<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: May 2, 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 May 29, 1998: 9,141,800.
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MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
May 2, 1998 and January 31, 1998 4
Consolidated Statements of Operations -
for the quarter ended May 2, 1998 and April 26, 1997 5
Consolidated Statements of Cash Flows -
for the quarter ended May 2, 1998 and April 26, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1- 6. 14
Signatures 15
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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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<TABLE>
<CAPTION>
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
May 2, January 31,
1998 1998
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,676 1,240
Accounts receivable-trade, less allowance for doubtful
accounts of $195 in both periods presented 15,059 15,507
Notes and other receivables 206 334
Inventories 62,470 53,676
Prepaid expenses 1,747 1,194
Deferred income taxes 2,837 2,837
--------- ---------
Total current assets 83,995 74,788
Equipment, furniture, and leasehold improvements, net 12,472 10,889
Other assets 4,403 3,183
Investment in VCM, Ltd. 8,738 8,879
Notes and accounts receivable-related parties 4,408 3,952
Goodwill, net 10,623 10,701
Deferred income taxes 1,492 1,492
--------- ---------
$126,131 113,884
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Long-term debt, current portion $ 2,017 17
Accounts payable 20,635 14,362
Accrued expenses 3,700 4,036
Other current liabilities 747 511
--------- ---------
Total current liabilities 27,099 18,926
Revolving line of credit 22,648 19,716
Long-term debt, net of current portion 44 48
Other liabilities 2,563 2,355
--------- ---------
Total liabilities 52,354 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;
9,141,800 and 9,144,200 shares issued and
outstanding, respectively - -
Additional paid-in capital 64,320 64,302
Retained earnings 9,457 8,537
--------- ---------
Total stockholders' equity 73,777 72,839
--------- ---------
Commitments and contingencies
$126,131 113,884
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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<TABLE>
<CAPTION>
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Quarter Ended
--------------------
May 2, April 26,
1998 1997
------ -----
<S> <C> <C>
Net sales $ 48,907 43,128
Cost of sales 31,586 28,284
------- -------
Gross profit 17,321 14,844
Selling, general, and administrative expense 15,213 12,220
------- -------
Operating profit 2,108 2,624
Other income (expense)
Interest expense, net (432) (45)
Other (140) 107
-------- -------
Income before income taxes 1,536 2,686
Income tax expense 614 1,155
-------- -------
Net income $ 922 1,531
======== =======
Net income per share (basic) $ 0.10 0.17
Net income per share (diluted) $ 0.10 0.16
Average shares outstanding (basic) 9,141,000 9,170,100
Average shares outstanding (diluted) 9,191,000 9,367,100
</TABLE>
See accompanying notes to consolidated financial statements
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<TABLE>
<CAPTION>
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Fiscal Quarter Ended
--------------------
May 2, April 26,
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities
Net income $ 922 1,531
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 556 332
Equity in net loss from VCM Ltd. 141 -
Changes in operating assets and liabilities
Accounts receivable - trade 448 (2,837)
Notes and other receivables 128 (192)
Inventories (8,794) (9,535)
Prepaid expenses (553) 164
Other assets (462) 92
Accounts payable 6,273 370
Accrued expenses and other liabilities 106 587
--------- --------
Total adjustments (2,157) (11,019)
--------- --------
Net cash used in operating activities (1,235) (9,488)
--------- --------
Cash flows from investing activities
Capital expenditures (2,005) (1,003)
Cash paid for lease acquisitions (1,270)
--------- --------
Net cash used in investing activities (3,275) (1,003)
--------- --------
Cash flows from financing activities
Repayment of debt (4) 3,677
Net borrowings under credit facility 4,932 -
Sale of common shares 18 -
--------- --------
Net cash provided by financing activities 4,946 3,677
--------- --------
Net increase (decrease) in cash and cash equivalents 436 (6,814)
Cash and cash equivalents at beginning of period 1,240 8,010
--------- --------
Cash and cash equivalents at end of period $ 1,676 1,196
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTERS ENDED MAY 2, 1998 AND APRIL 26, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The financial statements for the fiscal quarters ended May 2, 1998 and
April 26, 1997 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, the information herein includes all
adjustments which 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) Investments 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.
(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.
Fiscal Quarter Ended
May 2, April 26,
1998 1997
---------- ---------
NUMERATOR:
Net income available to Common shareholders used
in basic and diluted net income per share $ 922 $1,531
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,141,000 9,170,100
Net dilutive effect of stock options 50,000 197,000
---------- ---------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in diluted
net income per share 9,191,000 9,367,100
Basic net income per share $0.10 0.17
Diluted net income per share $0.10 0.16
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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 first
quarter, the Company operated 38 closeout retail stores, including 20 in New
York (six of which are in Manhattan), 14 in New Jersey, and two each in
Pennsylvania and Connecticut.
Management's business strategy has expanded from a primary focus on
wholesale operations to an emphasis on 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 stores in fiscal
1999.
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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<TABLE>
<CAPTION>
MAZEL STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Quarter Ended
May 2, 1998 April 26,1997
------------------------ -----------------------
Percent of Percent of
Amount Net Sales Amount Net Sales
------ --------- ------ ---------
Net sales
<S> <C> <C> <C> <C>
Retail $ 28,470 58.21% 21,044 48.79%
Wholesale 20,437 41.79% 22,084 51.21%
-------- ------ ------- ------
48,907 100.00% 43,128 100.00%
Gross profit
Retail 11,373 39.95% 8,290 39.39%
Wholesale 5,948 29.10% 6,554 29.68%
------- ------ ------- ------
17,321 35.42% 14,844 34.42%
Segment operating profit
Retail 49 0.17% 527 2.50%
Wholesale 2,332 11.41% 3,096 14.02%
Corporate (273) -0.56% (999) -2.32%
-------- ------- -------- -------
2,108 4.31% 2,624 6.08%
Interest expense, net 432 0.88% 45 0.10%
Other (income) expense 140 0.29% (107) -0.25%
Income tax expense 614 1.26% 1,155 2.68%
------- ------- ------ -------
Net income $ 922 1.88% 1,531 3.55%
======= ======= ===== =======
Net income per share
Basic $ 0.10 0.17
Diluted $ 0.10 0.16
</TABLE>
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<PAGE> 10
RETAIL SEGMENT
First Quarter 1998 versus First Quarter 1997
Net sales increased $7.5 million, or 35.3% to $28.5 million in the first
quarter 1998, from $21.0 million for the first quarter 1997. Comparable store
net sales increased 1.4%, or $300,000, from 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 at the nine stores opened during
fiscal 1997 and from the six stores opened during the first quarter 1998.
Gross profit increased $3.1 million, or 37.2%, to $11.4 million in the
first quarter 1998, from $8.3 million in first quarter 1997. Gross margin
increased to 40.0% in the first quarter 1998, from 39.4% in the first quarter
1997. The increase in gross margin was due primarily to typically higher gross
margin in new stores, which includes vendor rebates.
Selling, general and administrative expense increased $3.5 million, or
45.9%, to $11.3 million in the first quarter 1998, from $7.8 million in the
first quarter 1997. Selling, general and administrative expense, as a percentage
of net sales, increased to 39.8% in the first quarter 1998, from 36.9% in the
first quarter 1997. The increase primarily resulted from $3.3 million of
increased store level expenses, particularly payroll and occupancy expenses
related to the new stores and higher warehouse related expenses. In addition,
$470,000 of preopening expenses associated with stores opened in the 1998 first
quarter, and administrative support expenses related to the addition of key
management positions in the retail segment had no comparable offset in the 1997
first quarter.
Operating profit decreased to $49,000 for the first quarter 1998, from
$527,000 for the first quarter 1997. As a percentage of net sales, operating
margin decreased to 0.2%, from 2.5%. This decrease was primarily due to the
factors described above.
WHOLESALE SEGMENT
First Quarter 1998 versus First Quarter 1997
Net sales decreased $1.7 million, or 7.5%, to $20.4 million in the first
quarter 1998, from $22.1 million in the first quarter 1997. The decrease was due
mostly to lower shipments to the Company's largest wholesale customer, partially
offset by increased sales of proprietary goods and sales to new customers,
including VCM, Ltd.
Gross profit decreased $606,000, or 9.2%, to $5.9 million in the first
quarter 1998, from $6.6 million in the first quarter 1997. Gross margin
decreased to 29.1% in the first quarter 1998 from 29.7% in the first quarter
1997. The decrease in gross profit was due primarily to lower sales while the
decrease in gross margin was attributable to a decrease in margin on drop
shipped sales, from similar sales levels in the fiscal 1997 first quarter.
Selling, general and administrative expense increased $158,000, or 4.6%,
to $3.6 million in the first quarter 1998, from $3.5 million in the first
quarter 1997. As a percentage of net sales,
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selling, general and administrative expense increased to 17.7% in the first
quarter 1998, from 15.7% in the first quarter 1997. The increase was primarily
attributable to higher warehouse expense, associated with rent on the 100,000
square foot addition completed in third quarter 1997.
Wholesale operating profit decreased to $2.3 million in the first
quarter 1998, from $3.1 million in the first quarter 1997. As a percentage of
net sales, operating margin decreased to 11.4% in the first quarter 1998, from
14.0% in the comparable 1997 quarter, due to the factors described above.
CORPORATE EXPENSES
First Quarter 1998 versus First Quarter 1997
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 $726,000, or 72.7%, to $273,000 during the first
quarter 1998, from $1.0 million for the first quarter 1997. Corporate expenses
decreased as a percentage of total Company's sales to 0.6% in the first quarter
1998, from 2.3% in the first quarter 1997. The decrease in corporate expenses
was due to the inclusion of $622,000 of management fee revenue from VCM, Ltd.
and lower public company expenses.
LIQUIDITY AND CAPITAL RESOURCES
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 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'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.
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 which require minimum
net worth levels, maintenance of certain financial ratios and
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<PAGE> 12
limitations on capital expenditures and investments.
Cash used by consolidated operating activities was $1.2 million for the first
quarter 1998 and $9.5 million for the first quarter 1997. Increases in
inventories partially offset by an increase in trade payables, comprised the
majority of cash used by operating activities for the first quarter 1998.
Increases in accounts receivable and inventories accounted for the cash used by
operating activities for first quarter 1997. Cash used in investing activities
increased to $3.3 million in the first quarter 1998, representing capital
expenditures of $2.0 million and lease purchases of $1.3 million. Cash used in
investing activities, all capital expenditures, were $1.0 million for the first
quarter 1997. Cash generated by financing activities of $4.9 million and $3.7
million for the first quarter 1998 and first quarter 1997, respectively, was the
result of additional borrowings from the Company's credit facility.
Working capital increased to $56.9 million at May 2, 1998, from $55.9 million at
January 31, 1998, primarily as a result of an increase in inventory and
partially offset by an increase in trade payables. The current ratio was 3.10 at
May 2, 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 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.
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<PAGE> 13
YEAR 2000 DISCLOSURE
The Company has completed a review of its 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. The company expects to bring all of its management
information systems into year 2000 compliance by fiscal 1999. While it is likely
that these efforts will be successful, if necessary modifications and
conversions are not completed in a timely manner, the year 2000 issue could have
an adverse effect on the Company's operations. Costs associated with making
management information systems year 2000 complaint are expected to have a
material effect on the Company's financial position or results of operations.
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.
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. Readers are
cautioned not to place undue reliance on these forward looking statements which
speak only as of the date hereof. Such 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 of comparable store sales on the small
platform of stores and 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 the transportation of merchandise in general, the operating and
financial results of the Value City joint venture, the effect of the
Consolidated Stores/Mac Frugal merger on wholesale sales, and general economic
conditions. Please refer to the Company's subsequent SEC filings under the
Securities Exchange Act of 1934, as amended, for further information.
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<PAGE> 14
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
Exhibit 27- Financial Data Schedule
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<PAGE> 15
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
Chairman and Chief Executive Officer
____________________ _____________________________________
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 1,676
<SECURITIES> 0
<RECEIVABLES> 15,460
<ALLOWANCES> 195
<INVENTORY> 62,470
<CURRENT-ASSETS> 83,995
<PP&E> 12,472
<DEPRECIATION> 0
<TOTAL-ASSETS> 126,131
<CURRENT-LIABILITIES> 27,099
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 73,777
<TOTAL-LIABILITY-AND-EQUITY> 126,131
<SALES> 48,907
<TOTAL-REVENUES> 0
<CGS> 31,586
<TOTAL-COSTS> 15,213
<OTHER-EXPENSES> 140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 432
<INCOME-PRETAX> 1,536
<INCOME-TAX> 614
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 922
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
