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: November 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-21597
MAZEL STORES, INC.
-----------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1830097
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31000 Aurora Road
Solon, Ohio 44139
-----------------
(Address of principal executive offices)
(Zip Code)
440-248-5200
----------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes * No
---------- -----------
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practical date.
Common Shares, no par value, outstanding as of November 30, 2001: 9,117,093.
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MAZEL STORES, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
November 3, 2001 (unaudited) and February 3, 2001 4
Consolidated Statements of Operations (unaudited) -
for the thirteen and thirty-nine week periods ended
November 3, 2001 and October 28, 2000 5
Consolidated Statements of Cash Flows (unaudited) -
for the thirty-nine week periods ended
November 3, 2001 and October 28, 2000 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1-6. 19
Signatures 20
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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)
November 3, February 3,
2001 2001
----------- -----------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 4,047 2,318
Receivables, less allowance for doubtful accounts
of $408 in both periods 13,242 14,769
Notes and accounts receivable-related parties 5,496 7,432
Income tax receivable - 2,625
Inventories 66,889 53,778
Prepaid expenses 2,354 1,805
Deferred income taxes 5,442 8,863
-------- --------
Total current assets 97,470 91,590
Equipment, furniture, and leasehold improvements, net 26,303 30,479
Other assets 3,443 3,961
Investment in VCM, Ltd. 6,804 9,421
Goodwill, net 9,526 9,761
Deferred income taxes 3,399 2,570
-------- --------
$146,945 147,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,517 2,017
Accounts payable 32,860 22,763
Accrued expenses and other current liabilities 4,433 8,384
-------- --------
Total current liabilities 38,810 33,164
Revolving line of credit 29,072 35,769
Long-term debt, net of current portion 7,511 2,511
Other liabilities 4,917 4,585
-------- --------
Total liabilities 80,310 76,029
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;
9,117,100 and 9,141,800 shares issued and
outstanding, respectively 64,246 64,320
Retained earnings 2,389 7,433
-------- --------
Total stockholders' equity 66,635 71,753
Commitments and contingencies
-------- --------
$146,945 147,782
======== ========
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 Thirty-nine Weeks Ended
----------------------------- -----------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 76,429 74,222 230,778 220,153
Cost of sales 48,395 47,694 148,631 140,783
----------- ----------- ----------- -----------
Gross profit 28,034 26,528 82,147 79,370
Selling, general and administrative expense 28,260 29,030 84,787 80,838
----------- ----------- ----------- -----------
Operating loss (226) (2,502) (2,640) (1,468)
Interest expense, net (1,032) (1,232) (2,618) (3,182)
Other expense (1,241) (550) (2,617) (711)
----------- ----------- ----------- -----------
Loss before income taxes
and extraordinary loss (2,499) (4,284) (7,875) (5,361)
Income tax benefit (976) (1,713) (3,072) (2,142)
----------- ----------- ----------- -----------
Loss before extraordinary loss (1,523) (2,571) (4,803) (3,219)
Extraordinary loss on extinguishment
of debt (net of $154 tax benefit) (241) - (241) -
----------- ----------- ----------- -----------
Net loss $ (1,764) (2,571) (5,044) (3,219)
=========== =========== =========== ===========
Net loss per common share -
basic and diluted $ (0.19) (0.28) (0.55) (0.35)
Weighted average common shares outstanding -
basic and diluted 9,117,100 9,141,800 9,131,800 9,141,800
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Thirty-nine Weeks Ended
--------------------------
November 3, October 28,
2001 2000
--------- --------
Cash flows from operating activities
Net loss $ (5,044) (3,219)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 5,632 4,477
Equity in net loss from VCM, Ltd. 2,617 738
Changes in operating assets and liabilities
Receivables 3,463 (4,038)
Inventories (13,111) (24,365)
Prepaid expenses 2,076 (818)
Deferred taxes 2,592 (99)
Other assets 7 610
Accounts payable 10,097 17,386
Accrued expenses and other liabilities (3,619) (2,737)
-------- --------
Net cash provided (used) by operating activities 4,710 (12,065)
-------- --------
Cash flows from investing activities
Capital expenditures (710) (9,337)
-------- --------
Net cash used by investing activities (710) (9,337)
-------- --------
Cash flows from financing activities
Debt repayments (99,718) (40,068)
Debt borrowings 97,521 62,422
Purchase of Common Shares (74) --
-------- --------
Net cash (used) provided by financing activities (2,271) 22,354
-------- --------
Net increase in cash and cash equivalents 1,729 952
Cash and cash equivalents at beginning of period 2,318 2,367
-------- --------
Cash and cash equivalents at end of period $ 4,047 3,319
======== ========
Supplemental disclosures:
Cash paid for interest $ 2,783 2,776
Cash (received) paid for taxes - net $ (4,509) 2,023
======== ========
See accompanying notes to consolidated financial statements
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MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen-week (fiscal third
quarter) and thirty-nine week (fiscal nine month) periods ended November 3, 2001
and October 28, 2000, 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 February 3, 2001
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 ("VCDS"),
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. The Company recorded management fee revenue
totaling $867 and $810 for the fiscal 2001 and 2000 third-quarters,
respectively, and $2.3 million for both fiscal 2001 and 2000 nine months,
respectively.
On July 19, 2001, the Company received a notice from VCDS with respect to its
election to terminate the VCM joint venture by fiscal 2001 year-end. VCDS has
the option to continue the business of VCM and acquire the net assets at book
value or liquidate the net assets. The Company has not received notice of VCDS's
election and is in discussion with VCDS regarding the notice of termination. As
of November 3, 2001, the Company and VCDS have not reached an agreement as to
the book value of VCM.
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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 Thirty-nine Weeks Ended
----------------------------- -----------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
NUMERATOR:
Net loss attributable to common
shareholders used in basic and diluted
net loss per share $ (1,764) (2,571) (5,044) (3,219)
DENOMINATOR:
Weighted-average number of
Common Shares used in basic
earnings per share 9,117,100 9,141,800 9,131,800 9,141,800
Net dilutive effect of stock options -- -- -- --
----------- ----------- ----------- -----------
Weighted-average number of Common
Shares and dilutive potential Common
Shares used in diluted net loss per share 9,117,100 9,141,800 9,131,800 9,141,800
=========== =========== =========== ===========
Basic net loss per share $ (0.19) (0.28) (0.55) (0.35)
Diluted net loss per share $ (0.19) (0.28) (0.55) (0.35)
(4) Business Segment Information
The Company's business segments are: retail, wholesale, and corporate.
Summarized financial information by business segment is as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Sales:
Retail $ 57,394 52,305 172,444 152,556
Wholesale 21,211 24,479 63,653 74,832
Intersegment sales (2,176) (2,562) (5,319) (7,235)
-------- -------- -------- --------
$ 76,429 74,222 230,778 220,153
======== ======== ======== ========
Operating (loss) profit:
Retail $ (1,870) (4,110) (5,875) (8,216)
Wholesale 1,938 2,081 4,981 7,181
Corporate (294) (473) (1,746) (433)
-------- -------- -------- --------
$ (226) (2,502) (2,640) (1,468)
======== ======== ======== ========
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(5) Long-term Debt
On August 21, 2001, the Company entered into a $70.0 million three-year
revolving credit facility with IBJ Whitehall Retail Finance. Under this
facility, the Company also borrowed $8.0 million through a Tranche B term loan
with Wingate Capital, and $1.0 million through a Tranche C term loan with The
Provident Bank and National City Bank. Borrowings under the revolving credit
facility bear interest, at the Company's option, at either the banks' prime
rate or LIBOR plus a spread based upon an availability grid. Interest on the
Tranche B loan is based upon the greater of the banks' prime rate plus 750
basis points or 15%, plus 3% deferrable at the Company's option, plus an
original issue discount of $300,000 due upon payment of the Tranche B loan.
Interest on the Tranche C loan is 20% through November 2001 and 25%
thereafter. The Tranche C loan also provided for the issuance of warrants for
2.5% of the Company's outstanding shares at $0.01 per share in the event that
the loan exists as of June 3, 2002. The warrants are not yet exercisable and
will terminate in their entirety if the Tranche C loan is repaid by June 3,
2002. Availability on the revolving credit facility and the Tranche B loan is
the lesser of the total credit commitment or a borrowing base calculation
based primarily upon the Company's accounts receivable and inventories. The
entire facility contains restrictive covenants that require minimum EBITDA
levels, maximum annual capital expenditure levels, and minimum inventory
leverage ratios. At November 3, 2001, the Company was in compliance with all
restrictive covenants.
In the fiscal 2001 third quarter, the Company recorded an extraordinary loss
as a result of the early extinguishment of debt relating to the Company's
former revolving credit facility. The extraordinary loss consists of the
write-off of debt issuance costs totaling $395, or $241 net of tax.
(6) New Accounting Pronouncements
In July 2001, The Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. SFAS No. 142 replaces
the requirement to amortize intangible assets with indefinite lives and
goodwill with a requirement for an impairment test. This statement also
requires an evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain intangible assets. After
transition, the impairment tests will be performed annually. The Company must
adopt SFAS No. 142 at the beginning of the fiscal year 2002 (beginning
February 3, 2002). As of November 3, 2001, unamortized goodwill totals $9.5
million, including accumulated amortization totaling $1.8 million. Management
is currently analyzing the effect that SFAS No. 142 will have on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations
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associated with the retirement of tangible long-lived assets and associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of the long-lived
asset, except for certain obligations of lessees. The provisions of SFAS No.
143 will be effective for fiscal years beginning after June 15, 2002, however
earlier application is permitted. Management does not believe SFAS No. 143
will have a significant impact on the Company's financial position or results
of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and portions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Discontinued Events and Extraordinary Items," and establishes a
single accounting model, based on the framework established in SFAS No. 121,
for long-lived assets to be disposed of by sale. The provisions of SFAS No.
144 will be effective for fiscal years beginning after December 15, 2001.
Management does not believe SFAS No. 144 will have a significant impact on the
Company's financial position or results of operations.
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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. The Company
currently operates 76 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), 24 in New Jersey, seven in Ohio, six in Pennsylvania, four in
Michigan, three in Connecticut, 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 did not open new retail stores in fiscal 2001.
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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 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------------- -------------------------------------------
November 3, October 28, November 3, October 28,
2001 % 2000 % 2001 % 2000 %
----------------------------------------- -------------------------------------------
Net sales
Retail $ 57,394 75.09% 52,305 70.47% 172,444 74.72% 152,556 69.30%
Wholesale 19,035 24.91% 21,917 29.53% 58,334 25.28% 67,597 30.70%
-------- ------ ------- ------- -------- ------ -------- ------
76,429 100.00% 74,222 100.00% 230,778 100.00% 220,153 100.00%
Gross profit
Retail 22,799 39.72% 20,463 39.12% 66,254 38.42% 60,600 39.72%
Wholesale 5,235 27.50% 6,065 27.67% 15,893 27.24% 18,770 27.77%
-------- ------ ------- ------- -------- ------ -------- ------
28,034 36.68% 26,528 35.74% 82,147 35.60% 79,370 36.05%
Segment operating (loss) profit
Retail (1,870) (3.26%) (4,110) (7.86%) (5,875) (3.41%) (8,216) (5.39%)
Wholesale 1,938 10.18% 2,081 9.49% 4,981 8.54% 7,181 10.62%
Corporate (294) (0.39%) (473) (0.63%) (1,746) (0.75%) (433) (0.19%)
-------- ------ ------- ------- -------- ------ -------- ------
(226) (0.30%) (2,502) (3.37%) (2,640) (1.14%) (1,468) (0.67%)
Interest expense, net 1,032 1.35% 1,232 1.66% 2,618 1.13% 3,182 1.45%
Other expense, net 1,241 1.62% 550 0.74% 2,617 1.13% 711 0.32%
-------- ------ ------- ------- -------- ------ -------- ------
Loss before income taxes and
extraordinary loss (2,499) (3.27%) (4,284) (5.77%) (7,875) (3.41%) (5,361) (2.44%)
Income tax benefit (976) (1.28%) (1,713) (2.31%) (3,072) (1.33%) (2,142) (0.97%)
-------- ------ ------- ------- -------- ------ -------- ------
Loss before extraordinary loss (1,523) (1.99%) (2,571) (3.46%) (4,803) (2.08%) (3,219) (1.46%)
Extraordinary loss on extinguishment of
debt (net of $154 tax benefit) (241) (0.32%) - - (241) (0.10%) - -
-------- ------ ------- ------- -------- ------ -------- ------
Net loss $ (1,764) (2.31%) (2,571) (3.46%) (5,044) (2.19%) (3,219) (1.46%)
======== ====== ======= ======= ======== ====== ======== ======
Net loss per common share -
basic and diluted $ (0.19) (0.28) (0.55) (0.35)
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RETAIL SEGMENT
Thirteen Weeks 2001 versus Thirteen Weeks 2000 (Fiscal Third Quarter)
Net sales for the fiscal 2001 third quarter were $57.4 million, compared to
$52.3 million for the third quarter 2000, an increase of $5.1 million, or
9.7%. The sales increase resulted from a comparable store net sales increase
of 6.7% and from the new stores opened during fiscal 2000.
Gross profit for the fiscal 2001 third quarter was $22.8 million, compared to
$20.5 million in third quarter 2000, an increase of $2.3 million, or 11.4%.
Gross margin increased to 39.7% in the third quarter 2001, from 39.1% in the
third quarter 2000. The increase in gross margin was due primarily to higher
realized product markup.
Selling, general and administrative expense was $24.7 million for third
quarter 2001, approximately unchanged from the prior year third quarter.
Selling, general and administrative expense, as a percentage of net sales,
decreased to 43.0% in the third quarter 2001, from 47.0% in the third quarter
2000. Store level expenses increased $517,000, primarily payroll, advertising,
and occupancy, attributable to new stores opened during fiscal 2000. In the
fiscal 2000 third quarter, the Company had new store preopening expenses that
totaled $525,000; no such expenses were incurred in the fiscal 2001 third
quarter. Administrative expenses decreased $421,000 due primarily to lower
payroll and general operating expenses.
In the fiscal 2001 third quarter, retail reported an operating loss of $1.9
million, compared to an operating loss of $4.1 million for the third quarter
2000. As a percentage of net sales, operating margin increased to -3.3%, from
-7.9%. This increase was primarily due to the factors described above.
Thirty-nine Weeks 2001 versus Thirty-nine Weeks 2000 (Fiscal Nine Months)
Net sales for the fiscal 2001 nine months were $172.4 million, compared to
$152.6 million for the fiscal 2000 nine months, an increase of $19.8 million,
or 13.0%. The sales increase resulted from a comparable store net sales
increase of 5.1% and from the new stores opened during fiscal 2000.
Gross profit for the fiscal 2001 nine months was $66.3 million, compared to
$60.6 million in the fiscal 2000 nine months, an increase of $5.7 million, or
9.3%. Gross margin decreased to 38.4% in the fiscal 2001 nine months, from
39.7% in the prior year nine months. The decrease in gross margin was due
primarily to lower realized product markup and reduced vendor allowances.
Selling, general and administrative expense was $72.1 million for the fiscal
2001 nine months, compared to $68.8 million in the prior year, an increase of
$3.3 million, or 4.8%. Selling, general and administrative expense, as a
percentage of net sales, decreased to 41.8% in the fiscal 2001 nine months,
from 45.1% in the fiscal 2000 nine months. The dollar increase primarily
resulted from a $4.3 million increase in store level expenses, primarily
payroll, advertising, and occupancy attributable to new stores opened during
fiscal 2000. In addition,
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there were no new store preopening expenses incurred in the fiscal 2001 nine
months, compared to $1.8 million for fiscal 2000 nine months. Administrative
expenses decreased $954,000 due primarily to lower payroll expenses and
general operating expenses.
In the fiscal 2001 nine months, retail reported an operating loss of $5.9
million, compared to an operating loss of $8.2 million for the same prior year
period. As a percentage of net sales, operating margin increased to -3.4%,
from -5.4%. This increase was primarily due to the factors described above.
WHOLESALE SEGMENT
Thirteen Weeks 2001 versus Thirteen Weeks 2000 (Fiscal Third Quarter)
Net sales for the fiscal 2001 third quarter were $19.0 million, compared to
$21.9 million in the fiscal 2000 third quarter, a decrease of $2.9 million, or
13.1%. The decrease was due primarily to lower drop-shipped sales and the
impact of lower per case value of inventory liquidated pursuant to the special
charge recorded in the fiscal 2000 fourth quarter.
Gross profit for the fiscal 2001 third quarter was $5.2 million, compared to
$6.1 million in the fiscal 2000 third quarter, a decrease of $830,000, or
13.7%. Gross margin decreased slightly to 27.5% in the fiscal 2001 third
quarter, from 27.7% in the third quarter 2000.
Selling, general and administrative expense for the fiscal 2001 third quarter
was $3.3 million, compared to $4.0 million in the fiscal 2000 third quarter, a
decrease of $687,000, or 17.2%. The decrease is primarily attributable to
lower warehouse and administrative expense, mostly payroll and incentive
compensation accruals. As a percentage of net sales, selling, general and
administrative expense decreased to 17.3% in the third quarter 2001, from
18.2% in last year's third quarter.
Wholesale operating profit decreased to $1.9 million in the third quarter of
fiscal 2001, from $2.1 million in the third quarter 2000. As a percentage of
net sales, operating margin increased to 10.2%, from 9.5%, due to the factors
described above.
Thirty-nine Weeks 2001 versus Thirty-nine Weeks 2000 (Fiscal Nine Months)
Net sales for the fiscal 2001 nine months were $58.4 million, compared to
$67.6 million in the fiscal 2000 nine months, a decrease of $9.2 million, or
13.7%. The decrease was due primarily to lower drop-shipped sales and the
impact of lower per case value of inventory liquidated pursuant to the special
charge recorded in the fiscal 2000 fourth quarter.
Gross profit for the fiscal 2001 nine months was $15.9 million, compared to
$18.8 million in the fiscal 2000 nine months, a decrease of $2.9 million, or
15.3%. Gross margin decreased to 27.2% for the fiscal 2001 nine months,
compared to 27.8% for the same period last year. This
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decrease was due primarily to lower margin on stock sales and lower levels of
vendor allowances.
Selling, general and administrative expense for the fiscal 2001 nine months
was $10.9 million, compared to $11.6 million in the fiscal 2000 nine months, a
decrease of $677,000, or 5.8%. As a percentage of net sales, selling, general
and administrative expense increased to 18.7% in the fiscal 2001 nine months,
from 17.1% in the last year's nine months, due to the lower sales level.
Wholesale operating profit decreased to $5.0 million in the nine months of
fiscal 2001, from $7.2 million in the fiscal 2000 nine months. As a percentage
of net sales, operating margin decreased to 8.5%, from 10.6%, due to the
factors described above.
CORPORATE
Thirteen Weeks 2001 versus Thirteen Weeks 2000 (Fiscal Third Quarter)
Corporate consists of the cost of senior management and shared administrative
resources that are utilized by both segments of the business, offset by the
income generated by the management fee revenue from VCM, Ltd., and other
buying commissions. For the fiscal 2001 third quarter, corporate expense
totaled $294,000, compared to $473,000 in the fiscal 2000 third quarter.
Corporate expenses decreased $179,000 primarily reflecting lower management
incentive compensation accruals for the fiscal 2001 third quarter, lower
professional fees, and an increase in VCM management fee revenue.
Thirty-nine Weeks 2001 versus Thirty-nine Weeks 2000 (Fiscal Nine Months)
Corporate expense for the fiscal 2001 nine months was $1.7 million, compared
to $433,000 in the same prior year period. This increase in corporate expenses
reflects a reduction of buying commission revenue and lower management
incentive compensation accruals for the fiscal 2000 nine months, partially
offset by an increase in VCM management fee revenue.
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.
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. On August 21,
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2001, the Company entered into a $70.0 million three-year revolving credit
facility with IBJ Whitehall Retail Finance. Under this facility, the Company
also borrowed $8.0 million through a Tranche B term loan with Wingate Capital,
and $1.0 million through a Tranche C term loan with The Provident Bank and
National City Bank. Borrowings under the revolving credit facility bear
interest, at the Company's option, at either the banks' prime rate or LIBOR
plus a spread based upon an availability grid. Interest on the Tranche B loan
is based upon the greater of the banks' prime rate plus 750 basis points or
15%, plus 3% deferrable at the Company's option, plus an original issue
discount of $300,000 due upon payment of the Tranche B loan. Interest on the
Tranche C loan is 20% through November 2001 and 25% thereafter. The Tranche C
loan also provided for the issuance of warrants for 2.5% of the Company's
outstanding shares at $0.01 per share in the event that the loan exists as of
June 3, 2002. The warrants are not yet exercisable and will terminate in their
entirety if the Tranche C loan is repaid by June 3, 2002. Availability on the
revolving credit facility and the Tranche B loan is the lesser of the total
credit commitment or a borrowing base calculation based primarily upon the
Company's accounts receivable and inventories. At November 3, 2001,
availability on the Company's revolving credit facility and Tranche B loan was
$21 million. The entire facility contains restrictive covenants that require
minimum EBITDA levels, maximum annual capital expenditure levels, and minimum
inventory leverage ratios. At November 3, 2001, the Company was in compliance
with all restrictive covenants.
For the fiscal 2001 nine months, cash provided by consolidated operating
activities was $4.7 million, comprised primarily of an increase in accounts
payable and the collection of income tax receivables related to the fiscal
2000 net loss, partially offset by the seasonal increase in retail inventory.
Cash used in operating activities the fiscal 2000 nine months totaled $12.1
million, comprised primarily of an increase in inventories for both the retail
and wholesale divisions, and an increase in accounts receivable due to the
higher sales levels. Cash used in investing activities in the nine months 2001
decreased to $710,000, from $9.3 million in the same 2000 period. The decrease
is reflective of the suspension of new store openings in fiscal 2001 and the
completion of the retail warehouse racking and automation project in fiscal
2000. Cash used in financing activities was $2.3 million for the fiscal 2001
nine months, as excess operating cashflow was used to reduce borrowings on the
Company's revolving credit facility. This compares to cash provided by
financing activities of $22.4 million for the 2000 nine months, and was the
result of additional borrowings from the Company's credit facility to fund
operating and investing cash flow requirements.
Total assets were $146.9 million at the end of the fiscal 2001 third quarter,
compared to $147.8 million at fiscal 2000 year-end. Working capital increased
slightly to $58.7 million at the fiscal 2001 third quarter-end, from $58.4
million at fiscal 2000 year-end, primarily the result of an increase in
inventory, partially offset by an increase in accounts payable. The current
ratio was 2.5 to 1 at the 2001 third quarter-end, compared to 2.8 to 1 at
fiscal 2000 year-end.
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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.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, The Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. SFAS No. 142 replaces
the requirement to amortize intangible assets with indefinite lives and
goodwill with a requirement for an impairment test. This statement also
requires an evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain intangible assets. After
transition, the impairment tests will be performed annually. The Company must
adopt SFAS No. 142 at the beginning of the fiscal year 2002 (beginning
February 3, 2002). As of November 3, 2001, unamortized goodwill totals $9.5
million, including accumulated amortization totaling $1.8 million. Management
is currently analyzing the effect of SFAS No. 142 will have on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of the long-lived
asset, except for certain obligations of lessees. The provisions of SFAS No.
143 will be effective for fiscal years beginning after June 15, 2002, however
earlier application is permitted. Management does not believe SFAS No. 143
will have a significant impact on the Company's financial position or results
of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and portions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Discontinued Events and Extraordinary Items," and establishes a
single accounting model, based on the framework established in SFAS No. 121,
for long-lived assets to be disposed of by sale. The provisions of SFAS No.
144 will be effective for fiscal years beginning after December 15, 2001.
Management does not believe SFAS No. 144 will have a significant impact on the
Company's financial position or results of operations.
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FORWARD LOOKING STATEMENTS
Forward-looking statements in this release 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, (i) the
Company's execution of a plan to restore its retail stores to profitability
and the profitability of its wholesale division; (ii) the ability to purchase
sufficient quality closeout and other merchandise at acceptable terms; and
(iii) the ability of the Company to attract and retain qualified management
and store personnel. Please refer to the Company's SEC filings for further
information.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On August 21, 2001, the Company refinanced its entire credit facility and
entered into a Tranche C loan that provided for the issuance of warrants for
2.5% of the Company's outstanding shares at $0.01 per share in the event that
the loan exists as of June 3, 2002. The warrants are not yet exercisable and
will terminate in their entirety if the Tranche C loan is repaid by June 3,
2002.
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
September 5, 2001.
At the annual meeting, the Company's shareholders elected Charles Bilezikian,
Brady Churches, and Robert Horne as Directors whose term expires at the annual
meeting of shareholders in 2004. Reuven Dessler, Ned Sherwood, William Shenk,
and Mark Miller continued as Directors whose term expires at the annual
meeting of shareholders in 2002. Peter Hayes, Jacob Koval, and Jerry Sommers
continued as Directors whose term expires at the annual meeting of
shareholders in 2003. The following tabulation represents the voting for the
elected Directors:
Withheld
Nominee For Authority
---------------------- -------------- ---------
Charles Bilezikian 4,299,767 1,193,210
Brady Churches 4,929,067 563,910
Robert Horne 4,929,767 563,210
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
February 2, 2002. The holders of 5,217,461 Common Shares voted to ratify the
appointment, 275,116 voted against the ratification, and the holders of 400
shares abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
Reference Form 8-K that was filed on September 5, 2001 relating
to the Company's revolving credit facility dated August 21, 2001.
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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)
12/17/01 /s/ Peter J. Hayes
---------------- ----------------------------------
Date Peter J. Hayes
Chief Executive Officer
12/17/01 /s/ Edward Cornell
---------------- ----------------------------------
Date Edward Cornell
Executive V.P. and CFO
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