<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: October 25, 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)
440-248-5200
------------
(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 November 30, 1997:
9,148,289.
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<TABLE>
<CAPTION>
MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
October 25, 1997 and January 25, 1997 4
Consolidated Statements of Operations - for the
quarter and nine months ended October 25, 1997 and
October 26, 1996 5
Consolidated Statements of Cash Flows - for the
nine months ended October 25, 1997 and October 26, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operation
Part II OTHER INFORMATION
Item 1- 6. 18
SIGNATURES 19
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Consolidated Financial Statements follow this page.
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<PAGE> 4
<TABLE>
<CAPTION>
Mazel Stores, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
October 25, January 25,
1997 1997
------------------ ------------------
(unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,496 $ 8,010
Accounts receivable-- trade, less allowance for
doubtful accounts of $195 in both periods presented 16,906 10,565
Notes and other receivables 970 96
Inventories 58,666 40,399
Prepaid expenses 1,492 1,186
Deferred income tax benefit 3,006 3,006
-------- --------
Total current assets 82,536 63,262
Equipment, furniture and leasehold improvements, net 8,813 6,251
Other assets 1,384 1,107
Investment in VCM, Ltd. 8,520
Notes receivable- related parties 2,492 2,936
Goodwill, net 10,679 10,876
Deferred income tax benefit 1,929 1,929
-------- --------
$116,353 $ 86,361
======== ========
Liabilities and Stockholder's Equity
Current liabilities
Long-term debt, current portion $ 17 $ 17
Accounts payable 17,956 15,447
Accrued expenses 2,516 3,050
Other current liabilities 535 275
-------- --------
Total current liabilities 21,024 18,789
Revolving line of credit 22,945 0
Long-term debt, net of current portion 54 53
Other liabilities 2,247 2,091
Deferred income tax liability 666 666
-------- --------
Total liabilities 46,936 21,599
Stockholder's equity
Common stock, no par value: 14,000,000 shares authorized:
9,170,100 shares issued and 9,148,289 outstanding 0 0
Preferred stock, no par value: 2,000,000 shares authorized:
no shares issued or outstanding 0 0
Additional paid-in capital 64,309 64,742
Retained earnings 5,108 20
-------- --------
Total stockholder's equity 69,417 64,762
Commitments and contingencies
-------- --------
$116,353 $ 86,361
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 19
<PAGE> 5
<TABLE>
<CAPTION>
Mazel Stores, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Quarters Ended Nine Months Ended
----------------------------- ------------------------------
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $48,820 $44,387 $141,001 $129,552
Gross profit 17,342 14,718 48,346 41,369
% of sales 35.52% 33.16% 34.29% 31.93%
Selling general and administrative 13,097 11,562 37,839 32,384
---------- ---------- ---------- ----------
Operating profit 4,245 3,156 10,507 8,985
% of sales 8.70% 7.11% 7.45% 6.94%
Other income (expense)
Interest (expense) (395) (775) (570) (2,059)
Other income (expense) (1,117) 8 (1,010) 30
---------- ---------- ---------- ----------
Income before income taxes 2,733 2,389 8,927 6,956
Income tax expense (benefit) 1,175 (27) 3,839 7
---------- ---------- ---------- ----------
Net income $1,558 $2,416 $5,088 $6,949
========== ========== ========== ==========
Net income per share $0.17 $0.56
========== ==========
Average shares outstanding 9,161,000 9,167,000
========== ==========
Pro Forma As Adjusted Data (note 4)
Income before income taxes $2,389 $6,956
Supplemental pro forma adjustments
Management compensation adjustments 412 1,236
Reduction in interest expense net 738 2,213
Provision for income taxes (1,451) (4,266)
---------- ----------
Pro forma as adjusted net income $2,088 $6,139
========== ==========
Pro forma as adjusted net income per share $0.23 $0.67
========== ==========
Pro forma as adjusted shares outstanding 9,170,100 9,170,100
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 19
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<TABLE>
<CAPTION>
Mazel Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
---------------------------------
October 25, October 26,
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $5,088 $6,949
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 1,017 738
Changes in operating assets and liabilities
Accounts receivable-- trade (6,341) 19
Notes and other receivables (1,310) (93)
Inventories (18,267) (15,196)
Prepaid expenses (306) (746)
Other assets 141 (993)
Accounts payable 2,509 1,930
Accrued expenses and other liabilities (117) 1,737
---------- ----------
Total adjustments (22,674) (12,604)
---------- ----------
Net cash used in operating activities (17,586) (5,655)
---------- ----------
Cash flows from investing activities
Capital expenditures (3,353) (2,165)
Investment in VCM, Ltd. (8,520)
---------- ----------
Net cash used in investing activities (11,873) (2,165)
---------- ----------
Cash flows from financing activities
Repayment of debt (1,521)
Net borrowings under credit facility 22,945 8,037
Equity contributions 4,000
Partners' withdrawals (2,957)
---------- ----------
Net cash provided by financing activities 22,945 7,559
---------- ----------
Net decrease in cash and cash equivalents (6,514) (261)
Cash and cash equivalents at beginning of period 8,010 1,470
---------- ----------
Cash and cash equivalents at end of period $1,496 $1,209
========== ==========
Supplemental disclosure
Cash paid for interest $451 $1,974
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 19
<PAGE> 7
MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended
October 25, 1997 & October 26, 1996
(1) Basis of Presentation
Combined financial statements for the quarter and nine months ended
October 26, 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 and nine
months ended October 25, 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 10-K 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.
(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.
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<PAGE> 8
(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.
(5) New Accounting Pronouncements
During 1997 the FASB issued SFAS No. 128, Earnings per Share, which
changes the computation and presentation of earnings per share information and
SFAS No. 129, Disclosure of Information about Capital Structure. Both
statements, effective for financial statements issued for periods ending after
December 15, 1997 and, accordingly, will be adopted by the Company in the fourth
quarter of the current fiscal year. Adoption of these statements will not
materially impact the current computation and presentation of earnings per share
or financial statement disclosures.
During 1997 the FASB also issued No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which are effective for fiscal years beginning after December 15,
1997. The impact upon adoption of these statements by the Company in fiscal 1998
will result in additional disclosures with regard to the Company's business
segments.
(6) Investments in Joint Ventures
On August 3, 1997 the Company commenced the operation of its joint
venture (VCM, Ltd.) with Value City Department Stores. VCM, Ltd. operates the
toy, sporting goods, and expanded health and beauty aid departments (including
stationery, greeting cards, and small electronics) in the Value City stores. The
Company made an initial investment of $9.6 million cash for its 50% ownership
share in VCM, Ltd. The Company receives a quarterly management fee of 3% of
joint venture sales and will participate in 50% of the profits or losses of the
joint venture. The Company accounts for its 50% interest in VCM, Ltd. under the
equity method.
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<PAGE> 9
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)
opened or acquired ten (10) stores in fiscal 1996; has opened nine stores in
fiscal 1997 (two of which were opened during the third quarter, four of which
were opened in the fourth quarter) and plans to open 13 to 15 stores in fiscal
1998 and 15 stores in fiscal 1999.
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 third quarter and nine months
1996 and the results of the wholesale segment of Mazel Stores, Inc. for the
third quarter and nine months 1997.
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<TABLE>
<CAPTION>
RETAIL SEGMENT
STATEMENT OF OPERATION DATA
RETAIL SEGMENT
(IN THOUSANDS)
Quarters Ended Three Quarters Ended
-------------- --------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 26,088 $ 19,785 $ 70,350 $ 54,824
Cost of sales 16,061 12,017 42,658 33,385
---------- ---------- ---------- ----------
Gross profit 10,027 7,768 27,692 21,439
SG&A expense 9,819 7,258 25,836 19,851
---------- ---------- ---------- ----------
Operating profit-retail $ 208 $ 510 $ 1,856 $ 1,588
========== ========== ========== ==========
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
Quarters Ended Three Quarters Ended
-------------- --------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 61.56% 60.74% 60.64% 60.89%
---------- ---------- ---------- ----------
Gross margin 38.44% 39.26% 39.36% 39.11%
SG&A expense 37.64% 36.68% 36.72% 36.21%
---------- ---------- ---------- ----------
Operating margin - retail 0.80% 2.58% 2.64% 2.90%
========== ========== ========== ==========
</TABLE>
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<PAGE> 11
Third Quarter 1997 versus Third Quarter 1996
Net sales increased $6.3 million, or 31.9% to $26.1 million in third
quarter 1997 from $19.8 million for third quarter 1996. Comparable store net
sales, which are based on a small base of 13 stores, increased approximately
$296,000, or 1.8% to $16.5 million in third quarter 1997 from $16.2 million in
third quarter 1996. Overall sales increases reflect the addition of 11 stores
opened or acquired since the beginning of third quarter 1996.
Gross profit increased $2.3 million, or 29.1%, to $10.0 million in third
quarter 1997, from $7.7 million in third quarter 1996. Gross margin decreased
slightly to 38.4% in third quarter 1997, from 39.3% in third quarter 1996. The
decrease was due in part to the increase in lower margin deals included in the
quarter's deal mix. Due to the deal to deal nature of the business, the decrease
in third quarter margin may not be indicative of future gross margin
performance.
Selling, general and administrative expenses increased $2.6 million, or
35.3%, to $9.8 million in third quarter 1997, from $7.2 million in third quarter
1996. Selling, general and administrative expenses, as a percentage of net
sales, increased to 37.6% in third quarter 1997 from 36.7% in the third quarter
1996. The $2.6 million increase primarily resulted from $1.9 million of
increased store level expenses, particularly occupancy expense related to the
new stores. Pre opening expenses incurred in third quarter 1997 were $461,000 as
compared to $272,000 in the third quarter 1996. In addition, warehouse and store
delivery costs increased $369,000 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 $313,000
in advertising costs.
Operating profit decreased to $208,000 for third quarter 1997, from
$510,000 for third quarter 1996. As a percentage of net sales, operating margin
decreased to 0.8% from 2.6%. This decrease was primarily due to the factors
described above.
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<PAGE> 12
Nine Months Ended 1997 versus Nine Months Ended 1996
Net sales increased $15.5 million, or 28.3% to $70.3 million in nine
months ended 1997 from $54.8 million for nine months ended 1996. Comparable
store net sales decreased approximately $177,000, or 0.4% to $48.2 million in
nine months ended 1997 from $48.4 million in the comparable 1996 period. Overall
sales increases reflect the addition of 15 stores opened or acquired since the
beginning of fiscal year 1996. A stronger third quarter helped improve year to
date comparable store sales results.
Gross profit increased $6.3 million, or 29.2%, to $27.7 million in nine
months ended 1997, from $21.4 million in nine months ended 1996. Gross margin
increased to 39.4% in nine months ended 1997, from 39.1% in the comparable 1996
period. The year to date gross margin reflects the positive effect of vendor
rebates and large purchases made late in the first quarter.
Selling, general and administrative expenses increased $6.0 million, or
30.1%, to $25.8 million in nine months ended 1997, from $19.8 million in nine
months ended 1996. Selling, general and administrative expenses, as a percentage
of net sales, increased to 36.7% in the nine months ended 1997 from 36.2% in the
comparable 1996 period. The $6.0 million increase primarily resulted from $4.5
million of increased store level expenses, particularly occupancy expense
related to the new stores and new store pre opening expenses. In addition,
warehouse and store delivery costs increased $829,000 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 $665,000 in advertising costs.
Operating profit increased to $1.9 million for nine months ended 1997
from $1.6 million for nine months ended 1996. As a percentage of net sales,
operating profit decreased to 2.6% from 2.9%. This decrease was primarily due to
the factors described above.
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<TABLE>
<CAPTION>
WHOLESALE SEGMENT
STATEMENT OF OPERATION DATA
WHOLESALE SEGMENT
(IN THOUSANDS)
Quarters Ended Nine Months Ended
-------------- -----------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $22,731 $24,602 $70,650 $74,728
Cost of sales 15,416 17,652 49,996 54,798
------ ------ ------ ------
Gross profit 7,315 6,950 20,654 19,930
SG&A expense 3,217 3,022 9,950 8,713
----- ----- ----- ------
Operating profit-wholesale $ 4,098 $ 3,928 $10,704 $11,217
======= ======= ======= =======
Corporate expenses (1) $ 61 $ 1,282 $ 2,053 $ 3,820
======= ======= ======= ========
<CAPTION>
(1) Corporate expenses consist of shared administrative costs between retail and
wholesale.
PERCENTAGE OF NET SALES
-----------------------
Quarters Ended Nine Months Ended
-------------- -----------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 67.82% 71.75% 70.77% 73.33%
-------- -------- -------- --------
Gross margin 32.18% 28.25% 29.23% 26.67%
SG & A expense 14.15% 12.28% 14.08% 11.66%
-------- -------- -------- --------
Operating margin-wholesale 18.03% 15.97% 15.15% 15.01%
======== ======== ======== ========
Corporate expenses 0.12% 2.89% 1.46% 2.95%
========= ========= ========= =========
</TABLE>
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<PAGE> 14
Third Quarter 1997 versus Third Quarter 1996
Net sales decreased $1.9 million or 7.6%, to $22.7 million in third
quarter 1997, from $24.6 million in third quarter 1996. The decrease is
partially reflective of higher sales to affiliates including the Company's
retail division and VCM, Ltd. (the Company's joint venture with Value City
Department Stores). Were sales to affiliates included in net sales figures, the
quarterly net sales would have shown a slight increase.
Gross profit increased $365,000 or 5.3%, to $7.3 million in third
quarter 1997, from $7.0 million in third quarter 1996. Gross margin increased to
32.2% in third quarter 1997 from 28.3% in third quarter 1996. The increase in
gross profit and gross margin was due in part to the Company's ability to buy
and sell higher margin product. In addition, as sales to affiliates increase,
the handling markup associated with these sales has a positive impact on the
gross margin percentage.
Selling, general and administrative expenses increased $195,000 or 6.5%,
to $3.2 million in third quarter 1997, from $3.0 million in third quarter 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 14.2% in third quarter 1997, from 12.3% in third quarter 1996.
Warehouse expenses accounted for an increase of $358,000 in the third quarter of
1997, due mainly to increases in repack labor and supplies. This increase was
partially offset by a decline in the purchasing and administrative expenses for
the quarter.
Wholesale operating profit increased to $4.1 million in third quarter
1997, from $3.9 million in third quarter 1996. As a percentage of net sales,
operating margin increased to 18.0% in the third quarter 1997 from 16.0% in the
comparable 1996 quarter, due to the factors described above.
Nine Months Ended 1997 versus Nine Months Ended 1996
Net sales decreased $4.1 million or 5.5%, to $70.6 million in nine
months ended 1997 from $74.7 million in the comparable 1996 period. Increases in
sales to affiliates, eliminated in consolidation, were largely responsible for
the decline.
Gross profit increased $724,000 or 3.6%, to $20.7 million in the nine
months ended 1997 from $19.9 million in the comparable 1996 period. Gross margin
increased to 29.2% in nine months ended 1997 from 26.7% in nine months ended
1996. The increase in gross profit and gross margin was due in part to the
Company's ability to buy and sell higher margin product. In addition, as sales
to affiliates increase, the handling markup associated with these sales has a
positive impact on the gross margin percentage.
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<PAGE> 15
Selling, general and administrative expenses increased $1.2 million or
14.2%, to $9.9 million in the nine months ended 1997, from $8.7 million in the
nine months ended 1996. As a percentage of net sales, selling, general and
administrative expenses increased to 14.1% in the nine months ended 1997, from
11.7% in the nine months ended 1996. Warehousing expense accounted for more than
half of the increase, as increased repack labor and supplies were required.
Other variable expenses such as sales commissions, travel and start up expenses
associated with a new promotional line of products accounted for the remainder
of the increase.
Wholesale operating profit decreased to $10.7 million in the nine months
ended 1997, from $11.2 million in the nine months ended 1996. As a percentage of
net sales, operating margin increased to 15.2% in the nine months ended 1997
from 15.0% in the comparable 1996 quarter due to the factors described above.
CORPORATE EXPENSES
Third Quarter 1997 versus Third 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 expenses decreased $1.2 million or 95.2% to $61,000 during third
quarter 1997 from $1.3 million for third quarter 1996. Corporate expenses
decreased as a percentage of total Company's sales to 0.1% in 1997 from 2.9% in
1996. The decrease in corporate expenses was due primarily to salary reductions
taken by key executives as part of the Company's offering, compensation accrual
adjustments and the inclusion of $638,000 of management fees received by the
Company from VCM, Ltd.
Nine Months Ended 1997 versus Nine Months Ended 1996
Corporate expenses consist of the cost of senior management and shared
administrative resources which are utilized by both segments of the business.
Corporate expenses decreased $1.7 million or 46.3% to $2.1 million during the
nine months ended 1997 from $3.8 million for the nine months ended 1996.
Corporate expenses decreased as a percentage of total Company's sales to 1.5% in
1997 from 2.9% in 1996. The decrease in corporate expenses was due primarily to
salary reductions taken by key executives as part of the Company offering,
compensation accrual adjustments and management fees received by the Company
from VCM, Ltd., offset partially by increases in legal and professional
expenses.
OTHER EXPENSES
Loss from the VCM, Ltd. joint venture totaled $1.1 million for the
three and nine months ended October 25, 1997. The joint venture began operations
in August of 1997.
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<PAGE> 16
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 an 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. A portion of the tax loans to certain
executive officers were repaid in the third quarter of the current fiscal year
from the proceeds of sale of the company's common stock by such individuals,
including the repurchase of 21,811 shares directly by the Company at market
value.
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 October 25, 1997 the
Company's availability on the credit facility was $13.4 million.
For the first nine months of 1997, cash used by consolidated operating
activities was $17.6 million as compared to cash used in the first nine months
of 1996 of $5.7 million. Increases in inventory and trade receivables partially
offset by decreases in trade payables accounted for the majority of cash used in
the first nine months of 1997. In the first nine months of 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 $11.9 million in the first nine months of 1997 from $2.2 million in
the first nine months of 1996. Cash used in investing activities in the first
nine months of 1997 was comprised of two major components, capital asset
acquisitions and the investment in VCM Ltd. Equipment and racking for the
expansion of the wholesale distribution facility, the remodeling of the
Company's New York showroom, the opening of new retail stores and retail
software development accounted for the majority of these capital expenditures.
Cash provided by financing activities increased to $22.9 million in the first
nine months of 1997 from $7.6 million in the first nine months of 1996. The
financing provided in the first nine months of 1997 was from borrowings on the
Company's line of credit. In the first nine months of 1996 financing was
provided by equity contributions and borrowings on the Company's line of credit,
partially offset by partner withdrawals.
16 of 19
<PAGE> 17
INFLATION
During the nine months ended October 25, 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.
FORWARD-LOOKING INFORMATION
Forward looking statements in this document are made pursuant to the
safe harbor provision of the Private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward looking
statements which speak only as of the date hereof.
Any impact of the proposed Consolidated Stores/MacFrugals merger on
sales by the Company's wholesale division cannot be determined at this time.
Additional risks and uncertainties include, but are not limited to, the
successful implementation of the Company's retail expansion plans and the timing
of new store openings, the ability to purchase quality closeout merchandise at
prices that allow the Company to maintain or exceed expected margins on sales,
the effect on comparable store sales of the small platform of stores, the
disproportionate impact caused by individual buying transactions, growth into
new geographic areas, availability of appropriate retail locations, any
unanticipated problems at the Company's distribution facilities or in
transportation of merchandise, in general, the operating and financial result of
the Value City joint venture and general economic conditions. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.
17 of 19
<PAGE> 18
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
18 of 19
<PAGE> 19
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)
_______________ ______________________________
Date Reuven Dessler
Chief Executive Officer
_______________ ______________________________
Date Sue Atkinson
Senior Vice President
Chief Financial Officer and
Treasurer
19 of 19
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