<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 30, 1999
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 26, 1999: 9,141,798.
1 of 18
<PAGE> 2
MAZEL STORES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
October 30, 1999 and January 30, 1999 4
Consolidated Statements of Operations -
for the thirteen and thirty-nine week periods ended
October 30, 1999 and October 31, 1998 5
Consolidated Statements of Cash Flows -
for the thirty-nine week periods ended
October 30, 1999 and October 31, 1998 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 1-6. 17
Signatures 18
2 of 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Consolidated Financial Statements follow this page.
3 of 18
<PAGE> 4
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
October 30, January 30,
1999 1999
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,677 1,668
Accounts receivable-trade, less allowance for doubtful
accounts of $288 and $195, respectively 17,521 12,819
Notes and other receivables 388 223
Inventories 83,591 60,789
Prepaid expenses 3,873 3,140
Deferred income taxes 3,389 3,389
--------- ---------
Total current assets 111,439 82,028
Equipment, furniture, and leasehold improvements, net 22,470 17,268
Other assets 4,105 4,205
Investment in VCM, Ltd. 7,876 8,401
Notes and accounts receivable-related parties 4,676 6,953
Goodwill, net 10,153 10,388
Deferred income taxes 1,752 1,752
--------- ---------
$ 162,471 130,995
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,017 2,017
Accounts payable 26,967 21,882
Accrued expenses 3,241 3,432
Other current liabilities 1,163 737
--------- ---------
Total current liabilities 33,388 28,068
Revolving line of credit 41,060 15,448
Long-term debt, net of current portion 5,027 6,537
Other liabilities 3,716 2,912
--------- ---------
Total liabilities 83,191 52,965
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 shares issued and outstanding in both periods 64,320 64,320
Retained earnings 14,960 13,710
--------- ---------
Total stockholders' equity 79,280 78,030
Commitments and contingencies
--------- ---------
$ 162,471 130,995
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- ---------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 67,727 60,324 187,988 162,564
Cost of sales 42,098 39,468 118,478 105,316
----------- ----------- ----------- -----------
Gross profit 25,629 20,856 69,510 57,248
Selling, general and administrative expense (note 4) 22,772 17,700 64,856 49,513
Special charge (note 4) - 1,387 - 1,387
----------- ----------- ----------- -----------
Operating profit 2,857 1,769 4,654 6,348
Other
Interest expense, net (851) (624) (2,048) (1,591)
Other (169) (1,102) (525) (1,710)
----------- ----------- ----------- -----------
Income before income taxes 1,837 43 2,081 3,047
Income tax expense 734 17 831 1,218
----------- ----------- ----------- -----------
Net income $ 1,103 26 1,250 1,829
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.12 0.00 0.14 0.20
Diluted $ 0.12 0.00 0.14 0.20
Weighted average common shares outstanding:
Basic 9,141,800 9,140,400 9,141,800 9,140,600
Diluted 9,150,700 9,140,400 9,150,200 9,163,300
</TABLE>
See accompanying notes to consolidated financial statements
5 of 18
<PAGE> 6
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
------------------------------------
October 30, October 31,
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,250 1,829
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 2,919 1,993
Equity in net loss from VCM, Ltd. 525 1,711
Changes in operating assets and liabilities
Accounts receivable - trade (4,702) (1,286)
Notes and other receivables (165) (74)
Inventories (22,802) (18,492)
Prepaid expenses (733) (2,393)
Other assets 2,193 (1,700)
Accounts payable 5,085 9,644
Accrued expenses and other liabilities 1,039 115
---------- --------
Net cash used in operating activities (15,391) (8,653)
---------- --------
Cash flows from investing activities
Capital expenditures (7,477) (7,122)
Cash paid for lease acquisitions (225) (1,270)
---------- --------
Net cash used in investing activities (7,702) (8,392)
---------- --------
Cash flows from financing activities
Debt repayments (33,738) (39,841)
Debt borrowings 57,840 57,881
Sale of common shares -- 18
---------- --------
Net cash provided by financing activities 24,102 18,058
---------- --------
Net increase in cash and cash equivalents 1,009 1,013
Cash and cash equivalents at beginning of period 1,668 1,240
---------- --------
Cash and cash equivalents at end of period $ 2,677 2,253
========== ========
Supplemental disclosures:
Cash paid for interest $ 1,966 1,530
Cash paid for taxes $ 1,601 2,342
========== ========
See accompanying notes to consolidated financial statements
</TABLE>
6 of 18
<PAGE> 7
MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
OCTOBER 30, 1999 AND OCTOBER 31, 1998
(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 30, 1999 and
October 31, 1998, 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 30, 1999
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.
7 of 18
<PAGE> 8
(3) Earnings Per Share
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>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income available to common shareholders
used in basic and diluted net income per share $ 1,103 26 1,250 1,829
DENOMINATOR:
Weighted-average number of Common Shares
used in basic earnings per share 9,141,800 9,140,400 9,141,800 9,140,600
Net dilutive effect of stock options 8,900 -- 8,400 22,700
------------ ----------- ---------- ----------
Weighted-average number of Common Shares
and dilutive potential Common Shares used
in diluted net income per share 9,150,700 9,140,400 9,150,200 9,163,300
=========== =========== ========== ==========
Basic net income per share $ 0.12 0.00 0.14 0.20
Diluted net income per share $ 0.12 0.00 0.14 0.20
</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.
8 of 18
<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) one of the nation's largest closeout
wholesale businesses. 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
an affiliate of ZS Fund L.P., a shareholder of the Company. The Company's
business strategy has expanded from a primary focus on wholesale operations to
an emphasis on the growth of its Odd Job retail operations. At the end of the
fiscal 1999 third quarter, the Company operated 59 closeout retail stores,
including 29 in New York (eight of which are in Manhattan), 21 in New Jersey,
six in Pennsylvania and three in Connecticut.
The growth of the Company's retail operations, 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 store expansion plan includes the opening of 18 stores in
fiscal 1999, of which 17 stores have been opened to-date, and 18 to 20 stores in
fiscal 2000.
9 of 18
<PAGE> 10
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.
MAZEL STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------------------- ------------------------------------------
October 30, October 31, October 30, October 31,
1999 % 1998 % 1999 % 1998 %
--------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales
Retail $45,696 67.47% 36,307 60.19% 129,988 69.15% 99,612 61.28%
Wholesale 22,031 32.53% 24,017 39.81% 58,000 30.85% 62,952 38.72%
------- ------- ------ ------- ------- ------- ------- -------
67,727 100.00% 60,324 100.00% 187,988 100.00% 162,564 100.00%
Gross profit
Retail 19,134 41.87% 13,930 38.37% 53,012 40.78% 39,178 39.33%
Wholesale 6,495 29.48% 6,926 28.84% 16,498 28.44% 18,070 28.70%
------- ------- ------ ------- ------- ------- ------- -------
25,629 37.84% 20,856 34.57% 69,510 36.98% 57,248 35.22%
Segment operating profit
Retail (57) (0.12%) (596) (1.64%) (86) (0.07%) 276 0.28%
Wholesale 3,131 14.21% 3,690 15.36% 5,712 9.85% 8,201 13.03%
Corporate (217) (0.32%) 62 0.10% (972) (0.52%) (742) (0.46%)
Special charge -- -- (1,387) (2.30%) -- -- (1,387) (0.85%)
------- ------- ------ ------- ------- ------- ------- -------
2,857 4.22% 1,769 2.93% 4,654 2.48% 6,348 3.90%
Interest expense, net 851 1.26% 624 1.03% 2,048 1.09% 1,591 0.98%
Other expense, net 169 0.25% 1,102 1.83% 525 0.28% 1,710 1.05%
Income tax expense 734 1.08% 17 0.03% 831 0.44% 1,218 0.75%
------- ------- ------ ------- ------- ------- ------- -------
Net income $ 1,103 1.63% 26 0.04% 1,250 0.66% 1,829 1.12%
======= ======= ====== ======= ======= ======= ======= =======
Net income per common share:
Basic $ 0.12 0.00 0.14 0.20
Diluted $ 0.12 0.00 0.14 0.20
</TABLE>
10 of 18
<PAGE> 11
RETAIL SEGMENT
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal Third Quarter)
Net sales for the third quarter 1999 were $45.7 million, compared to $36.3
million for the third quarter 1998, an increase of $9.4 million, or 25.9%.
Comparable store net sales increased 2.3%, or approximately $650,000, on a base
of 32 stores. The remainder of the sales increase resulted from sales in the 15
stores opened during fiscal 1998 and from the 12 stores opened during the fiscal
1999 nine months.
Gross profit for the fiscal 1999 third quarter was $19.1 million, compared to
$13.9 million in third quarter 1998, an increase of $5.2 million. Gross margin
increased to 41.9% in the third quarter 1999, from 38.4% in the third quarter
1998. The increase in gross margin was due to higher realized product markup and
vendor allowances.
Selling, general and administrative expense was $19.2 million for third quarter
1999, compared to $14.5 million in the prior year quarter, an increase of $4.7
million, or 32.1%. Selling, general and administrative expense, as a percentage
of net sales, increased to 42.0% in the third quarter 1999, from 40.0% in the
third quarter 1998. The increase resulted from a $2.6 million increase in store
level expenses, primarily attributable to the additional stores in operation in
third quarter 1999. As a percentage of sales, store level expenses decreased to
29.9%, from 30.5% last year. New store preopening expense for the fiscal 1999
third quarter increased $796,000 over the fiscal 1998 third quarter. Warehouse
expenses increased due to costs related to the larger facility occupied since
third quarter 1998, increased volume due to the larger store base, and continued
startup inefficiencies. Additionally, administrative expenses increased due
primarily to the addition of key management over the past year and higher
operating expenses in support of the larger store base. Selling, general and
administrative expense for the fiscal 1998 third quarter includes charges
totaling $389,000 related to the relocation of the Company's warehouse.
In the fiscal 1999 third quarter, the retail operating loss was $57,000,
compared to an operating loss of $596,000 for the third quarter 1998. As a
percentage of net sales, operating margin improved to -0.1%, from -1.6%. This
increase was due to the factors described above.
A special charge of $1.4 million was recorded during the 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 1999 versus Thirty-nine Weeks 1998 (Fiscal Nine Months)
Net sales for the fiscal 1999 nine months were $130.0 million, compared to $99.6
million for the fiscal 1998 nine months, an increase of $30.4 million, or 30.5%.
Comparable store net sales increased 4.5%, or approximately $3.8 million.
Gross profit for the fiscal 1999 nine months was $53.0 million, compared to
$39.2 million in the fiscal 1998 nine months, an increase of $13.8 million.
Gross margin increased to 40.8% in the
11 of 18
<PAGE> 12
fiscal 1999 nine months, from 39.3% in the comparable prior year period. The
increase in gross margin was due primarily to higher realized product markup and
vendor allowances.
Selling, general and administrative expense was $53.1 million for the fiscal
1999 nine months, compared to $38.9 million in the prior year, an increase of
$14.2 million, or 36.5%. Selling, general and administrative expense, as a
percentage of net sales, increased to 40.8% in the fiscal 1999 nine months, from
39.0% in the fiscal 1998 nine months. The increase resulted from a $8.9 million
increase in store level expenses, primarily attributable to the additional
stores in operation in the fiscal 1999 nine months. As a percentage of net
sales, store level expenses were unchanged at 29.5%. New store preopening
expense increased $648,000 over the fiscal 1998 nine months. Warehouse expenses
increased due to costs related to the larger facility occupied since third
quarter 1998, increased volume due to the larger store base, and continued
startup inefficiencies. In addition, administrative expenses increased due
primarily to the addition of key management added over the past year and higher
operating expenses in support of the larger store base. Selling, general and
administrative expense for the fiscal 1998 nine months includes charges totaling
$389,000 related to the relocation of the Company's warehouse.
Fiscal 1999 nine month retail operating loss was $86,000, compared to operating
profit of $276,000 last year. As a percentage of net sales, operating margin
decreased to -0.1%, from 0.3%. This decrease in retail operating profit was due
to the factors described above.
A special charge of $1.4 million was recorded during the fiscal 1998 nine
months, 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 1999 versus Thirteen Weeks 1998 (Fiscal Third Quarter)
Net sales for the fiscal 1999 third quarter were $22.0 million, compared to
$24.0 million in the fiscal 1998 third quarter, a decrease of $2.0 million, or
8.3%. The decrease can be attributed to the loss of sales to a former large
customer, partially offset by sales to new and existing customers.
Gross profit for the fiscal 1999 third quarter was $6.5 million, compared to
$6.9 million in the fiscal 1998 third quarter, a decrease of $431,000. Gross
margin increased to 29.5% in the third quarter 1999, from 28.8% in the third
quarter 1998. The increase in gross margin was attributable to the deal-to-deal
nature of wholesale sales.
Selling, general and administrative expense for the fiscal 1999 third quarter
was $3.4 million, compared to $3.3 million in the fiscal 1998 third quarter, an
increase of $128,000, or 4.0%. As a percentage of net sales, selling, general
and administrative expense increased to 15.3% in the third quarter 1999, from
13.5% in the third quarter 1998, with the increase reflecting the semi-fixed
nature of expenses.
12 of 18
<PAGE> 13
Wholesale operating profit decreased to $3.1 million in the third quarter of
fiscal 1999, from $3.7 million in the third quarter 1998. As a percentage of net
sales, operating margin decreased to 14.2%, from 15.4%, due to the factors
described above.
Thirty-nine Weeks 1999 versus Thirty-nine Weeks 1998 (Fiscal Nine Months)
Net sales for the fiscal 1999 nine months were $58.0 million, compared to $63.0
million in the fiscal 1998 nine months, a decrease of $5.0 million, or 7.9%. The
decrease can be attributed to lower sales to a former large customer, partially
offset by sales to new and existing customers.
Gross profit for the fiscal 1999 nine months was $16.5 million, compared to
$18.1 million in the fiscal 1998 nine months, a decrease of $1.6 million. Gross
margin decreased to 28.4% in the fiscal 1999 nine months, from 28.7% last year.
The decrease in gross margin was attributable to the deal-to-deal nature of
wholesale sales.
Selling, general and administrative expense for the fiscal 1999 nine months was
$10.8 million, compared to $9.9 million in the fiscal 1998 nine months, an
increase of $917,000, or 9.3%. As a percentage of net sales, selling, general
and administrative expense increased to 18.6% in the fiscal 1999 nine months,
from 15.7% last year, with the increase reflecting the semi-fixed nature of
expenses, and higher bad debt expense in the fiscal 1999 nine months.
Wholesale operating profit decreased to $5.7 million in the nine months of
fiscal 1999, from $8.2 million in the fiscal 1998 nine months. As a percentage
of net sales, operating margin decreased to 9.8%, from 13.0%, due to the factors
described above.
CORPORATE EXPENSE
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal Third Quarter)
Corporate expense consists of the cost of senior management and shared
administrative resources that are utilized by both segments of the business,
offset by management fee revenue from VCM, Ltd. Corporate expense for the fiscal
1999 third quarter was $217,000, compared to ($62,000) in the fiscal 1998 third
quarter, an increase of $279,000. Corporate expense as a percentage of the
Company's total sales was 0.3%, compared to (0.1%). The increase in corporate
expenses was due to higher expected levels of incentive based compensation,
partially offset by higher management fee revenue from VCM, Ltd.
Thirty-nine Weeks 1999 versus Thirty-nine Weeks 1998 (Fiscal Nine Months)
Corporate expense for the fiscal 1999 nine months was $972,000, compared to
$742,000 in the prior year, an increase of $230,000. Corporate expense as a
percentage of the Company's total net sales was unchanged at 0.5%. The increase
in corporate expenses was due to higher expected levels of incentive based
compensation and lease costs on upgraded information systems, partially offset
by higher management fee revenue from VCM, Ltd.
13 of 18
<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, MIS
initiatives, 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.
The Company's growth has been financed through cash flow from operations,
borrowings under its revolving credit facility and the extension of trade
credit. The Company has a $60.0 million credit facility comprised of a $50.0
million revolving line of credit and a $10.0 million term loan. The facility
expires on November 15, 2002. The term loan requires 20 consecutive quarterly
payments of $500,000 plus accrued interest which commenced in May 1998.
Borrowings under the facility bear interest, at the Company's option, at either
the banks' 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. In July 1999, the Company amended the credit facility to modify
certain of the restrictive covenants and capital expenditure limits.
For the fiscal 1999 nine months, cash used by consolidated operating activities
was $15.4 million, compared to cash used in fiscal 1998 nine months of $8.7
million. An increase in inventories, principally related to the increase in
retail stores in operation and seasonal requirements, and an increase in
accounts receivable, partially offset by an increase in accounts payable
comprised the majority of the cash used in the fiscal 1999 nine months. An
increase in inventories, partially offset by an increase in accounts payable
comprised the majority of cash used in the prior year nine months. Cash used in
investing activities in the fiscal 1999 nine months decreased to $7.7 million,
from $8.4 million in the same 1998 period, primarily reflecting lesser amounts
paid for retail store lease acquisitions. Cash provided by financing activities
was $24.1 million for the fiscal 1999 nine months, compared to $18.1 million for
the fiscal 1998 nine months, and was the result of additional borrowings from
the Company's credit facility.
Working capital increased to $78.1 million at the end of the fiscal 1999 nine
month, from $54.0 million at fiscal 1998 year-end, primarily the result of an
increase in inventories and accounts receivable, and partially offset by an
increase in accounts payable. The current ratio was 3.3 to 1 at the end of the
1999 nine-months, compared to 2.9 to 1 at fiscal 1998 year-end.
14 of 18
<PAGE> 15
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 larger 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 its 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 evaluated its internal systems, both purchased and legacy,
regarding Year 2000 issues. For purchased systems, the Company has completed a
review and converted to Year 2000 compliant versions where necessary. For
internal legacy systems, the Company has developed an action plan, completed the
necessary program modifications, and successfully tested the systems under
controlled simulations. Final testing of these systems has commenced and will be
complete early in the fiscal 1999 fourth quarter. Costs associated with making
internal management information systems Year 2000 compliant and costs associated
with testing are not material. The Company also relies, directly and indirectly,
on external systems of business enterprises such as suppliers, creditors, and
financial organizations, both domestic and international. Many of these external
business partners have not, as of yet, advised the Company as to the status of
their Year 2000 program. 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 April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities.
SOP 98-5 requires that the cost of start-up activities be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The
Company has adopted SOP 98-5 with no material effect on its consolidated
financial statements.
15 of 18
<PAGE> 16
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 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; and the operating and financial
results of the Value City joint venture. 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
The Company settled a previously reported investigation by the
U.S. Consumer Product Safety Commission paying a $40,000 penalty
and pleading guilty to four counts of violations of 15 U.S.C. Sec.
1263. The related action by the Company against DanDee
International, Inc. and DanDee's counterclaim against the Company
have both been dismissed.
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
Mark J. Miller, an Executive Vice President and Chief Operating
Officer for the Home Products Division of Value City Department
Stores, was named a Director of the Company effective November 23,
1999.
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)
12/13/99 /s/ Reuven Dessler
- -------------- ----------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
12/13/99 /s/ Sue Atkinson
- -------------- ----------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 2,677
<SECURITIES> 0
<RECEIVABLES> 17,809
<ALLOWANCES> (288)
<INVENTORY> 83,591
<CURRENT-ASSETS> 111,439
<PP&E> 22,470
<DEPRECIATION> 0
<TOTAL-ASSETS> 162,471
<CURRENT-LIABILITIES> 33,388
<BONDS> 0
0
0
<COMMON> 64,320
<OTHER-SE> 14,960
<TOTAL-LIABILITY-AND-EQUITY> 162,471
<SALES> 187,988
<TOTAL-REVENUES> 187,988
<CGS> 118,478
<TOTAL-COSTS> 64,856
<OTHER-EXPENSES> 525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,048
<INCOME-PRETAX> 2,081
<INCOME-TAX> 831
<INCOME-CONTINUING> 1,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,250
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
