United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: May 4, 2002
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.)
200 Helen Street
South Plainfield, NJ 07080
--------------------------
(Address of principal executive offices)
(Zip Code)
908-222-1000
------------
(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.
1
Common Shares, no par value, outstanding as of June 14, 2002: 9,060,695
MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - as of
May 4, 2002 (unaudited) and February 2, 2002 4
Consolidated Statements of Operations (unaudited) -
for the thirteen week periods ended
May 4, 2002 and May 5, 2001 5
Consolidated Statements of Cash Flows (unaudited) -
for the thirteen week periods ended
May 4, 2002 and May 5, 2001 6
Condensed Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1- 6. 14
Signatures 15
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
The Registrant's Consolidated Financial Statements follow this page.
3
MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
May 4, February 2,
2002 2002
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,723 $ 4,046
Notes and accounts receivable - related parties 90 90
Other receivables 6,118 1,176
Income tax receivable 2,155 2,396
Inventories 35,315 27,580
Prepaid expenses and other current assets 932 585
Deferred income taxes 7,818 5,986
Net assets of discontinued operations - 26,218
-------- --------
Total current assets 57,151 68,077
Property and equipment, net 21,081 22,286
Other assets 2,485 3,480
Goodwill, net - 9,447
Deferred income taxes 3,818 3,818
-------- --------
Total assets $ 84,535 $107,108
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12 $ 3,017
Accounts payable 15,914 16,568
Accrued expenses and other current liabilities 7,446 8,915
-------- --------
23,372 28,500
Total current liabilities
Long-term debt, net of current portion - 6,083
Other liabilities 5,089 5,000
-------- --------
Total liabilities 28,461 39,583
-------- --------
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;
9,019,900 and 9,141,800 shares issued and outstanding,
respectively 64,428 63,935
Retained earnings (deficit) (8,354) 3,590
-------- --------
Total stockholders' equity 56,074 67,525
Commitments and contingencies - -
-------- --------
Total liabilities and stockholders' equity $ 84,535 $107,108
======== ========
See accompanying condensed notes to consolidated financial statements
4
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Thirteen Week Periods Ended
May 4, May 5,
2002 2001
----------- ---------
Net sales $ 54,702 $ 54,915
Cost of sales 33,071 34,050
----------- ---------
Gross profit 21,631 20,865
Selling, general and administrative expenses 24,630 24,245
----------- ---------
Operating loss (2,999) (3,380)
Other expense, net - 475
Interest expense, net 348 521
----------- ---------
Loss from continuing operations before income taxes and extraordinary item (3,347) (4,376)
Income tax benefit (1,305) (1,706)
----------- ---------
Loss from continuing operations before extraordinary item (2,042) (2,670)
Extraordinary loss on extinguishment of debt (net of tax benefit of $291) (455) -
Income from operations of the discontinued Wholesale Division
(net of tax benefit of $682) - 1,068
----------- ---------
Net loss before change in accounting principle (2,497) (1,602)
Change in accounting principle (9,447) -
----------- ---------
Net loss $ (11,944) $(1,602)
=========== =========
Basic and diluted net income (loss) per common share:
Loss from continuing operations before extraordinary item $ (0.23) $(0.29)
Extraordinary loss (0.05) -
Income from discontinued operations - 0.12
----------- ---------
Net loss per common share, before change in accounting principle (0.28) (0.17)
Loss per share from change in accounting principle (1.05) -
----------- ---------
Net loss per common share $ (1.33) $(0.17)
=========== =========
Weighted average common shares outstanding-basic and diluted 9,019,900 9,141,800
=========== =========
See accompanying condensed notes to consolidated financial statements
5
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Thirteen Week Periods Ended
May 4, May 5,
2002 2001
------------- -------------
Net loss $(11,944) $ (1,602)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Income from operations of discontinued wholesale division, net of tax - 1,068
Change in accounting principle 9,447 -
Extraordinary loss on the extinguishment of debt, net of tax 455 -
Depreciation and amortization 1,581 1,727
Deferred income taxes (1,832) -
Equity in net loss from VCM, Ltd. - 475
Changes in operating assets and liabilities
Notes and other receivables (1,016) 1,199
Income tax receivable 241 -
Inventories (7,735) (2,576)
Prepaid expenses (347) 245
Other assets 866 -
Accounts payable (654) 52
Accrued expenses and other liabilities (1,380) (209)
-------- --------
Total adjustments (374) 1,981
-------- --------
Net cash (used in) provided by continuing operations (12,318) 379
Net cash provided by discontinued operations - 3,855
-------- --------
Net cash (used in) provided by operating activities (12,318) 4,234
-------- --------
Cash flows from investing activities
Capital expenditures, net (226) (103)
Lease acquisitions (21) (62)
Proceeds from sale of net assets of discontinued operations 22,292 -
-------- --------
Net cash provided by (used in) investing activities 22,045 (165)
-------- --------
Cash flows from financing activities
Debt repayments (21,858) (20,710)
Debt borrowings 12,770 17,944
Financing costs paid (455) -
Proceeds from exercise of stock options 493 -
-------- --------
Net cash used in financing activities (9,050) (2,766)
-------- --------
Net increase in cash and cash equivalents 677 1,303
Cash and cash equivalents at beginning of period 4,046 2,318
-------- --------
Cash and cash equivalents at end of period $ 4,723 $ 3,621
======== ========
Supplemental disclosures
Cash paid for interest 47 911
Cash (received) paid for income taxes (6) 58
======== ========
See accompanying condensed notes to consolidated financial statements
6
MAZEL STORES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEK PERIODS ENDED MAY 4, 2002 AND MAY 5, 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Basis of Presentation
The consolidated financial statements for the thirteen week periods ended May 4,
2002 and May 5, 2001 (fiscal first quarters), respectively, represent the retail
operations of Mazel Stores, Inc. Comparative consolidated financial statements
for the thirteen week period ended May 5, 2001 have been restated, where
applicable, to reflect the Company's former Wholesale Division as a discontinued
operation.
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 accounting principles generally
accepted in the United States of America. 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 2, 2002
and should be read in conjunction with the consolidated financial statements and
the notes thereto.
(2) Goodwill and Other Intangible Assets
Effective February 3, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under the provisions of SFAS No. 142, intangible assets with indefinite
lives and goodwill are no longer amortized but are subject to annual impairment
tests. In the first quarter of 2002, the Company determined, using the goodwill
impairment provisions of SFAS No. 142, that its unamortized goodwill was
impaired and recorded a non-cash charge of $9,447 to write-off the entire
goodwill balance. This charge is shown as a change in accounting principle for
the first quarter ended May 4, 2002. An unamortized goodwill balance of $6,688
remains for tax purposes and a valuation allowance has been established to
offset the deferred tax asset. Amortization expense related to goodwill was $79
for the first quarter ended May 5, 2001. This would not have affected earnings
per share for the first quarter ended May 5, 2001.
(3) Discontinued Operations
On February 11, 2002, the Company signed an agreement that sold substantially
all assets of its Wholesale Division ("Division") to MZ Wholesale Acquisition
LLC (MZ), d/b/a Mazel Company, a group headed by two former executives and
current members of the Board of Directors. The Division was engaged in the
business of acquiring closeout merchandise at prices
7
substantially below traditional wholesale prices and selling such merchandise
through a variety of channels. The Division's wholesale operations purchased and
resold many of the same lines of merchandise sold through the Company's current
retail operations.
On the date of the sale, MZ paid the Company $22,292 for the purchase of the
assets of the Wholesale Division, based on a preliminary estimate of the net
assets of the Division. On May 21, 2002, after the close of the first quarter,
MZ paid the Company an additional $5,245 based upon a finalized balance sheet of
the Division and other advances after the balance sheet date. This amount is
reported in other receivables at May 4, 2002. At May 4, and February 2, 2002,
$970 and $3,266, respectively, were included in accrued expenses and other
current liabilities related to closing costs on the disposal of the Wholesale
Division.
Operating results of discontinued operations for the quarter ended May 5, 2001,
(after elimination of intercompany losses) were as follows:
Net sales $20,860
Cost of sales 15,067
-------
Gross margin 5,793
Selling, general and administrative expenses 3,808
-------
Operating income 1,985
Interest expense 235
-------
Income before income taxes 1,750
Income tax expense 682
-------
Income from discontinued operations $ 1,068
=======
Net income per basic and diluted share
from discontinued operations $ 0.12
=======
(4) Investment in VCM, Ltd.
On February 2, 2002, the Company reached an agreement to terminate the operation
of VCM, Ltd. ("VCM"), a 50 percent owned joint venture with Value City
Department Stores. The Company's original investment in VCM was accounted for
under the equity method. In addition to its 50 percent equity share of VCM's net
profit or loss, the Company received a management fee equal to three percent of
VCM's net sales. For the first quarter ended May 5, 2001, the Company recorded
management fee revenue of $688 (within selling, general and administrative
expenses) and its share of VCM's net loss of $475.
8
(5) 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.
The effect of incremental shares from stock options at May 4, 2002, and May 5,
2001, respectively, have been excluded from diluted weighted average shares, as
the net loss for the related periods would cause the incremental shares to be
antidilutive.
Thirteen Weeks Ended
--------------------
May 4, May 5,
2002 2001
---- ----
NUMERATOR:
Net loss available to common shareholders used in
basic and diluted net income per share $ (11,944) $ (1,602)
DENOMINATOR:
Basic weighted average shares 9,019,900 9,141,800
Effect of dilutive stock options - -
----------- -----------
Diluted weighted average shares 9,019,900 9,141,800
=========== ===========
Basic loss per common share $ (1.33) $ (0.17)
Diluted loss per common share $ (1.33) $ (0.17)
(6) Long-term Debt
On February 3, and February 5, 2002, the Company paid off its entire outstanding
loan balances of $8,000 with Wingate Capital (Tranche B term loan) and $1,000
with The Provident Bank and National City Bank (Tranche C term loan),
respectively. In connection with the repayment of the Tranche C term loan, a
previously reported warrant for 2.5% of the Company's outstanding shares has
been extinguished. On February 11, 2002, the Company reduced the borrowing limit
of its revolving credit facility with IBJ Whitehall Retail Finance from $70,000
to $30,000, and modified certain covenants. During the first quarter of 2002,
the Company recorded an extraordinary charge of $455, net of taxes, for the
early extinguishment of debt and modifications made to the revolving credit
facility.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Mazel Stores, Inc. (the "Company") is a major regional closeout retail 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. 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. As of May 4, 2002, the
Company operated a chain of 77 closeout retail stores in New York, New Jersey,
Pennsylvania, Connecticut, Delaware, Ohio, Michigan, and Kentucky.
The Company was founded in 1975 as a wholesaler of close-out merchandise. In
fiscal 1996, the Company purchased the established Odd Job retail business,
consisting of 12 retail stores and a warehouse and distribution facility.
Management's business strategy has primarily focused on the growth of its Odd
Job retail business. In February 2002, the Company sold its Wholesale Division
to focus exclusively on the growth and profitability of the retail stores. The
stores, which operate primarily under the name Odd Job, are located in the
Northeast and Midwest regions with a concentration in metropolitan New York. The
company has consolidated all management, buying and administrative functions to
its New Jersey offices. The Company expects to change its corporate name to "Odd
Job Stores, Inc." later this year.
Thirteen Weeks 2002 versus Thirteen Weeks 2001 (Fiscal First Quarters)
Net sales for the first quarter 2002 were $54.7 million, compared to $54.9
million for the first quarter 2001, a decrease of $0.2 million, or 0.4%. The
decrease in net sales was attributable to the loss of sales from two stores
closed in 2001 offsetting a comparable store (76 stores for fiscal 2002) net
sales increase of 2.6%.
Gross profit for the fiscal 2002 first quarter was $21.6 million, compared to
$20.9 million for the first quarter 2001, an increase of $0.8 million or 3.7%.
Gross profit increased to 39.5% from 38.0% in the first quarter 2001, due
primarily to higher realized product markup.
Selling, general and administrative expense reflects the four-wall cost of the
stores, the distribution facility and office support. Selling, general and
administrative expense for the fiscal 2002 first quarter was $24.6 million,
compared to $24.2 million for the first quarter 2001, an increase of $0.4
million or 1.6%. The increase resulted from the absence of management fee
revenue received from VCM, Ltd. compared to $0.7 million for first quarter 2001,
a $0.1 million
10
increase in store level expenses, primarily occupancy costs, offsetting a $0.4
million reduction in corporate support expense.
The operating loss was $3.0 million or 5.5% of sales for the first quarter 2002,
compared to an operating loss of $3.4 million or 6.2% of sales for the first
quarter 2001. This improvement was due primarily to the factors described above.
Interest expense was $0.3 million for the first quarter 2002, compared to $0.5
million for the first quarter 2001, reflecting lower average borrowings. First
quarter 2002 interest expense includes a $0.3 million charge related to amending
the availability under the Company's credit facility from $70 million to $30
million on February 11, 2002. Other expense was comprised of the Company's 50%
equity share in VCM, Ltd.'s net loss for the first quarter 2001.
As discussed in Note 2 to Consolidated Financial Statements, effective February
3, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets.
Upon adoption the Company determined that its unamortized goodwill was impaired
and recorded a non-cash charge of $9.4 million to write-off the entire goodwill
balance. The charge is shown as a change in accounting principle for the first
quarter ended May 4, 2002. Amortization expense related to goodwill was $79 for
the first quarter ended May 5, 2001. This would not have affected earnings per
share for the first quarter ended May 5, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been financed through cash flow from operations,
borrowings under its revolving credit facility and the extension of trade
credit.
The Company's primary requirements for capital consist of inventory purchases,
expenditures related to new store openings, existing store remodeling, warehouse
enhancements, 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.
As a result of terminating the VCM, Ltd., joint venture with Value City
Department Stores, Inc., the Company received approximately $12 million in cash
prior to the Company's February 2, 2002 year-end. The cash proceeds were used to
completely paydown the debt under its prior Revolving Credit Facility. At
February 2, 2002, the Company had no debt under the credit
11
facility and term loans of approximately $9.1 million.
On February 11, 2002, the Company affected the sale of the Wholesale Division.
The cash proceeds of approximately $22.3 million were used by the Company to
payoff all the term loans, all debt under its Revolving Credit Facility and
resulted in a $10 million positive cash position at that time. As a result of
the VCM, Ltd. termination and Wholesale divestiture, the Company amended its
credit facility to provide $30 million of revolving credit. The amended
Revolving Credit Facility expires in August of 2004. As a result of paying off
its term loans and amending its revolving credit facility, the Company recorded
an after tax charge of $0.5 million in the first quarter of fiscal 2002 as a
result of the loss on the extinguishment of debt. The Company currently
anticipates the use of its credit facility to cover seasonal and potentially
larger opportunistic inventory purchases.
For the first quarter of fiscal 2002, cash used in operating activities was
$12.3 million, compared to cash provided by operating activities of $4.2 million
in the first quarter of fiscal 2001. For the first quarter of fiscal 2002, cash
used in operating activities was primarily comprised of the net loss of $11.9
million partially offset by the $9.9 million change in accounting principle and
extraordinary loss on extinguishment of debt charges, depreciation and
amortization of $1.6 million, higher deferred tax assets of $1.8 million, higher
notes and other receivables of $1.0 million, higher inventories of $7.7 million
and lower accrued expenses and other liabilities of $1.4 million. The increased
inventory at May 4, 2002 compared with February 2, 2002 reflects the seasonality
of the Company's retail business. For the first quarter of 2001, cash provided
by operating activities was primarily comprised of discontinued operations of
$3.9 million, depreciation and amortization of $1.7 million, lower notes and
other receivables of $1.2 million and higher inventories of $2.6 million.
Cash provided by investing activities was $22.0 million in the first quarter of
2002, primarily from proceeds from the sale of the net assets of the
discontinued operation. Cash used in investing activities was $0.2 million in
the first quarter of 2001, primarily from capital expenditures. Cash used in
financing activities totaled $9.1 million in the first quarter of 2002 from the
$9.1 million net debt repayments and $0.5 financing costs paid slightly offset
by $0.5 million of proceeds from the exercise of stock options. Cash used in
financing activities totaled $2.8 million in the first quarter of 2001 from the
net debt payments.
Total assets were $84.5 million at the end of the first quarter 2002, compared
to $107.1 million at fiscal 2001 year-end. Working capital decreased to $33.8
million at the end of the first quarter 2002 from $39.6 million at fiscal 2001
year-end primarily from the sale of the net assets of the discontinued
operation, partially offset by higher inventory, the debt repayment and lower
accounts payable and accrued expenses. The current ratio was 2.4 to 1 at the end
of the first quarter 2002, compared to 2.4 to 1 at fiscal 2001 year-end.
The Company will open no new stores in the first half of 2002 and is currently
evaluating its expansion policy to determine when such program will recommence.
When the Company
12
resumes its expansion program, it does not anticipate opening more than 6-12
stores in the first year of the program.
SEASONALITY
The Company's retail operations result in a greater weighting of sales and
earnings toward the second half of the fiscal year.
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: (i) the Company's continuing
execution of its plan to restore its retail stores to profitability, (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
subsequent SEC filings under the Securities Exchange Act of 1934, as amended,
for further information.
13
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 8-K
(a) Exhibits
10.10: Agreement dated June 10, 2002 between the Company and
Brady J. Churches.
(b) Reports on Form 8-K
The Company filed reports on Form 8-K on February 5, 2002 and
February 12, 2002, to report the termination of the VCM, Ltd.
joint venture and the sale of the Wholesale Division,
respectively during the quarter ended May 4, 2002.
14
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)
6/17/02 /s/ Peter Hayes
- ----------------- -----------------------
Date Peter Hayes
Chief Executive Officer and
Chairman of the Board
6/17/02 /s/ Edward Cornell
- --------------- --------------------------
Date Edward Cornell
Executive Vice President and
Chief Financial Officer
15