<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 1, 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 May 28, 1999: 9,141,798.
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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 as of
May 1, 1999 and January 30, 1999 4
Consolidated Statements of Operations
for the thirteen week periods ended
May 1, 1999 and May 2, 1998 5
Consolidated Statements of Cash Flows
for the thirteen week periods ended
May 1, 1999 and May 2, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Items 1-6. 15
Signatures 16
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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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MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
May 1, January 30,
1999 1999
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,289 1,668
Accounts receivable-trade, less allowance
for doubtful accounts of $370 and $195,
respectively 12,881 12,819
Notes and other receivables 208 223
Inventories 70,668 60,789
Prepaid expenses 4,045 3,140
Deferred income taxes 3,389 3,389
-------- -------
Total current assets 93,480 82,028
Equipment, furniture, and leasehold improvements, net 17,732 17,268
Other assets 4,365 4,205
Investment in VCM, Ltd. 8,340 8,401
Notes and accounts receivable-related parties 3,304 6,953
Goodwill, net 10,309 10,388
Deferred income taxes 1,752 1,752
-------- -------
$139,282 130,995
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,017 2,017
Accounts payable 21,225 21,882
Accrued expenses 3,421 3,432
Other current liabilities 927 737
-------- -------
Total current liabilities 27,590 28,068
Revolving line of credit 24,523 15,448
Long-term debt, net of current portion 6,033 6,537
Other liabilities 3,028 2,912
-------- -------
Total liabilities 61,174 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 13,788 13,710
-------- -------
Total stockholders' equity 78,108 78,030
Commitments and contingencies
-------- -------
$139,282 130,995
======== =======
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Thirteen Weeks Ended
------------------------
May 1, May 2,
1999 1998
---------- ----------
Net sales $ 59,308 48,907
Cost of sales 38,177 31,586
---------- ---------
Gross profit 21,131 17,321
Selling, general, and administrative expense 20,410 15,213
---------- ---------
Operating profit 721 2,108
Other income (expense)
Interest expense, net (530) (432)
Other (61) (140)
---------- ---------
Income before income taxes 130 1,536
Income tax expense 52 614
---------- ---------
Net income $ 78 922
========== =========
Net income per share (basic) $ 0.01 0.10
Net income per share (diluted) $ 0.01 0.10
Average shares outstanding (basic) 9,141,800 9,141,000
Average shares outstanding (diluted) 9,147,800 9,191,000
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Thirteen Weeks Ended
------------------------
May 1, May 2,
1999 1998
-------- -------
Cash flows from operating activities
Net income $ 78 922
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 889 556
Equity in net loss from VCM, Ltd. 61 141
Changes in operating assets and liabilities
Accounts receivable - trade (62) 448
Notes and other receivables 15 128
Inventories (9,879) (8,794)
Prepaid expenses (905) (553)
Other assets 3,583 (462)
Accounts payable (657) 6,273
Accrued expenses and other liabilities 295 106
-------- ------
Net cash used in operating activities (6,582) (1,235)
-------- ------
Cash flows from investing activities
Capital expenditures (1,143) (2,005)
Cash paid for lease acquisitions (225) (1,270)
-------- ------
Net cash used in investing activities (1,368) (3,275)
-------- ------
Cash flows from financing activities
Debt repayments (11,854) (9,040)
Debt borrowings 20,425 13,968
Sale of common shares, net -- 18
-------- ------
Net cash provided by financing activities 8,571 4,946
-------- ------
Net increase in cash and cash equivalents 621 436
Cash and cash equivalents at beginning of period 1,668 1,240
-------- ------
Cash and cash equivalents at end of period $ 2,289 1,676
======== ======
Supplemental disclosures
Cash paid for interest $ 413 386
Cash paid for income taxes $ 150 565
======== ======
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED MAY 1, 1999 AND MAY 2, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen week periods ended May 1,
1999 and May 2, 1998 (fiscal first quarters), 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.
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(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.
Thirteen Weeks Ended
------------------------
May 1, May 2,
1999 1998
---------- ---------
NUMERATOR:
Net income available to Common shareholders used
in basic and diluted net income per share $ 78 922
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,141,800 9,141,000
Net dilutive effect of stock options 6,000 50,000
---------- ---------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in diluted
net income per share 9,147,800 9,191,000
========== =========
Basic net income per share $ 0.01 0.10
Diluted net income per share $ 0.01 0.10
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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) one of 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
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 fiscal
1999 first quarter, the Company operated 49 closeout retail stores, including 26
in New York (seven of which are in Manhattan), 18 in New Jersey, three in
Pennsylvania and two 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 is to open 16 to 18 stores in fiscal 1999
and 18 to 20 stores in fiscal 2000.
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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.
(Dollars in thousands, except per share data)
Thirteen Weeks Ended Thirteen Weeks Ended
May 1, 1999 May 2, 1998
---------------------- --------------------
Percent of Percent of
Amount Net Sales Amount Net Sales
-------- ---------- -------- ----------
Net sales
Retail $ 39,736 67.00% $ 28,470 58.21%
Wholesale 19,572 33.00% 20,437 41.79%
-------- ------ -------- -------
59,308 100.00% 48,907 100.00%
Gross profit
Retail 15,645 39.37% 11,373 39.95%
Wholesale 5,486 28.03% 5,948 29.10%
-------- ------ -------- ------
21,131 35.63% 17,321 35.42%
Segment operating profit
Retail (544) -1.37% 49 0.17%
Wholesale 1,599 8.16% 2,332 11.41%
Corporate (334) -0.56% (273) -0.56%
-------- ------ -------- ------
721 1.22% 2,108 4.31%
Interest expense, net 530 0.90% 432 0.88%
Other expense, net 61 0.10% 140 0.29%
Income tax expense 52 0.09% 614 1.26%
-------- ------ -------- ------
Net income $ 78 0.13% $ 922 1.88%
======== ====== ======== ======
Net income per share
Basic $ 0.01 $ 0.10
Diluted $ 0.01 $ 0.10
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RETAIL SEGMENT
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal First Quarters)
Net sales for the first quarter 1999 were $39.7 million, compared to
$28.5 million for the first quarter 1998, an increase of $11.2 million, or
39.6%. Comparable store net sales increased 8.3%, or $2.2 million, 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 two stores opened during first
quarter 1999.
Gross profit for the fiscal 1999 first quarter was $15.6 million, compared to
$11.4 million in first quarter 1998, an increase of $4.2 million, or 37.6%.
Gross margin decreased to 39.4% in the first quarter 1999, from 39.9% in the
first quarter 1998. The decrease in gross margin was due primarily to lower
levels of vendor allowances.
Selling, general and administrative expense was $16.2 million for first quarter
1999, compared to $11.3 million in the prior year quarter, an increase of $4.9
million, or 43.0%. Selling, general and administrative expense, as a percentage
of net sales, increased to 40.7% in the first quarter 1999, from 39.8% in the
first quarter 1998. The increase primarily resulted from $3.0 million of
increased store level expenses, primarily attributable to the additional stores
in operation in first quarter 1999, partially offset by a $427,000 decrease in
preopening expense, due to fewer store openings in first quarter 1999 compared
to first quarter 1998. Warehouse expenses increased $875,000 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 $1.1 million due primarily to the
impact of key retail management added in the last three-quarters of fiscal 1998.
In the fiscal 1999 first quarter, retail reported an operating loss of $544,000,
compared to operating profit of $49,000 for the first quarter 1998. As a
percentage of net sales, operating margin decreased to -1.4%, from 0.2%. This
decrease was primarily due to the factors described above.
WHOLESALE SEGMENT
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal First Quarters)
Net sales for the fiscal 1999 first quarter were $19.6 million, compared to
$20.4 million in the fiscal 1998 first quarter, a decrease of $865,000, or 4.2%.
The decrease can be attributed to lower shipments to a large customer, partially
offset by sales to new customers and increased sales of proprietary goods.
Gross profit for the fiscal 1999 first quarter was $5.5 million, compared to
$5.9 million in the fiscal 1998 first quarter, a decrease of $462,000, or 7.8%.
Gross margin decreased to 28.0% in the first quarter 1999 from 29.1% in the
first quarter 1998. The decrease in gross profit was due
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primarily to the lower sales level, while 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 first quarter
was $3.9 million, compared to $3.6 million in the fiscal 1998 first quarter, an
increase of $271,000, or 7.5%. As a percentage of net sales, selling, general
and administrative expense increased to 19.9% in the first quarter 1999, from
17.7% in the first quarter 1998. The increase is primarily attributable to
increased bad debt expense and the semi-fixed nature of wholesale expenses over
the lower sales base.
Wholesale operating profit decreased to $1.6 million in the first quarter of
fiscal 1999, from $2.3 million in the first quarter 1998. As a percentage of net
sales, operating margin decreased to 8.2% in the first quarter 1999, from 11.4%
in the comparable 1998 quarter, due to the factors described above.
CORPORATE EXPENSE
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal First Quarters)
Corporate expense consists of the cost of senior management and shared
administrative resources that are utilized by both segments of the business, and
management fee revenue from VCM, Ltd. Corporate expense for the fiscal 1999
first quarter was $334,000, compared to $273,000 in the fiscal 1998 first
quarter, an increase of $61,000. Corporate expense as a percentage of the
Company's total sales was unchanged at 0.6% comparing first quarter 1999 to
first quarter 1998. The increase in corporate expense was due to lower levels of
management fee revenue from VCM, Ltd.
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. In March 1998, the Company entered into a new $60.0 million credit
facility. This facility is comprised of a $50.0 million revolving line of credit
and a $10.0 million term loan. The facility expires on November 15,
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2002. The term loan requires 20 consecutive quarterly payments of $500,000 plus
accrued interest commencing May 1, 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.
For the fiscal 1999 first quarter, cash used by consolidated operating
activities was $6.6 million, compared to cash used in fiscal 1998 first quarter
of $1.2 million. An increase in retail inventory, principally related to the
increase in stores in operation, partially offset by a decrease in related party
receivables comprised the majority of the cash used in the fiscal 1999 first
quarter. An increase in inventory partially offset by an increase in trade
payables comprised the majority of cash used in the fiscal 1998 first quarter.
Cash used in investing activities in the first quarter 1999 decreased to
$1.4 million, from $3.3 million in the same 1998 period, reflecting lower
capital expenditures primarily related to fewer comparable new store openings.
Cash generated by financing activities was $8.6 million for the fiscal 1999
first quarter, compared to $4.9 million for the 1998 first quarter, and was the
result of additional borrowings from the Company's credit facility.
Working capital increased to $65.9 million at the fiscal 1999 first quarter-end,
from $54.0 million at fiscal 1998 year-end, primarily the result of an increase
in inventories. The current ratio was 3.4 to 1 at the 1999 first quarter-end,
compared to 2.9 to 1 at fiscal 1998 year-end.
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 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> 14
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, or 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. 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 adoptedd SOP 98-5 with no material effect on its consolidated
financial statements.
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.
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<PAGE> 15
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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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)
6/14/99 /s/ Reuven Dessler
- --------- ------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
6/14/99 /s/ Sue Atkinson
- --------- -------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
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<PERIOD-END> MAY-01-1999
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