<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: April 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------.
Commission File No. 0-21597
MAZEL STORES, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1830097
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31000 Aurora Road
Solon, Ohio 44139
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
216-248-5200
----------------
(Registrant's telephone number, including area code)
---------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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.
Yes * No
------ ------
Indicate the number of shares outstanding of each of the issuer's common
stock, as of the latest practical date.
Common Shares, no par value, outstanding as of May 31, 1997: 9,170,100.
Page 1 of 16
<PAGE> 2
MAZEL STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Part I FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
April 26, 1997 and January 25, 1997 4
Consolidated Statements of Operations - for the
quarters ended April 26, 1997 and April 30, 1996 5
Consolidated Statements of Cash Flows - for the
quarters ended April 26, 1997 and April 30, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operation
Part II OTHER INFORMATION
Item 1-6. 15
SIGNATURES 16
</TABLE>
Page 2 of 16
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item l. Consolidated Financial Statements (unaudited)
The Registrant's Consolidated Financial Statements follow this page.
Page 3 of 16
<PAGE> 4
Mazel Stores, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
April 26, January 25,
1997 1997
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,196 $ 8,010
Accounts receivable - trade, less allowance for
doubtful accounts of $195 in both years presented 13,402 10,565
Notes and other receivables 288 96
Inventories 49,934 40,399
Prepaid expenses 1,022 1,186
Deferred income tax benefit 3,006 3,006
------- -------
Total current assets 68,848 63,262
Equipment, furniture and leasehold improvements, net 7,007 6,251
Other assets 1,004 1,107
Notes receivable - related parties 2,940 2,936
Goodwill, net 10,798 10,876
Deferred income tax benefit 1,929 1,929
------- -------
$92,526 $86,361
======= =======
Liabilities and Stockholder's Equity
Current liabilities
Long-term debt, current portion $ 17 $ 17
Accounts payable 15,817 15,447
Accrued expenses 3,453 3,050
Other current liabilities 457 275
------- -------
Total current liabilities 19,744 18,789
Revolving line of credit 3,677 0
Long-term debt, net of current portion 53 53
Other liabilities 2,093 2,091
Deferred income tax liability 666 666
------- -------
Total liabilities 26,233 21,599
Stockholder's equity
Common stock, no par value: 14,000,000 shares authorized:
9,170,100 share issued and outstanding 0 0
Preferred stock, no par value: 2,000,000 shares authorized:
no shares issued or outstanding 0 0
Additional paid-in capital 64,742 64,742
Retained earnings 1,551 20
------- -------
Total stockholders equity 66,293 64,762
Commitments and contingencies
------- -------
$92,526 $86,361
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 16
<PAGE> 5
Mazel Stores, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------
April 26, April 30,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 43,128 $ 42,455
Gross profit 14,844 12,899
% of Sales 34.42% 30.38%
Selling general and administrative 12,220 9,899
----------- -----------
Operating profit 2,624 3,000
% of Sales 6.08% 7.07%
Other income (expense)
Interest (expense) (45) (591)
Other income 107 8
----------- -----------
Income before income taxes 2,686 2,417
Income tax expense 1,155 79
----------- -----------
Net income $ 1,531 $ 2,338
=========== ===========
Net income per share $ 0.17
==========
Average shares outstanding 9,170,100
==========
PRO FORMA AS ADJUSTED DATA (NOTE 4)
Income before income taxes $ 2,417
Supplemental pro forma adjustments
Management compensation adjustments 412
Reduction in interest expense, net 738
Provision for income taxes (1,427)
-----------
Pro forma as adjusted net income $ 2,140
===========
Pro forma as adjusted net income per share $ 0.23
===========
Pro forma as adjusted shares outstanding 9,170,100
===========
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 16
<PAGE> 6
Mazel Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarters Ended
----------------------
April 26 April 30
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,531 $ 2,338
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 332 235
Changes in operating assets and liabilities
Accounts receivable-- trade (2,837) (2,856)
Notes and other receivables (192) (207)
Inventories (9,535) (5,769)
Prepaid expenses 164 (2)
Other assets 92 (9)
Accounts payable 370 1,166
Accrued expenses and other liabilities 587 123
-------- -------
Total adjustments (11,019) (7,319)
-------- -------
Net cash used in operating activities (9,488) (4,981)
-------- -------
Cash flows from investing activities
Capital expenditures (1,003) (325)
Cash received at acquisition, net of cash expenses 39
-------- -------
Net cash used in investing activities (1,003) (286)
Cash flows from financing activities
Repayment of debt (433)
Net borrowings under credit facility 3,677 2,049
Equity contributions 4,000
Partners' withdrawals (834)
-------- -------
Net cash provided by financing activities 3,677 4,782
-------- -------
Net decrease in cash and cash equivalents (6,814) (485)
Cash and cash equivalents at beginning of period 8,010 1,470
-------- -------
Cash and cash equivalents at end of period $ 1,196 $ 985
======== =======
Supplemental disclosure
Cash paid for interest $ 0 $ 588
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 16
<PAGE> 7
MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters Ended
April 26, 1997 & April 30, 1996
(1) Basis of Presentation
Combined financial statements for the quarter ended April 30, 1996 are
derived from the unaudited combined financial statements of Mazel Company L.P.
and Odd Job Holdings, Inc., which were previously under common control and
combined as of the date of the initial public offering (the "Offering") (see
note 2). The financial statements for the quarter ended April 26, 1997 represent
the consolidated retail and wholesale operations of Mazel Stores, Inc. All
significant intercompany accounts and transactions are eliminated in the
combined and consolidated financial statements.
In the opinion of management, the information herein includes all
adjustments which are normal and recurring in nature, necessary to present
fairly the results of the interim periods shown in accordance with generally
accepted accounting principles. Operating results for the interim period are not
necessarily indicative of the results that may be expected for the full fiscal
year.
The unaudited interim consolidated financial statements have been prepared
using the same accounting principles that were used in the preparation of the
Company's annual report on Form 10K for the year ended January 25, 1997 and
should be read in conjunction with the consolidated financial statements and the
notes thereto.
(2) Initial Public Offering
On November 21, 1996, the Company completed its initial public offering of
2,574,000 shares of Common Stock, no par value at $16 per share, generating net
proceeds of approximately $37.3 million, after deducting underwriting fees and
Offering expenses. On December 13, 1996, the underwriters exercised their over-
allotment option to purchase an additional 386,100 common shares, generating
an additional $5.7 million of cash proceeds to the Company. The net proceeds
were used to repay approximately $33.4 million of indebtedness to a senior
institutional lender and approximately $4.0 million of Partners' notes, and to
fund $2.9 million in tax loans and approximately $900,000 in compensation
buyouts to certain executives; the remaining $1.9 million was used for the
Company's general corporate purposes.
Page 7 of 16
<PAGE> 8
(3) Earnings Per Share
Earnings per share have been computed based on the weighted average shares
outstanding during each period presented. Pro forma as adjusted earnings per
share include shares issued pursuant to the Company's Offering as if such shares
were outstanding at the beginning of the period presented.
(4) Pro Forma Disclosures
Prior to the Offering, Mazel Company L.P., the predecessor company,
maintained the tax status of a limited partnership and therefore, was not
subject to federal or state income taxes. The unaudited pro forma as adjusted
income data assumes a provision for federal and state income taxes at an
effective rate of 40%. Pro forma as adjusted data excludes certain nonrecurring
charges, and gives effect to the use of proceeds of the Offering, as well as
certain adjustments made as a result of the Offering relating principally to
compensation expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Overview
Mazel Stores, Inc. consists of two complementary operations: (i) a major
regional closeout retail business; and (ii) one of the nation's largest closeout
wholesale businesses.
Mazel was founded as a wholesaler of closeout merchandise in 1975. In 1992,
Mazel Company L.P. (a predecessor to the Company), a general partner of which
was an affiliate of ZS Fund, a private investment firm, acquired substantially
all of the assets of Mazel's wholesale and retail businesses. In December 1995,
Odd Job Holdings, Inc., wholly-owned by another affiliate of ZS Fund, acquired
Odd Job, which operated a chain of 12 retail stores in the New York metropolitan
area, and acquired Peddlers Mart, which operated one store. In connection with a
restructuring that occurred immediately prior to the Offering in November 1996,
the Company acquired all of the assets of Mazel Company L.P. and the stock of
Odd Job Holdings, Inc. The Company (including its predecessors) has opened or
acquired ten (10) stores in fiscal 1996; it plans to open nine stores in fiscal
1997, 12 stores in fiscal 1998 and 15 stores in fiscal 1999.
Page 8 of 16
<PAGE> 9
RESULTS OF OPERATIONS
The results of operations set forth below describe: (i) the Company's
retail operations; and (ii) its wholesale operations. Retail operations include
the results of the Odd Job and Peddlers Mart operations. Wholesale operations
include the results of Mazel Company L.P. for the first quarter of 1996 and the
results of the wholesale segment of Mazel Stores, Inc. for the first quarter
1997.
RETAIL SEGMENT
STATEMENT OF OPERATION DATA
RETAIL SEGMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended
----------------------
April 26, April 30,
1997 1996
-------- ---------
<S> <C> <C>
Net sales $21,044 $16,882
Cost of sales 12,754 10,381
------- -------
Gross profit 8,290 6,501
SG&A expenses 7,763 5,892
------- -------
Operating profit-retail 527 609
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
Quarters Ended
---------------------
April 26, April 30,
1997 1996
------ ------
<S> <C> <C>
Net sales 100.00% 100.00%
Cost of sales 60.61% 61.49%
------ ------
Gross margin 39.39% 38.51%
SG&A expenses 36.89% 34.90%
------ ------
Operating margin-retail 2.50% 3.61%
====== ======
</TABLE>
Page 9 of 16
<PAGE> 10
First Quarter 1997 Results versus First Quarter 1996
Net sales increased $4.2 million, or 24.7% to $21.0 million in first
quarter 1997 from $16.9 million for first quarter 1996. Comparable store net
sales decreased approximately $645,000, or 4.0% to $15.4 million in first
quarter 1997 from $16.0 million in first quarter 1996. Overall sales increases
reflect the addition of 10 stores opened or acquired during fiscal year 1996.
Comparable retail sales were adversely impacted by the later timing of unusually
large deals, whose positive impact are expected to be realized later in the
year. In addition, sales were adversely affected by lower shipments to the
stores in the early portion of the quarter and later timing of the Passover
holiday.
Gross profit increased $1.8 million, or 27.5%, to $8.3 million in first
quarter 1997, from $6.5 million in first quarter 1996. Gross margin increased to
39.4% in first quarter 1997, from 38.5% in first quarter 1996. The increase was
due to increased purchasing opportunities resulting from the ability to buy for
both the retail and wholesale operations, as well as the efforts of the
Company's senior buyers in acquiring higher margin products.
Selling, general and administrative expenses increased $1.9 million, or
31.8%, to $7.8 million in first quarter 1997, from $5.9 million in first quarter
1996. Selling, general and administrative expenses, as a percentage of net
sales, increased to 36.9% in first quarter 1997 from 34.9% in the first quarter
1996. The $1.9 million increase primarily resulted from $1.4 million of
increased store level expenses, particularly occupancy expense related to the 10
stores opened in 1996. In addition, warehouse and store delivery costs increased
$316,000 due to costs associated with increased inventory levels and new store
support costs. An expanded advertising program, including periodic circulars,
resulted in an increase of approximately $186,000 in advertising costs.
Operating profit decreased to $527,000 for first quarter 1997, from
$609,000 for first quarter 1996. As a percentage of net sales, operating profit
decreased to 2.5% from 3.6%. This decrease was primarily due to the factors
described above.
Page 10 of 16
<PAGE> 11
WHOLESALE SEGMENT
STATEMENT OF OPERATION DATA
WHOLESALE SEGMENT AND CORPORATE EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended
---------------------
April 26, April 30,
1997 1996
------- -------
<S> <C> <C>
Net sales $22,084 $25,573
Cost of sales 15,530 19,175
------- -------
Gross profit 6,554 6,398
SG & A expense 3,458 2,824
------- -------
Operating profit-wholesale 3,096 3,574
======= =======
Corporate expenses (1) 999 1,183
======= =======
</TABLE>
(1) Corporate expenses consist of shared administrative costs between retail and
wholesale.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
Quarters Ended
-----------------------
April 26, April 30,
1997 1996
------ ------
<S> <C> <C>
Net sales 100.00% 100.00%
Cost of sales 70.32% 74.98%
------ ------
Gross margin 29.68% 25.02%
SG & A expense 15.66% 11.04%
------ ------
Operating margin - wholesale 14.20% 13.98%
====== ======
Corporate expenses 2.32% 2.79%
====== ======
</TABLE>
Page 11 of 16
<PAGE> 12
First Quarter 1997 versus First Quarter 1996
Net sales decreased $3.5 million, or 13.6%, to $22.1 million in first
quarter 1997, from $25.6 million in first quarter 1996. Sales in the wholesale
as well as the retail operation were adversely affected by the later timing of
unusually large deals in the fiscal 1997 first quarter as compared with large
purchases that occurred early in the fiscal 1996 first quarter. The sales
benefit of these larger deals will continue through the second and third quarter
of this fiscal year.
Gross profit increased $156,000 or 2.4%, to $6.6 million in 1997, from $6.4
million in first quarter 1996. Gross margin increased to 29.7% in first quarter
1997 from 25.0% in first quarter 1996. The increase in gross profit and gross
margin was due to the Company's ability to buy higher margin product and the
increase in warehouse sales in relation to dropship sales, the former carrying a
higher margin.
Selling, general and administrative expenses increased $634,000 or 22.5%,
to $3.5 million in first quarter 1997, from $2.8 million in first quarter 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 15.7% in first quarter 1997, from 11.0% in first quarter 1996.
Warehousing expense accounted for more than one third of the increase as
increased storage and labor was required to process the larger deals being
received. Other variable expenses such as sales commissions and travel
contributed to the selling general and administrative increase.
Wholesale operating profit decreased to $3.1 million in first quarter 1997,
from $3.6 million in first quarter 1996. As a percentage of net sales, operating
margin remained constant at 14.0% in the first quarter 1997 from 14.0% in the
comparable 1996 quarter due to the factors described above.
CORPORATE EXPENSES
First Quarter 1997 versus First Quarter 1996
Corporate expenses consist of the cost of senior management and shared
administrative resources which are utilized by both segments of the business.
Corporate expense decreased $184,000 or 15.6% to $ 1.0 million during first
quarter 1997 from $1.2 million for first quarter 1996. Corporate expenses
decreased as a percentage of total Company's sales to 2.32% in 1997 from 2.79%
in 1996. The decrease in corporate expenses was due primarily to salary
reductions taken by key executives as part of the Company's initial public
Offering offset partially by increases in legal and professional expenses.
Page 12 of 16
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchases of
inventory, expenditures related to new store openings and the working capital
requirements for new and existing stores. The Company takes advantage of
closeout and other special situation purchasing opportunities which frequently
result in large volume purchases, and, as a consequence, its cash requirements
are not constant or predictable during the year and can be affected by the
timing and size of its purchases. The Company maintains a high level of
committed credit, so that it can take immediate advantage of special situation
purchasing opportunities. Having such credit availability provides the Company
with a competitive advantage measured against many of its competitors.
In the fourth quarter of 1996 the Company completed an initial public
Offering of 2,960,100 shares of Common Stock, no par value, at $16 per share.
The Offering generated net proceeds of approximately $43.0 million, after
deducting underwriting fees and Offering expenses. The net proceeds were used to
repay $33.4 million of indebtedness to a senior institutional lender and $4.0
million of Partners' notes, to fund approximately $2.9 million in tax loans to
certain executives and former shareholders of the Company, $900,000 in
compensation buyouts to certain executives and the remaining $1.9 million was
used for general corporate purposes.
As a result of the Offering, in December 1996, the Company entered into a
new $40 million credit facility. Loans under the new facility are secured by
liens only on the Company's receivables and warehouse inventories. The facility
has a maturity date of April 30, 1999. Borrowings under the new facility bear
interest, at the Company's option, at either LIBOR plus 200 basis points or
prime less 50 basis points. The credit facility contains restrictive covenants
which require minimum net worth levels, maintenance of certain financial ratios
and limitations on capital expenditures and investments. At April 26, 1997 the
Company's availability on the credit facility was $36.3 million.
For first quarter 1997, cash used by consolidated operating activities was
$11.0 million as compared to cash used in first quarter 1996 of $7.3 million.
Increases in inventory and trade receivables accounted for the cash used in
first quarter 1997. In first quarter 1996, increased inventory and trade
receivable levels and decreased trade payables accounted for the majority of
cash used in operations. Cash used in investing activities increased to $ 1.0
million in first quarter 1997 from $286,000 in first quarter 1996. Cash used in
investing activities in first quarter 1997, was primarily for the acquisition of
capital assets. Equipment and racking required for the expansion of the
wholesale distribution facility and the remodeling of the Company's New York
Showroom accounted for the majority of these capital expenditures. Cash provided
by financing activities decreased to $3.7 million in first quarter 1997 from
$4.8 million in first quarter 1996. The financing provided in first quarter 1997
was from borrowings on the Company's line of credit. In first quarter 1996
financing was provided by equity contributions, partially offset by partner
withdrawals and borrowings on the Company's line of credit.
Page 13 of 16
<PAGE> 14
INFLATION
During the quarter ended April 26, 1997, lease expense, salaries and wages
have increased modestly. The increases have not had a significant effect on the
Company's results of operations because the impact of rising costs have been
offset by price increases. As a result, inflation has not had nor is it expected
to have a significant impact on the Company's operations.
SEASONALITY AND QUARTERLY FLUCTUATION
Historically, the Company's retail stores have experienced their highest
net sales and operating income levels during the fourth quarter, which includes
the holiday selling season. The Company's wholesale operations have historically
experienced slightly higher sales and operating income levels in the second half
of the year.
The Company's quarterly results of operations may also fluctuate from
quarter to quarter as a result of the amount and timing of sales contributed by
new stores, the level of advertising and pre-opening expenses associated with
the opening of new stores, the integration of new stores into the operations of
the Company and the timing of large opportunistic purchases and sales in the
Company's wholesale operations as well as other factors.
Page 14 of 16
<PAGE> 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
None
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAZEL STORES, INC.
(Registrant)
June 6, 1997 /s/ Rueven Dessler
- ------------ ----------------------------
Date Rueven Dessler
Chief Executive Officer
June 6, 1997 /s/ Sue Atkinson
- ------------ ----------------------------
Date Sue Atkinson
Senior Vice President
Chief Financial Officer and
Treasurer
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> JAN-26-1997
<PERIOD-END> APR-26-1997
<CASH> 1,196
<SECURITIES> 0
<RECEIVABLES> 13,885
<ALLOWANCES> 195
<INVENTORY> 49,934
<CURRENT-ASSETS> 68,848
<PP&E> 9,816
<DEPRECIATION> 2,809
<TOTAL-ASSETS> 92,526
<CURRENT-LIABILITIES> 19,744
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 66,293
<TOTAL-LIABILITY-AND-EQUITY> 92,526
<SALES> 43,128
<TOTAL-REVENUES> 43,128
<CGS> 28,244
<TOTAL-COSTS> 28,244
<OTHER-EXPENSES> 12,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 2,686
<INCOME-TAX> 1,155
<INCOME-CONTINUING> 1,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,531
<EPS-PRIMARY> .17
<EPS-DILUTED> 0
</TABLE>
