<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: July 31, 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 August 27, 1999: 9,141,798.
<PAGE> 2
MAZEL STORES, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
July 31, 1999 and January 30, 1999 4
Consolidated Statements of Operations -
for the thirteen and twenty-six week
periods ended July 31, 1999 and August 1, 1998 5
Consolidated Statements of Cash Flows -
for the twenty-six week periods ended
July 31, 1999 and August 1, 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
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Consolidated Financial Statements follow this page.
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<PAGE> 4
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,052 1,668
Accounts receivable-trade, less allowance for doubtful
accounts of $370 and $195, respectively 12,047 12,819
Notes and other receivables 428 223
Inventories 74,914 60,789
Prepaid expenses 3,811 3,140
Deferred income taxes 3,389 3,389
-------- --------
Total current assets 96,641 82,028
Equipment, furniture, and leasehold improvements, net 19,975 17,268
Other assets 4,282 4,205
Investment in VCM, Ltd. 8,045 8,401
Notes and accounts receivable-related parties 3,939 6,953
Goodwill, net 10,231 10,388
Deferred income taxes 1,752 1,752
-------- --------
$144,865 130,995
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,017 2,017
Accounts payable 18,586 21,882
Accrued expenses 2,602 3,432
Other current liabilities 1,023 737
-------- --------
Total current liabilities 24,228 28,068
Revolving line of credit 33,474 15,448
Long-term debt, net of current portion 5,530 6,537
Other liabilities 3,456 2,912
-------- --------
Total liabilities 66,688 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 13,857 13,710
-------- --------
Total stockholders' equity 78,177 78,030
Commitments and contingencies
-------- --------
$144,865 130,995
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ ------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 60,954 53,333 120,261 102,240
Cost of sales 38,204 34,262 76,380 65,848
----------- ----------- ----------- -----------
Gross profit 22,750 19,071 43,881 36,392
Selling, general and administrative expense 21,674 16,600 42,084 31,813
----------- ----------- ----------- -----------
Operating profit 1,076 2,471 1,797 4,579
Other
Interest expense, net (667) (535) (1,197) (967)
Other (295) (468) (356) (608)
----------- ----------- ----------- -----------
Income before income taxes 114 1,468 244 3,004
Income tax expense 45 587 97 1,201
----------- ----------- ----------- -----------
Net income $ 69 881 147 1,803
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.01 0.10 0.02 0.20
Diluted $ 0.01 0.10 0.02 0.20
Weighted average common shares outstanding:
Basic 9,141,800 9,140,400 9,141,800 9,140,700
Diluted 9,152,000 9,158,900 9,149,900 9,174,800
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
------------------------------
July 31, August 1,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 147 1,803
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 1,851 1,249
Equity in net loss from VCM, Ltd. 356 608
Changes in operating assets and liabilities
Accounts receivable - trade 772 3,639
Notes and other receivables (205) (81)
Inventories (14,125) (9,761)
Prepaid expenses (671) (2,300)
Other assets 2,893 (1,082)
Accounts payable (3,296) 5,119
Accrued expenses and other liabilities -- (905)
-------- --------
Net cash used in operating activities (12,278) (1,711)
-------- --------
Cash flows from investing activities
Capital expenditures (4,132) (4,434)
Cash paid for lease acquisitions (225) (1,270)
-------- --------
Net cash used in investing activities (4,357) (5,704)
-------- --------
Cash flows from financing activities
Debt repayments (22,566) (20,633)
Debt borrowings 39,585 28,439
Sale of common shares -- 18
-------- --------
Net cash provided by financing activities 17,019 7,824
-------- --------
Net increase in cash and cash equivalents 384 409
Cash and cash equivalents at beginning of period 1,668 1,240
-------- --------
Cash and cash equivalents at end of period $ 2,052 1,649
======== ========
Supplemental disclosures:
Cash paid for interest $ 1,129 915
Cash paid for taxes $ 981 2,261
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED
JULY 31, 1999 AND AUGUST 1, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen (fiscal second quarters)
and twenty-six (fiscal six months) week periods ended July 31, 1999 and August
1, 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.
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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.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, August 1, July 31, August 1,
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 $ 69 881 147 1,803
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,141,800 9,140,400 9,141,800 9,140,700
Net dilutive effect of stock options 10,200 18,500 8,100 34,100
---------- ---------- ---------- ----------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in dilute
net income per share 9,152,000 9,158,900 9,149,900 9,174,800
========== ========== ========== ==========
Basic net income per share $ 0.01 0.10 0.02 0.20
Diluted net income per share $ 0.01 0.10 0.02 0.20
</TABLE>
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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 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 fiscal
1999 second quarter, the Company operated 55 closeout retail stores, including
27 in New York (seven of which are in Manhattan), 21 in New Jersey, four 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 is to open 16 to 18 stores in fiscal
1999, of which eight stores have been opened 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.
MAZEL STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------------------- --------------------------------------------
July 31, August 1, July 31, August 1,
1999 % 1998 % 1999 % 1998 %
-------- ------- -------- ------- -------- ------ -------- ------
Net Sales
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail $ 44,556 73.10% 34,835 65.32% 84,292 70.09% 63,305 61.92%
Wholesale 16,398 26.90% 18,498 34.68% 35,969 29.91% 38,935 38.08%
-------- ------- -------- ------- -------- ------ -------- ------
60,954 100.00% 53,333 100.00% 120,261 100.00% 102,240 100.00%
Gross profit
Retail 18,233 40.92% 13,875 39.83% 33,878 40.19% 25,248 39.88%
Wholesale 4,517 27.55% 5,196 28.09% 10,003 27.81% 11,144 28.62%
-------- ------- -------- ------- -------- ------ -------- ------
22,750 37.32% 19,071 35.76% 43,881 36.49% 36,392 35.59%
Segment operating profit
Retail 515 1.16% 823 2.36% (29) (0.03%) 872 1.38%
Wholesale 982 5.99% 2,179 11.78% 2,581 7.18% 4,511 11.59%
Corporate (421) (0.69%) (531) (1.00%) (755) (0.63%) (804) (0.79%)
-------- ------- -------- ------- -------- ------ -------- ------
1,076 1.77% 2,471 4.63% 1,797 1.49% 4,579 4.48%
Interest expense, net 667 1.10% 535 1.00% 1,197 0.99% 967 0.95%
Other expense, net 295 0.48% 468 0.88% 356 0.30% 608 0.60%
Income tax expense 45 0.07% 587 1.10% 97 0.08% 1,201 1.17%
-------- ------- -------- ------- -------- ------ -------- ------
Net income $ 69 0.12% 881 1.65% 147 0.12% 1,803 1.76%
======== ======= ======== ======= ======== ====== ======== ======
Net income per common share:
Basic $ 0.01 0.10 0.02 0.20
Diluted $ 0.01 0.10 0.02 0.20
</TABLE>
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RETAIL SEGMENT
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal Second Quarter)
Net sales for the second quarter 1999 were $44.6 million, compared to $34.8
million for the second quarter 1998, an increase of $9.8 million, or 27.9%.
Comparable store net sales increased 3.3%, or approximately $950,000, 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 eight stores opened during the
fiscal 1999 first half.
Gross profit for the fiscal 1999 second quarter was $18.2 million, compared to
$13.9 million in second quarter 1998, an increase of $4.3 million, or 31.4%.
Gross margin increased to 40.9% in the second quarter 1999, from 39.8% in the
second quarter 1998. The increase in gross margin was due primarily to higher
realized product markup.
Selling, general and administrative expense was $17.7 million for second quarter
1999, compared to $13.1 million in the prior year quarter, an increase of $4.6
million, or 35.7%. Selling, general and administrative expense, as a percentage
of net sales, increased to 39.8% in the second quarter 1999, from 37.5% in the
second quarter 1998. The increase primarily resulted from a $2.9 million
increase in store level expenses, primarily attributable to the additional
stores in operation in second quarter 1999, and a $279,000 increase in new store
preopening expense, due to more store openings in second quarter 1999 compared
to second quarter 1998. Warehouse expenses increased $591,000 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 $868,000 due primarily to the impact
of key retail management added in the last two quarters of fiscal 1998 and
additional reserves established for a closed warehouse facility.
In the fiscal 1999 second quarter, retail operating profit was $515,000,
compared to $823,000 for the second quarter 1998. As a percentage of net sales,
operating margin decreased to 1.2%, from 2.4%. This decrease was primarily due
to the factors described above.
Twenty-six Weeks 1999 versus Twenty-six Weeks 1998 (Fiscal First Half)
Net sales for the fiscal 1999 first half were $84.3 million, compared to $63.3
million for the fiscal 1998 first half, an increase of $21.0 million, or 33.1%.
Comparable store net sales increased 5.7%, or approximately $3.1 million.
Gross profit for the fiscal 1999 first half was $33.9 million, compared to $25.3
million in the fiscal 1998 first half, an increase of $8.6 million, or 34.2%.
Gross margin increased to 40.2% in the fiscal 1999 first half, from 39.9% in the
prior year first half. The increase in gross margin was due primarily to higher
realized product markup, partially offset by lower levels of vendor allowances.
Selling, general and administrative expense was $33.9 million for the fiscal
1999 first half,
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compared to $24.4 million in the prior year, an increase of $9.5 million, or
39.1%. Selling, general and administrative expense, as a percentage of net
sales, increased to 40.2% in the fiscal 1999 first half, from 38.5% in the
fiscal 1998 first half. The increase primarily resulted from a $6.3 million
increase in store level expenses, primarily attributable to the additional
stores in operation in the fiscal 1999 first half. Warehouse expenses increased
$1.5 million 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 $1.9
million due primarily to the impact of key retail management added in the second
half of fiscal 1998 and additional reserves established for a closed warehouse
facility.
Fiscal 1999 first half retail operations were approximately breakeven, compared
to the fiscal 1998 first half retail operating profit of $872,000, or an
operating margin of 1.8% of net sales. This decrease in retail operating profit
was primarily due to the factors described above.
WHOLESALE SEGMENT
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal Second Quarter)
Net sales for the fiscal 1999 second quarter were $16.4 million, compared to
$18.5 million in the fiscal 1998 second quarter, a decrease of $2.1 million, or
11.3%. The decrease can be attributed to the loss of sales to a former large
customer, partially offset by sales to new and existing customers, including
increased sales of proprietary goods.
Gross profit for the fiscal 1999 second quarter was $4.5 million, compared to
$5.2 million in the fiscal 1998 second quarter, a decrease of $679,000, or
13.1%. Gross margin decreased to 27.6% in the second quarter 1999 from 28.1% in
the second quarter 1998. 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 second quarter
was $3.5 million, compared to $3.0 million in the fiscal 1998 second quarter, an
increase of $518,000, or 17.2%. As a percentage of net sales, selling, general
and administrative expense increased to 21.6% in the second quarter 1999, from
16.3% in the second quarter 1998. The increase is primarily attributable to
higher warehouse expenses, including rent, and higher administrative expenses.
Wholesale operating profit decreased to $1.0 million in the second quarter of
fiscal 1999, from $2.2 million in the second quarter 1998. As a percentage of
net sales, operating margin decreased to 6.0%, from 11.8%, due to the factors
described above.
Twenty-six Weeks 1999 versus Twenty-six Weeks 1998 (Fiscal First Half)
Net sales for the fiscal 1999 first half were $36.0 million, compared to $38.9
million in the fiscal 1998 first half, a decrease of $2.9 million, or 7.6%. The
decrease can be attributed to lower sales to a former large customer, partially
offset by sales to new and existing customers, including increased sales of
proprietary goods.
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<PAGE> 13
Gross profit for the fiscal 1999 first half was $10.0 million, compared to $11.1
million in the fiscal 1998 first half, a decrease of $1.1 million, or 10.2%.
Gross margin decreased to 27.8% in the fiscal 1999 first half, from 28.6% in the
fiscal 1998 first half. The decrease in gross margin was attributable to the
deal-to-deal nature of wholesale sales, and lower levels of vendor allowances.
Selling, general and administrative expense for the fiscal 1999 first half was
$7.4 million, compared to $6.6 million in the fiscal 1998 first half, an
increase of $789,000, or 11.9%. As a percentage of net sales, selling, general
and administrative expense increased to 20.6% in the fiscal 1999 first half,
from 17.0% in the last year's first half. The increase is primarily attributable
to higher warehouse expenses, including rent, higher bad debt expense, and
higher administrative expenses.
Wholesale operating profit decreased to $2.6 million in the first half of fiscal
1999, from $4.5 million in the fiscal 1998 first half. As a percentage of net
sales, operating margin decreased to 7.2%, from 11.6%, due to the factors
described above.
CORPORATE EXPENSE
Thirteen Weeks 1999 versus Thirteen Weeks 1998 (Fiscal Second Quarter)
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
second quarter was $421,000, compared to $531,000 in the fiscal 1998 second
quarter, a decrease of $110,000. Corporate expense as a percentage of the
Company's total sales was 0.7%, compared to 1.0%. The decrease in corporate
expenses was due to cost reductions and higher levels of management fee revenue
from VCM, Ltd., partially offset by additional reserves established for a closed
operation.
Twenty-six Weeks 1999 versus Twenty-six Weeks 1998 (Fiscal First Half)
Corporate expense for the fiscal 1999 first half was $755,000, compared to
$804,000 in the prior year first half, a decrease of $49,000. Corporate expense
as a percentage of the Company's total sales was 0.6%, compared to 0.8%. The
decrease in corporate expenses was due to cost reductions, partially offset by
additional reserves established for a closed operation. Management fee revenue
from VCM, Ltd. was unchanged.
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
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<PAGE> 14
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, 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. In July 1999, the
Company amended the credit facility to modify certain of the restrictive
covenants and capital expenditure limits.
For the fiscal 1999 first half, cash used by consolidated operating activities
was $12.3 million, compared to cash used in fiscal 1998 first half of $1.7
million. An increase in inventories, principally related to the increase in
retail stores in operation, and a decrease in accounts payable, partially offset
by a decrease in other assets comprised the majority of the cash used in the
fiscal 1999 first half. An increase in inventories partially offset by an
increase in trade payables comprised the majority of cash used in the prior year
first half. Cash used in investing activities in the fiscal 1999 first half
decreased to $4.4 million, from $5.7 million in the same 1998 period, primarily
reflecting lesser amounts paid for retail store lease acquisitions. Cash
provided by financing activities was $17.0 million for the fiscal 1999 first
half, compared to $7.8 million for the fiscal 1998 first half, and was the
result of additional borrowings from the Company's credit facility.
Working capital increased to $72.4 million at the end of the fiscal 1999 first
half, from $54.0 million at fiscal 1998 year-end, primarily the result of an
increase in inventories and a decrease in accounts payable. The current ratio
was 4.0 to 1 at the end of the 1999 first half, 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
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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. Further testing of these systems will continue
throughout the third quarter. Costs associated with making internal management
information systems Year 2000 compliant and costs associated with final 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.
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
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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> 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of matters to a vote of security holders
The Company's annual meeting of shareholders was held on
May 25, 1999.
At the annual meeting, the Company's shareholders elected Reuven Dessler and Ned
Sherwood as Directors whose term expires at the annual meeting of shareholders
in 2002. Phillip Cohen, Jacob Koval, and Jerry Sommers continued as Directors
whose term expires at the annual meeting of shareholders in 2000. Charles
Bilezikian, Brady Churches, and Robert Horne continued as Directors whose term
expires at the annual meeting of shareholders in 2001. The following tabulation
represents the voting for the Directors:
Withheld
Nominee For Authority
-------------- ---------- --------------
Reuven Dessler 7,130,137 213,350
Ned Sherwood 7,130,137 213,350
At the annual meeting, the Company's shareholder's ratified the appointment of
KPMG LLP as independent auditors of the Company for the fiscal year ended
January 29, 2000. The holders of 7,342,687 shares of Common Stock voted to
ratify the appointment, the holders of 700 shares voted against the
ratification, and the holders of 100 shares abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
Exhibit 4.2 First Amendment to Asset Based Loan and Security
Agreement dated March 10, 1998
Exhibit 27 Financial Data Schedule
17 of 18
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAZEL STORES, INC.
(Registrant)
9/13/99 /s/ Reuven Dessler
- ------------- ----------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
9/13/99 /s/ Sue Atkinson
- ------------- ----------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
<PAGE> 1
EXHIBIT 4.2
FIRST AMENDMENT TO ASSET BASED LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO ASSET BASED LOAN AND SECURITY AGREEMENT, dated
as of ____________, 1999 ("First Amendment") is entered into by and between
MAZEL STORES, INC. ("Stores") an Ohio corporation, and ODD-JOB ACQUISITION CORP.
("Odd-Job"), a Delaware corporation, HIA TRADING ASSOCIATES, a New York General
Partnership, jointly and severally ("Borrower"), whose mailing address is 31000
Aurora Road, Solon, Ohio 44139, and THE PROVIDENT BANK ("Agent"), an Ohio
banking corporation, whose mailing address is 1111 Superior Avenue, Cleveland,
Ohio 44114-2522, LASALLE BANK NATIONAL ASSOCIATION ("LaSalle"), a national
banking association whose mailing address is 135 South LaSalle Street, Chicago,
Illinois 60603, and NATIONAL CITY BANK ("NCB," and together with Agent and
LaSalle,"Lenders"), a national banking association whose mailing address is
National City Center, P.O.
Box 5756 Loc. 2104, Cleveland, Ohio 44101-0756.
W I T N E S S E T H:
--------------------
WHEREAS, Borrower and the Lenders are parties to that certain Asset
Based Loan and Security Agreement dated as of March 10, 1998 (hereinafter the
?Original Agreement?);
WHEREAS, Borrower and the Lenders have agreed to amend the Original
Agreement in order to modify certain terms, provisions, definitions and
covenants contained in the Original Agreement all upon the terms and conditions
set forth in this First Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the Borrower and the Lenders agree as follows:
SECTION 1. AMENDMENT TO SECTION 2 - LOANS AND INTEREST.
A. Subsection 2.1(a) of the Original Agreement is hereby deleted in its
entirety and the following inserted in lieu thereof:
(a) Subject to the terms and conditions of this Agreement, and in
reliance upon the representations and warranties contained
herein, each Lender severally agrees to make Advances to or for
the account of Borrower in the form of loans to the Borrower in
an aggregate amount not to exceed the lesser of (i) the amount of
such Lender?s Revolving Credit Commitment, minus the lesser of
(A) the aggregate face amount such Lender?s LC Exposure or (B)
the Available Draw under such Lender?s LC Exposure or (ii) such
Lender?s Ratable portion of the Borrowing Base, minus the lesser
of (E) the aggregate face amount such Lender?s LC Exposure or (F)
the Available Draw under such Lender?s LC Exposure (the lesser of
(i) or (ii) being referred to hereinafter as the "Maximum Loan
Amount"). Agent reserves the right to modify, in its reasonable
<PAGE> 2
discretion, subject to Section 11.21 herein, the advance rates
stated in the definition of ?Borrowing Base? upon ninety (90)
days prior notice to Borrower. Should the outstanding amount of
Loans at any time exceed the Maximum Loan Amount, Borrower shall
on demand immediately repay such excess amount. Each Lender?s
loan pursuant to this Section 2.1 shall be evidenced by a
properly executed promissory note in the form of Exhibit C
("Revolving Loan Note"), with all blanks appropriately filled in.
SECTION 2. AMENDMENT TO SECTION 5 - AFFIRMATIVE COVENANTS.
A. Subsection 5.15(d) of the Original Agreement is hereby deleted in
its entirety and the following inserted in lieu thereof:
(d) A ratio of Indebtedness owing to the Lenders to
EBITDA at all times not more than: (i) for fiscal
quarters ending closest to October 31, 4.25 to 1.0,
and (ii) for all other fiscal quarters, 4.0 to 1.0.
This covenant shall be tested quarterly.
B. Section 5.19 of the Original Agreement are hereby deleted in its
entirety and the following inserted in lieu thereof:
5.19 LANDLORD WAIVER AND CONSENT AGREEMENTS . The Borrower
agrees to use its best efforts to cause all the owners and/or
landlord?s of retail store locations (i) leased by Borrower on or after
August 1, 1999, and (ii) which have their leases renewed on or after
August 1, 1999 to execute landlord waiver and consent agreements in
form acceptable to Agent, within sixty (60) days from the date such
retail store location is occupied or such lease is renewed.
SECTION 3. AMENDMENT TO SECTION 6 - NEGATIVE COVENANTS.
A. Section 6.13 of the Original Agreement is hereby deleted in its
entirety and the following inserted in lieu thereof:
6.13 CAPITAL EXPENDITURES . Borrower shall not expend funds or
accrue expense for any machinery, equipment, real or personal property
or any other type of property including leasehold improvements, whether
through direct purchases and capitalized lease obligations, in excess
of Thirteen Million Dollars ($13,000,000.00) in the aggregate during
fiscal year-end January, 2000, and an aggregate amount not to exceed
fifty percent (50%) of EBITDA in any fiscal year thereafter. The
capital expense limits contained herein are subject to the continued
compliance by the Borrower (prior to and after giving effect to the
expenditure) with the covenants and obligations herein. Borrower shall
be permitted to carry-forward as an additional capital expense
allowance the amount of any unexpended portion of the capital expense
limitation which had been designated for scheduled capital
expenditures.
-2-
<PAGE> 3
SECTION 4. FEES AND EXPENSES.
In consideration of the modifications set forth herein, Borrower shall
pay all out-of-pocket fees and expenses incurred by the Lenders in connection
with the preparation, negotiation, execution and delivery of this First
Amendment and the agreements, documents and instruments executed in connection
therewith, including, without limitation, legal fees and other costs and
expenses of the Agent.
SECTION 5. REFERENCES.
On and after the Effective Date of this First Amendment each reference
in the Original Agreement to "this Agreement", "hereunder", "hereof", "thereof"
and each reference to the Original Agreement in any of the other Loan Documents
shall mean and refer to the Original Agreement, as amended by this First
Amendment. All references to exhibits or schedules in the Original Agreement
shall be deemed to refer to the exhibits or schedules attached hereto. The
Original Agreement, as amended by this First Amendment, is and shall continue to
be in full force and effect and is hereby and in all respects ratified and
confirmed. Except as amended by this First Amendment, all of the terms,
conditions and provisions of the Original Agreement are incorporated herein by
reference and Borrower agrees to be bound by all of the terms and conditions of
the Original Agreement as amended by this First Amendment. The Loan Documents
executed in connection with the Original Agreement shall remain in full force
and effect in all respects as if the unpaid balance of the principal
outstanding, together with interest accrued thereon, had originally been payable
and secured as provided for therein, as amended from time to time and as
modified by this First Amendment. Nothing herein shall affect or impair any
rights and powers which Lenders may have under the Original Agreement and any
and all related Loan Documents.
SECTION 6. APPLICABLE LAW.
This First Amendment shall be deemed to be a contract under the laws of
the State of Ohio, and for all purposes shall be construed in accordance with
the laws of the State of Ohio.
SECTION 7. COUNTERPARTS; CONFLICTS.
This First Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument, and any
one of the parties hereby may execute this First Amendment by signing any such
counterpart. In the event of any ambiguity of conflict between the terms,
conditions, or provisions of the Original Agreement and this First Amendment,
the terms, conditions and provisions of this First Amendment will control.
SECTION 8. EFFECTIVE DATE.
This First Amendment shall be effective as of __________, 1999
("Effective Date").
-3-
<PAGE> 4
SECTION 9. MISCELLANEOUS.
A. In consideration of this First Amendment, Borrower hereby
releases and discharges Lenders and their shareholders,
directors, officers, employees, attorneys, affiliates and
subsidiaries from any and all claims, demands, liability and
causes of action whatsoever, now known or unknown, arising
prior to the Effective Date of this First Amendment out of or
in any way related to the extension or administration of the
obligations, liabilities, and indebtedness of Borrower to
Lenders, the Original Agreement or any mortgage or security
interest related thereto.
B. Borrower and Lenders hereby agree to extend all liens and
security interests securing the obligations, liabilities, and
indebtedness of Borrower to Lenders, until said obligations,
liabilities, and indebtedness, as modified herein, and any and
all related promissory notes have been fully paid. The parties
hereto further agree that this First Amendment shall in no
manner affect or impair the liens and security interests
evidenced by the Original Agreement and/or any other
instruments evidencing, securing or related to the
obligations, liabilities, and indebtedness. Borrower hereby
acknowledges that all liens and security interests securing
the obligations, liabilities, and indebtedness of Borrower to
Lenders are valid and subsisting.
C. Borrower covenants and agrees (i) to pay the balance of any
principal, together with all accrued interest, as specified
above in connection with any promissory note executed and
evidencing any indebtedness incurred in connection with the
Original Agreement, as modified by this First Amendment, and
(ii) to perform and observe covenants, agreements,
stipulations and conditions on its part to be performed
hereunder or under the Original Agreement and all other
related Loan Documents executed in connection herewith or
therewith.
D. Borrower hereby declares and certifies to Lenders that as of
the Effective Date of this First Amendment, except as
previously reported to Lenders in writing or except as waived
in connection herewith, no Event of Default exists under the
Original Agreement, as amended by this First Amendment, nor
shall any event have occurred which, with the giving of notice
or the passage of time, or both, would constitute an Event of
Default. Borrower hereby declares that Borrower has no set
offs, counterclaims, defenses or other causes of action
against Lenders arising out of the Original Agreement or any
related loan documents, and to the extent any such set offs,
counterclaims, defenses or other causes of action may exist,
whether known or unknown, such items are hereby waived by
Borrower.
-4-
<PAGE> 5
E. Borrower hereby represents and warrants to Lenders that (a)
Borrower has the legal power and authority to execute and
deliver this First Amendment; (b) the officials executing this
First Amendment have been duly authorized to execute and
deliver the same and bind Borrower with respect to the
provisions hereof; (c) the execution and delivery hereof by
Borrower and the performance and observance by Borrower of the
provisions hereof do not violate or conflict with the
organizational agreements of Borrower or any law applicable to
Borrower or result in a breach of any provisions of or
constitute a default under any other agreement, instrument or
document binding upon or enforceable against Borrower; and (d)
this First Amendment constitutes a valid and binding
obligation upon Borrower in every respect.
SECTION 10. MUTUAL WAIVER OF JURY TRIAL.
AS A SPECIFICALLY BARGAINED INDUCEMENT FOR THE LENDERS TO EXTEND CREDIT
TO BORROWER AND FOR BORROWER TO BORROW FROM LENDERS, AND AFTER HAVING THE
OPPORTUNITY TO CONSULT COUNSEL, BORROWER HEREBY EXPRESSLY WAIVES THE RIGHT TO
TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO THIS FIRST AMENDMENT OR
THE OTHER LOAN DOCUMENTS OR ARISING IN ANY WAY FROM THE LOANS OR OTHER
OBLIGATIONS UNDER THE LOAN DOCUMENTS.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers.
AGENT,
LETTER OF CREDIT LENDER, AND
LENDER:
THE PROVIDENT BANK
By: ____________________________
John R. Mirlisena, Jr.
Senior Vice President
LENDER:
NATIONAL CITY BANK LASALLE BANK
NATIONAL ASSOCIATION
By: ____________________________ By: ___________________________
Gregory M. Jelinek Name: Henry J. Munez
Senior Vice President Its: Assistant Vice President
BORROWER:
HIA TRADING ASSOCIATES MAZEL STORES, INC.
a New York general partnership a Delaware corporation
By: ODD-JOB ACQUISITION CORP., By: ___________________________
a Delaware corporation Name: ___________________________
Its: ___________________________
By: ____________________________
Name: ____________________________ ODD-JOB ACQUISITION CORP.,
Its: ____________________________ a Delaware corporation
By: ___________________________
Name: ___________________________
Its: ___________________________
-6-
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<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,052
<SECURITIES> 0
<RECEIVABLES> 12,417
<ALLOWANCES> 370
<INVENTORY> 74,914
<CURRENT-ASSETS> 96,641
<PP&E> 19,975
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0
0
<COMMON> 0
<OTHER-SE> 78,177
<TOTAL-LIABILITY-AND-EQUITY> 144,865
<SALES> 120,261
<TOTAL-REVENUES> 120,261
<CGS> 76,380
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