<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: August 1, 1998
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 August 31, 1998: 9,140,400.
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<PAGE> 2
MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
August 1, 1998 and January 31, 1998 4
Consolidated Statements of Operations -
for the 13 and 26 week periods ended
August 1, 1998 and July 26, 1997 5
Consolidated Statements of Cash Flows -
for the 26 week periods ended August 1,
1998 and July 26, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1- 6. 17
Signatures 18
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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
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,649 1,240
Accounts receivable-trade, less allowance for doubtful
accounts of $195 in both periods presented 11,868 15,507
Notes and other receivables 415 334
Inventories 63,437 53,676
Prepaid expenses 3,494 1,194
Deferred income taxes 2,837 2,837
-------- --------
Total current assets 83,700 74,788
Equipment, furniture, and leasehold improvements, net 14,408 10,889
Other assets 4,302 3,183
Investment in VCM, Ltd. 8,271 8,879
Notes and accounts receivable-related parties 5,009 3,952
Goodwill, net 10,544 10,701
Deferred income taxes 1,492 1,492
-------- --------
$127,726 113,884
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Long-term debt, current portion $ 2,017 17
Accounts payable 19,481 14,362
Accrued expenses 2,399 4,036
Other current liabilities 865 511
-------- --------
Total current liabilities 24,762 18,926
Revolving line of credit 25,528 19,716
Long-term debt, net of current portion 42 48
Other liabilities 2,733 2,355
-------- --------
Total liabilities 53,065 41,045
Stockholders'equity
Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, no par value; 14,000,000 shares authorized;
9,140,400 and 9,144,200 shares issued and
outstanding, respectively 64,320 64,302
Retained earnings 10,341 8,537
-------- --------
Total stockholders'equity 74,661 72,839
Commitments and contingencies
-------- --------
$127,726 113,884
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------------- ---------------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 53,333 49,053 102,240 92,181
Cost of sales 34,262 32,893 65,848 61,177
----------- ----------- ----------- -----------
Gross profit 19,071 16,160 36,392 31,004
Selling, general and administrative
expense 16,600 12,522 31,813 24,742
----------- ----------- ----------- -----------
Operating profit 2,471 3,638 4,579 6,262
Other income (expense)
Interest expense, net (535) (130) (967) (175)
Other (468) -- (608) 107
----------- ----------- ----------- -----------
Income before income taxes 1,468 3,508 3,004 6,194
Income tax expense 587 1,506 1,201 2,661
----------- ----------- ----------- -----------
Net income $ 881 2,002 1,803 3,533
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.10 0.22 0.20 0.39
Diluted $ 0.10 0.22 0.20 0.38
Weighted average common shares outstanding:
Basic 9,140,400 9,170,100 9,140,700 9,170,100
Diluted 9,158,900 9,200,000 9,174,800 9,283,500
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
26 Weeks Ended
---------------------------
August 1, July 26,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,803 3,533
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 1,249 638
Equity in net loss from VCM, Ltd. 608 --
Changes in operating assets and liabilities
Accounts receivable - trade 3,639 (7,406)
Notes and other receivables (81) (36)
Inventories (9,761) (11,399)
Prepaid expenses (2,300) (358)
Other assets (1,082) (241)
Accounts payable 5,119 (52)
Accrued expenses and other liabilities (905) 1,697
----------- -----------
Total adjustments (3,514) (17,157)
----------- -----------
Net cash used in operating activities (1,711) (13,624)
----------- -----------
Cash flows from investing activities
Capital expenditures (4,434) (1,654)
Cash paid for lease acquisitions (1,270) --
----------- -----------
Net cash used in investing activities (5,704) (1,654)
----------- -----------
Cash flows from financing activities
Repayment of debt (6) --
Repayments under credit facility (20,627) (12,885)
Borrowings under credit facility 28,439 21,905
Sale of common shares 18 --
----------- -----------
Net cash provided by financing activities 7,824 9,020
----------- -----------
Net increase (decrease) in cash and cash equivalents 409 (6,258)
Cash and cash equivalents at beginning of period 1,240 8,010
----------- -----------
Cash and cash equivalents at end of period $ 1,649 1,752
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED AUGUST 1, 1998 AND JULY 26,
1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The financial statements for the fiscal second quarters and first half ended
August 1, 1998 and July 26, 1997, respectively, represent the consolidated
retail and wholesale operations of Mazel Stores, Inc. All significant
intercompany accounts and transactions are eliminated in the consolidated
financial statements.
In the opinion of management, this information includes all adjustments that are
normal and recurring in nature and 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 fiscal year ended January 31, 1998
and should be read in conjunction with the consolidated financial statements and
the notes thereto.
(2) Investment in VCM, Ltd.
On August 3, 1997, the Company commenced the operation of VCM, Ltd. ("VCM"), a
50 percent owned joint venture with Value City Department Stores, whereby VCM
operates the toy, sporting goods, and expanded health and beauty care
departments for the Value City department store chain. The Company coordinates
merchandise purchasing on behalf of VCM, some of which is sourced from the
Company's wholesale segment. The Company's investment in VCM, which is accounted
for under the equity method, was $9,637. In addition to its 50 percent equity
share of VCM's net profit or loss, the Company receives a management fee equal
to three percent of net sales.
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(3) Earnings Per Share
During 1997, the FASB issued SFAS No. 128, Earnings per Share, which changed the
computation and presentation of earnings per share information. SFAS No. 128 was
adopted for the fiscal year ended January 31, 1998. The following data shows the
amounts used in computing earnings per share and the effect on the
weighted-average number of shares of dilutive potential common stock.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------ -------------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income available to Common shareholders used
in basic and diluted net income per share $ 881 2,002 1,803 3,533
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,140,400 9,170,100 9,140,700 9,170,100
Net dilutive effect of stock options 18,500 29,900 34,100 113,400
---------- ---------- ---------- ----------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in diluted
net income per share 9,158,900 9,200,000 9,174,800 9,283,500
========== ========== ========== ==========
Basic net income per share $ 0.10 0.22 0.20 0.39
Diluted net income per share $ 0.10 0.22 0.20 0.38
</TABLE>
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company consists of two complementary operations: (i) a major regional
closeout retail business; and (ii) the nation's largest closeout wholesale
business. The Company sells quality, value-oriented consumer products at a broad
range of price points offered at a substantial discount to the original retail
or wholesale price. The Company's merchandise primarily consists of new,
frequently brand-name products that are available to the Company for a variety
of reasons, including overstock positions of a manufacturer, wholesaler or
retailer; the discontinuance of merchandise due to a change in style, color,
shape or repackaging; a decrease in demand for a product through traditional
channels; or the termination of business by a manufacturer, wholesaler or
retailer.
The Company was founded in 1975 as a wholesaler of closeout merchandise. In
fiscal 1996, the Company purchased the established Odd Job retail business,
consisting of 12 retail stores and a warehouse and distribution facility, from a
shareholder of the Company. At the end of the fiscal 1998 second quarter, the
Company operated 41 closeout retail stores, including 22 in New York (six of
which are in Manhattan), 15 in New Jersey, and two each in Pennsylvania and
Connecticut. The Company opened nine new stores during the fiscal 1998 first
half.
Management's business strategy has expanded from a primary focus on wholesale
operations to an emphasis on the growth of its Odd Job retail business. The
execution of this strategy coupled with the fiscal 1997 investment in VCM, Ltd.
has transformed the Company into a "retailer", with quarterly sales and
earnings patterns similar to other retail operations. The Company's Odd Job
expansion plan is to open 13 to 15 stores in fiscal 1998 and 15 to 18 stores in
fiscal 1999. In support of the retail expansion, the Company has initiated a
search for a larger warehouse and distribution facility.
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
The results of operations set forth below describe the Company's retail and
wholesale segments and the Company's combined corporate structure.
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MAZEL STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------------------------------------
August 1, July 26,
1998 % 1997 %
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Retail $ 34,835 65.32% 23,218 47.33%
Wholesale 18,498 34.68% 25,835 52.67%
-------- -------- -------- --------
53,333 100.00% 49,053 100.00%
Gross profit
Retail 13,875 39.83% 9,375 40.38%
Wholesale 5,196 28.09% 6,785 26.26%
-------- -------- -------- --------
19,071 35.76% 16,160 32.94%
Segment operating profit
Retail 823 2.36% 1,121 4.83%
Wholesale 2,179 11.78% 3,510 13.59%
Corporate (531) (1.00%) (993) (2.02%)
-------- -------- -------- --------
2,471 4.63% 3,638 7.42%
Interest expense, net 535 1.00% 130 0.27%
Other (income) expense 468 0.88% -- --
Income tax expense 587 1.10% 1,506 3.07%
-------- -------- -------- --------
Net income $ 881 1.65% 2,002 4.08%
======== ======== ======== ========
Net income per common share:
Basic $ 0.10 0.22
Diluted $ 0.10 0.22
<CAPTION>
26 Weeks Ended
--------------------------------------------------------
August 1, July 26,
1998 % 1997 %
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Retail $ 63,305 61.92% 44,262 48.02%
Wholesale 38,935 38.08% 47,919 51.98%
-------- -------- -------- --------
102,240 100.00% 92,181 100.00%
Gross profit
Retail 25,248 39.88% 17,665 39.91%
Wholesale 11,144 28.62% 13,339 27.84%
-------- -------- -------- --------
36,392 35.59% 31,004 33.63%
Segment operating profit
Retail 872 1.38% 1,648 3.72%
Wholesale 4,511 11.59% 6,606 13.79%
Corporate ( 804) (0.79%) (1,992) (2.16%)
-------- -------- -------- --------
4,579 4.48% 6,262 6.79%
Interest expense, net 967 0.95% 175 0.19%
Other (income) expense 608 0.59% (107) (0.12%)
Income tax expense 1,201 1.17% 2,661 2.89%
-------- -------- -------- --------
Net income 1,803 1.76% 3,533 3.83%
======== ======== ======== ========
Net income per common share:
Basic 0.20 0.39
Diluted 0.20 0.38
</TABLE>
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<PAGE> 11
RETAIL SEGMENT
Second Quarter 1998 versus Second Quarter 1997
Net sales increased $11.6 million, or 50.0%, to $34.8 million in the second
quarter 1998, from $23.2 million for the second quarter 1997. Comparable store
net sales increased 0.8%, or $188,000, on a base of 23 stores, which includes
high single digit increases in stores opened during fiscal 1996. The remainder
of the sales increase resulted from sales in the nine stores opened during
fiscal 1997 and from the nine stores opened during the fiscal 1998 first half.
Gross profit increased $4.5 million, or 48.0%, to $13.9 million in the second
quarter 1998, from $9.4 million in second quarter 1997, driven by the higher
sales level. Gross margin decreased to 39.8% in the second quarter 1998, from
40.4% in the second quarter 1997. The decrease in gross margin was attributable
to large purchases in fiscal 1997 that produced high margins not duplicated in
the current year, partially offset by higher gross margin in new stores, which
includes vendor rebates.
Selling, general and administrative expense increased $4.8 million, or 58.1%, to
$13.1 million in the second quarter 1998, from $8.3 million in the second
quarter 1997. The increase resulted primarily from a $4.3 million increase in
store level expenses, particularly payroll and occupancy expenses related to the
new stores and higher warehouse related expenses. Also included in this increase
are new store preopening costs of $600,000 for the second quarter 1998, compared
to $76,000 in the second quarter 1997, and administrative support expenses
related to the addition of key retail management positions that had no
comparable offset in the 1997 second quarter. Selling, general and
administrative expense, as a percentage of net sales, increased to 37.5% in the
second quarter 1998, from 35.5% in the second quarter 1997.
Operating profit decreased to $823,000 for the second quarter 1998, from $1.1
million for the second quarter 1997. As a percentage of net sales, operating
margin decreased to 2.4%, from 4.8%. This decrease was primarily due to the
factors described above.
First Half 1998 versus First Half 1997
Net sales increased $19.0 million, or 43.0%, to $63.3 million in the first half
1998, from $44.3 million for the first half 1997. Comparable store net sales
increased 1.1%, or $486,000. The remainder of the increase is due to sales at
stores opened during fiscal 1997 and the fiscal 1998 first half.
Gross profit increased $7.6 million, or 42.9%, to $25.3 million in the first
half 1998, from $17.7 million in first half 1997, due primarily to the higher
sales level. Gross margin was unchanged at 39.9%. Gross margin was impacted by
large purchases in fiscal 1997 that produced high margins not duplicated in the
current year, offset by higher gross margin in new stores, which includes
vendor rebates.
Selling, general and administrative expense increased $8.4 million, or 52.2%, to
$24.4 million in
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the first half 1998, from $16.0 million in the first half 1997. The increase
resulted primarily from $7.5 million of increased store level expenses,
particularly payroll and occupancy expenses related to the new stores and higher
warehouse related expenses. Also included in this increase are new store
preopening costs of $1.1 million for the first half 1998, compared to $76,000 in
the first half 1997, and administrative support expenses related to the addition
of key retail management positions that had no comparable offset in the 1997
first half. Selling, general and administrative expense, as a percentage of net
sales, increased to 38.5% in the first half 1998, from 36.2% in the first half
1997.
Operating profit decreased to $872,000 for the first half 1998, from $1.6
million for the first half 1997. As a percentage of net sales, operating margin
decreased to 1.4%, from 3.7%. This decrease was primarily due to the factors
described above.
WHOLESALE SEGMENT
Second Quarter 1998 versus Second Quarter 1997
Net sales decreased $7.3 million, or 28.4%, to $18.5 million in the second
quarter 1998, from $25.8 million in the second quarter 1997. The decrease can be
attributed to lower sales to the Company's largest wholesale customer, partially
offset by increased sales of proprietary goods and sales to new customers.
Gross profit decreased $1.6 million, or 23.4%, to $5.2 million in the second
quarter 1998, from $6.8 million in the second quarter 1997. Gross margin
increased to 28.1% in the second quarter 1998 from 26.3% in the second quarter
1997. The decrease in gross profit was due primarily to lower sales while the
increase in gross margin was attributable to higher margins in both stock and
drop ship sales categories.
Selling, general and administrative expense decreased $258,000, or 7.9%, to $3.0
million in the second quarter 1998, from $3.3 million in the second quarter
1997. The decrease was primarily attributable to efficiencies in warehouse
operations, partially offset by higher rent expense on a 100,000 square foot
addition to the warehouse completed in third quarter 1997. As a percentage of
net sales, selling, general and administrative expense increased to 16.3% in the
second quarter 1998, from 12.7% in the second quarter 1997.
Wholesale operating profit decreased to $2.2 million in the second quarter 1998,
from $3.5 million in the second quarter 1997. As a percentage of net sales,
operating margin decreased to 11.8% in the second quarter 1998, from 13.6% in
the second quarter 1997, due to the factors described above.
First Half 1998 versus First Half 1997
Net sales decreased $9.0 million, or 18.7%, to $38.9 million in the first half
1998, from $47.9
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<PAGE> 13
million in the first half 1997. The decrease can be primarily attributed to
lower sales to the Company's largest wholesale customer, partially offset by
increased sales of proprietary goods and sales to new customers.
Gross profit decreased $2.2 million, or 16.5%, to $11.1 million in the first
half 1998, from $13.3 million in the first half 1997. Gross margin increased to
28.6% in the first half 1998 from 27.8% in the first half 1997. The decrease in
gross profit was due primarily to lower sales while the increase in gross margin
was attributable to higher margins on stock sales.
Selling, general and administrative expense decreased $100,000, or 1.5%, to $6.6
million in the first half 1998, from $6.7 million in the first half 1997. The
decrease was primarily attributable to efficiencies in warehouse operations and
lower sales related costs, partially offset by higher rent expense on a 100,000
square foot addition to the warehouse completed in third quarter 1997. As a
percentage of net sales, selling, general and administrative expense increased
to 17.0% in the first half 1998, from 14.1% in the first half 1997.
Wholesale operating profit decreased to $4.5 million in the first half 1998,
from $6.6 million in the first half 1997. As a percentage of net sales,
operating margin decreased to 11.6% in the first half 1998, from 13.8% in the
first half 1997, due to the factors described above.
CORPORATE EXPENSES
Second Quarter 1998 versus Second Quarter 1997
Corporate expenses consist of the cost of senior management and shared
administrative resources that are utilized by both segments of the business.
Corporate expenses decreased $462,000, or 46.5%, to $531,000 during the second
quarter 1998, from $993,000 for the second quarter 1997. Corporate expenses
decreased as a percentage of total Company's sales to 1.0% in the second quarter
1998, from 2.0% in the second quarter 1997. The decrease in corporate expenses
was due to the inclusion of $560,000 of management fee revenue from VCM, Ltd.
First Half 1998 versus First Half 1997
Corporate expenses decreased $1.2 million, or 59.6%, to $804,000 during the
first half 1998, from $2.0 million for the first half 1997. Corporate expenses
decreased as a percentage of total Company's sales to 0.8% in the first half
1998, from 2.2% in the first half 1997. The decrease in corporate expenses was
due primarily to the inclusion of $1.2 million of management fee revenue from
VCM, Ltd.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE> 14
The Company's primary requirements for capital consist of inventory purchases,
expenditures related to new store openings, existing store remodeling, and other
working capital needs. The Company takes advantage of closeout and other special
situation purchasing opportunities that 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's high level of committed credit allows it to 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.
Historically, the Company's growth has been financed through cash flow from
operations, borrowings under its revolving credit facility and the extension of
trade credit. In March 1998, the Company entered into a new $60.0 million credit
facility that expires on November 15, 2002. This facility is comprised of a
$50.0 million revolving line of credit and a $10.0 million term loan. Borrowings
under the facility bear interest, at the Company's option, at either the Bank's
prime rate less 50 basis points or Libor plus a spread. Availability on the
facility is the lesser of the total credit commitment or a borrowing base
calculation based upon the Company's accounts receivable and inventories. The
facility contains restrictive covenants that require minimum net worth levels,
maintenance of certain financial ratios, and limitations on capital expenditures
and investments.
Cash used by consolidated operating activities was $1.7 million for the first
half 1998 and $13.6 million for the first half 1997. Increases in inventories,
mostly attributable to the nine new retail stores, partially offset by a
decrease in accounts receivable and an increase in trade payables, comprised the
majority of cash used by operating activities for the first half 1998. Increases
in accounts receivable and inventories accounted for the cash used by operating
activities for first half 1997. Cash used in investing activities increased to
$5.7 million in the first half 1998, representing capital expenditures of $4.4
million and cash paid for lease acquisitions of $1.3 million. Capital
expenditures were $1.7 million for the first half 1997. Cash generated by
financing activities of $7.8 million and $9.0 million for the first half 1998
and first half 1997, respectively, was the result of additional borrowings from
the Company's credit facility.
Working capital increased to $58.9 million at August 1, 1998, from $55.9 million
at January 31, 1998, primarily as a result of an increase in inventory and
partially offset by a decrease in accounts receivable and an increase in trade
payables. The current ratio was 3.38 at August 1, 1998, compared to 3.95 at
January 31, 1998.
The Company currently anticipates opening new stores in each of the next few
years. In addition to new store openings, the Company may increase the number of
stores it operates through acquisitions. Management believes that, from time to
time, acquisition opportunities will arise. Possible acquisitions will vary in
size and the Company will consider large acquisitions that could be material to
the Company. In order to finance any such possible acquisitions, the Company may
use cash flow from operations, may borrow additional amounts under its revolving
credit facility, may seek to obtain additional debt or equity financing or may
use its
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<PAGE> 15
equity securities as consideration. The availability and attractiveness of any
outside sources of financing will depend on a number of factors, some of which
will relate to the financial condition and performance of the Company, and some
of which will be beyond the Company's control, such as prevailing interest rates
and general economic conditions.
SEASONALITY
The Company, with the growth of the retail operations and the retail orientation
of the VCM, Ltd. joint venture, has shifted its business mix more toward retail.
This shift will also effect the net sales and earnings pattern of the Company,
with a greater weighting toward the second half of the fiscal year.
YEAR 2000 DISCLOSURE
The Company has completed a review of its internal management information
systems regarding "Year 2000" issues. The Company's planned systems initiatives
will resolve the majority of the issues as current systems are converted to year
2000 compliant systems. For other legacy systems, the Company has developed an
action plan and begun implementing remedial measures. All internal management
information systems are expected to be in year 2000 compliance by mid-fiscal
1999. The Company estimates that costs associated with making internal
management information systems year 2000 compliant will not be material, and
thus will not have a material impact on the Company's financial position,
results of operations, and cash flows. The Company also relies, directly and
indirectly, on external systems of business enterprises such as suppliers,
creditors, and financial organizations, both domestic and international. The
Company's operations could also be effected if its external business partners do
not successfully implement year 2000 compliant systems.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires public business
enterprises to report certain information about operating segments, as well as
certain information about products and services, geographic areas in which an
enterprise operates, and any major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 will have no effect
on the Company's financial condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. In June, 1998, the FASB issued SFAS No.
133, Accounting for Derivative
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Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 132 and SFAS No. 133 are currently not
applicable to the Company.
FORWARD LOOKING STATEMENTS
Forward looking statements in this report are made pursuant to the safe harbor
provisions 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. Such risks and
uncertainties include, but are not limited to, the successful implementation and
timing of the Company's retail expansion plans, the ability to purchase quality
closeout merchandise at prices that allow the Company to maintain or exceed
expected margins on sales, the effect of comparable store sales on the small
platform of stores and the disproportionate impact caused by individual buying
transactions, any unanticipated problems at the Company's distribution
facilities or in the transportation of merchandise in general, the operating and
financial results of the Value City joint venture, and the continued effect of
the Consolidated Stores/Mac Frugal merger on wholesale sales. Please refer to
the Company's subsequent SEC filings under the Securities Exchange Act of 1934,
as amended, for further information.
16 of 18
<PAGE> 17
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
The Company's annual meeting of shareholders was held on
June 4, 1998.
At the annual meeting, the Company's shareholders elected Charles Bilezikian,
Brady Churches, and Robert Horne as Directors for a three year term expiring at
the annual meeting of shareholders in 2001. Reuven Dessler and Ned Sherwood
continued as Directors whose term expires at the annual meeting of shareholders
in 1999. Phillip Cohen, Jacob Koval, and Jerry Sommers continued as Directors
whose term expires at the annual meeting of shareholders in 2000. The following
tabulation represents the voting for the Directors:
Withheld
Nominee For Authority
------------------------- --------- ---------
Charles Bilezikian 7,296,549 17,107
Brady Churches 7,310,166 3,490
Robert Horne 7,312,456 1,200
At the annual meeting, the Company's shareholder's ratified the appointment of
KPMG Peat Marwick LLP as auditors of the Company for the fiscal year ended
January 30, 1999. The holders of 7,311,956 shares of Common Stock voted to
ratify the appointment, the holders of 300 shares voted against the
ratification, and 1,400 holders abstained.
At the annual meeting, the Company's shareholder's approved an amendment to the
1996 Stock Option Plan that increased the number of authorized shares. The
holders of 6,471,262 shares of Common Stock voted to approve the amendment, the
holders of 168,940 shares voted against the approval, and 24,987 holders
abstained.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
Exhibit 27 - Financial Data Schedule
17 of 18
<PAGE> 18
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)
9/15/98 /s/ Reuven Dessler
- --------------- ----------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
9/15/98 /s/ Sue Atkinson
- --------------- ----------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 1,649
<SECURITIES> 0
<RECEIVABLES> 12,063
<ALLOWANCES> 195
<INVENTORY> 63,437
<CURRENT-ASSETS> 83,700
<PP&E> 14,408
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,726
<CURRENT-LIABILITIES> 24,762
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 74,661
<TOTAL-LIABILITY-AND-EQUITY> 127,726
<SALES> 102,240
<TOTAL-REVENUES> 0
<CGS> 65,848
<TOTAL-COSTS> 31,813
<OTHER-EXPENSES> 608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 967
<INCOME-PRETAX> 3,004
<INCOME-TAX> 1,201
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,803
<EPS-PRIMARY> 0.20
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