<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 31, 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 November 27, 1998: 9,140,400.
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<PAGE> 2
MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
October 31, 1998 and January 31, 1998 4
Consolidated Statements of Operations -
for the 13 and 39 week periods ended
October 31, 1998 and October 25, 1997 5
Consolidated Statements of Cash Flows -
for the 39 week periods ended
October 31, 1998 and October 25, 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
Item 6. 17
Signatures 18
</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
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
---------- ----------
<S> <C> <C>
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 2,253 1,240
Accounts receivable-trade, less allowance for doubtful
accounts of $195 in both periods presented 16,793 15,507
Notes and other receivables 408 334
Inventories 72,168 53,676
Prepaid expenses 3,587 1,194
Deferred income taxes 2,837 2,837
---------- ----------
Total current assets 98,046 74,788
Equipment, furniture, and leasehold improvements, net 16,553 10,889
Other assets 4,254 3,183
Investment in VCM, Ltd. (note 2) 7,168 8,879
Notes and accounts receivable-related parties 5,551 3,952
Goodwill, net 10,466 10,701
Deferred income taxes 1,492 1,492
---------- ----------
$ 143,530 113,884
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Long-term debt, current portion $ 2,017 17
Accounts payable 24,006 14,362
Accrued expenses 3,229 4,036
Other current liabilities 938 511
---------- ----------
Total current liabilities 30,190 18,926
Revolving line of credit 28,765 19,716
Long-term debt, net of current portion 7,039 48
Other liabilities 2,850 2,355
---------- ----------
Total liabilities 68,844 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 10,366 8,537
---------- ----------
Total stockholders' equity 74,686 72,839
Commitments and contingencies
---------- ----------
$ 143,530 113,884
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 5
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 60,324 48,820 162,564 141,001
Cost of sales 39,468 31,478 105,316 92,655
------------- ------------- ------------- -------------
Gross profit 20,856 17,342 57,248 48,346
Selling, general and administrative expense (note 4) 17,700 13,097 49,513 37,839
Special charge (note 4) 1,387 -- 1,387 --
------------- ------------- ------------- -------------
Operating profit 1,769 4,245 6,348 10,507
Other
Interest expense, net (624) (395) (1,591) (570)
Other expense, net (note 2) (1,102) (1,117) (1,710) (1,010)
------------- ------------- ------------- -------------
Income before income taxes 43 2,733 3,047 8,927
Income tax expense 17 1,175 1,218 3,839
------------- ------------- ------------- -------------
Net income $ 26 1,558 1,829 5,088
============= ============= ============= =============
Net income per common share:
Basic $ 0.00 0.17 0.20 0.56
Diluted $ 0.00 0.17 0.20 0.55
Weighted average common shares outstanding:
Basic 9,140,400 9,160,600 9,140,600 9,167,000
Diluted 9,140,400 9,361,500 9,163,300 9,309,600
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 6
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------
October 31, October 25,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,829 5,088
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 1,993 1,017
Equity in net loss from VCM, Ltd. 1,711 1,117
Changes in operating assets and liabilities
Accounts receivable - trade (1,286) (6,341)
Notes and other receivables (74) (1,310)
Inventories (18,492) (18,267)
Prepaid expenses (2,393) (306)
Other assets (1,700) 141
Accounts payable 9,644 2,509
Accrued expenses and other liabilities 115 (117)
-------- --------
Net cash used in operating activities (8,653) (16,469)
-------- --------
Cash flows from investing activities
Capital expenditures (7,122) (3,353)
Cash paid for lease acquisitions (1,270) --
Investment in VCM, Ltd. -- (9,637)
-------- --------
Net cash used in investing activities (8,392) (12,990)
-------- --------
Cash flows from financing activities
Repayment of debt (1,009) --
Borrowings under term debt 10,000 --
Repayments under credit facility (38,832) (35,250)
Borrowings under credit facility 47,881 58,195
Sale of common shares 18 --
-------- --------
Net cash provided by financing activities 18,058 22,945
-------- --------
Net increase (decrease) in cash and cash equivalents 1,013 (6,514)
Cash and cash equivalents at beginning of period 1,240 8,010
-------- --------
Cash and cash equivalents at end of period $ 2,253 1,496
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 7
MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
OCTOBER 31, 1998 AND OCTOBER 25, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen (fiscal third quarters)
and thirty-nine (fiscal nine months) week periods ended October 31, 1998 and
October 25, 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 Stores chain. The Company coordinates
merchandise purchasing on behalf of VCM, some of which is sourced from the
Company's wholesale segment. The Company's original 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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<PAGE> 8
(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 39 Weeks Ended
------------------------ ------------------------
October 31, October 25, October 31, October 25,
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 $ 26 1,558 1,829 5,088
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,140,400 9,160,600 9,140,600 9,167,000
Net dilutive effect of stock options -- 200,900 22,700 142,600
---------- ---------- ---------- ----------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in diluted
net income per share 9,140,400 9,361,500 9,163,300 9,309,600
========== ========== ========== ==========
Basic net income per share $ 0.00 0.17 0.20 0.56
Diluted net income per share $ 0.00 0.17 0.20 0.55
</TABLE>
(4) Warehouse Relocation Charges
In September 1998, the Board of Directors authorized the relocation of the
Company's retail warehouse from Englewood, New Jersey to a larger facility in
South Plainfield, New Jersey. The warehouse relocation resulted in charges
totaling $1.8 million pre-tax, $1.1 million after-tax, or $0.12 per diluted
share. The pre-tax components include: $389,000 of additional selling, general,
and administrative expenses, representing the costs of moving the inventory and
office, and a $1.4 million special charge, representing the estimated continued
lease costs of the former warehouse facility, net of expected sublease revenue,
fixed asset write-offs, and employee severance.
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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 consists primarily 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 third quarter, the
Company operated 44 closeout retail stores, including 24 in New York (seven of
which are in Manhattan), 16 in New Jersey, and two each in Pennsylvania and
Connecticut. The Company opened 12 new stores during fiscal 1998 through the end
of the third quarter, and with three additional stores opened early in the
fourth quarter, will close fiscal 1998 with 15 new stores.
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 at least 17 stores in fiscal 1999. In support of the retail
expansion, the Company has nearly completed a relocation of its retail warehouse
to a larger facility located in South Plainfield, New Jersey.
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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<PAGE> 10
MAZEL STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------------------------------
October 31, October 25,
1998 % 1997 %
----------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Retail $ 36,307 60.19% 26,088 53.44%
Wholesale 24,017 39.81% 22,732 46.56%
--------- --------- --------- ---------
60,324 100.00% 48,820 100.00%
Gross profit
Retail 13,930 38.37% 10,027 38.44%
Wholesale 6,926 28.84% 7,315 32.18%
--------- --------- --------- ---------
20,856 34.57% 17,342 35.52%
Segment operating profit
Retail (596) (1.64%) 208 0.80%
Wholesale 3,690 15.36% 4,098 18.03%
Corporate 62 0.10% (61) (0.12%)
Special charge (1,387) (2.30%) -- --
--------- --------- --------- ---------
1,769 2.93% 4,245 8.70%
Interest expense, net 624 1.03% 395 0.81%
Other expense, net 1,102 1.83% 1,117 2.29%
Income tax expense 17 0.03% 1,175 2.41%
--------- --------- --------- ---------
Net income $ 26 0.04% 1,558 3.19%
========= ========= ========= =========
Net income per common share:
Basic $ 0.00 0.17
Diluted $ 0.00 0.17
<CAPTION>
39 Weeks Ended
----------------------------------------------------
October 31, October 25,
1998 % 1997 %
----------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Retail $ 99,612 61.28% 70,350 49.89%
Wholesale 62,952 38.72% 70,651 50.11%
--------- --------- --------- ---------
162,564 100.00% 141,001 100.00%
Gross profit
Retail 39,178 39.33% 27,692 39.36%
Wholesale 18,070 28.70% 20,654 29.23%
--------- --------- --------- ---------
57,248 35.22% 48,346 34.29%
Segment operating profit
Retail 276 0.28% 1,856 2.64%
Wholesale 8,201 13.03% 10,704 15.15%
Corporate (742) (0.46%) (2,053) (1.46%)
Special charge (1,387) (0.85%) -- --
--------- --------- --------- ---------
6,348 3.90% 10,507 7.45%
Interest expense, net 1,591 0.98% 570 0.40%
Other expense, net 1,710 1.05% 1,010 0.72%
Income tax expense 1,218 0.75% 3,839 2.72%
--------- --------- --------- ---------
Net income 1,829 1.12% 5,088 3.61%
========= ========= ========= =========
Net income per common share:
Basic 0.20 0.56
Diluted 0.20 0.55
</TABLE>
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<PAGE> 11
RETAIL SEGMENT
Thirteen Weeks 1998 versus Thirteen Weeks 1997 (Fiscal Third Quarters)
Net sales were $36.3 million in the third quarter 1998, compared to $26.1
million in the third quarter 1997, an increase of $10.2 million, or 39.2%. The
sales increase resulted from sales in the nine stores opened during fiscal 1997
and from the 12 stores opened during the fiscal 1998 nine months. Comparable
store net sales decreased 2.7%, or $627,000, on a base of 23 stores. The 10
stores opened in fiscal 1996 reported a low single-digit comparable store
increase.
Third quarter 1998 gross profit was $13.9 million, compared to $10.0 million in
the third quarter 1997, an increase of $3.9 million, or 38.9%, The dollar
increase was primarily due to the higher sales level. Gross margin was mostly
unchanged at 38.4%.
Selling, general and administrative expense was $14.5 million in the third
quarter 1998, compared to $9.8 million in the third quarter 1997, an increase
of $4.7 million, or 48.0%. The dollar increase resulted primarily from a $3.9
million increase in store level expenses, the majority of which related to the
higher number of stores in operation. Selling, general and administrative
expense also included an increase in advertising expense related to an expanded
circular program, new store preopening costs, expensed as incurred, of $263,000
for the third quarter 1998, compared to $461,000 in the third quarter 1997,
administrative support expenses related to the addition of key retail
management positions that had no comparable offset in the 1997 third quarter,
and one-time charges of $389,000 related to the relocation of the warehouse and
distribution center during the third quarter 1998. Selling, general and
administrative expense as a percentage of net sales increased to 40.0% in the
third quarter 1998, from 37.6% in the third quarter 1997.
The retail operation incurred an operating loss of $596,000 for the third
quarter 1998, compared to operating profit of $208,000 for the third quarter
1997. As a percentage of net sales, operating margin decreased to (1.6%), from
0.8%. This decrease was primarily due to the factors described above.
A special charge of $1.4 million was recorded during third quarter 1998,
reflecting the estimated costs of exiting the former retail warehouse located
in Englewood, New Jersey, and related fixed asset write-offs and employee
severance.
Thirty-nine Weeks 1998 versus Thirty-nine Weeks 1997 (Fiscal Nine Months)
Net sales were $99.6 million in fiscal 1998 nine months, compared to $70.3
million in fiscal 1997 nine months, an increase of $29.3 million, or 41.6%. The
net sales increase was due to sales at stores opened during fiscal 1997 and
fiscal 1998 nine months. Comparable store net sales decreased 0.2%, or $139,000.
Fiscal 1998 nine month gross profit was $39.2 million, compared to $27.7 million
in fiscal 1997 nine months, an increase of $11.5 million, or 41.5%. The dollar
increase was primarily due to the higher sales level. Gross margin was unchanged
at 39.3%.
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<PAGE> 12
Selling, general and administrative expense was $38.9 million in fiscal 1998
nine months, compared to $25.8 million in fiscal 1997 nine months, an increase
of $13.1 million, or 50.5%. The dollar increase resulted primarily from an
$11.4 million increase in store level expenses, the majority of which related
to the higher number of stores in operation. Selling, general and
administrative expense also included an increase in advertising expense related
to an expanded circular program, new store preopening costs, expensed as
incurred, of $1.3 million for fiscal 1998 nine months, compared to $537,000 in
fiscal 1997 nine months, administrative support expenses related to the
addition of key retail management positions that had no comparable offset in
fiscal 1997 nine months, and one-time charges of $389,000 related to the
relocation of the warehouse and distribution center during the third quarter
1998. Selling, general and administrative expense as a percentage of net sales
increased to 39.0% in the fiscal 1998 nine months, from 36.7% in the fiscal
1997 nine months.
Operating profit decreased to $276,000 for the fiscal 1998 nine months, compared
to $1.9 million for fiscal 1997 nine months. As a percentage of net sales,
operating margin decreased to 0.3%, from 2.6%. This decrease was primarily due
to the factors described above.
A special charge of $1.4 million was recorded during third quarter 1998,
reflecting the estimated costs of exiting the former retail warehouse located
in Englewood, New Jersey, and related fixed asset write-offs and employee
severance.
WHOLESALE SEGMENT
Thirteen Weeks 1998 versus Thirteen Weeks 1997 (Fiscal Third Quarters)
Net sales were $24.0 million in the third quarter 1998, compared to $22.7
million in the third quarter 1997, an increase of $1.3 million, or 5.7%. The
increase was due to higher stock sales to new and existing customers, partially
offset by a $4 million decrease in sales to the division's largest customer that
was acquired by a competitor earlier this year.
Third quarter 1998 gross profit was $6.9 million, compared to $7.3 million in
the third quarter 1997, a decrease of $389,000, or 5.3%. Gross margin declined
to 28.8%, from 32.2% in the third quarter 1997. The percentage decrease can be
attributed to the margin impact of lower intercompany sales eliminated in
consolidation and a reduction in stock sales margin.
Selling, general and administrative expense was unchanged at $3.2 million in the
third quarter 1998. As a percentage of sales, selling, general and
administrative expense decreased to 13.5% in third quarter 1998, from 14.2% in
third quarter 1997, reflecting improved operating efficiencies.
Operating profit was $3.7 million for the third quarter 1998, compared to $4.1
million for the third quarter 1997. As a percentage of net sales, operating
margin decreased to 15.4%, from 18.0%. This decrease was primarily due to the
factors described above.
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<PAGE> 13
Thirty-nine Weeks 1998 versus Thirty-nine Weeks 1997 (Fiscal Nine Months)
Net sales were $63.0 million in fiscal 1998 nine months, compared to $70.6
million in fiscal 1997 nine months, a decrease of $7.6 million, or 10.9%. The
decrease was due primarily to an $11 million decrease in sales to the division's
largest customer, partially offset by sales to new customers and higher sales
levels to existing customers.
Fiscal 1998 nine month gross profit was $18.1 million, compared to $20.7
million in fiscal 1997 nine months, a decrease of $2.6 million, or 12.5%. Gross
margin declined to 28.7%, from 29.2% in the fiscal 1997 due to the margin
impact of lower intercompany sales eliminated in consolidation and a softening
of stock sales margins.
Selling, general and administrative expense was mostly unchanged at $9.9 million
in fiscal 1998 nine months. As a percentage of sales, selling, general and
administrative expense increased to 15.7% in fiscal 1998 nine months, from 14.1%
in fiscal 1997 nine months. The percentage increase is reflective of a lower
sales base, partially offset by improved operating efficiencies.
Operating profit was $8.2 million for fiscal 1998 nine months, compared to $10.7
million for fiscal 1997 nine months. As a percentage of net sales, operating
margin decreased to 13.0%, from 15.1%. This decrease was primarily due to the
factors described above.
CORPORATE EXPENSES
Thirteen Weeks 1998 versus Thirteen Weeks 1997 (Fiscal Third Quarters)
Corporate expenses consist of the cost of senior management and shared
administrative resources that are utilized by both segments of the business.
Corporate expenses for the third quarter 1998 were ($62,000), compared to
$61,000 for the third quarter 1997, or a decrease of $123,000. The decrease was
due to the change in estimate of incentive based compensation, partially offset
by lower management fee income from VCM, Ltd., to $576,000 in third quarter 1998
from $638,000 in third quarter 1997.
Thirty-nine Weeks 1998 versus Thirty-nine Weeks 1997 (Fiscal Nine Months)
Corporate expenses for the fiscal 1998 nine months were $742,000, compared to
$2.1 million in fiscal 1997 nine months, a decrease of $1.3 million, or 63.9%.
The decrease was due to the inclusion of VCM, Ltd. management fee income for a
full nine months versus three months in fiscal 1997, and the change in estimate
of incentive based compensation. VCM, Ltd. management fee income was $1.8
million in fiscal 1998 nine months compared to $638,000 in fiscal 1997 nine
months.
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<PAGE> 14
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 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 $8.7 million for fiscal 1998
nine months and $16.5 million for fiscal 1997 nine months. Increases in accounts
receivable and inventories, mostly attributable to the new retail stores,
partially offset by an increase in trade payables, comprised the majority of
cash used by operating activities for both fiscal 1998 and fiscal 1997 nine
months. Cash used in investing activities decreased to $8.4 million for fiscal
1998 nine months, representing capital expenditures of $7.1 million and cash
paid for lease acquisitions of $1.3 million. Cash used in investing activities
for fiscal 1997 nine months consisted of capital expenditures of $3.4 million
and the investment in VCM, Ltd. of $9.6 million. Cash generated by financing
activities of $18.1 million and $22.9 million for fiscal 1998 and 1997 nine
months, respectively, was the result of additional borrowings from the Company's
credit facility.
Working capital increased to $67.9 million at October 31, 1998, from $55.9
million at January 31, 1998, primarily as a result of increases in accounts
receivable and inventory, partially offset by an increase in trade payables. The
current ratio was 3.25 at October 31, 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
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<PAGE> 15
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.
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.
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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<PAGE> 16
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 transportation of merchandise in general; the operating and
financial results of the Value City joint venture; and the continued adverse
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.
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<PAGE> 17
PART II
OTHER INFORMATION
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)
12/15/98 /s/ Reuven Dessler
- -------------- --------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
12/15/98 /s/ Sue Atkinson
- -------------- --------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
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