted a new strategic direction in response to a difficult retail climate and to improve comparable store sales. 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. However, the success of the Company's strategic initiative will also 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 41.2% in fiscal 1995 compared to 47.5% for the total Company in fiscal 1994. The decrease was primarily due to the Company recording a $35 million non-cash charge in connection with its new strategic direction to reduce retail prices in order to hasten the liquidation of aged inventory. 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 more competitive pricing of its merchandise and is part of the Company's new strategic direction. 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 of operating expenses 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 expense as a percent of sales for fiscal 1995 versus 1994 was largely due to lower payroll expense, lower equipment rentals and lower workers' 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. 8 11 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. FISCAL YEAR ENDED JANUARY 29, 1995 ("FISCAL 1994") COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1994 ("FISCAL 1993") Net sales for fiscal 1994 increased $55,020,000 or 8.8% from fiscal 1993. This increase was the combined result of 41 net new stores during the year and the full year operation of the 36 net new stores opened in the prior year partially offset by the discontinuance of the seasonal Christmas stores, 168 of which were operated during the third and fourth quarters of the prior year. Excluding the loss of sales from discontinuing the seasonal Christmas store concept, net sales increased $81,139,000 or 13.5% from fiscal 1993. Sales from California stores accounted for 62.8% of net sales in fiscal 1994 compared to 64.1% of net sales in fiscal 1993 (excluding seasonal Christmas stores in California). At the beginning of fiscal 1994, the Company changed its method for reporting comparable store sales. Under the new method, a comparable store is one that has been open fifteen full months (65 full weeks) and which doesn't have a store within four miles of it that has been open less than twelve full months (52 full weeks). The prior method treated a store as a comparable store when it was open a full fiscal year. The new method is intended to eliminate the effect (the "sales transfer effect") on an existing store's sales that can occur when a new store is opened within four miles of a store that has been open more than 15 full months. Fifteen full months was selected as the period when a new store should be tracked as a comparable store because it is the earliest uniform time a store has sales in both the current and prior year, and the prior year sales is not distorted because of the grand opening promotions which occur during the first one to three months the store is open. Based on historical experience, and subject to certain exceptions, the Company believes that a sales transfer effect typically occurs within a radius of approximately four miles. Based on the new method, comparable store sales increased 1.8% in fiscal 1994. Under the old method, comparable store sales increased 0.8% in fiscal 1994. California comparable store sales decreased 1.8% (old method) and 1.4% (new method) reflecting continuing poor economic conditions in California. Gross profit (total) as a percentage of sales was 47.5% in fiscal 1994 compared to 46.4% in fiscal 1993. The increase was primarily due to a higher initial markup on beginning store inventory in the current year. The gross profit percent also rose, to a lesser extent, because of the expense recorded in the last fiscal year for damaged inventory as a result of the January 1994 Southern California earthquake. Partially offsetting these increases were small increases in markdowns to clear certain old merchandise, primarily softgoods, and an increase in the rate of inventory shrinkage (inventory 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 and cost inventory methods, as appropriate) to 3.3% in fiscal 1994 from 3.1% in fiscal 1993. Operating expenses consist of store and 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. Operating expenses were 37.1% of sales in fiscal 1994 compared to 37.2% of sales in fiscal 1993 including the earthquake expenses and 37.0% excluding the earthquake expenses. Store expenses decreased in both dollars and as a percentage of sales because of the fiscal 1993 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; and reduced advertising expense in fiscal 1994 compared to fiscal 1993 because television advertising was not used in fiscal 1994 while it was in fiscal 1993. Occupancy costs rose as a percentage of sales which is to be expected during a phase of expansion. As a percentage of sales, administrative expenses increased because of gains on the sale of two excess properties in the prior fiscal year (which partially offset administrative expenses in such years), and warehouse expenses decreased reflecting efficiencies as the Company grows. Net interest expense increased as a result of both higher interest rates and higher debt levels incurred to finance a portion of the Company's stock repurchase programs and temporary working capital requirements. The Company's effective tax rate remained relatively constant at 39.5% in fiscal 1994 compared to 39.6% in fiscal 1993. The Company believes that a meaningful assessment of its net earnings performance requires making adjustments for earthquake related expenses incurred in fiscal 1993. Net earnings in fiscal 1993 would have been $33,776,000 or 5.4% of net sales and $1.13 per share excluding such expenses. 9 12 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:
NET RETURN ON AVERAGE NET RETURN ON STOCKHOLDERS' YEAR ENDED AVERAGE ASSETS EQUITY ---------- -------------- ------------- Fiscal 1995 3.6% 6.5% Fiscal 1994 10.3% 16.4% Fiscal 1993 8.5%(1) 13.3%
- --------------- (1) Net Return on Average Assets has been restated to conform fiscal 1993 total assets to the fiscal 1994 presentation. Net return on average assets for fiscal 1995 decreased from fiscal 1994 due to (1) the $35,000,000 charge to reduce inventories which decreased net income by $21,700,000 and (2) an increase in average assets from fiscal 1994 to fiscal 1995. Net return on average stockholders' equity for fiscal 1995 decreased from fiscal 1994 due to the $35,000,000 charge which was partially offset by the repurchase of Company stock during fiscal 1995 and 1994 that reduced stockholders' equity. Net return on average assets increased from fiscal 1993 to fiscal 1994 because net income grew at a faster rate than average assets, and net return on average stockholders' equity grew as the combined result of the net income growth and repurchase of Company stock. Net return on average assets and net return on average stockholders' equity would have been 9.0% and 12.7% in fiscal 1993, respectively, excluding the earthquake expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements flow 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 following table indicates the Company's primary cash requirements for the past three years:
FISCAL FISCAL FISCAL (AMOUNTS IN THOUSANDS) 1995 1994 1993 TOTAL - ---------------------- ------- ------- ------- -------- Cash Requirements: Capital Expenditures................................. $26,117 $40,814 $29,365 $ 96,296 Increase in inventory (net of checks outstanding and accounts payable)................................. 7,486 4,764 30,742 42,992 ------- ------- ------- -------- Total........................................ $33,603 $45,578 $60,107 $139,288 ======= ======= ======= ======== Cash provided by operating activities (excluding net inventory additions)................................. $23,698 $72,887 $55,124 $151,709 ======= ======= ======= ========
The Company opened, including relocations, 35 stores in fiscal 1995, 43 stores (includes three temporarily closed stores) in fiscal 1994 and 39 stores in fiscal 1993. In fiscal 1995, with decreased levels of capital expenditures combined with a minor stock repurchase program, 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. In fiscal 1993, with significant cash flows from operating activities, proceeds from the sale and leaseback of the New Orleans distribution center and a reduction of its cash balances, the Company reduced its debt by $42,029,000. During fiscal 1995 as part of its change in strategic direction, the Company reduced the average level of inventories compared to prior years at its stores. During fiscal 1994 and 1993, store inventories remained relatively stable between years. Warehouse inventories for the recent fiscal years have increased or decreased depending upon the availability of close-out merchandise during the last several months of the fiscal year as well as changing internal buying patterns. The Company presently plans to open not more than 10 stores in fiscal 1996, primarily 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 1996 would be approximately $13,000,000. Additionally, the Company has authorization to repurchase an additional $8,427,300 of its stock during fiscal 1996 if and when the Board of Directors believe market prices warrant such repurchases. Funds required to finance the store expansion program and repurchase stock are expected to come from operating activities with the remainder, if necessary, provided by unused bank lines of credit. In fiscal 1995, 1994 and 1993, the Company repurchased 118,800, 4,258,100 and 55,100 shares of its Common Stock, respectively, in open market transactions at an average cost of $13.24, $19.08 and $15.02 per share, respectively. All of the shares repurchased in fiscal 1993 and 1,280,400 of the shares repurchased in fiscal 1994 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 10 13 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 1995 were made under a $10,000,000 repurchase program authorized by the Board of Directors in fiscal 1994. The Company currently has in place a $200,000,000 unsecured revolving credit facility with a group of banks (the "Revolver") with a maturity date of August 1998. The Revolver also includes a $50,000,000 sublimit for commercial and standby letters of credit. At January 28, 1996, the Company had $75,000,000 outstanding under the Revolver and $106,694,000 was available to be borrowed with $31,694,000 available for letters of credit. Amounts outstanding under the Revolver bear interest at the agent bank's prime rate, which at January 28, 1996 was 8.50%, LIBOR plus 5/8% or such other negotiated rate, at the Company's option. In addition, the Company has in place $55,000,000 of other unsecured revolving credit facilities with four 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. Two of these banks providing $25,000,000 of such facilities were not permitting further borrowings to be drawn at this time. At January 28, 1996, the Company had $15,800,000 outstanding under the Other Credit Facilities, and pursuant to the terms of the Revolver Agreement, up to $40,000,000 may be outstanding under these credit facilities. The weighted average interest rate for borrowings during fiscal 1995 under the Revolver and Other Credit Facilities was 6.7%. The Company believes the Revolver is adequate to meet any seasonal or temporary liquidity needs that cannot be met with cash flows from operating activities. Working capital was $144,519,000 and $44,012,000 at January 28, 1996 and January 29, 1995, respectively. The Company's current ratio was 2.7 and 1.3 at January 28, 1996 and January 29, 1995, respectively. The total debt to equity ratio increased from 39.2% at January 29, 1995 to 41.9% at January 28, 1996. The increase in the working capital and current ratio in fiscal 1995 was primarily the result of classifying the Revolver and Other Credit Facilities debt, which is below the Revolver's clean-down requirement as long-term debt versus being classified as a current liability in 1994. 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 EARNINGS NET GROSS NET PER COMMON SALES PROFIT EARNINGS SHARE -------- -------- -------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 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 (16,003) (0.62) January 28, 1996................................. 251,577 113,494 23,957 0.93(1) -------- -------- -------- ----- $704,934 $290,294 $ 14,559 $ 0.56 ======== ======== ======== ===== 1994 Quarter Ended May 1............................................ $142,095.. $ 66,770 $ 5,910 $ 0.20 July 31.......................................... 133,693 62,398 2,534 0.09 October 30....................................... 158,491 74,698 5,234 0.19 January 29, 1995................................. 247,804 119,879 25,206 0.96(2) -------- -------- -------- ----- $682,083 $323,745 $ 38,884 $ 1.37 ======== ======== ======== =====
- --------------- (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) The Company repurchased 2,121,900 and 855,800 shares of its Common Stock in the third and fourth quarters, respectively, of fiscal 1994. 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 $0.07. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 14 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. (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.
12 15
NUMBER DESCRIPTION ------- --------------------------------------------------------------------------------------- 10.14 Stock Option Agreement dated December 6, 1990 between the Company and Peter S. Willmott filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991 and incorporated herein by this reference. 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 November 12, 1990 between the Company and Leonard S. Williams filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991 and incorporated herein by this reference. 10.17 Amendment No. 1 to Employment Agreement dated November 12, 1990 between the Company and Leonard S. Williams dated as of February 3, 1992 filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1992 and incorporated herein by this reference. 10.18 Amendment No. 2 to Employment Agreement between the Company and Leonard S. Williams dated as of January 31, 1994 filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 and incorporated herein by this reference. 10.19 Employment Agreement dated as of March 15, 1995 between the Company and Mark J. Miller. 10.20 Employment Agreement dated as of July 17, 1995 between the Company and Earl C. Bonnecaze. 10.21 Employment Agreement dated as of March 15, 1995 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 Amended and Restated Credit Agreement dated as of October 5, 1993 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Continental Bank, as Co-Agent filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 and incorporated herein by this reference. 10.24 First Amendment to Amended and Restated Credit Agreement dated as of August 10, 1994 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Continental Bank, as Co-Agent, filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995 and incorporated herein by this reference. 10.25 Second Amendment to Amended and Restated Credit Agreement dated as of February 21, 1995 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Bank of America Illinois (formerly named Continental Bank, N.A.), as Co-Agent filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995 and incorporated herein by this reference. 10.26 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 Stock Option Agreement dated May 2, 1995 between the Company and Peter S. Willmott. 10.31 Separation Agreement and Release of Claims dated September 6, 1995 between the Company and Leonard S. Williams filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1995 and incorporated herein by this reference. 10.32 Amendment No. 1 to Stock Option Plan for Non-Employee Directors.
13 16
NUMBER DESCRIPTION ------- --------------------------------------------------------------------------------------- 10.33 Letter dated August 4, 1995 executed by Bank of America, NT&SA, as Administrative Agent, and the other banks signatory thereto, amending that certain Amended and Restated Credit Agreement dated as of October 5, 1993, among the Company, certain of its subsidiaries, Bank of America, NT&SA, as Administrative Agent, and such banks, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1995 and incorporated herein by this reference. 10.34 Amendment No. 3 to 1990 Employee Stock Incentive Plan. 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 January 28, 1996. (c) Copies of Exhibits 10.19, 10.20, 10.21, 10.30, 10.32, 10.34, 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: April 26, 1996 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. By: /s/ PHILIP L. CARTER ------------------------------------------- Philip L. Carter Director, 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. April 26, 1996 /s/ PHILIP L. CARTER --------------------------------------------------------- Philip L. Carter Director, President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer) April 26, 1996 /s/ PETER S. WILLMOTT --------------------------------------------------------- Peter S. Willmott Chairman of the Board April 26, 1996 /s/ DAVID H. BATCHELDER --------------------------------------------------------- David H. Batchelder Director April 26, 1996 /s/ BRUCE E. KARATZ --------------------------------------------------------- Bruce E. Karatz Director April 26, 1996 /s/ ANTHONY LUISO --------------------------------------------------------- Anthony Luiso Director April 26, 1996 /s/ MARK J. MILLER --------------------------------------------------------- Mark J. Miller Director April 26, 1996 /s/ RONALD P. SPOGLI --------------------------------------------------------- Ronald P. Spogli Director April 26, 1996 /s/ BILL M. THOMAS --------------------------------------------------------- Bill M. Thomas Director April 26, 1996 /s/ JAMES J. ZEHENTBAUER --------------------------------------------------------- James J. Zehentbauer Director
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 -- January 28, 1996 and January 29, 1995................................... F-3 Consolidated statements of earnings -- years ended January 28, 1996, January 29, 1995 and January 30, 1994................................................................................................. F-4 Consolidated statements of stockholders' equity -- years ended January 28, 1996, January 29, 1995 and January 30, 1994..................................................................................... F-5 Consolidated statements of cash flows -- years ended January 28, 1996, January 29, 1995 and January 30, 1994................................................................................................. F-6 Notes to consolidated financial statements............................................................. F-7
- --------------- * Schedules 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 January 28, 1996 and January 29, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended January 28, 1996, January 29, 1995 and January 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 January 28, 1996 and January 29, 1995 and the results of their operations and their cash flows for the years ended January 28, 1996, January 29, 1995 and January 30, 1994, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Los Angeles, California March 12, 1996 (Except for Note 10, as to which the date is March 21, 1996) F-2 20 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PAR VALUE) ASSETS
JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ---------------- Current Assets: Cash and cash equivalents................................................ $ 7,285 $ 6,674 Merchandise inventories (Notes 3, 9 and 10).............................. 200,616 182,102 Deferred income taxes (Note 5)........................................... 13,003 5,377 Other current assets..................................................... 9,965 9,506 -------- -------- Total current assets.................................................. 230,869 203,659 Property, Equipment and Improvements (Notes 9 and 10): Land..................................................................... 35,195 33,876 Building and improvements................................................ 84,054 80,762 Automobiles and trucks................................................... 3,040 2,778 Furniture, fixtures and equipment........................................ 99,966 89,225 Leasehold improvements................................................... 84,127 73,931 Construction in progress................................................. 635 2,987 -------- -------- 307,017 283,559 Less: Accumulated depreciation and amortization.......................... (121,106) (105,339) -------- -------- 185,911 178,220 Deferred Income Taxes (Note 5)............................................. 604 780 Deferred Financing Costs and Other Assets.................................. 1,688 3,717 -------- -------- Total Assets..................................................... $419,072 $386,376 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Checks outstanding....................................................... $ 16,704 $ 11,098 Loan payable to bank (Note 2)............................................ -- 80,500 Current portion of long-term debt (Note 2)............................... 69 63 Accounts payable......................................................... 14,781 9,359 Accrued expenses (Note 4)................................................ 40,605 37,096 Income taxes payable (Note 5)............................................ 4,664 12,154 Sales tax payable........................................................ 9,527 9,377 -------- -------- Total current liabilities........................................ 86,350 159,647 Long-Term Debt (Note 2).................................................... 96,435 4,491 Deferred Income Taxes (Note 5)............................................. 5,888 5,357 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 25,582 shares (1996) and 29,854 shares (1995)......................... 711 829 Additional paid-in capital............................................... 512 3,216 Retained earnings........................................................ 230,749 294,917 -------- -------- 231,972 298,962 Less: Treasury stock, at cost, 119 shares (1996) and 4,313 shares (1995)................................................................ (1,573) (82,081) -------- -------- Total Stockholders' Equity............................................ 230,399 216,881 -------- -------- Total Liabilities and Stockholders' Equity....................... $419,072 $386,376 ======== ========
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 ------------------------------------------------------------------ JANUARY 28, 1996 JANUARY 29, 1995 JANUARY 30, 1994 ---------------- ---------------- ---------------- Net Sales.............................................. $704,934 $682,083 $627,063 Cost of Sales (Note 3)................................. 414,640 358,338 335,928 -------- -------- -------- Gross Profit........................................... 290,294 323,745 291,135 -------- -------- -------- Expenses: Store expenses....................................... 197,270 191,496 180,008 Warehouse and administrative expenses................ 57,157 61,604 53,460 -------- -------- -------- Total Expenses............................... 254,427 253,100 233,468 -------- -------- -------- Operating Income....................................... 35,867 70,645 57,667 Interest Expense, Net (Note 2)......................... 12,385 6,373 4,792 -------- -------- -------- Earnings Before Income Taxes........................... 23,482 64,272 52,875 Income Taxes (Note 5).................................. 8,923 25,388 20,938 -------- -------- -------- Net Earnings........................................... $ 14,559 $ 38,884 $ 31,937 ======== ======== ======== Average Shares Outstanding............................. 25,782 28,353 29,931 ======== ======== ======== Net Earnings Per Common Share.......................... $ 0.56 $ 1.37 $ 1.07 ======== ======== ======== 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 31, 1993................... 30,423 $ 845 $ 62 $232,170 832 $ (8,630) $224,447 Exercise of stock options................... 136 3 1,715 -- -- -- 1,718 Non-cash compensation expense............... -- -- 75 -- -- -- 75 Treasury stock retired...................... (832) (23 ) (533) (8,074) (832) 8,630 -- Purchase of Treasury stock, at cost......... -- -- -- -- 55 (827) (827) Net earnings for the year................... -- -- -- 31,937 -- -- 31,937 ------ ----- ------ -------- ------ ------ ------- 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.......................... -- -- 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.......................... -- -- 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 ====== ===== ====== ======== ====== ====== =======
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 --------------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Cash received from customers................................... $ 704,934 $ 682,083 $ 627,063 Cash paid to suppliers and employees........................... (653,184) (594,293) (576,515) Income taxes paid.............................................. (23,318) (13,709) (21,091) Interest paid (net of amount capitalized)...................... (12,369) (6,579) (5,774) Interest received.............................................. 149 621 699 --------- --------- --------- Net cash provided by operating activities................... 16,212 68,123 24,382 --------- --------- --------- Cash flows from investing activities: Capital expenditures........................................... (26,117) (40,814) (29,365) Proceeds from sale of fixed assets............................. 207 473 25,883 --------- --------- --------- Net cash used in investing activities....................... (25,910) (40,341) (3,482) --------- --------- --------- Cash flows from financing activities: Net (repayments) borrowings under line of credit agreements.... (80,500) 45,600 34,900 Repurchase of Treasury stock................................... (1,573) (81,254) (827) Net borrowings (repayments) of long-term debt.................. 90,737 (96) (76,814) Proceeds from exercise of stock options........................ 432 1,514 1,718 Other, net..................................................... 1,213 683 (116) --------- --------- --------- Net cash provided by (used in) financing activities......... 10,309 (33,553) (41,139) --------- --------- --------- Increase (decrease) in cash and cash equivalents............ 611 (5,771) (20,239) Cash and cash equivalents, beginning of period................... 6,674 12,445 32,684 --------- --------- --------- Cash and cash equivalents, end of period......................... $ 7,285 $ 6,674 $ 12,445 ========= ========= =========
YEAR ENDED --------------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income....................................................... $ 14,559 $ 38,884 $ 31,937 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 18,215 16,000 15,380 (Increase) decrease in net deferred income taxes............... (6,919) (1,715) 14,320 Tax benefit from disqualifying dispositions of stock options... 14 312 -- Loss (gain) on sale of fixed assets............................ 4 (58) (924) Non-cash compensation expense.................................. 86 75 75 Changes in assets and liabilities: Increase in merchandise inventories......................... (18,514) (347) (34,180) Decrease (increase) in other assets......................... 1,570 1,882 (2,104) Increase in checks outstanding, accounts payable, accrued expenses and sales tax payable............................ 14,687 936 14,595 (Decrease) increase in income taxes payable................. (7,490) 12,154 (14,717) --------- --------- --------- 1,653 29,239 (7,555) --------- --------- --------- $ 16,212 $ 68,123 $ 24,382 ========= ========= =========
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 JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 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 311 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. 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. Depreciation and amortization are provided 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. Deferred Expenses The Company capitalizes costs associated with opening new store and warehouse facilities and amortizes these costs over six and twenty-four months, respectively. 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. 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. F-7 25 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 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. 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. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Prospective Accounting Changes The Financial Accounting Standards Board has issued a new statement on accounting for the impairment of long-lived assets and for long-lived assets to be disposed of (SFAS 121). This statement is effective for fiscal years beginning after December 15, 1995; however, earlier application is permitted. Among other provisions, the statement standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The Company has decided not to elect early adoption of the statement; however, the Company anticipates that adoption of the change in the accounting will not have a material impact on its financial statements. The Company currently accounts for its stock-based compensation plans using the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In 1995, the Financial Accounting Standards Board issued a new statement on accounting for stock-based compensation (SFAS 123). This statement is effective for fiscal years beginning after December 15, 1995; however, earlier application is permitted. Among other provisions the statement allows companies to elect to account for stock-based compensation plans using a fair-value-based method or continue measuring compensation expense for those plans using the intrinsic value method prescribed in APB 25. SFAS 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. The adoption of SFAS 123 will be reflected in the Company's 1996 consolidated financial statements. As the Company anticipates continuing to account for stock-based compensation using the intrinsic value method, SFAS 123 will not have an impact on the Company's results of operations or financial position. NOTE 2 -- LONG-TERM DEBT Long-term debt consists of the following (in thousands):
JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ---------------- 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 August 10, 1998................ $ 75,000 $ -- Other revolving notes payable, under various lines of credit agreements at negotiated rates. Maturities in February 1996 have been refinanced under the revolving note payable with a final maturity of August 10, 1998.... 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% ($715 in fiscal 1995, $852 in fiscal 1994)............... 1,285 1,348 Other...................................................... 2,419 1,206 ------- ------ 96,504 4,554 Less current maturities.................................... (69) (63) ------- ------ Long-term debt............................................. $ 96,435 $4,491 ======= ======
F-8 26 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 The aggregate maturities of long-term debt for the years subsequent to January 28, 1996 are as follows (in thousands): 1996................................................ $ 69 1997................................................ 76 1998................................................ 92,884 1999................................................ 93 2000................................................ 97 Thereafter.......................................... 3,285 ------- $96,504 =======
As of January 28, 1996, the Company had available from a syndicate of banks, an annually renewable unsecured three-year $200,000,000 revolving line of credit (the "Revolver") for seasonal working capital needs, with a $50,000,000, sublimit for commercial and standby letters of credit. At the end of fiscal 1996, $106,694,000 was available for working capital requirements, including $31,694,000 for letters of credit. The Revolver bears interest at the agent bank's prime rate, which at January 28, 1996 was 8.5% or LIBOR plus 5/8% (which at January 28, 1996, was 6.16%) or other negotiated rates, all at the Company's option. The Revolver contains restrictive covenants requiring the Company to maintain certain financial ratios and limiting the payment of dividends to an amount based upon a formula. The Company had outstanding borrowings of $75,000,000 and $56,000,000 at January 28, 1996 and January 29, 1995, respectively, under the Revolver. At January 28, 1996, $8,525,000 of retained earnings were unrestricted as to the declaration of cash dividends and the acquisition of Common Stock by the Company. At the end of fiscal 1995, the Company had in place $55,000,000 of unsecured revolving credit facilities with four individual banks (the "Other Credit Facilities"). Two of these banks providing $25,000,000 of such facilities were not permitting further borrowings to be drawn at this time. Under the terms of the Revolver, only $40,000,000 may be outstanding under the Other Credit Facilities at any one time. The banks providing the Other Credit Facilities are not obligated to advance funds when requested by the Company. At January 28, 1996 and January 29, 1995, $15,800,000 and $24,500,000, respectively, were outstanding under these credit facilities. Interest rates for borrowings outstanding at January 28, 1996, under these credit facilities ranged between 5.89% and 6.28%. The weighted average interest rate for both the Revolver and the Other Credit Facilities during fiscal 1995 was 6.66%. In fiscal 1995, the Company began classifying all debt, including Other Credit Facilities debt, which is below the Revolver's clean-down requirements, as long-term. The Company had the intent and the ability, supported by the terms of its existing Revolver, to maintain all such principal amounts outstanding through August 10, 1998. Commitments under outstanding letters of credit amounted to $18,306,000 and $18,397,000 at January 28, 1996 and January 29, 1995, respectively. 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 a notional amount of $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 counter-party to this financial instrument and does not anticipate nonperformance by this counter-party. The impact of interest rate risk management activities on income in fiscal 1995 and 1994 and the amount of deferred gains and losses from interest rate risk management transactions at January 28, 1996 were not material. Net interest on bank borrowings and long-term debt is summarized as follows (in thousands):
YEAR ENDED ------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- Expense.................................................... $12,568 $ 6,997 $ 5,436 Income..................................................... (149) (389) (644) Capitalized Interest....................................... (34) (235) -- ------- ------ ------ Net Interest............................................... $12,385 $ 6,373 $ 4,792 ======= ====== ======
NOTE 3 -- MARKDOWN RESERVE In November of 1995, the Company announced a change in the strategic direction of the Company. As part of the new strategy, the Company recognized a $35,000,000 pre-tax charge to reduce retail prices on merchandise in order to liquidate aged inventory. As of January 28, 1996, approximately $19,600,000 of the markdown reserve remains in merchandise inventories. F-9 27 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 NOTE 4 -- ACCRUED EXPENSES Accrued expenses are comprised of the following (in thousands):
JANUARY 28, JANUARY 29, 1996 1995 ----------- ----------- Insurance.............................................................. $18,893 $20,369 Salaries............................................................... 3,184 3,956 Profit sharing and 401(k).............................................. 622 1,047 Percentage rent........................................................ 651 589 Other expenses......................................................... 17,255 11,135 ------- ------- $40,605 $37,096 ======= =======
NOTE 5 -- INCOME TAXES The provision for income taxes includes the following (in thousands):
YEAR ENDED ------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- Current: Federal.................................................. $13,215 $22,673 $ 5,048 State.................................................... 2,627 4,430 1,571 ------- ------- ------- 15,842 27,103 6,619 Deferred: Federal.................................................. (5,812) (1,996) 11,649 State.................................................... (1,107) 281 2,670 ------- ------- ------- (6,919) (1,715) 14,319 ------- ------- ------- $ 8,923 $25,388 $20,938 ======= ======= =======
The Company's effective tax rate differs from the statutory federal income tax rate as follows:
YEAR ENDED ------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- Statutory federal tax rate................................. 35.0% 35.0% 35.0% State income tax, net of federal benefit................... 3.4 4.7 5.4 Rate benefit from federal Targeted Jobs Tax Credit......... (1.6) (0.8) (0.4) Other, net................................................. 1.2 0.6 (0.4) ---- ---- ---- 38.0% 39.5% 39.6% ==== ==== ====
Significant components of the Company's net deferred income taxes are as follows (in thousands):
JANUARY 28, JANUARY 29, 1996 1995 ----------- ----------- Deferred Income Tax Assets: Inventories.......................................................... $12,151 $ 3,541 State Franchise Taxes................................................ (134) 991 Insurance Reserves................................................... 1,094 1,558 Deferred Expenses.................................................... 870 804 Excess of Tax Over Book Depreciation................................. -- (672) Other................................................................ (374) (65) ------- ------- 13,607 6,157 ------- ------- Deferred Income Tax Liabilities: Excess of Tax Over Book Depreciation................................. (14,069) (13,786) Insurance Reserves................................................... 7,018 7,025 Other................................................................ 1,163 1,404 ------- ------- (5,888) (5,357) ------- ------- Net Deferred Income Tax Asset.......................................... $ 7,719 $ 800 ======= =======
The Company provided no valuation allowance against the deferred income tax assets recorded as of January 28, 1996 and January 29, 1995 because management believes it is more likely than not that the deferred income tax assets will be realized. F-10 28 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 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 such 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 has granted options to purchase 25,000 shares outside of these plans. 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. Each non-employee director receives a non-qualified stock option grant of 2,250 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 his or her annual retainer in the form of a non-qualified stock option grant based on a formula. The expense associated with these grants are recognized ratably over the director's term. Changes for all options are summarized as follows:
STOCK OPTIONS ---------------------------------- PER SHARE SHARES PRICE RANGE -------------- --------------- Outstanding, January 31, 1993.................................. 1,667,563 $ 6.63 - $23.00 Granted........................................................ 646,570 $14.25 - $18.50 Exercised...................................................... (135,745) $ 9.00 - $17.08 Cancelled...................................................... (772,863) $10.50 - $22.13 --------- 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 ========= Options exercisable for shares at January 28, 1996............. 991,633 =========
At January 28, 1996, there were 1,120,467 and 222,734 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. NOTE 7 -- DEFINED CONTRIBUTION PLANS The Company had 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 its profit sharing 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 January 28, 1996, January 29, 1995 and January 30, 1994 were $515,000, $1,050,000 and $1,038,000, respectively. F-11 29 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JANUARY 28, 1996, JANUARY 29, 1995 AND JANUARY 30, 1994 NOTE 8 -- COMMITMENTS AND CONTINGENCIES The Company has leases outstanding for retail store locations, the New Orleans distribution center and equipment with varying initial expiration dates through 2020; 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. Total rental expense was as follows (in thousands):
YEAR ENDED --------------------------------------------------- JANUARY 28, JANUARY 29, JANUARY 30, 1996 1995 1994 ----------- ----------- ----------- Base rental expense................................ $39,735 $34,858 $28,707 Contingent rental expense.......................... 627 416 102 ------- ------- ------- $40,362 $35,274 $28,809 ======= ======= =======
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 28, 1996 were as follows (in thousands):
FISCAL YEAR EXPENSE INCOME NET ----------- -------- -------- -------- 1996................................................ $ 35,240 $ 2,572 $ 32,668 1997................................................ 35,164 1,657 33,507 1998................................................ 34,689 1,348 33,341 1999................................................ 33,623 1,160 32,463 2000................................................ 31,926 785 31,141 Thereafter.......................................... 205,993 4,950 201,043 -------- ------- -------- $376,635 $ 12,472 $364,163 ======== ======= ========
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 9 -- 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. Three stores reopened during fiscal 1994. The fourth store has been permanently closed and was relocated during fiscal 1995. 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. All of these costs were recorded in fiscal 1993. NOTE 10 -- SUBSEQUENT EVENT On March 21, 1996, the New Orleans distribution center and its contents were destroyed by fire. The Company's lease with an unrelated third party obligates the Company to rebuild the distribution center. All of the Company's stores are currently being serviced by the Company's remaining distribution center. The Company believes that its insurance proceeds will adequately cover all losses and that the loss of inventory and equipment from the fire is not expected to have a material adverse impact on the Company's operations. However, the Company is unable to predict with certainty what the ultimate outcome will be. F-12 30 INDEX TO EXHIBITS
FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR PAGE NUMBER THE FISCAL YEAR ENDED JANUARY 28, 1996 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 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 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 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 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 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 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 fiscal year ended February 3, 1991......................................................... * 10.14 Stock Option Agreement dated December 6, 1990 between the Company and Peter S. Willmott filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991........................................................................... * 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 November 12, 1990 between the Company and Leonard S. Williams filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for fiscal year ended February 3, 1991........................................................................... * 10.17 Amendment No. 1 to Employment Agreement between the Company and Leonard S. Williams dated as of February 3, 1992 filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1992................................................. * 10.18 Amendment No. 2 to Employment Agreement between the Company and Leonard S. Williams dated as of August 31, 1993 filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994................................................. * 10.19 Employment Agreement dated as of March 15, 1996 between the Company and Mark J. Miller..... 10.20 Employment Agreement dated as of July 17, 1995 between the Company and Earl C. Bonnecaze... 10.21 Employment Agreement dated as of March 15, 1995 between the Company and Philip L. Carter... 10.22 Lease dated August 1, 1988 among 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...................................................... *
31
FILED WITH THE ANNUAL REPORT ON FORM 10-K FOR PAGE NUMBER THE FISCAL YEAR ENDED JANUARY 28, 1996 NUMBER - ------ ------------------------------------------------------------------------------------------- ------ 10.23 Amended and Restated Credit Agreement dated as of October 5, 1993 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Continental Bank, as Co-Agent, filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994................................................................ * 10.24 First Amendment to Amended and Restated Credit Agreement dated as of August 10, 1994 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Continental Bank, as Co-Agent, filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995....................................... * 10.25 Second Amendment to Amended and Restated Credit Agreement dated as of February 21, 1995 among the Company, West Coast Liquidators, Inc., PNS Stores, Inc., the lenders listed therein and Bank of America National Trust and Savings Association, as Administrative Agent, and Bank of America Illinois (formerly named Continental Bank, N.A.), as Co-Agent, filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995..................................................................... * 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 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 Stock Option Agreement dated May 2, 1995 between the Company and Peter S. Willmott......... 10.31 Separation Agreement and Release of Claims dated September 6, 1995 between the Company and Leonard S. Williams filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1995.............................................. * 10.32 Amendment No. 1 to Stock Option Plan for Non-Employee Directors............................ 10.33 Letter dated August 4, 1995 executed by Bank of America, NT&SA, as Administrative Agent, and the other banks signatory thereto, amending that certain Amended and Restated Credit Agreement dated as of October 5, 1993, among the Company, certain of its subsidiaries, Bank of America, NT&SA, as Administrative Agent, and such banks, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1995...... * 10.34 Amendment No. 3 to 1990 Employee Stock Incentive Plan...................................... 22.1 Subsidiaries of Company.................................................................... 24.1 Consent of Independent Auditors............................................................ 27 Financial Data Schedule....................................................................
- --------------- * By this reference incorporated herein and made a part hereof. EX-10.19 2 EMPLOYMENT AGT - MILLER 1 Exhibit 10.19 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 15th day of March, 1995, by and between Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (the "Company"), and Mark J. Miller ("Executive"). RECITALS WHEREAS, the Company desires to employ Executive as Executive Vice President of Merchandise and Stores on the terms and conditions set forth herein and Executive desires to accept such employment with the Company; AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment and Duties. The Company hereby engages Executive in the capacity of Executive Vice President of Merchandise and Stores of the Company. Executive shall perform such duties and functions as shall be specified from time to time by the President and Chief Executive Officer of the Company. Executive hereby accepts such employment and agrees to perform such duties. During the term of this Agreement, Executive shall not be required without his consent to undertake responsibilities not commensurate with his position as an Executive Vice President. 2. Compensation. (a) Base Salary. For all services to be rendered by Executive hereunder, Executive shall be paid a base salary at the rate of three hundred seventy-five thousand dollars ($375,000) per year. Executive's base compensation shall be reviewed at least annually and may be increased at the discretion of the Board of Directors of the Company (the "Board"), but during the term of this Agreement may not be decreased below the then-effective base salary. Executive's salary shall be paid on such basis as is the normal payment pattern for executive officers of the Company. The base salary payable under this Section 2(a) shall be in addition to and exclusive of any payments to Executive from time to time under formal or informal bonus, incentive compensation or similar plans now in effect or which hereafter may be adopted. 2 (b) Performance Bonus. With respect to each full fiscal year of the Company that this Agreement is in effect throughout and any fiscal year of the Company in which Executive is terminated pursuant to Section 8(d) hereof (each, a "Bonus Year"), Executive shall be entitled to participate in a performance bonus plan approved annually for executive officers of the Company by the Compensation Committee of the Board. The calculation and payment to Executive of a performance bonus contemplated by this Section 2(b), if any, shall be made as soon as practicable in the fiscal year of the Company immediately succeeding such Bonus Year, following preparation of the Company's annual audited financial statements for such Bonus Year. 3. Payment in Event of Termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d), the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall continue to provide Executive with the medical, disability and life insurance benefits provided in Section 5(a) hereof for eighteen (18) months from the date of such termination. Executive shall not be required or obligated to obtain other employment to mitigate the payments due hereunder. Executive may, at his sole option, terminate this Agreement and receive the payments provided for in this Section 3 following the occurrence of either of the following events (a "Company Breach"): (a) Executive's authority to function as President and Chief Executive Officer shall be removed or limited in any material respect, unless such removal or limitation was a result of one or more events that would permit the Board to terminate Executive's employment For Cause (as defined in Section 8(c)), or (b) the Company shall have breached in any material respect any of its covenants and agreements in this Agreement. Notwithstanding the foregoing, Executive shall not be entitled to terminate this Agreement unless Executive provides written notice to the Company specifying in reasonable detail the nature of the Company Breach, and the Company shall have failed to cure such Company Breach within 45 days thereafter. 4. Options. Executive shall be entitled to participate in any performance stock option plan approved annually for other executive officers of the Company by the Compensation Committee of the Board. To the maximum extent permitted by the Internal Revenue Code of 1986, as amended (the "IRC"), including the rules and regulations thereunder, all such options shall be incentive stock options, and the remainder of such options shall be non-qualified stock options. 5. Benefits. (a) Executive shall be entitled to such fringe benefits and perquisites as are generally made available to Page 2 3 executive officers of the Company, and such other fringe benefits as may be approved by the Board for executive officers of the Company during the term hereof including, without limitation, major medical, extended medical and extended disability insurance, group term life insurance in face amount of the base salary payable pursuant to Section 2(a) and annual vacation time of not less than four weeks. (b) Every two years during the term of Executive's employment, the Company shall furnish Executive with a motor vehicle of his choice to use for business purposes, provided, however, that such motor vehicle shall not have an original cost to the Company of more than $55,000. (c) Nothing contained herein is intended or shall be deemed to be granted to Executive in lieu of any rights or privileges to which Executive may be entitled as an employee of the Company under any retirement, pension, insurance, hospitalization, stock option, stock bonus or purchase, incentive compensation or other plan of the Company which may now be in effect or which may hereafter be adopted, it being understood that Executive shall have the same rights and privileges to participate in such plans as any other executive officers of the Company. 6. Reimbursement of Expenses. The Company shall reimburse Executive for all reasonable business expenses incurred by Executive in connection with the performance of his duties hereunder, provided that Executive furnishes to the Company receipts and other documentation reasonably acceptable to the Company evidencing such expenditures. 7. Performance of Duties. (a) In consideration of the payments to be made hereunder, Executive agrees to devote his entire business time and attention to the performance of his duties hereunder, to serve the Company diligently and to the best of his abilities and not to compete with the Company or any of its Affiliates (as defined below) in any manner whatsoever. Without limiting the generality of the foregoing, Executive shall not, during the term of his employment by the Company, directly or indirectly (whether for compensation or otherwise), alone or as an agent, principal, partner, officer, employee, trustee, director, shareholder or in any other capacity, own, manage, operate, join, control or participate in the ownership, management, operation or control of or furnish any capital to or be connected in any manner with or provide any services as a consultant for any business which competes directly or indirectly with any of the businesses of the Company or any of its Affiliates (as defined below) as they may be conducted from time to time; provided, however, that notwithstanding the foregoing, nothing contained in this Page 3 4 Agreement shall be deemed to preclude Executive from owning not more than one percent of the publicly-traded capital stock of an entity which is in competition with any of such businesses. Affiliate of the Company means any person, association or entity: (a) that, in whole or in part, owns or is owned by, or otherwise has a material interest (whether debt, equity or otherwise) in, the Company; (b) that controls or is controlled by the Company; (c) that is a subsidiary (whether owned in whole or in part) of the Company; or (d) to which the Company is a "related tax payer" as defined in Section 1313(c) of the IRC. (b) Executive may continue his civic, educational and charitable activities and serve on boards of directors of other companies, if consistent with this Section 7 and if otherwise approved by the Board. 8. Term and Termination. (a) The term of Executive's employment with the Company hereunder shall commence on the date hereof and shall continue until Executive resigns or is terminated under this Section 8 or under Section 9 of this Agreement. (b) In the event of Executive's death or in the event of Executive's total disability for any consecutive six-month period during the term of this Agreement, the Company may at its sole option thereafter (unless Executive, in the case of disability, shall have resumed his duties in full prior to such termination) terminate this Agreement, and in such event the sole right hereunder of Executive, Executive's widower or Executive's legal representative, as the case may be, shall be to: (i) receive the base salary due Executive through the last day of the twelfth full calendar month following the month in which his death or disability shall have occurred; (ii) have any and all previously accruing bonuses or options or other rights vest in Executive or in his estate immediately (unless Executive or his estate shall elect to the contrary); and (iii) in the event of termination by reason of disability, have the Company continue to maintain in effect at its sole expense, the major medical, extended medical, extended disability and term life insurance referred to in Section 5(a) for the one year period following the date of any such termination. (c) The Company, upon 30 days prior written notice to Executive, may terminate this Agreement For Cause (as defined herein). For the purposes of this Agreement, the term "For Cause" shall mean: (i) Executive's breach of the covenants contained in Sections 7, 11 or 13(a) hereof; (ii) Executive's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent jurisdiction for any crime involving moral turpitude or any felony punishable by imprisonment in the jurisdiction involved; or (iii) Executive's commission of any act Page 4 5 of fraud or dishonesty in connection with, or related to, his duties hereunder. Upon termination of Executive For Cause, this Agreement shall immediately terminate, and Executive shall not be entitled to any further rights or payments hereunder (other than payment under Section 2(a) for services rendered prior to the date of such termination). Without limiting the generality of the foregoing, Executive shall have no right on or after the date of such termination to any of the benefits set forth in Section 5 hereof (other than payment for accrued vacation), any payment of base salary pursuant to Section 2(a), any payment of performance bonus pursuant to Section 2(b) for the Bonus Year in which such termination occurs or any other benefit or payment of any kind whatsoever. (d) Subject to the payment of amounts required by Sections 2(b) and 3, the Company shall be entitled to terminate Executive's employment without cause at any time upon thirty days written notice. 9. Change in Control. If a Change in Control (as defined below) of the Company occurs during the term of this Agreement, the provisions of this Section 9 shall become operative. For purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred if any "person" (as defined in Section 13(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing more than 35% of the combined voting power of the Company's then outstanding securities, as a result of purchases of the Company's securities which are not expressly approved by the Board. For the purposes of this Section 9, the Board expressly approving the 35% or more voting power ownership must consist of individuals who for the previous consecutive twenty-four month period, consituted at least a majority of the Board. For a period of two months after a Change in Control of the Company, Executive shall have the right to terminate his employment with the Company pursuant to this Section 9, and the Company shall pay Executive the following amounts no later than the 15th business day after the date of termination of Executive's employment: (a) A lump sum severance payment equal to 2 multiplied by the sum of (A) Executive's base annual salary at the highest rate in effect during the fiscal year of the Company immediately preceding the date Executive's employment terminates, and (B) the greater of the amount of any incentive, bonus or other cash compensation that was paid to Executive during either (x) the 12 months immediately preceding the date Executive's employment terminates and (y) the 12 months immediately preceding the Change in Control; and Page 5 6 (b) A cash payment equal to the amount by which the greater of (A) the closing price of the Company's Common Stock on the day before the date Executive's employment terminates or (B) the highest price per share actually paid in connection with the Change in Control of the Company, exceeds the per share exercise price of each then vested and exercisable stock option held by Executive on the day before the date Executive's employment terminates, multiplied by the number of shares covered by each such option. In exchange for such payment, Executive will surrender all such options to the Company without exercising them. 10. Deductibility of Payments to Executive. Notwithstanding anything else to the contrary in this Agreement, in the event that the payments to Executive under this Agreement, either alone or together with other payments Executive has a right to receive from the Company, would be non-deductible (in whole or in part) by the Company for Federal income tax purposes because of Section 280G of the IRC, then the aggregate present value of amounts payable to Executive pursuant to this agreement shall be reduced (but not below zero) to the "Reduced Amount." The Reduced Amount shall be an amount expressed in present value which maximizes the aggregate present value of all payments to be made to Executive under this Agreement without causing any payment to be non-deductible by the Company because of Section 280G of the Code. For purposes of this Section 10, present value shall be determined in accordance with Section 280G(d)(4) of the IRC. The determination of the Reduced Amount shall be made exclusively by the Company's outside auditors and in consultation with outside counsel to the Company (each of whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding on the Company and Executive. 11. Confidentiality. (a) The Company (which for purposes of this Section 11 shall mean the Company and its Affiliates (as defined in Section 7(a)) and Executive recognize that during the course of Executive's employment with the Company he will accumulate certain crucial proprietary and confidential information and trade secrets for use in the Company's business and will have divulged to him certain crucial confidential and proprietary information and trade secrets about the business, operations and prospects of the Company, including, without limitation, confidential and proprietary information regarding suppliers and employees of the Company, which constitute valuable business assets providing the Company the opportunity to obtain an advantage over competitors who do not know or use such information or have access to it without the investment of considerable resources. Executive hereby acknowledges and agrees that such information (the "Proprietary Information") is confidential and proprietary and a trade secret and that such Page 6 7 information shall include, without limitation: (i) the identity and location of customers and domestic and foreign suppliers of quality low-cost close-out merchandise that can profitably be resold, and their buying and selling histories and creditworthiness; information regarding the quantity, quality, frequency, pricing and marketability of their supply offerings; and lists setting forth the same; (ii) processes, methods and techniques, including but not limited to primary contact points in the Company's network; methods of merchandising in the Company's stores; processes and methods of giving directions and instructions to the Company's stores and its employees in connection with merchandising moves; information, techniques, formulas and judgments relating to the appropriate bidding, pricing and marketing of close-out merchandise; and the price ranges and techniques by which such merchandise can be profitably resold at substantial reductions from normal retail rates; and designs, styles and methods of packaging and distributing close-out merchandise distinctive to the Company; (iii) records of research, including but not limited to demographic studies conducted by the Company and its agents which contribute to the Company's ability to locate retail store sites; (iv) proposals and projections, including but not limited to long-range plans for the Company's growth, expansion, development and continued fostering of its relationships with its employees, suppliers and customers; and (v) files, reports, memoranda, computer software or programming and budgets or other financial plans or information regarding the Company and its business, properties or affairs. (b) Executive agrees that he shall not, at any time subsequent to the execution of this Agreement, whether during or after the term hereof, disclose, divulge or make known, directly or indirectly, to any person, or otherwise use or exploit, any Proprietary Information obtained by Executive at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his duties hereunder for the Company. Executive agrees to disclose to the Company the identity and nature of any contacts with any person or entity soliciting from Executive disclosure of any Propriety Information or soliciting Executive's involvement in any business venture competitive with the Company. Executive shall not conceal from or fail to disclose to the Company, or divert or exploit for his own personal profit or that of others, any business opportunity or other opportunity to acquire an interest Page 7 8 in or a contractual relationship with any person or entity where such person or entity is in the Company's line of business or where such contractual relationship involves the acquisition of real estate and which would be considered a feasible and advantageous opportunity or acquisition for the Company. Upon termination of this Agreement, Executive will deliver to the Company all tangible displays and repositories of customer and supplier lists, files, records of research, proposals, reports, memoranda, business methods and techniques, computer software and programming, budgets and other financial plans and information and other materials or records or writings of any other type (including all copies thereof) made, used or obtained by, or provided to, Executive, containing any Proprietary Information, whether obtained prior to or subsequent to the execution of this Agreement. 12. Non-Solicitation of Employees. (a) Executive hereby agrees that for the two-year period following the date of termination of this Agreement he will not (i) authorize his name to be used by any person, partnership, corporation or other business entity, or (ii) engage in or carry on, directly or indirectly, whether as advisor, principal, agent, partner, officer, director, employee, stockholder, associate or consultant of any person, partnership, corporation or other business entity which is in competition with the bargain close-out business carried on by the Company or any of its Affiliates in Los Angeles, Orange, Riverside, San Bernardino, Ventura, Santa Barbara or San Diego Counties in the State of California, or any other county in California where business is then carried on or conducted by the Company or any of its Affiliates, or in the States of Alabama, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Missouri, Nevada, New Mexico, Tennessee, Texas or Utah. (b) Executive further agrees that during the period from the date of this Agreement until two years after the termination of this Agreement he shall not contact any employee or supplier of the Company or any of its Affiliates without advising the Company of such contact and he shall not participate in any endeavor or activity which would disrupt the Company's or any of its Affiliate's good business relationships with the employees, suppliers and/or persons engaged in purchasing activities on behalf of the Company or such Affiliate, and he shall not make any false, deceptive or misleading statement or statements to any one or more of such suppliers or such persons which would be likely to cause such disruption. 13. Miscellaneous. (a) Executive represents and warrants to the Company that he is not now under any obligation of a contractual Page 8 9 or other nature to any person, firm or corporation which is inconsistent or in conflict with this Agreement, or which would prevent, limit or impair in any way the performance by him of his obligations hereunder. (b) The waiver by either party of a breach of any provision of this Agreement must be in writing and shall not operate or be construed as a waiver of any subsequent breach thereof. (c) This Agreement constitutes the entire Agreement of Executive and the Company and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter hereof. (d) Any and all notices referred to herein shall be sufficiently furnished if in writing, and sent by registered or certified mail, postage prepaid, or by facsimile transmission (but only if confirmation of receipt is subsequently received by the sender either orally or in writing), or by overnight courier (if such overnight courier guarantees next day delivery and such notice is sent for delivery on a day on which such courier guarantees such overnight delivery), to the respective parties at the following addresses or such other address as either party may from time to time designate in writing in the manner set forth in this Section 13(d): The Company: Mac Frugal's Bargains * Close-outs Inc. 2430 E. Del Amo Boulevard Dominguez, California 90220 Attention: Board of Directors and Chief Executive Officer Telephone Number: (310) 761-4200 Executive: Mark J. Miller 3146 Dragonfly Street Glendale, California 91206 (e) If any portion or provision of this Agreement shall be invalid or unenforceable for any reason, there shall be deemed to be made such minor changes (and only such minor changes) in such provision or portion as are necessary to make it valid and enforceable. The invalidity or unenforceability of any provision or portion of this Agreement shall not affect the validity or enforceability of any other provisions or portions of this Agreement. If any such unenforceable or invalid provision Page 9 10 or provisions shall be rendered enforceable and valid by changes in applicable law, then such provision or provisions shall be deemed to read as they presently do in this Agreement without change. (f) The rights and obligations of the parties hereto shall inure to and be binding upon the parties hereto and their respective heirs, successors and assigns. (g) The waiver by either party of a breach of a provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach hereof. (h) This Agreement is intended to and shall be governed by, and interpreted under and construed in accordance with, the laws of the State of California, without reference to any conflict of laws or principles. (i) If any litigation, arbitration or any other proceedings is instituted in connection with or related to this Agreement, the non-prevailing party in such litigation, arbitration or other proceeding shall pay the expenses, including, without limitation, the attorneys' fees and expenses of investigation, of the prevailing party. (j) Arbitration. (i) Any controversy, claim or dispute between the parties directly or indirectly concerning this Agreement or the breach hereof, or the subject matter hereof (except in instances where only injunctive relief is sought by the Company), shall be finally settled by arbitration held in Los Angeles, California. The Company and Executive shall each select an arbitrator from a panel of seven (7) arbitrators (the "Arbitration Pool") obtained by the Company from the Federal Mediation and Conciliation Service within thirty (30) days of receiving written notice from either party demanding any such proceeding. Such two chosen arbitrators shall agree on a third arbitrator from the Arbitration Pool within fifteen days thereafter. In the event an agreement has not been reached on the third arbitrator by the end of such fifteen-day period, the third arbitrator shall be chosen by the American Arbitration Association. The arbitration shall be held and a final decision reached within 30 days thereafter. The decision of a majority of the three chosen arbitrators shall be final and conclusive on the parties, and there shall be no appeal therefrom. A decision of the arbitrators may be enforced by the prevailing party in a court of competent jurisdiction. All other issues in connection with such arbitration shall be in accordance with the Rules of the American Arbitration Association. Page 10 11 (ii) The parties hereto agree that an action to compel arbitration pursuant to this Agreement may be brought in any appropriate court and in connection therewith the laws of the State of California shall control. Application may also be made to such court for confirmation of any decision or award of the arbitrators but only if necessary to effectuate such decision or award. The parties hereto hereby consent to the jurisdiction of the arbitrators and of such court and waive any objection to the jurisdiction of such arbitrators or court. (k) The Company and Executive expressly agree that the provisions of Sections 11, 12 and 13 shall survive the termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE COMPANY: MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. By:/s/ Philip L. Carter ---------------------------------------- Philip L. Carter President and Chief Executive Officer EXECUTIVE: /s/ Mark J. Miller ---------------------------------------- Mark J. Miller Page 11 EX-10.20 3 EMPLOYMENT AGT - BONNECAZE 1 Exhibit 10.20 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made and entered into as of the 17th day of July, 1995, by and between Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (the "Company"), and Earl C. Bonnecaze ("Executive"). WHEREAS, the Company desires to employ Executive as its Senior Vice President, Stores on the terms and conditions set forth herein and Executive desires to accept such employment with the Company; NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment and Duties. The Company hereby engages Executive in the capacity of Senior Vice President, Stores. Executive shall perform such duties and functions as shall be specified from time to time by the Company's Executive Vice President Merchandise and Stores. Executive hereby accepts such employment and agrees to perform such duties. During the term of this Agreement, Executive shall not be required without his consent to undertake responsibilities not commensurate with his position as the Company's Senior Vice President, Stores. 2. Compensation. (a) Base Salary. For all services to be rendered by Executive hereunder, Executive shall be paid a base salary at the rate of one hundred sixty thousand dollars ($160,000) per year. Executive's base compensation shall be reviewed at least annually and may be increased at the discretion of the Board of Directors of the Company (the "Board"), but during the term of this Agreement may not be decreased below the then-effective base salary. Executive's salary shall be paid on such basis as is the normal payment pattern for executive officers of the Company. The base salary payable under this Section 2(a) shall be in addition to and exclusive of any payments to Executive from time to time under formal or informal bonus, incentive compensation or similar plans now in effect or which hereafter may be adopted. (b) Performance Bonus. With respect to each full fiscal year of the Company during which Executive is employed by the Company pursuant to this Agreement throughout (each, a "Bonus Year"), Executive shall be entitled to participate in a performance bonus plan approved annually for executive officers of the Company by the Compensation Committee of the Board. The calculation and payment to Executive of a performance bonus contemplated by this Section 2(b), if any, shall be made as soon as practicable in the fiscal year of the Company immediately 1 2 succeeding such Bonus Year, following preparation of the Company's annual audited financial statements for such Bonus Year. 3. Payment in Event of Termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d) on or before the second (2nd) anniversary of the date of this Agreement, the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall provide Executive with COBRA medical and dental insurance benefits for one hundred eighty (180) days from the date of such termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d) after the second (2nd) anniversary of the date of this Agreement but on or before the third (3rd) anniversary of the date of this Agreement, the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall provide Executive with COBRA medical and dental insurance benefits for two hundred seventy (270) days from the date of such termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d) after the third (3rd) anniversary of the date of this Agreement, the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall provide Executive with COBRA medical and dental insurance benefits for three hundred sixty-five (365) days from the date of such termination. Executive shall not be required or obligated to obtain other employment to mitigate the payments due hereunder. Executive may, at his sole option, terminate this Agreement and receive the payments provided for in this Section 3 following the occurrence of either of the following events (a "Company Breach"): (a) Executive's authority to function as a Senior Vice President shall be removed or limited in any material respect, unless such removal or limitation was a result of one or more events that would permit the termination of Executive's employment For Cause (as defined in Section 8(c)), or (b) the Company shall have breached in any material respect any of its covenants and agreements in this Agreement. Notwithstanding the foregoing, Executive shall not be entitled to terminate this Agreement unless Executive provides written notice to the Company specifying in reasonable detail the nature of the Company Breach, and the Company shall have failed to cure such Company Breach within 45 days thereafter. 4. Options. Executive shall be entitled to participate in any performance stock option plan approved annually for other executive officers of the Company by the Compensation Committee of the Board. To the maximum extent permitted by the Internal Revenue Code of 1986, as amended (the "IRC"), including the rules and regulations thereunder, all such options shall be incentive stock options, and the remainder of such options shall be non-qualified stock options. 2 3 5. Benefits. (a) Executive shall be entitled to such fringe benefits and perquisites as are generally made available to executive officers of the Company, and such other fringe benefits as may be approved by the Board for executive officers of the Company during the term hereof including, without limitation, medical, dental and disability insurance, group term life insurance in face amount of the base salary payable pursuant to Section 2(a) and annual vacation time of three weeks. (b) During the term of Executive's employment, the Company shall furnish Executive with a motor vehicle of his choice to use for business purposes in accordance with the Company's policies in effect from time to time. (c) Nothing contained herein is intended or shall be deemed to be granted to Executive in lieu of any rights or privileges to which Executive may be entitled as an employee of the Company under any medical, dental, disability, life insurance, retirement, stock option, stock bonus or purchase, incentive compensation or other plan of the Company which may now be in effect or which may hereafter be adopted, it being understood that Executive shall have the same rights and privileges to participate in such plans as any other executive officers of the Company. 6. Reimbursement of Expenses. The Company shall reimburse Executive for all reasonable business expenses incurred by Executive in connection with the performance of his duties hereunder, provided that Executive furnishes to the Company receipts and other documentation reasonably acceptable to the Company evidencing such expenditures. 7. Performance of Duties. (a) In consideration of the payments to be made hereunder, Executive agrees to devote his entire business time and attention to the performance of his duties hereunder, to serve the Company diligently and to the best of his abilities and not to compete with the Company or any of its Affiliates (as defined below) in any manner whatsoever. Without limiting the generality of the foregoing, Executive shall not, during the term of his employment by the Company, directly or indirectly (whether for compensation or otherwise), alone or as an agent, principal, partner, officer, employee, trustee, director, shareholder or in any other capacity, own, manage, operate, join, control or participate in the ownership, management, operation or control of or furnish any capital to or be connected in any manner with or provide any services as a consultant for any business which competes directly or indirectly with any of the businesses of the Company or any of its Affiliates (as defined below) as they may be conducted from time to time; provided, however, that notwithstanding the foregoing, nothing contained in this Agreement shall be deemed to preclude Executive from owning not 3 4 more than one percent of the publicly-traded capital stock of an entity which is in competition with any of such businesses. Affiliate of the Company means any person, association or entity: (a) that, in whole or in part, owns or is owned by, or otherwise has a material interest (whether debt, equity or otherwise) in, the Company; (b) that controls or is controlled by the Company; (c) that is a subsidiary (whether owned in whole or in part) of the Company; or (d) to which the Company is a "related tax payer" as defined in Section 1313(c) of the IRC. (b) Executive may continue his civic, educational and charitable activities and serve on boards of directors of other companies, if consistent with this Section 7 and if otherwise approved by the Board. 8. Term and Termination. (a) The term of Executive's employment with the Company hereunder shall commence on the date hereof and shall continue until Executive resigns or is terminated under this Section 8 or under Section 9 of this Agreement. (b) In the event of Executive's death or in the event of Executive's total disability for any consecutive six-month period during the term of this Agreement, the Company may at its sole option thereafter (unless Executive, in the case of disability, shall have resumed his duties in full prior to such termination) terminate this Agreement, and in such event the sole right hereunder of Executive, Executive's widower or Executive's legal representative, as the case may be, shall be to: (i) receive the base salary due Executive through the last day of the twelfth full calendar month following the month in which his death or disability shall have occurred; (ii) have any and all previously accruing bonuses or options or other rights vest in Executive or in his estate immediately (unless Executive or his estate shall elect to the contrary); and (iii) in the event of termination by reason of disability, have the Company continue to maintain in effect at its sole expense, COBRA medical and dental for three hundred sixty-five (365) days following the date of any such termination. (c) The Company, upon 30 days prior written notice to Executive, may terminate this Agreement For Cause (as defined herein). For the purposes of this Agreement, the term "For Cause" shall mean: (i) Executive's breach of the covenants contained in Sections 7, 11 or 13(a) hereof; (ii) Executive's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent jurisdiction for any crime involving moral turpitude or any felony punishable by imprisonment in the jurisdiction involved; or (iii) Executive's commission of any act of fraud or dishonesty in connection with, or related to, his duties hereunder. Upon termination of Executive For Cause, this Agreement shall immediately terminate, and Executive shall not be entitled to any further rights or payments hereunder (other than payment under Section 2(a) for services rendered prior to the 4 5 date of such termination). Without limiting the generality of the foregoing, Executive shall have no right on or after the date of such termination to any of the benefits set forth in Section 5 hereof (other than payment for accrued vacation), any payment of base salary pursuant to Section 2(a), any payment of performance bonus pursuant to Section 2(b) for the Bonus Year in which such termination occurs or any other benefit or payment of any kind whatsoever. (d) Subject to the payment of amounts, if any, required by Sections 2(b) and 3, the Company shall be entitled to terminate Executive's employment without cause at any time upon thirty days written notice. 9. Change in Control. If a Change in Control (as defined below) of the Company occurs during the term of this Agreement, the provisions of this Section 9 shall become operative. For the purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred if any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing more than 35% of the combined voting power of the Company's then outstanding securities, as a result of purchases which are not expressly approved by the Board. For purposes of this Section 9, the Board expressly approving the 35% or more voting power ownership must consist of individuals who for the previous consecutive twenty-four (24) month period, constituted at least a majority of the Board. For a period of two months after a Change in Control of the Company, Executive shall have the right to terminate his employment with the Company pursuant to this Section 9, and the Company shall pay Executive the following amounts no later than the 15th business day after the date of termination of Executive's employment: (i) A lump sum severance payment equal to 2 multiplied by the sum of (A) Executive's base annual salary at the highest rate in effect during the fiscal year of the Company immediately preceding the date Executive's employment terminates, and (B) the greater of the amount of any incentive, bonus or other cash compensation that was paid to Executive during either (x) the 12 months immediately preceding the date Executive's employment terminates and (y) the 12 months immediately preceding the Change in Control; and (ii) A cash payment equal to the amount by which the greater of (A) the closing price of the Company's Common Stock on the day before the date Executive's employment terminates or (B) the highest price per share actually paid in connection with the Change in Control of the Company, exceeds the per share exercise price of each then vested and exercisable stock option held by Executive on the day before the date 5 6 Executive's employment terminates, multiplied by the number of shares covered by each such option. In exchange for such payment, Executive will surrender all such options to the Company without exercising them. 10. Deductibility of Payments to Executive. Notwithstanding anything else to the contrary in this Agreement, in the event that the payments to Executive under this Agreement, either alone or together with other payments Executive has a right to receive from the Company, would be non-deductible (in whole or in part) by the Company for Federal income tax purposes because of Section 280G of the IRC, then the aggregate present value of amounts payable to Executive pursuant to this agreement shall be reduced (but not below zero) to the "Reduced Amount." The Reduced Amount shall be an amount expressed in present value which maximizes the aggregate present value of all payments to be made to Executive under this Agreement without causing any payment to be non-deductible by the Company because of Section 280G of the Code. For purposes of this Section 10, present value shall be determined in accordance with Section 280G(d)(4) of the IRC. The determination of the Reduced Amount shall be made exclusively by the Company's outside auditors and in consultation with outside counsel to the Company (each of whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding on the Company and Executive. 11. Confidentiality. (a) The Company (which for purposes of this Section 11 shall mean the Company and its Affiliates (as defined in Section 7(a)) and Executive recognize that during the course of Executive's employment with the Company he will accumulate certain crucial proprietary and confidential information and trade secrets for use in the Company's business and will have divulged to him certain crucial confidential and proprietary information and trade secrets about the business, operations and prospects of the Company, including, without limitation, confidential and proprietary information regarding suppliers and employees of the Company, which constitute valuable business assets providing the Company the opportunity to obtain an advantage over competitors who do not know or use such information or have access to it without the investment of considerable resources. Executive hereby acknowledges and agrees that such information (the "Proprietary Information") is confidential and proprietary and a trade secret and that such information shall include, without limitation: (i) the identity and location of customers and domestic and foreign suppliers of quality low-cost close-out merchandise that can profitably be resold, and their buying and selling histories and creditworthiness; information regarding the quantity, quality, frequency, pricing and marketability of their supply offerings; and lists setting forth the same; (ii) processes, methods and techniques, including 6 7 but not limited to primary contact points in the Company's network; methods of merchandising in the Company's stores; processes and methods of giving directions and instructions to the Company's stores and its employees in connection with merchandising moves; information, techniques, formulas and judgments relating to the appropriate bidding, pricing and marketing of close-out merchandise; and the price ranges and techniques by which such merchandise can be profitably resold at substantial reductions from normal retail rates; and designs, styles and methods of packaging and distributing close-out merchandise distinctive to the Company; (iii) records of research, including but not limited to demographic studies conducted by the Company and its agents which contribute to the Company's ability to locate retail store sites; (iv) proposals and projections, including but not limited to long-range plans for the Company's growth, expansion, development and continued fostering of its relationships with its employees, suppliers and customers; and (v) files, reports, memoranda, computer software or programming and budgets or other financial plans or information regarding the Company and its business, properties or affairs. (b) Executive agrees that he shall not, at any time subsequent to the execution of this Agreement, whether during or after the term hereof, disclose, divulge or make known, directly or indirectly, to any person, or otherwise use or exploit, any Proprietary Information obtained by Executive at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his duties hereunder for the Company. Executive agrees to disclose to the Company the identity and nature of any contacts with any person or entity soliciting from Executive disclosure of any Propriety Information or soliciting Executive's involvement in any business venture competitive with the Company. Executive shall not conceal from or fail to disclose to the Company, or divert or exploit for his own personal profit or that of others, any business opportunity or other opportunity to acquire an interest in or a contractual relationship with any person or entity where such person or entity is in the Company's line of business or where such contractual relationship involves the acquisition of real estate and which would be considered a feasible and advantageous opportunity or acquisition for the Company. Upon termination of this Agreement, Executive will deliver to the Company all tangible displays and repositories of customer and supplier lists, files, records of research, proposals, reports, memoranda, business methods and techniques, computer software and programming, budgets and other financial plans and information and other materials or records or writings of any other type (including all copies thereof) made, used or obtained by, or provided to, Executive, containing any Proprietary Information, 7 8 whether obtained prior to or subsequent to the execution of this Agreement. 12. Non-Solicitation of Employees. (a) Executive hereby agrees that for the two-year period following the date of termination of this Agreement he will not (i) authorize his name to be used by any person, partnership, corporation or other business entity, or (ii) engage in or carry on, directly or indirectly, whether as advisor, principal, agent, partner, officer, director, employee, stockholder, associate or consultant of any person, partnership, corporation or other business entity which is in competition with the bargain close-out business carried on by the Company or any of its Affiliates in Los Angeles, Orange, Riverside, San Bernardino, Ventura, Santa Barbara or San Diego Counties in the State of California, or any other county in California where business is then carried on or conducted by the Company or any of its Affiliates, or in the States of Alabama, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Missouri, Nevada, New Mexico, Tennessee, Texas, Utah or any other State in which business is then carried on or conducted by the Company or its Affiliates. (b) Executive further agrees that during the period from the date of this Agreement until two years after the termination of this Agreement he shall not contact any employee or supplier of the Company or any of its Affiliates without advising the Company of such contact and he shall not participate in any endeavor or activity which would disrupt the Company's or any of its Affiliate's good business relationships with the employees, suppliers and/or persons engaged in purchasing activities on behalf of the Company or such Affiliate, and he shall not make any false, deceptive or misleading statement or statements to any one or more of such suppliers or such persons which would be likely to cause such disruption. 13. Miscellaneous. (a) Executive represents and warrants to the Company that he is not now under any obligation of a contractual or other nature to any person, firm or corporation which is inconsistent or in conflict with this Agreement, or which would prevent, limit or impair in any way the performance by him of his obligations hereunder. (b) The waiver by either party of a breach of any provision of this Agreement must be in writing and shall not operate or be construed as a waiver of any subsequent breach thereof. (c) This Agreement constitutes the entire Agreement of Executive and the Company and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect 8 9 to the subject matter hereof. (d) Any and all notices referred to herein shall be sufficiently furnished if in writing, and sent by registered or certified mail, postage prepaid, or by facsimile transmission (but only if confirmation of receipt is subsequently received by the sender either orally or in writing), or by overnight courier (if such overnight courier guarantees next day delivery and such notice is sent for delivery on a day on which such courier guarantees such overnight delivery), to the respective parties at the following addresses or such other address as either party may from time to time designate in writing in the manner set forth in this Section 13(d): The Company: Mac Frugal's Bargains * Close-outs Inc. 2430 E. Del Amo Boulevard Dominguez, California 90220 Attention: Board of Directors and Chief Executive Officer Telephone Number: (310) 761-4200 Executive: Earl C. Bonnecaze 1000 South Coast Drive, Unit W203 Costa Mesa, California 92626 (e) If any portion or provision of this Agreement shall be invalid or unenforceable for any reason, there shall be deemed to be made such minor changes (and only such minor changes) in such provision or portion as are necessary to make it valid and enforceable. The invalidity or unenforceability of any provision or portion of this Agreement shall not affect the validity or enforceability of any other provisions or portions of this Agreement. If any such unenforceable or invalid provision or provisions shall be rendered enforceable and valid by changes in applicable law, then such provision or provisions shall be deemed to read as they presently do in this Agreement without change. (f) The rights and obligations of the parties hereto shall inure to and be binding upon the parties hereto and their respective heirs, successors and assigns. (g) The waiver by either party of a breach of a provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach hereof. (h) This Agreement is intended to and shall be governed by, and interpreted under and construed in accordance with, the laws of the State of California, without reference to 9 10 any conflict of laws or principles. (i) If any litigation, arbitration or any other proceedings is instituted in connection with or related to this Agreement, the non-prevailing party in such litigation, arbitration or other proceeding shall pay the expenses, including, without limitation, the attorneys' fees and expenses of investigation, of the prevailing party. (j) Arbitration. (i) Any controversy, claim or dispute between the parties directly or indirectly concerning this Agreement or the breach hereof, or the subject matter hereof (except in instances where only injunctive relief is sought by the Company), shall be finally settled by arbitration held in Los Angeles, California. The Company and Executive shall each select an arbitrator from a panel of seven (7) arbitrators (the "Arbitration Pool") obtained by the Company from the Federal Mediation and Conciliation Service within thirty (30) days of receiving written notice from either party demanding any such proceeding. Such two chosen arbitrators shall agree on a third arbitrator from the Arbitration Pool within fifteen days thereafter. In the event an agreement has not been reached on the third arbitrator by the end of such fifteen-day period, the third arbitrator shall be chosen by the American Arbitration Association. The arbitration shall be held and a final decision reached within 30 days thereafter. The decision of a majority of the three chosen arbitrators shall be final and conclusive on the parties, and there shall be no appeal therefrom. A decision of the arbitrators may be enforced by the prevailing party in a court of competent jurisdiction. All other issues in connection with such arbitration shall be in accordance with the Rules of the American Arbitration Association. (ii) The parties hereto agree that an action to compel arbitration pursuant to this Agreement may be brought in any appropriate court and in connection therewith the laws of the State of California shall control. Application may also be made to such court for confirmation of any decision or award of the arbitrators but only if necessary to effectuate such decision or award. The parties hereto hereby consent to the jurisdiction of the arbitrators and of such court and waive any objection to the jurisdiction of such arbitrators or court. (k) The Company and Executive expressly agree 10 11 that the provisions of Sections 11, 12 and 13 shall survive the termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE COMPANY: MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. By:/s/ Philip L. Carter ------------------------------------ Philip L. Carter President and Chief Executive Officer EXECUTIVE: /s/ Earl C. Bonnecaze ------------------------------------ Earl C. Bonnecaze 11 EX-10.21 4 EMPLOYMENT AGT - CARTER 1 Exhibit 10.21 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 15th day of March, 1995, by and between Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (the "Company"), and Philip L. Carter ("Executive"). RECITALS WHEREAS, the Company desires to employ Executive as President and Chief Executive Officer on the terms and conditions set forth herein and Executive desires to accept such employment with the Company; AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment and Duties. The Company hereby engages Executive in the capacity of President and Chief Executive Officer of the Company. Executive shall perform such duties and functions as shall be specified from time to time by the Board of Directors of the Company (the "Board"). Executive hereby accepts such employment and agrees to perform such duties. During the term of this Agreement, Executive shall not be required without his consent to undertake responsibilities not commensurate with his position as a President and Chief Executive Officer. 2. Compensation. (a) Base Salary. For all services to be rendered by Executive hereunder, Executive shall be paid a base salary at the rate of four hundred fifty thousand dollars ($450,000) per year. Executive's base compensation shall be reviewed at least annually and may be increased at the discretion of the Board, but during the term of this Agreement may not be decreased below the then-effective base salary. Executive's salary shall be paid on such basis as is the normal payment pattern for executive officers of the Company. The base salary payable under this Section 2(a) shall be in addition to and exclusive of any payments to Executive from time to time under formal or informal bonus, incentive compensation or similar plans now in effect or which hereafter may be adopted. (b) Performance Bonus. With respect to each full fiscal year of the Company that this Agreement is in effect throughout and any fiscal year of the Company in which Executive is terminated pursuant to Section 8(d) hereof (each, a "Bonus Year"), Executive shall be entitled to participate in a performance bonus plan approved annually for executive officers of the Company by the Compensation Committee of the Board. The 2 calculation and payment to Executive of a performance bonus contemplated by this Section 2(b), if any, shall be made as soon as practicable in the fiscal year of the Company immediately succeeding such Bonus Year, following preparation of the Company's annual audited financial statements for such Bonus Year. 3. Payment in Event of Termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d) on or before March 15, 1998, the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall continue to provide Executive with the medical, disability and life insurance benefits provided in Section 5(a) hereof for eighteen (18) months from the date of such termination. In the event of the termination of Executive's employment hereunder pursuant to Section 8(d) after March 15, 1998, the Company shall continue to make the payments provided for in Section 2(a) at the rate then being paid to Executive and shall continue to provide Executive with the medical, disability and life insurance benefits provided in Section 5(a) hereof for twenty-four (24) months from the date of such termination. Executive shall not be required or obligated to obtain other employment to mitigate the payments due hereunder. Executive may, at his sole option, terminate this Agreement and receive the payments provided for in this Section 3 following the occurrence of either of the following events (a "Company Breach"): (a) Executive's authority to function as President and Chief Executive Officer shall be removed or limited in any material respect, unless such removal or limitation was a result of one or more events that would permit the Board to terminate Executive's employment For Cause (as defined in Section 8(c)), or (b) the Company shall have breached in any material respect any of its covenants and agreements in this Agreement. Notwithstanding the foregoing, Executive shall not be entitled to terminate this Agreement unless Executive provides written notice to the Company specifying in reasonable detail the nature of the Company Breach, and the Company shall have failed to cure such Company Breach within 45 days thereafter. Page 2 3 4. Options. Executive shall be entitled to participate in any performance stock option plan approved annually for other executive officers of the Company by the Compensation Committee of the Board. To the maximum extent permitted by the Internal Revenue Code of 1986, as amended (the "IRC"), including the rules and regulations thereunder, all such options shall be incentive stock options, and the remainder of such options shall be non-qualified stock options. 5. Benefits. (a) Executive shall be entitled to such fringe benefits and perquisites as are generally made available to executive officers of the Company, and such other fringe benefits as may be approved by the Board for executive officers of the Company during the term hereof including, without limitation, major medical, extended medical and extended disability insurance, group term life insurance in face amount of the base salary payable pursuant to Section 2(a) and annual vacation time of not less than four weeks. (b) Every two years during the term of Executive's employment, the Company shall furnish Executive with a motor vehicle of his choice to use for business purposes, provided, however, that such motor vehicle shall not have an original cost to the Company of more than $65,000. (c) Nothing contained herein is intended or shall be deemed to be granted to Executive in lieu of any rights or privileges to which Executive may be entitled as an employee of the Company under any retirement, pension, insurance, hospitalization, stock option, stock bonus or purchase, incentive compensation or other plan of the Company which may now be in effect or which may hereafter be adopted, it being understood that Executive shall have the same rights and privileges to participate in such plans as any other executive officers of the Company. 6. Reimbursement of Expenses. The Company shall reimburse Executive for all reasonable business expenses incurred by Executive in connection with the performance of his duties hereunder, provided that Executive furnishes to the Company receipts and other documentation reasonably acceptable to the Company evidencing such expenditures. Page 3 4 7. Performance of Duties. (a) In consideration of the payments to be made hereunder, Executive agrees to devote his entire business time and attention to the performance of his duties hereunder, to serve the Company diligently and to the best of his abilities and not to compete with the Company or any of its Affiliates (as defined below) in any manner whatsoever. Without limiting the generality of the foregoing, Executive shall not, during the term of his employment by the Company, directly or indirectly (whether for compensation or otherwise), alone or as an agent, principal, partner, officer, employee, trustee, director, shareholder or in any other capacity, own, manage, operate, join, control or participate in the ownership, management, operation or control of or furnish any capital to or be connected in any manner with or provide any services as a consultant for any business which competes directly or indirectly with any of the businesses of the Company or any of its Affiliates (as defined below) as they may be conducted from time to time; provided, however, that notwithstanding the foregoing, nothing contained in this Agreement shall be deemed to preclude Executive from owning not more than one percent of the publicly-traded capital stock of an entity which is in competition with any of such businesses. Affiliate of the Company means any person, association or entity: (a) that, in whole or in part, owns or is owned by, or otherwise has a material interest (whether debt, equity or otherwise) in, the Company; (b) that controls or is controlled by the Company; (c) that is a subsidiary (whether owned in whole or in part) of the Company; or (d) to which the Company is a "related tax payer" as defined in Section 1313(c) of the IRC. (b) Executive may continue his civic, educational and charitable activities and serve on boards of directors of other companies, if consistent with this Section 7 and if otherwise approved by the Board. 8. Term and Termination. (a) The term of Executive's employment with the Company hereunder shall commence on the date hereof and shall continue until Executive resigns or is terminated under this Section 8 or under Section 9 of this Agreement. Page 4 5 (b) In the event of Executive's death or in the event of Executive's total disability for any consecutive six-month period during the term of this Agreement, the Company may at its sole option thereafter (unless Executive, in the case of disability, shall have resumed his duties in full prior to such termination) terminate this Agreement, and in such event the sole right hereunder of Executive, Executive's widower or Executive's legal representative, as the case may be, shall be to: (i) receive the base salary due Executive through the last day of the twelfth full calendar month following the month in which his death or disability shall have occurred; (ii) have any and all previously accruing bonuses or options or other rights vest in Executive or in his estate immediately (unless Executive or his estate shall elect to the contrary); and (iii) in the event of termination by reason of disability, have the Company continue to maintain in effect at its sole expense, the major medical, extended medical, extended disability and term life insurance referred to in Section 5(a) for the one year period following the date of any such termination. (c) The Company, upon 30 days prior written notice to Executive, may terminate this Agreement For Cause (as defined herein). For the purposes of this Agreement, the term "For Cause" shall mean: (i) Executive's breach of the covenants contained in Sections 7, 11 or 13(a) hereof; (ii) Executive's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent jurisdiction for any crime involving moral turpitude or any felony punishable by imprisonment in the jurisdiction involved; or (iii) Executive's commission of any act of fraud or dishonesty in connection with, or related to, his duties hereunder. Upon termination of Executive For Cause, this Agreement shall immediately terminate, and Executive shall not be entitled to any further rights or payments hereunder (other than payment under Section 2(a) for services rendered prior to the date of such termination). Without limiting the generality of the foregoing, Executive shall have no right on or after the date of such termination to any of the benefits set forth in Section 5 hereof (other than payment for accrued vacation), any payment of base salary pursuant to Section 2(a), any payment of performance bonus pursuant to Section 2(b) for the Bonus Year in which such termination occurs or any other benefit or payment of any kind whatsoever. (d) Subject to the payment of amounts required by Sections 2(b) and 3, the Company shall be entitled to terminate Executive's employment without cause at any time upon thirty days written notice. Page 5 6 9. Change in Control. (a) The provisions of this Section 9 shall become operative if an Approved Change in Control (as defined below) or if an Unapproved Change in Control (as defined below) occurs during the term of this Agreement. For the purposes of this Agreement, an "Unapproved Change in Control" shall be deemed to have occurred if any "person" (as defined in Section 13(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing more than 35% of the combined voting power of the Company's then outstanding securities, as a result of purchases of the Company's securities which are not expressly approved by the Board. For the purposes of this Agreement, an "Approved Change in Control" shall be deemed to have occurred if any "person" (as defined in Section 13(d) of the Exchange Act becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing more than eighty percent (80%) of the combined voting power of the Company's then outstanding securities, as a result of a transaction which is expressly approved by the Board. For purposes of determining whether or not the Board has expressly approved purchases of the Company's then outstanding securities resulting in an Unapproved Change in Control, express approval of the Board shall be defined to mean that individuals constituting at least a majority of the Board for a consecutive twenty-four (24) month period prior to such purchases did not vote in favor thereof. (b) For a period of two months after an Unapproved Change in Control of the Company, Executive shall have the right to terminate his employment with the Company pursuant to this Section 9, and the Company shall pay Executive the following amounts no later than the 15th business day after the date of termination of Executive's employment: (i) A lump sum severance payment equal to 2.9 multiplied by the sum of (A) Executive's base annual salary at the highest rate in effect during the fiscal year of the Company immediately preceding the date Executive's employment terminates, and (B) the greater of the amount of any incentive, bonus or other cash compensation that was paid to Executive during either (x) the 12 months immediately preceding the date Executive's employment terminates and (y) the 12 months immediately preceding the Change in Control; and Page 6 7 (ii) A cash payment equal to the amount by which the greater of (A) the closing price of the Company's Common Stock on the day before the date Executive's employment terminates or (B) the highest price per share actually paid in connection with the Change in Control of the Company, exceeds the per share exercise price of each then vested and exercisable stock option held by Executive on the day before the date Executive's employment terminates, multiplied by the number of shares covered by each such option. In exchange for such payment, Executive will surrender all such options to the Company without exercising them. (c) In the event the Company terminates Executive's employment without cause within eighteen (18) months after the effective date of an Approved Change in Control of the Company, then, in lieu of the amounts required to be paid to Executive pursuant to Section 8(d) above, the Company shall pay Executive, within fifteen (15) days after written demand therefor by Executive, a lump sum severance payment equal to 2.9 multiplied by the sum of (A) Executive's base annual salary at the highest rate in effect during the fiscal year of the Company immediately preceding the date Executive's employment terminates, and (B) the greater of the amount of any incentive, bonus or other cash compensation that was paid to Executive during either (x) the 12 months immediately preceding the date Executive's employment terminates and (y) the 12 months immediately preceding the Approved Change in Control. (d) Notwithinstanding anything contained in this Agreement to the contrary, in the event of an Approved Change in Control or an Unapproved Change in Control, any unvested portion of that certain stock option to purchase 250,000 shares of the Company's Common Stock granted to Executive on May 2, 1995 shall automatically and immediately vest and become exercisable. 10. Deductibility of Payments to Executive. Notwithstanding anything else to the contrary in this Agreement, in the event that the payments to Executive under this Agreement, either alone or together with other payments Executive has a right to receive from the Company, would be non-deductible (in whole or in part) by the Company for Federal income tax purposes because of Section 280G of the IRC, then the aggregate present value of amounts payable to Executive pursuant to this agreement shall be reduced (but not below zero) to the "Reduced Amount." The Reduced Amount shall be an amount expressed in present value which maximizes the aggregate present value of all payments to be made to Executive under this Agreement without causing any payment to be non-deductible by the Company because of Section 280G of the Code. For Page 7 8 purposes of this Section 10, present value shall be determined in accordance with Section 280G(d)(4) of the IRC. The determination of the Reduced Amount shall be made exclusively by the Company's outside auditors and in consultation with outside counsel to the Company (each of whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding on the Company and Executive. 11. Confidentiality. (a) The Company (which for purposes of this Section 11 shall mean the Company and its Affiliates (as defined in Section 7(a)) and Executive recognize that during the course of Executive's employment with the Company he will accumulate certain crucial proprietary and confidential information and trade secrets for use in the Company's business and will have divulged to him certain crucial confidential and proprietary information and trade secrets about the business, operations and prospects of the Company, including, without limitation, confidential and proprietary information regarding suppliers and employees of the Company, which constitute valuable business assets providing the Company the opportunity to obtain an advantage over competitors who do not know or use such information or have access to it without the investment of considerable resources. Executive hereby acknowledges and agrees that such information (the "Proprietary Information") is confidential and proprietary and a trade secret and that such information shall include, without limitation: (i) the identity and location of customers and domestic and foreign suppliers of quality low-cost close-out merchandise that can profitably be resold, and their buying and selling histories and creditworthiness; information regarding the quantity, quality, frequency, pricing and marketability of their supply offerings; and lists setting forth the same; (ii) processes, methods and techniques, including but not limited to primary contact points in the Company's network; methods of merchandising in the Company's stores; processes and methods of giving directions and instructions to the Company's stores and its employees in connection with merchandising moves; information, techniques, formulas and judgments relating to the appropriate bidding, pricing and marketing of close-out merchandise; and the price ranges and techniques by which such merchandise can be profitably resold at substantial reductions from normal retail rates; and designs, styles and methods of packaging and distributing close-out merchandise distinctive to the Company; Page 8 9 (iii) records of research, including but not limited to demographic studies conducted by the Company and its agents which contribute to the Company's ability to locate retail store sites; (iv) proposals and projections, including but not limited to long-range plans for the Company's growth, expansion, development and continued fostering of its relationships with its employees, suppliers and customers; and (v) files, reports, memoranda, computer software or programming and budgets or other financial plans or information regarding the Company and its business, properties or affairs. (b) Executive agrees that he shall not, at any time subsequent to the execution of this Agreement, whether during or after the term hereof, disclose, divulge or make known, directly or indirectly, to any person, or otherwise use or exploit, any Proprietary Information obtained by Executive at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his duties hereunder for the Company. Executive agrees to disclose to the Company the identity and nature of any contacts with any person or entity soliciting from Executive disclosure of any Propriety Information or soliciting Executive's involvement in any business venture competitive with the Company. Executive shall not conceal from or fail to disclose to the Company, or divert or exploit for his own personal profit or that of others, any business opportunity or other opportunity to acquire an interest in or a contractual relationship with any person or entity where such person or entity is in the Company's line of business or where such contractual relationship involves the acquisition of real estate and which would be considered a feasible and advantageous opportunity or acquisition for the Company. Upon termination of this Agreement, Executive will deliver to the Company all tangible displays and repositories of customer and supplier lists, files, records of research, proposals, reports, memoranda, business methods and techniques, computer software and programming, budgets and other financial plans and information and other materials or records or writings of any other type (including all copies thereof) made, used or obtained by, or provided to, Executive, containing any Proprietary Information, whether obtained prior to or subsequent to the execution of this Agreement. Page 9 10 12. Non-Solicitation of Employees. (a) Executive hereby agrees that for the two-year period following the date of termination of this Agreement he will not (i) authorize his name to be used by any person, partnership, corporation or other business entity, or (ii) engage in or carry on, directly or indirectly, whether as advisor, principal, agent, partner, officer, director, employee, stockholder, associate or consultant of any person, partnership, corporation or other business entity which is in competition with the bargain close-out business carried on by the Company or any of its Affiliates in Los Angeles, Orange, Riverside, San Bernardino, Ventura, Santa Barbara or San Diego Counties in the State of California, or any other county in California where business is then carried on or conducted by the Company or any of its Affiliates, or in the States of Alabama, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Missouri, Nevada, New Mexico, Tennessee, Texas or Utah. (b) Executive further agrees that during the period from the date of this Agreement until two years after the termination of this Agreement he shall not contact any employee or supplier of the Company or any of its Affiliates without advising the Company of such contact and he shall not participate in any endeavor or activity which would disrupt the Company's or any of its Affiliate's good business relationships with the employees, suppliers and/or persons engaged in purchasing activities on behalf of the Company or such Affiliate, and he shall not make any false, deceptive or misleading statement or statements to any one or more of such suppliers or such persons which would be likely to cause such disruption. 13. Miscellaneous. (a) Executive represents and warrants to the Company that he is not now under any obligation of a contractual or other nature to any person, firm or corporation which is inconsistent or in conflict with this Agreement, or which would prevent, limit or impair in any way the performance by him of his obligations hereunder. (b) The waiver by either party of a breach of any provision of this Agreement must be in writing and shall not operate or be construed as a waiver of any subsequent breach thereof. Page 10 11 (c) This Agreement constitutes the entire Agreement of Executive and the Company and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter hereof. (d) Any and all notices referred to herein shall be sufficiently furnished if in writing, and sent by registered or certified mail, postage prepaid, or by facsimile transmission (but only if confirmation of receipt is subsequently received by the sender either orally or in writing), or by overnight courier (if such overnight courier guarantees next day delivery and such notice is sent for delivery on a day on which such courier guarantees such overnight delivery), to the respective parties at the following addresses or such other address as either party may from time to time designate in writing in the manner set forth in this Section 13(d): The Company: Mac Frugal's Bargains * Close-outs Inc. 2430 E. Del Amo Boulevard Dominguez, California 90220 Attention: Board of Directors Telephone Number: (310) 761-4200 Executive: Philip L. Carter 10520 Wilshire Blvd., #702 Los Angeles, California 90024 (e) If any portion or provision of this Agreement shall be invalid or unenforceable for any reason, there shall be deemed to be made such minor changes (and only such minor changes) in such provision or portion as are necessary to make it valid and enforceable. The invalidity or unenforceability of any provision or portion of this Agreement shall not affect the validity or enforceability of any other provisions or portions of this Agreement. If any such unenforceable or invalid provision or provisions shall be rendered enforceable and valid by changes in applicable law, then such provision or provisions shall be deemed to read as they presently do in this Agreement without change. Page 11 12 (f) The rights and obligations of the parties hereto shall inure to and be binding upon the parties hereto and their respective heirs, successors and assigns. (g) The waiver by either party of a breach of a provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach hereof. (h) This Agreement is intended to and shall be governed by, and interpreted under and construed in accordance with, the laws of the State of California, without reference to any conflict of laws or principles. (i) If any litigation, arbitration or any other proceedings is instituted in connection with or related to this Agreement, the non-prevailing party in such litigation, arbitration or other proceeding shall pay the expenses, including, without limitation, the attorneys' fees and expenses of investigation, of the prevailing party. (j) Arbitration. (i) Any controversy, claim or dispute between the parties directly or indirectly concerning this Agreement or the breach hereof, or the subject matter hereof (except in instances where only injunctive relief is sought by the Company), shall be finally settled by arbitration held in Los Angeles, California. The Company and Executive shall each select an arbitrator from a panel of seven (7) arbitrators (the "Arbitration Pool") obtained by the Company from the Federal Mediation and Conciliation Service within thirty (30) days of receiving written notice from either party demanding any such proceeding. Such two chosen arbitrators shall agree on a third arbitrator from the Arbitration Pool within fifteen days thereafter. In the event an agreement has not been reached on the third arbitrator by the end of such fifteen-day period, the third arbitrator shall be chosen by the American Arbitration Association. The arbitration shall be held and a final decision reached within 30 days thereafter. The decision of a majority of the three chosen arbitrators shall be final and conclusive on the parties, and there shall be no appeal therefrom. A decision of the arbitrators may be enforced by the prevailing party in a court of competent jurisdiction. All other issues in connection with such arbitration shall be in accordance with the Rules of the American Arbitration Association. Page 12 13 (ii) The parties hereto agree that an action to compel arbitration pursuant to this Agreement may be brought in any appropriate court and in connection therewith the laws of the State of California shall control. Application may also be made to such court for confirmation of any decision or award of the arbitrators but only if necessary to effectuate such decision or award. The parties hereto hereby consent to the jurisdiction of the arbitrators and of such court and waive any objection to the jurisdiction of such arbitrators or court. (k) The Company and Executive expressly agree that the provisions of Sections 11, 12 and 13 shall survive the termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE COMPANY: MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. By: /s/ Peter S. Willmott -------------------------------------- Peter S. Willmott Chairman of the Board EXECUTIVE: /s/ Philip L. Carter -------------------------------------- Philip L. Carter Page 13 EX-10.30 5 STOCK OPTION AGT 1 EXHIBIT 10.30 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. STOCK OPTION AGREEMENT This Stock Option Agreement (the "Agreement") is made and entered into as of the Date of Grant indicated below by and between Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (the "Company"), and Peter S. Willmott ("Optionee"). WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee") and the Board of Directors have approved the grant to Optionee of an option to purchase shares of the common stock, par value $0.2778 per share, of the Company (the "Common Stock"), on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing recitals and the covenants set forth herein, the parties hereto hereby agree as follows: 1. Grant of Option; Certain Terms and Conditions. The Company hereby grants to Optionee, and Optionee hereby accepts, as of the Date of Grant, an immediately exercisable option (the "Option") to purchase the number of shares of Common Stock indicated below (the "Option Shares") at the Exercise Price per share indicated below. The Exercise Price indicated below is the closing price for shares of the Common Stock quoted on the New York Stock Exchange on the Date of Grant. The Option expires at 5:00 p.m. (local time at the Company's principal exexutive office) on the Expiration Date indicated below and shall be subject to all of the terms and conditions set forth in this Agreement. Date of Grant: May 2, 1995 Number of Shares Purchasable: 25,000 Exercise Price per Share: $14.75 Expiration Date: May 2, 2005 The Option is not intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986. 2 2. Acceleration and Termination. (a) Termination of Position. If Optionee's relationship with the Company as a member of its Board of Directors is terminated by any person or entity for no reason, or for any reason other than Optionee's death or retirement with the consent of the Board of Directors of the Company, then the Option shall terminate upon the earlier of the Expiration Date or the ninetieth day following the date of such termination of such position; provided, however, that if such termination of such position is caused by the total disability of Optionee, then the Option shall terminate upon the earlier of the Expiration Date or the first anniversary of the date of such termination of such position. Notwithstanding the foregoing, the Committee, in its sole discretion, may terminate the Option effective as of the date of such termination of such position if it determines that such termination of such position was caused, in whole or in part, by (1) Optionee's refusal to perform his duties, (2) gross or willful misconduct of Optionee that was materially harmful to the Company or any of its subsidiaries, or (3) Optionee's conviction of a crime of moral turpitude or a felony involving personal dishonesty. (b) Retirement. If Optionee retires with then consent of the Board of Directors of the Company, then the Option shall terminate upon the earliest of the Expiration Date, the third anniversary of the date of such retirement or, if applicable, the first anniversary of the date of Optionee's death. (c) Death. If Optionee shall die on or prior to the date upon which his position with the Company is terminated, then the Option shall terminate upon the earlier of the Expiration Date or the first anniversary of the date of such death. 3. Adjustments. In the event that the outstanding securities of the class then subject to the Option are increased, decreased or exchanged for or converted into cash, property and/or a different number or kind of securities, or cash, property and/or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, reclassification, dividend (other than a regular, quarterly cash dividend) or other distribution, stock split, reverse stock split or the like, or in the event that substantially all of the property and assets of the Company are -2- 3 sold, then the Committee shall make appropriate and proportionate adjustments in the number and type of shares or other securities or cash or other property that may thereafter be acquired upon the exercise of the Option; provided, however, that any such adjustments in the Option shall be made without changing the aggregate Exercise Price of the then unexercised portion of the Option. 4. Exercise. (a) The Option shall be exercisable during Optionee's lifetime only by Optionee or by his or her guardian or legal representative, and after Optionee's death only by the person or entity entitled to do so under Optionee's last will and testament or applicable intestate law. The Option may only be exercised by the delivery to the Company of a written notice of such exercise, which notice shall specify the number of Option Shares to be purchased (the "Purchased Shares") and the aggregate Exercise Price for such shares (the "Exercise Notice"), together with payment in full of such aggregate Exercise Price in cash or by check payable to the Company; provided, however, that payment of such aggregate Exercise Price may instead be made, in whole or in part: (i) by the delivery to the Company of a full-recourse promissory note in a form and amount satisfactory to the Committee, provided that the principal amount of such note shall not exceed the excess of such aggregate Exercise Price over and above the aggregate par value of the Purchased Shares; (ii) by the delivery to the Company of a certificate or certificates representing shares of Common Stock, duly endorsed or accompanied by a duly executed stock powers, which delivery effectively transfers to the Company good and valid title to such shares, free and clear of any pledge, commitment, lien, claim or other encumbrance (such shares to be valued on the basis of the aggregate Fair Market Value (as defined below) thereof on the business day immediately preceding the date of such exercise), provided that the Company is not then prohibited from purchasing or acquiring such shares of Common Stock; and/or (iii) by reducing the number of shares of Common Stock to be issued and delivered to Optionee upon such exercise (such reduction to be valued on the basis of the aggregate Fair Market Value (determined on the business day immediately -3- 4 preceding the date of such exercise) of the additional shares of Common Stock that would otherwise have been issued and delivered upon such exercise, provided that the Company is not then prohibited from purchasing or acquiring such additional shares of Common Stock. The "Fair Market Value" of a share of Common Stock or other security on any day shall be equal to the last sale price, regular way, per Common Share or unit of such other security on such day or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of the Common Stock or such other security are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other security are listed or admitted to trading or, if the shares of Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or such other system then in use or, if on any such date the shares of Common Stock or such other security are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares of Common Stock or such other security selected by the Board of Directors. (b) If Optionee shall deliver to the Company a duly executed copy of such Exercise Notice and, in accordance with Section 220.3(e)(4) of Regulation T promulgated under the 1934 Act, a duplicate copy of duly executed, irrevocable instructions to a broker promptly to deliver to the Company a specified dollar amount from the proceeds of a sale of or loan secured by such Purchased Shares, the Company shall promptly confirm to such broker in writing that the Company shall issue and deliver such Purchased Shares to the person or entity specified in such Exercise Notice promptly upon the receipt by the Company of such aggregate Exercise Price in cash or other immediately available funds. -4- 5 5. Payment of Withholding Taxes. (a) If the Company is obligated by law to withhold an amount on account of any federal, state or local tax imposed as a result of the exercise of the Option (such amount shall be referred to herein as the "Withholding Liability"), Optionee shall, on the first date upon which the Company becomes obligated to pay the Withholding Liability to the appropriate taxing authority (the "Withholding Payment Date"), pay the Withholding Liability to the Company in full in cash or by check; provided, however, that, in the discretion of the Committee, Optionee may, pursuant to an irrevocable election of Optionee (a "Withholding Election") made on or prior to the date upon which the amount of the Withholding Liability is determined (the "Withholding Liability Determination Date"), pay all or any part of the Withholding Liability in the following manner: (i) by the delivery to the Company of a certificate or certificates representing shares of Common Stock, duly endorsed or accompanied by a duly executed stock powers, which delivery effectively transfers to the Company good and valid title to such shares, free and clear of any pledge, commitment, lien, claim or other encumbrance (such shares to be valued on the basis of the aggregate Fair Market Value thereof on the business day immediately preceding the Withholding Liability Determination Date), provided that the Company is not then prohibited from purchasing or acquiring such shares of Common Stock; and/or (ii) by reducing the number of shares of Common Stock to be issued and delivered upon such exercise (such reduction to be valued on the basis of the Fair Market Value on the business day immediately preceding the Withholding Liability Determination Date of the additional shares of Common Stock that would otherwise have been issued and delivered upon such exercise), provided that the Company is not then prohibited from purchasing or acquiring such additional shares of Common Stock. (b) Notwithstanding subsection (a) above, if Optionee is subject to Section 16 of the 1934 Act on the date of such exercise, Optionee may not make such a Withholding Election unless: -5- 6 (i) the Company shall have been subject to the reporting requirements of Section 13 of the 1934 Act for at least one year prior thereto and shall have filed pursuant to such section during such year; (ii) the Company on a regular basis releases quarterly and annual summary statements of its sales and earnings ("Financial Data") for publication on a wire service, in a financial news service or in a newspaper of general circulation, or Financial Data is otherwise made publicly available on a regular basis; (iii) such Withholding Election is not made during the six-month period commencing on the Date of Grant, provided that this subsection (b)(iii) shall not apply if Optionee dies or becomes disabled prior to the expiration of such six-month period; and (iv) such Withholding Election must be made (A0 no later than six months minus one day prior to the Withholding Liability Determination Date or (B) during a period beginning on the third business day following a date upon which the Company releases Financial Data and ending on the twelfth business day following such date. (c) The Committee shall have sole discretion to consent to or disapprove any Withholding Election after it is made and may adopt such rules and regulations as are consistent with and necessary to implement the foregoing. The Committee may permit Optionee to make a Withholding Election to pay withholding taxes in excess of the minimum amount required by law, provided that the amount of withholding taxes so paid does not exceed the estimated total federal, state and local tax liability of Optionee attributable to such exercise. 6. Stock Exchange Requirements; Applicable Laws. Nothwithstanding anything to the contrary in this Agreement, no shares of stock purchased upon exercise of the Option, and no certificate representing all or any part of such shares, shall be issued or delivered if (a) such shares have not been admitted to listing upon official notice of issuance on each stock exchange upon which shares of that class are then listed or (b) in the opinion of counsel to the Company, such issuance or delivery would cause the Company to be in -6- 7 violation of or to incur liability under any federal, state or other securities law, or any requirement of any stock exchange listing agreement to which the Company is a party, or any other requirement of law or of any administrative or regulatory body having jurisdiction over the Company. 7. Nontransferability. Neither the Option nor any interest therein may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner other than by will or the laws of descent and distribution. 8. Notices. Any notice or communication given pursuant hereto shall be in writing and delivered personnally or by mail, postage prepaid, addressed to Optionee at his then-current address, as indicated in the books and records of the Company, or addressed to the Company as follows: Mac Frugal's Bargains * Close-outs Inc. 2430 East Del Amo Boulevard Dominguez, CA 90220 Attention: Chief Executive Officer or at such other address as either party hereto, by written notice to the other, shall designate from time to time. Any such notice or communication by Optionee shall be deemed given upon actual receipt by the Company. Any such notice or communication by the Company, if mailed, shall be deemed given when mailed. 9. Stockholder Rights. No person or entity shall be entitled to vote, receive dividends or be deemed for any purpose the holder of any Option Shares until the Option shall have been duly exercised to purchase such Option Shares in accordance with the provisions of this Agreement. 10. Rights to Remain a Director. No provision of this Agreement or of the Option granted hereunder shall (a) confer upon Optionee any right to continue his relationship with the Company as a member of the Board of Directors, (b) affect the right of the Company to terminate such relationship of Optionee with the Company, with or without cause, or (c) confer upon Optionee any right to participate in any employee welfare or benefit plan or other program of the Company or any of its subsidiaries. -7- 8 11. Governing Law. This Agreement and the Option granted hereunder shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Company and Optionee have duly executed this Agreement as of the Date of Grant. Mac Frugal's Bargains * Close-outs Inc. By /s/ Philip L. Carter --------------------------------------- Philip L. Carter President and Chief Executive Officer /s/ Peter S. Willmott --------------------------------------- Peter S. Willmott Optionee -8- EX-10.32 6 AM#1 SOP FOR NON-EMPLOYEE DIR 1 EXHIBIT 10.32 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. (FORMERLY KNOWN AS PIC 'N' SAVE CORPORATION) AMENDMENT NO. 1 TO STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS This Amendment No. 1 to the Stock Option Plan for Non-Employee Directors (the "Plan") of Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (formerly known as Pic 'N' Save Corporation) (the "Company"), is made as of this 14th day of June, 1995. Capitalized terms used herein shall have the same meaning as ascribed to such terms in the Plan, unless otherwise defined herein. 1. The first sentence of Section 4(a) of the Plan is hereby amended to read in its entirety as follows: "(a) Amount, Exercise Price and Exercisability of Automatic Annual Grants. Each Director shall automatically be granted, on the date of the Director's election to the Board of Directors at the Company's annual meeting of stockholders (the "Annual Meeting"), including on the date of each re-election of such Director at any such Annual Meeting (the "Date of Grant"), an Option to purchase 2,250 Common Shares (subject to adjustment as provided in Section 7)." 2. Section 5(a) of the Plan is hereby amended to read in its entirety as follows: "(a) The maximum number of Common Shares that may be issued pursuant to all Options granted under the Plan is 400,000, subject to adjustment as provided in Section 7 hereof (such maximum number, as so adjusted, shall be referred to as the "Share Limitation")." 3. Except as set forth herein, the Plan is hereby ratified and confirmed in all respects. EX-10.34 7 AM#3 TO 1990 EMPLOYEE STOCK INCENTIVE PLAN 1 EXHIBIT 10.34 MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. (FORMERLY KNOWN AS PIC 'N' SAVE CORPORATION) AMENDMENT NO. 3 TO 1990 EMPLOYEE STOCK INCENTIVE PLAN This Amendment to the 1990 Employee Stock Incentive Plan (the "Plan") of Mac Frugal's Bargains * Close-outs Inc., a Delaware corporation (formerly known as Pic 'N' Save Corporation) (the "Company"), is made as of this 21st day of April, 1993. Capitalized terms used herein shall have the same meaning as ascribed to such term in the Plan, unless otherwise defined herein. 1. Section 3 of the Plan is hereby amended to read in its entirety as follows: "3. Common Shares Subject to Plan. The maximum number of Common Shares set aside and reserved for issuance under this Plan, in the aggregate is 3,200,000, subject to adjustment as provided in Section 12 hereof. Such maximum number includes the number of Common Shares subject to the portion of any Employee Option granted under this Plan that is surrendered in connection with the exercise of any Stock Appreciation Right granted in connection therewith, but does not include the number of Common Shares subject to the unexercised portion of any options granted under this Plan that are reacquired by the Company." 2. Except as set forth herein, the Plan is hereby ratified and confirmed in all respects. EX-22.1 8 SUBSIDIARIES 1 EXHIBIT 22.1 SUBSIDIARIES OF MAC FRUGAL'S BARGAINS * CLOSE-OUTS INC. 1. PNS Stores, Inc. State of Incorporation: California Business Names: Pic 'N' Save Mac Frugal's Bargains * Close-outs 2. West Coast Liquidators, Inc. State of Incorporation: California Business Names: None EX-24.1 9 IND. AUDITOR'S CONSENT 1 EXHIBIT 24.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of Mac Frugal's Bargains * Close-outs Inc. Dominguez, California: We consent to the incorporation by reference in Registration Statement No. 33-43661 on Form S-8 and Registration Statement No. 33-55130 of Mac Frugal's Bargains * Close-outs Inc. on Form S-8 of our report dated March 12, 1996 (except for Note 10, as to which the date is March 21, 1996), appearing in this Annual Report on Form 10-K of Mac Frugal's Bargains * Close-outs Inc. and subsidiaries for the year ended January 28, 1996. /s/ DELOITTE & TOUCHE LLP Los Angeles, California April 26, 1996 EX-27 10 FIN DATA SCHEDULE
5 1,000 12-MOS JAN-28-1996 JAN-30-1995 JAN-28-1996 7,285 0 0 0 200,616 230,869 307,017 (121,106) 419,072 86,350 0 0 0 711 229,688 419,072 704,934 704,934 414,640 414,640 254,427 0 12,385 23,482 8,923 14,559 0 0 0 14,559 .56 0
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