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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: April 29, 2000
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 30, 2000: 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
April 29, 2000 and January 29, 2000 (audited) 4
Consolidated Statements of Operations
for the thirteen week periods ended
April 29, 2000 and May 1, 1999 5
Consolidated Statements of Cash Flows
for the thirteen week periods ended
April 29, 2000 and May 1, 1999 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
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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<PAGE> 4
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
April 29, January 29,
2000 2000
--------- -----------
ASSETS (Unaudited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,892 2,367
Receivables, less allowance for doubtful
accounts of $388 in both periods 16,811 14,343
Inventories 84,769 70,178
Prepaid expenses 1,631 1,584
Deferred income taxes 4,112 4,112
--------- ---------
Total current assets 110,215 92,584
Equipment, furniture, and leasehold improvements, net 27,515 25,082
Other assets 3,884 3,959
Investment in VCM, Ltd. 9,419 9,687
Notes and accounts receivable-related parties 3,507 6,208
Goodwill, net 9,996 10,074
Deferred income taxes 1,507 1,507
--------- ---------
$166,043 149,101
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,017 2,017
Accounts payable 26,455 20,769
Accrued expenses and other current liabilities 5,443 7,646
--------- ---------
Total current liabilities 33,915 30,432
Revolving line of credit 39,384 25,542
Long-term debt, net of current portion 4,025 4,524
Other liabilities 3,926 3,816
--------- ---------
Total liabilities 81,250 64,314
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 20,473 20,467
--------- ---------
Total stockholders' equity 84,793 84,787
Commitments and contingencies --------- ---------
$ 166,043 149,101
========== =========
</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
------------------------------
April 29, May 1,
2000 1999
--------- -------
<S> <C> <C>
Net sales $ 72,790 59,308
Cost of sales 46,590 38,177
---------- ---------
Gross profit 26,200 21,131
Selling, general, and administrative expense 25,080 20,410
---------- ---------
Operating profit 1,120 721
Other income (expense)
Interest expense, net (840) (530)
Other (268) (61)
---------- ---------
Income before income taxes 12 130
Income tax expense 6 52
---------- ---------
Net income $ 6 78
========== =========
Net income per share (basic) $ 0.00 0.01
Net income per share (diluted) $ 0.00 0.01
Average shares outstanding (basic) 9,141,800 9,141,800
Average shares outstanding (diluted) 9,169,200 9,147,800
</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>
Thirteen Weeks Ended
-------------------------------------
April 29, May 1,
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6 78
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 1,261 889
Equity in net loss from VCM, Ltd. 268 61
Changes in operating assets and liabilities
Receivables (2,468) (47)
Inventories (14,591) (9,879)
Prepaid expenses (47) (905)
Other assets 2,669 3,583
Accounts payable 5,686 (657)
Accrued expenses and other liabilities (2,093) 295
--------- ----------
Net cash used in operating activities (9,309) (6,582)
--------- ----------
Cash flows from investing activities
Capital expenditures (3,478) (1,143)
Cash paid for lease acquisitions (31) (225)
--------- ----------
Net cash used in investing activities (3,509) (1,368)
--------- ----------
Cash flows from financing activities
Debt repayments (11,112) (11,854)
Debt borrowings 24,455 20,425
--------- ----------
Net cash provided by financing activities 13,343 8,571
--------- ----------
Net increase in cash and cash equivalents 525 621
Cash and cash equivalents at beginning of period 2,367 1,668
--------- ----------
Cash and cash equivalents at end of period $ 2,892 2,289
========= ==========
Supplemental disclosures
Cash paid for interest $ 815 413
Cash paid for income taxes $ 1,679 150
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2000 AND MAY 1, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen week periods ended April
29, 2000 and May 1, 1999 (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 29, 2000
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 general merchandise 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
---------------------
April 29, May 1,
2000 1999
--------- ------
NUMERATOR:
<S> <C> <C>
Net income available to Common shareholders used
in basic and diluted net income per share $ 6 78
DENOMINATOR:
Weighted-average number of Common Shares used
in basic earnings per share 9,141,800 9,141,800
Net dilutive effect of stock options 27,400 6,000
---------- ---------
Weighted-average number of Common Shares and
dilutive potential Common Shares used in diluted
net income per share 9,169,200 9,147,800
========== =========
Basic net income per share $ 0.00 0.01
Diluted net income per share $ 0.00 0.01
</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) 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. The
Company's business strategy has expanded from a primary focus on wholesale
operations to an emphasis on the growth of its retail operation, which began
with the 1995 acquisition of the 12 store "Odd Job" chain. At the end of the
fiscal 2000 first quarter, the Company operated 67 closeout retail stores under
the names "Odd Job," "Odd Job Trading," and "Mazel's," including 30 in New York
(eight of which are in Manhattan), 23 in New Jersey, six in Pennsylvania, three
in Connecticut, three in Ohio, and one each in Delaware and Kentucky.
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 retail store expansion plan is to open 16 to 18 stores in fiscal 2000,
of which four have been opened to-date.
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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.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Thirteen Weeks Ended Thirteen Weeks Ended
April 29, 2000 May 1, 1999
-------------------- --------------------
Percent of Percent of
Amount Net Sales Amount Net Sales
------ --------- ------ ---------
Net sales
<S> <C> <C> <C> <C>
Retail $ 47,421 65.15% $ 39,736 67.00%
Wholesale 25,369 34.85% 19,572 33.00%
-------- ------ -------- ------
72,790 100.00% 59,308 100.00%
Gross profit
Retail 18,869 39.79% 15,645 39.37%
Wholesale 7,331 28.90% 5,486 28.03%
-------- ------ -------- ------
26,200 35.99% 21,131 35.63%
Segment operating profit
Retail (2,532) -5.34% (544) -1.37%
Wholesale 3,658 14.42% 1,599 8.16%
Corporate (6) -0.01% (334) -0.56%
-------- ------ -------- ------
1,120 1.54% 721 1.22%
Interest expense, net 840 1.15% 530 0.90%
Other expense, net 268 0.37% 61 0.10%
Income tax expense 6 0.01% 52 0.09%
-------- ------ -------- ------
Net income $ 6 0.01% $ 78 0.13%
======== ====== ======== ======
Net income per share
Basic $ 0.00 $ 0.01
Diluted $ 0.00 $ 0.01
</TABLE>
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RETAIL SEGMENT
Thirteen Weeks 2000 versus Thirteen Weeks 1999 (Fiscal First Quarters)
Net sales for the first quarter 2000 were $47.4 million, compared to $39.7
million for the first quarter 1999, an increase of $7.7 million, or 19.3%. The
sales increase resulted from sales in the 17 stores opened during fiscal 1999
and from the three stores opened during first quarter 2000. Comparable store net
sales decreased 6.1%, or $2.4 million, on a base of 47 stores.
Gross profit for the fiscal 2000 first quarter was $18.9 million, compared to
$15.6 million in first quarter 1999, an increase of $3.2 million, or 20.6%.
Gross margin increased to 39.8% in the first quarter 2000, from 39.4% in the
first quarter 1999, due primarily to higher initial product mark-up.
Selling, general and administrative expense was $21.4 million for first quarter
2000, compared to $16.2 million in the prior year quarter, an increase of $5.2
million, or 32.2%. Selling, general and administrative expense, as a percentage
of net sales, increased to 45.1% in the first quarter 2000, from 40.7% in the
first quarter 1999. The increase primarily resulted from a $4.7 million increase
in store level expenses and warehouse costs, attributable mostly to the 17
stores opened in 1999 and the three stores opened in first quarter 2000. Store
level expenses include new store preopening costs, and totaled $713,000 for
first quarter 2000, compared to $43,000 from the prior year quarter. In
addition, administrative expenses increased $556,000 due primarily to an
increase in support infrastructure related to the Midwest market expansion and
increased MIS expenses.
In the fiscal 2000 first quarter, retail reported an operating loss of $2.5
million, compared to an operating loss of $544,000 for first quarter 1999. As a
percentage of net sales, operating margin decreased to -5.3%, from -1.4%. This
decrease was primarily due to the factors described above.
WHOLESALE SEGMENT
Thirteen Weeks 2000 versus Thirteen Weeks 1999 (Fiscal First Quarters)
Net sales for the fiscal 2000 first quarter were $25.4 million, compared to
$19.6 million in the fiscal 1999 first quarter, an increase of $5.8 million, or
29.6%. The increase is attributable to the strong product deal flow in the
quarter.
Gross profit for the fiscal 2000 first quarter was $7.3 million, compared to
$5.5 million in the fiscal 1999 first quarter, an increase of $1.8 million, or
33.6%. Gross margin increased to 28.9% in the first quarter 2000, from 28.0% in
the first quarter 1999. The increase in gross profit was due primarily to the
higher sales level, including higher gross margin related to strong deal flow
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<PAGE> 12
and higher levels of vendor commission.
Selling, general and administrative expense for the fiscal 2000 first quarter
was $3.7 million, compared to $3.9 million in the fiscal 1999 first quarter, a
decrease of $214,000, or 5.5%. As a percentage of net sales, selling, general
and administrative expense decreased to 14.5% in the first quarter 2000, from
19.9% in the first quarter 1999. The decrease is primarily attributable to
positive operating expense leverage on a higher sales base and lower levels of
bad debt expense.
Wholesale operating profit increased to $3.7 million in the first quarter of
fiscal 2000, from $1.6 million in the first quarter 1999. As a percentage of net
sales, operating margin increased to 14.4% in the first quarter 2000, from 8.2%
in the comparable 1999 quarter, due to the factors described above.
CORPORATE EXPENSE
Thirteen Weeks 2000 versus Thirteen Weeks 1999 (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. and other buying commissions. Corporate
expense for the fiscal 2000 first quarter was $6,000, compared to $334,000 in
the fiscal 1999 first quarter, a decrease of $328,000. The decrease in corporate
expense was primarily due to higher management fee revenue from VCM, Ltd. and an
increase in buying commission revenue, partially offset by higher levels of
professional fees. Corporate expense as a percentage of the Company's total
sales was 0.1%for the fiscal 2000 first quarter, comparing to 0.6% for first
quarter 1999.
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.
On an annual basis, the Company's growth is financed through cash flow from
operations, borrowings under its revolving credit facility and the extension of
trade credit. The Company maintains 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
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quarterly payments of $500,000 plus accrued interest that 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 May 2000, the Company added a $10.0
million seasonal revolving credit line available from May through December
annually.
For the fiscal 2000 first quarter, cash used by consolidated operating
activities was $9.3 million, compared to cash used in fiscal 1999 first quarter
of $6.6 million. An increase in retail inventory, principally related to the
increase in stores in operation, partially offset by an increase in accounts
payable, comprised the majority of the cash used in the fiscal 2000 and 1999
first quarters. Cash used in investing activities in the first quarter 2000
increased to $3.5 million from $1.4 million in the same 1999 period. The fiscal
2000 first quarter reflects higher capital expenditures related to additional
new store openings and the continuation of the retail warehouse racking and
automation project. Cash generated by financing activities was $13.3 million
for the fiscal 2000 first quarter, compared to $8.6 million for the 1999 first
quarter, and was the result of additional borrowings from the Company's credit
facility.
Working capital increased to $76.3 million at the fiscal 2000 first quarter-end,
from $62.2 million at fiscal 1999 year-end, primarily the result of an increase
in retail inventories. The current ratio was 3.2 to 1 at the 2000 first
quarter-end, compared to 3.0 to 1 at fiscal 1999 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
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.
The Company adopted SOP 98-5 effective January 31, 1999. The adoption of SOP
98-5 did not have a significant impact on the Company's results for the fiscal
year ended January 29, 2000.
During 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, " Deferral of Effective Date of
SFAS No. 133." This statement delays the required implementation of Accounting
for Derivative Instruments and Hedgng Acivities until fiscal quarters or fiscal
years beginning after June 15, 2000. SFAS No. 133 is currently not applicable to
the Company.
FORWARD LOOKING STATEMENTS
Forward looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to: the successful implementation and
timing of the Company's retail expansion plans; the ability to purchase quality
closeout merchandise at prices that allow the Company to maintain or exceed
expected margins on sales; the effect of comparable store sales 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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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)
6/13/00 /s/ Reuven Dessler
----------- ---------------------------------------
Date Reuven Dessler
Chairman and Chief Executive Officer
6/13/00 /s/ Sue Atkinson
----------- ---------------------------------------
Date Sue Atkinson
Senior Vice President -
Chief Financial Officer and Treasurer
