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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
MAZEL STORES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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[MAZEL STORES, INC. LOGO] [MAZEL STORES, INC. LETTERHEAD]
May 6, 1997
Reuven Dessler
Chairman
Chief Executive Officer
Dear Fellow Shareholder:
It is a pleasure to extend to you a cordial invitation to attend the
1997 Annual Meeting of Shareholders of Mazel Stores, Inc. This year's annual
meeting, the first since the Company's initial public offering last November,
will be held on June 3, 1997.
Shareholders will be asked to approve the election of Directors and to
ratify the appointment of auditors. In addition, we will present a report on the
operations and activities of the Company. Following the meeting, management will
be pleased to answer your questions about the Company.
Our audited financial statements, management's discussion and analysis
and other information are included in the Appendix to the Proxy Statement.
Please carefully review the Proxy Statement and the Appendix thereto.
I HOPE YOU WILL BE ABLE TO ATTEND THIS MEETING IN PERSON. WHETHER OR
NOT YOU EXPECT TO ATTEND, I URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD SO THAT YOUR SHARES WILL BE REPRESENTED.
I look forward to seeing you on June 3rd.
Sincerely,
Reuven D. Dessler
Chairman of the Board
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MAZEL STORES, INC.
31000 Aurora Road
Solon, Ohio 44139
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 3, 1997
The Annual Meeting of Shareholders of Mazel Stores, Inc., an Ohio
corporation (the "Company"), will be held at The Forum, 1375 E. 9th Street,
Cleveland, Ohio 44114 on Tuesday, June 3, 1997 at 10:00 a.m.
The purpose of the meeting will be to:
1. Elect three Directors for a term expiring in 2000;
2. Ratify the appointment of KPMG Peat Marwick LLP as auditors
of the Company for the fiscal year ending January 31, 1998;
and
3. Transact such other business as is properly brought before
the meeting.
Only holders of shares of Common Stock of record at the close of
business on May 1, 1997, will be entitled to notice of and to vote at the
meeting. A list of such shareholders will be open for examination by any
shareholder at the meeting.
ALL SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. TO ENSURE
YOUR REPRESENTATION AT THE MEETING, HOWEVER, PLEASE MARK, DATE AND SIGN YOUR
PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. Any
shareholder present at the meeting may withdraw his or her proxy and vote
personally on each matter brought before the meeting.
By Order of the Board of Directors
Marc H. Morgenstern
Secretary
Cleveland, Ohio
May 6, 1997
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MAZEL STORES, INC.
31000 AURORA ROAD
SOLON, OHIO 44139
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
SOLICITATION AND REVOCABILITY OF PROXIES
This proxy statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Mazel Stores, Inc. (the "Company") for
use at the Annual Meeting of Shareholders to be held at the time and place, and
for the purposes, set forth in the accompanying Notice of Annual Meeting of
Shareholders (the "Annual Meeting"). It is anticipated that the proxy statement
together with the proxy and the 1997 Annual Report to Shareholders will first be
mailed to the Company's Shareholders on or about May 6, 1997.
Pursuant to the Ohio General Corporation Law, a person giving the
enclosed proxy has the power to revoke it at any time before it is exercised by
(1) attending the Annual Meeting and voting in person, (2) executing and
delivering a proxy bearing a later date, or (3) delivering written notice of
revocation to the Secretary of the Company prior to the Annual Meeting.
The Company will bear the cost of this solicitation of proxies,
including the charges and expenses of brokerage firms and others for forwarding
solicitation materials to beneficial owners of the Company's shares of Common
Stock (the "Common Shares"). In addition, proxies may be solicited by mail,
personal interview, telephone or telegraph by Directors, officers or employees
of the Company and its subsidiaries without additional compensation therefor.
PURPOSES OF ANNUAL MEETING
The Annual Meeting has been called for the purposes of (1) electing
three (3) Directors of the class whose three-year term of office will expire in
2000; (2) ratifying the appointment of KPMG Peat Marwick LLP as auditors of the
Company for fiscal 1997 and (3) transacting such other business as may properly
come before the meeting.
The two persons named in the enclosed Proxy have been selected by the
Board of Directors and will vote Common Shares represented by valid Board of
Directors' Proxies. They have indicated that, unless otherwise indicated in the
enclosed Proxy, they intend to vote for the election of the Director nominees
named herein and in favor of the proposal listed in Item 2 above.
VOTING SECURITIES
The close of business on May 1, 1997, has been fixed as the record date
for the determination of holders of record of the Common Shares of the Company
entitled to notice of and to vote at the Annual Meeting. On the record date,
9,170,100 Common Shares were outstanding and eligible to be voted at the Annual
Meeting. A quorum for the transaction of business at the Annual Meeting is a
majority of the outstanding Common Shares. Votes cast by proxy or in person at
the Annual Meeting will be tabulated by the election inspector appointed for the
Annual Meeting. The election of Directors and the proposal to ratify the
appointment of auditors require approval only by a plurality of the votes cast.
As a consequence, abstentions and broker non-votes will not be counted in
determining the outcome of the vote; however, they will be counted for purposes
of determining the presence of a quorum.
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INFORMATION REGARDING THE BOARD OF DIRECTORS
GENERAL
The business of the Company is managed under the direction of the
Company's Board of Directors. The number of Directors is currently fixed at
nine. The Company's Amended and Restated Code of Regulations ("Code of
Regulations") divides the Board of Directors into three classes of three
Directors each. The Directors serve staggered terms of three years, with the
members of one class being elected each year, as follows: (i) Jacob Koval, Jerry
Sommers and Phillip Cohen have been designated as Class I Directors and will
serve until the 1997 annual meeting; (ii) Brady Churches, Robert Horne and
Charles Bilezikian have been designated as Class II Directors and will serve
until the 1998 annual meeting; and (iii) Reuven D. Dessler and Ned L. Sherwood
have been designated as Class III Directors and will serve until the 1999 annual
meeting; and in each case until their respective successors are elected and
qualified. A vacancy exists in the class of Directors whose term expires in
1999.
The Board of Directors held one meeting in fiscal 1996, subsequent to
the Company's initial public offering. At that meeting, the Board established
two standing committees: a Compensation Committee and an Audit Committee.
The Audit Committee has general responsibility for supervision of
financial controls as well as accounting and audit activities of the Company.
The Audit Committee annually reviews the qualifications of the Company's
independent certified public accountants, makes recommendations to the Board of
Directors concerning the selection of the accountants, reviews and approves the
services performed by the accountants, and reviews their fees. The Audit
Committee consists of Messrs. Bilezikian, Horne, and Sherwood.
The Compensation Committee has the authority to: (i) administer the
Company's stock option plan and restricted stock plan; (ii) review and monitor
key employee compensation and benefits policies and (iii) administer the
Company's management compensation plans. The Compensation Committee consists of
Messrs. Sherwood, Bilezikian and Cohen.
COMPENSATION OF DIRECTORS
The Company pays each outside Director a fee of $15,000 for attendance
at four meetings per year, together with reimbursement of out-of-pocket expenses
incurred in connection with the Directors' attendance at such meetings. In
addition, each outside Director receives $1,500 per meeting for each meeting
attended in excess of four per year. No additional compensation is to be paid
for committee meetings held on the same day as a Board of Directors' meeting.
Officers of the Company who are also Directors will receive no additional
compensation for serving as Directors.
Each outside Director of the Company upon election received a stock
option for 15,000 Common Shares. Such options vest ratably over a period of five
years and expire ten years from date of grant. During fiscal 1996, Messrs.
Bilezikian, Cohen, Horne and Sherwood received stock option grants of 15,000
shares each at an exercise price of $16 per share.
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PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors has nominated Phillip Cohen, Jacob Koval and
Jerry Sommers, the Directors whose terms of office expire this year, to stand
for reelection as Directors. The three-year term will end upon the election of
Directors at the 2000 annual meeting of shareholders.
At the Annual Meeting, the Common Shares represented by valid Proxies,
unless otherwise specified, will be voted to reelect the Directors. Each
individual nominated for election as a Director of the Company has agreed to
serve if elected. However, if any nominee becomes unable or unwilling to serve
if elected, the Proxies will be voted for the election of such other person as
may be recommended by the Board of Directors. The Board of Directors has no
reason to believe that the persons listed as nominees will be unable or
unwilling to serve.
The Board of Directors recommends that each shareholder vote "FOR" the
Board of Directors' nominees.
NOMINEES FOR TERMS TO EXPIRE IN 2000
Principal Occupation Past Five Years, Director
Name of Director Age Other Directorships Since
---------------- --- ------------------------------------ --------
Phillip Cohen 78 Vice President of P-C Sales, Inc., a wholesaler of 1997
closeout merchandise. From 1947 to his retirement in
1989, Mr. Cohen was Chairman and CEO of
Wisconsin Toy and Novelty, Inc., a midwest
distributor of closeout toy and novelty items.
Jacob Koval 49 Executive Vice President - Wholesale of the Company 1996
for over five years. Mr. Koval co-founded the
Company in 1975.
Jerry Sommers 46 Executive Vice President - Retail of the Company 1996
since November 1995. From 1984 through April
1995, Mr. Sommers held various positions with
Consolidated Stores Corporation, including Executive
Vice President - Merchandise from August 1993 until
April 1995.
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Principal Occupation Past Five Years, Director
Name of Director Age Other Directorships Since
---------------- --- ------------------------------------- --------
Directors Whose Terms Expire In 1998
-------------------------------------
Charles Bilezikian 60 President of Christmas Tree Shops, Inc., a New 1997
England-based specialty retailer of housewares and
gourmet foods since 1971.
Brady Churches 38 President of the Company since November 1996 1996
having served as President - Retail from August 1995
until such date. From 1978 until April 1995, Mr.
Churches held various senior management positions
with Consolidated Stores Corporation, including
President from August 1993 until April 1995. Mr.
Churches is currently a member of the Board of
Directors of Sun Television & Appliance, Inc.
Robert Horne 38 Principal of ZS Fund L.P., a private investment firm, 1996
for over five years.
Directors Whose Terms Expire In 1999
-------------------------------------
Reuven D. Dessler 49 Chairman of the Board and Chief Executive Officer of 1996
the Company since November 1996. Mr. Dessler co-
founded the Company in 1975 and served as its
President until November 1996.
Ned L. Sherwood 47 Principal of ZS Fund L.P., a private investment firm, 1996
for over five years. Mr. Sherwood is currently a
member of the Boards of Directors of Sun Television
& Appliance, Inc., Kaye Group, Inc. and Market
Facts, Inc.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of May 1, 1997,
with respect to the beneficial ownership of the Common Stock. Unless otherwise
indicated below, the persons named below have the sole voting and investment
power with respect to the number of shares set forth opposite their names. All
information with respect to beneficial ownership has been furnished by the
respective director, officer or 5% or greater shareholder, as the case may be.
Names and, where necessary, Number of Shares
Addresses of Beneficial Owners Beneficially Owned Percentage
- ------------------------------ ------------------ ----------
ZS Fund L.P. (1)................................... 2,750,383 30.0%
54 Morris Lane
Scarsdale, NY 10583
Ned Sherwood ...................................... 2,750,383 (2) 30.0
54 Morris Lane
Scarsdale, NY 10583
Robert Horne ...................................... 2,750,383 (2) 30.0
54 Morris Lane
Scarsdale, NY 10583
Mazel/D&K, Inc. (3)................................ 2,058,105 22.4
31000 Aurora Road
Solon, OH 44139
Reuven D. Dessler.................................. 1,560,755 (4) 17.0
31000 Aurora Road
Solon, OH 44139
Jacob Koval........................................ 802,917 (5) 8.8
31000 Aurora Road
Solon, OH 44139
William Shenk...................................... 550,200 6.0
1728 Ocean Front
Del Mar, CA 92014
Brady Churches .................................... 326,003 (6) 3.6
Jerry Sommers...................................... 312,472 (6) 3.4
Susan Atkinson..................................... 39,510 (6) *
Charles Bilezikian................................. 15,000 *
Phillip Cohen...................................... 6,000 (7) *
All Current Directors and.......................... 5,813,040 63.4%
Executive Officers of the Company (9 Persons)
- ----------
* Less than one percent.
(1) The shares beneficially owned by ZS Fund include 1,992,001 shares held
by ZS Mazel L.P., 453,767 shares held by ZS Mazel II L.P., and 304,615
shares held by ZS Mazel, Inc. Messrs. Horne and Sherwood are officers
of ZS Fund.
(2) Includes the shares beneficially owned by ZS Fund. As officers and/or
equity owners of the entities holding such shares, Messrs. Sherwood and
Horne have voting power with respect to such shares. Except to the
extent of their equity interests in the entities holding such shares,
Messrs. Sherwood and Horne disclaim beneficial ownership in such
shares.
(3) Mazel/D& K, Inc. is a corporation owned by Messrs. Dessler and Koval
and members of their families. Messrs. Dessler and Koval are the
directors and officers of Mazel/D&K, Inc.
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(4) Includes 1,372,304 shares owned by Mazel/D&K, Inc. for the benefit of
Mr. Dessler and family members.
(5) Includes 685,801 shares owned by Mazel/D&K, Inc. for the benefit of Mr.
Koval and family members.
(6) Messrs. Churches and Sommers and Ms. Atkinson own 52,613, 52,613 and
5,918 Common Shares, respectively, that are unvested and held under the
Company's Restricted Stock Plan. These shares are included in the
individuals respective totals.
(7) Includes 2,200 Common Shares held under a family trust for which Mr.
Cohen is the trustee. He disclaims beneficial ownership of such shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires the Company's
Directors, executive officers, and persons who own 10% or more of the Company's
Common Shares to file reports of ownership and changes of ownership with the
Securities and Exchange Commission and the Company. Based upon a review of these
filings and written representations from such individuals, the Company
understands that all such filers have adhered to all applicable filing
requirements.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information with respect to the
compensation earned during the fiscal years ended January 25, 1997 and January
31, 1996 by the Chief Executive Officer and certain other named executive
officers of the Company:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------- ----------------------------------
Option Restricted Stock All Other
Name and Principal Position Year Salary Bonus Awards(#) Awards ($)(1) Compensation(2)
- --------------------------- ---- ------ ----- --------- ------------- ---------------
Reuven D. Dessler 1996 $1,273,883 $125,000 75,000 $ -- $1,274,285
Chief Executive Officer 1995 1,406,836 -- -- 33,750 --
Brady Churches 1996 420,913 125,000 100,000 -- 881,479
President 1995 196,995 80,000 -- 110,250 122,500(3)
Jacob Koval 1996 414,719 75,000 30,000 -- 461,528
Executive Vice President - 1995 432,356 -- -- 11,250 --
Wholesale
Jerry Sommers 1996 367,044 125,000 100,000 --- 488,733
Executive Vice President - 1995 25,957 80,000 --- 110,250 ---
Retail
Susan Atkinson 1996 138,629 56,918 30,000 --- 123,134
Senior Vice President - 1995 121,564 25,000 --- 6,750 --
Chief Financial Officer and
Treasurer
(1) The executive officers each purchased in fiscal 1995 partnership units
in Mazel Company L.P., as part of the Company's Employee Equity Plan.
The issuances have been included here as the difference between their
fair market value on the date of purchase and the purchase price.
(2) Payments in fiscal 1996 to the executive officers were made under their
respective employment agreements. See discussion on pages 8-9 of this
Proxy Statement.
(3) Mr. Churches received a consulting fee in the amount of $122,500.
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The following table summarizes stock option grants by the Company during
the fiscal year ended January 25, 1997 to each of the executive officers
identified in the summary compensation table.
STOCK OPTION GRANTS IN FISCAL YEAR 1996
(a)
Number of % of Total (b)
Securities Options Potential realizable value at
Underlying Granted to Exercise or Assumed annual rates of stock
Options Employees Base Price Expiration Price appreciation for option term
Name Granted (#) In Fiscal '96 ($/Sh) Date 5%($) 10%($)
---- ----------- ------------- ---- ---- ---- -----
Reuven D. Dessler 75,000 11.3% $16.00 11-21-06 $ 754,674 $1,912,491
Brady Churches 100,000 15.0 16.00 11-21-06 1,006,231 2,549,988
Jacob Koval 30,000 4.5 16.00 11-21-06 301,869 764,996
Jerry Sommers 100,000 15.0 16.00 11-21-06 1,006,231 2,549,988
Susan Atkinson 30,000 4.5 16.00 11-21-06 301,869 764,996
(a) Options are exercisable upon vesting 20% each year, commencing in
November 1997.
(b) The potential realizable value illustrates the value that might be
recognized upon the exercise of the options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation over the entire term of the option. Shareholders of the
Company, as a group, would realize $7,228,210 and $18,317,810 at
assumed annual rates of appreciation of 5% and 10%, respectively, over
the ten-year life of the options. There can be no assurance that the
amounts reflected in this table will be achieved.
The following table summarizes the fiscal year-end value of unexercised
options for each of the executive officers identified in the Summary
Compensation Table on page 6. No options were exercised by any executive officer
in fiscal 1997.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
----------------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options at January 25, Value of Unexercised In-the-Money
1997 (#) Options at January 25, 1997 ($)(1)
-------------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- ------------- ----------- -------------
Reuven Dessler 0 75,000 $0 $562,500
Brady Churches 0 100,000 0 750,000
Jacob Koval 0 30,000 0 225,000
Jerry Sommers 0 100,000 0 750,000
Susan Atkinson 0 30,000 0 225,000
(1) The closing price of Mazel Stores Common Shares on January 24, 1997, the
last trading day prior to the fiscal year end, was $23.50.
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Mr. Dessler has an employment agreement terminating October 31, 2000.
Under the terms of the agreement, Mr. Dessler's annual salary is $425,000
(subject to annual cost-of-living adjustments). On November 21, 1996, Mr.
Dessler received non-qualified options to purchase 75,000 Common Shares at the
initial public offering price of $16 per share, with 20% of such options vesting
each year and terminating ten years after the grant date. Mr. Dessler is
entitled to received an annual bonus of up to 88.2% of his base salary subject
to the Company achieving pre-determined annual performance targets, provided
that the maximum bonus for fiscal 1997 is $125,000 per year. Under the
agreement, Mr. Dessler received on November 21, 1996, Common Shares having a
value of approximately $668,000 and $606,108 in cash. Under the agreement, Mr.
Dessler is entitled to a severance payment equal to one-year's salary and bonus
in the event of termination of his employment by the Company without cause,
except that, if the termination occurs after or in contemplation of a "change in
control" (as defined in the agreement) that Mr. Dessler voted against, the
severance payment is two-years' salary and bonus.
Mr. Koval has an employment agreement terminating on October 31, 2000.
Under the terms of the agreement, Mr. Koval's annual salary is $225,000 (subject
to annual cost-of-living adjustments). On November 21, 1996, Mr. Koval received
non-qualified options to purchase 30,000 Common Shares at $16 per share, with
20% of such options vesting each year and terminating ten years after the grant
date. Mr. Koval is entitled to receive an annual bonus of up to 66.7% of his
base salary subject to the Company achieving pre-determined annual performance
targets, provided that the maximum bonus for fiscal 1997 is $115,000 Under the
agreement, Mr. Koval was issued, on November 21, 1996, Common Shares having a
value of $369,349 and $92,179 in cash. Under the agreement, Mr. Koval is
entitled to a severance payment equal to one-year's salary and bonus in the
event of termination of his employment by the Company without cause, except
that, if the termination occurs after or in contemplation of a change in control
that Mr. Koval voted against, the severance payment is two-years' salary and
bonus.
Mr. Churches has an employment agreement terminating on October 31, 2000,
and providing him an annual base salary of $360,000 (subject to annual
cost-of-living adjustments). Mr. Churches is entitled to receive an annual bonus
up to 58.3% of his annual base salary, subject to the Company achieving
pre-determined annual performance targets, provided that the maximum annual
bonus in fiscal 1997 is $125,000. On November 21, 1996, Mr. Churches received
non-qualified options to purchase 100,000 Common Shares at $16 per share, with
20% of such options vesting each year and terminating ten years after the grant
date. Under the agreement, Mr. Churches was issued on November 21, 1996, Common
Shares having a value of $543,979. Under his agreement, Mr. Churches is entitled
to two-years' salary and bonus in the event of termination of his employment
without cause or in the event he elects to terminate employment following a
change in control.
Mr. Sommers has an employment agreement terminating on October 31, 2000
and providing him an annual base salary of $265,000 (subject to annual
cost-of-living adjustments). Mr. Sommers is entitled to receive annual bonus of
up to 59.4% of his annual base salary, subject to the Company achieving
pre-determined annual performance targets, provided that the maximum annual
bonus in fiscal 1997 is $125,000. On November 21, 1996, Mr. Sommers received
non-qualified options to purchase 100,000 Common Shares at $16 per share, with
20% of such options vesting each year and terminating ten years after the grant
date. On such date, pursuant to his employment agreement, Mr. Sommers also was
issued Common Shares having a value of $327,483. Mr. Sommers is entitled to
receive two-years' salary and bonus in the event of termination of his
employment without cause or in the event he elects to terminate employment
following a change in control.
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Ms. Atkinson has an employment agreement terminating January 31, 1999 and
providing her an annual base salary of $117,600. Ms. Atkinson is entitled to an
annual bonus of up to 48.4% of her annual base salary, subject to the Company
achieving pre-determined annual performance targets. On November 21, 1996, Ms.
Atkinson received non-qualified options to purchase 30,000 Common Shares at $16
per share, with 20% of such options vesting per year and terminating ten years
after the grant date. On such date, pursuant to her employment agreement, Ms.
Atkinson also was issued Common Shares having a value of $123,134. Under her
agreement, Ms. Atkinson is entitled to receive one-year's salary in the event of
termination of her employment other than for cause.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors was established in
November 1996 upon completion of the Company's initial public offering. Prior to
the offering, executive compensation decisions were made by the Board of
Directors of the Company, of which Messrs. Dessler, Horne, Koval and Sherwood
constituted the majority. Therefore, the Compensation Committee did not
establish executive compensation levels for 1996. Executive compensation
recommendations and determinations will be made for 1997 by the Compensation
Committee, all members of which are non-employee directors of the Company.
Charles Bilezikian, Chairman
Phillip Cohen
Ned Sherwood
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CERTAIN TRANSACTIONS
Messrs. Dessler and Koval are partners in Aurora Road Realty
Development Company, a partnership which leases the office and warehouse
facility located in Solon, Ohio, to the Company. Messrs. Dessler and Koval own
40.0% and 6.0% interests, respectively, in such partnership. The Company made
payments totaling approximately $1,471,000 pursuant to the lease for fiscal
1996. Messrs. Dessler and Koval are also minority shareholders in entities that
operate public warehouses in which the Company periodically leases space. The
Company believes the payments under the leases are on terms no less favorable to
the Company than could be obtained from unrelated parties.
The Company had a Financial Advisory Agreement with ZS Fund L.P., of
which Messrs. Sherwood and Horne are principals, which provided for an annual
financial advisory fee of $100,000 payable in equal quarterly installments. The
Company terminated the Financial Advisory Agreement at the time of the Company's
initial public offering (the "IPO"). Total payments in fiscal 1996 under the
Agreement and in connection with its termination totaled $289,000.
Payments of $1,266,800 and $1,000,000, were made to Messrs. Dessler and
Koval, respectively, at the time of the IPO, pursuant to a 1992 agreement
relating to the purchase of the Company from them. In addition, payments of
$316,700 and $250,000 were made to Messrs. Dessler and Koval, respectively,
reflecting their ownership in Odd Job Trading Corp., which was acquired pursuant
to the 1995 Agreement relating to Odd Job Trading Corp.'s acquisition by the
Company. Each of the payments were made in Common Shares (at a valuation equal
to the initial offering price).
Messrs. Churches and Sommers had executed promissory notes to the
Company in exchange for $225,000 and $107,500, respectively, advanced by the
Company to such individuals as bonus payments pursuant to their respective
employment agreements. Pursuant to the terms of their employment agreements,
the Company forgave such indebtedness upon the completion of the IPO.
The Company made loans to executives and other individuals in December
1996 to provide for payment of tax obligations arising from the issuance of
Common Shares to such individuals in connection with the Company's IPO,
including approximately $307,500, $250,000, $170,000, $50,500 and $56,500 to
Messrs. Dessler, Churches, Koval and Sommers, and Ms. Atkinson, respectively.
Such loans are to be repaid on the earlier of five years from the effective date
of the loan or the date of the individual's first sale of Common Shares, but
only to the extent of net sale proceeds. The loans bear interest at the
applicable federal rate.
P-C Sales, a corporation owned by the son of Mr. Cohen and of which Mr.
Cohen is an officer, has a joint venture agreement with the Company wherein the
two companies split the profits derived from the sale of closeout merchandise
located by P-C Sales and sold by the Company. In fiscal 1996, P-C Sales income
from the joint venture totaled $423,000.
Christmas Tree Shops, a New England-based retailer of which Mr.
Bilezikian is President and founder, is a customer of the Company's wholesale
division. The dollar amount of purchases by the Christmas Tree Shops is not
"material" (as defined in SEC Regulation S-K, Item 404(b)) to either the Company
or Christmas Tree Shops.
10
14
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative total
shareholder return on the Company's Common Shares against the cumulative total
return of the Nasdaq U.S. composite index and the Nasdaq Retail Trade Stock
index from the date of the Company's IPO in November 1996 through January 1997.
THE STOCK PRICE PERFORMANCE GRAPH BELOW SHALL NOT BE DEEMED
INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE
THIS PROXY STATEMENT INTO AND FILING UNDER THE SECURITIES ACT OF 1933 OR UNDER
THE SECURITIES EXCHANGE ACT OF 1934, EXCEPT TO THE EXTENT THAT THE COMPANY
SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE AND SHALL NOT OTHERWISE
BE DEEMED FILED UNDER SUCH ACTS.
COMPARISON OF CUMULATIVE TOTAL RETURNS
Mazel Stores, Inc., Nasdaq Retail Trade Stock Index and Nasdaq U.S. Index
From November 21, 1996 through January 25, 1997
11/21/96 1/25/97
Mazel Stores, Inc. $100.00 $123.68
Nasdaq Retail Trade Stock Index $100.00 $108.74
Nasdaq U.S. Index $100.00 $100.35
11
15
PROPOSAL TWO
INDEPENDENT AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee,
has selected KPMG Peat Marwick LLP as auditors for the fiscal year ending
January 31, 1998. The Board of Directors requests the ratification of the
appointment of KPMG Peat Marwick LLP by the shareholders at the annual meeting.
The Board of Directors recommends that each shareholder vote "FOR" ratification
of KPMG Peat Marwick LLP as auditors for fiscal 1997.
KPMG Peat Marwick LLP has audited the Company's financial statements
for each fiscal year since the fiscal year ended December 31, 1987.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
meeting with the opportunity to make a statement if they desire to do so, and
are expected to be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors of the Company is not aware that any matters
other than those listed in the Notice of Meeting is to be presented for action
at the meeting. If any of the Board's nominees is unavailable for election as a
Director or any other matter should properly come before the meeting, it is
intended that votes will be cast pursuant to the Proxy in respect thereto in
accordance with the best judgment of the person or persons acting as proxies.
SHAREHOLDERS' PROPOSALS
The deadline for shareholders to submit proposals to be considered for
inclusion in the Proxy Statement for the 1998 Annual Meeting of Shareholder is
expected to be December 31, 1997.
ANNUAL REPORT
The Company's Annual Report for the year ended January 25, 1997,
including financial statements of the Company and the report thereon of KPMG
Peat Marwick LLP is being mailed to shareholders with this Notice of the Annual
Meeting and Proxy Statement.
MARC H. MORGENSTERN
Secretary
By Order of the Board of Directors
May 6, 1997
12
16
MAZEL STORES, INC.
INDEX TO PROXY STATEMENT
JANUARY 25, 1997
Page
-----
Market for the Company's Common Stock and Related Stockholder Matters................... A-2
Selected Financial Data................................................................. A-3
Management's Discussion and Analysis of Financial Condition and Results of Operations... A-5
Independent Auditors' Report............................................................ A-17
Consolidated Financial Statements:
Consolidated Balance Sheets......................................................... A-18
Consolidated Statements of Operations............................................... A-19
Consolidated Statements of Shareholders' Equity and Partners' Capital............... A-20
Consolidated Statements of Cash Flows............................................... A-21
Notes to Consolidated Financial Statements.......................................... A-22
A-1
17
MARKET FOR THE COMANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "MAZL". The following table shows the
high and low closing sale prices of the Common Stock since the Common Stock
began trading publicly on November 21, 1996, as reported through January 24,
1997. The price to the public in the initial public offering which occurred on
November 21, 1996 was $16.00 per share.
Common Stock
High Low
---- ---
Quarter ended January 25, 1997
(From November 21, 1996) 25.125 19.00
As of April 1997, the Company believes that there were 2,000 beneficial
owners of the Company's Common Stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its future earnings, if any, to
finance the expansion of its business and for general corporate purpose and
currently does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future. Any payment of cash dividends in the future will be at
the discretion of the Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, capital requirements, level
of indebtedness, contractual restrictions with respect to the payment of
dividends and other factors that the Company's Board of Directors deems
relevant. In addition, the Company's credit facility with The Provident Bank
prohibits the Company from declaring or paying any dividends without the prior
written consent of The Provident Bank.
A-2
18
SELECTED FINANCIAL DATA
The selected historical financial data of the Company presented under
the captions Statement of Operations Data and Balance Sheet Data as of and for
the years ended December 31, 1992 and January 31,1994, 1995 and 1996 (fiscal
years 1992, 1993, 1994 and 1995, respectively) have been derived from the
financial statements of Mazel Company L.P. ("Partnership"), which during 1996
was restructured as the Company. The financial statements of the Partnership
include the operations of the Peddlers Mart retail store from December 9, 1994
and the Odd Job operations from December 7, 1995. The selected historical
financial data presented under the captions Statement of Operations Data and
Balance Sheet Data as of and for the fiscal year ended January 25, 1997 (fiscal
year 1996) was derived from the financial statements of the Company. Such
financial statements of the Partnership and the Company were audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected data
referred to above and the Pro Formas as Adjusted Data should be read in
conjunction with the financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this filing. The Pro Forma as Adjusted Data
and the information under the caption Selected Operating Data shown in the table
are unaudited.
A-3
19
STATEMENT OF OPERATIONS DATA
----------------------------
FISCAL YEAR
---------------------------------------------------------------------------------------
PRO FORMA,
AS ADJUSTED
1992 1993 1994 1995 1996 1996(1)
------ ------ ------ ------ ------ --------
(IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA)
Net sales $71,156 $74,954 $76,254 $98,106 $179,877 $179,877
Cost of sales 52,111 54,201 55,183 70,208 121,382 121,382
--------- --------- --------- -------- --------- ---------
Gross profit 19,045 20,753 21,071 27,898 58,495 58,495
SG & A expense 13,703 15,094 15,317 20,753 45,802 44,567
Special charges 8,100 1,285 0 2,203 4,243 0
--------- --------- --------- -------- --------- ---------
Operating profit (loss) (2,758) 4,374 5,754 4,942 8,450 13,928
Interest expense (income) 650 1,130 894 1,265 2,254 (205)
Other expense (income) (459) 43 (26) 559 (34) (34)
--------- --------- --------- -------- --------- ---------
Income (loss) before
income taxes (2,949) 3,201 4,886 3,118 6,230 14,168
Income taxes 63 21 71 19 (1,987) 5,667
Extraordinary loss 0 (455) 0 0 0 0
--------- --------- --------- -------- --------- ---------
Net income (loss) $(3,012) $2,725 $4,815 $3,099 $8,217 $8,501
========= ========= ========= ======== ========= =========
Pro forma as adjusted
earnings per share $0.93
Pro forma shares outstanding 9,170
BALANCE SHEET DATA:
Working capital $20,469 $18,373 $17,439 $26,193 $44,473 $44,473
Total assets 30,589 28,450 31,129 56,634 86,361 86,644
Long term debt 17,168 12,303 10,649 27,382 70 70
Total liabilities 22,848 18,997 19,567 43,764 21,599 21,599
Shareholders' equity and
partners' capital 7,741 9,453 11,562 12,870 64,762 65,045
SELECTED OPERATING DATA:
Number of stores 10 11 12 13 23
Total square footage 139,718 153,718 164,386 188,361 336,905
Total store sales growth 0.8% 5.4% 12.8% 6.3% 40.2%
Comparable store net sales 0.8% -2.6% 7.9% -4.4% 15.8%
Avg. net sales per gross sq. ft $340 $326 $344 $319 $354
<FN>
(1) Pro forma as adjusted data gives effect to the Company's initial public
offering, and includes the combination of: (i) the Mazel wholesale
operations; (ii) the Odd Job retail operations; and (iii) the Peddlers
Mart retail store, as if the combination of entities had occurred at
the beginning of fiscal 1996. Pro forma as adjusted data exclude
certain non-recurring charges, and give effect to the use of proceeds
resulting from the Company's 2,960,100 share initial public offering,
as well as certain adjustments to compensation expense.
A-4
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATION
Overview
Mazel Stores, Inc. consists of two complementary operations: (i) a
major regional closeout retail business; and (ii) one of the nation's largest
closeout wholesale businesses.
Mazel was founded as a wholesaler of closeout merchandise in 1975. In
1981, the Company initiated its Just Closeouts retail operations in Ohio, which
were subsequently sold in October 1995. In 1992, Mazel Company L.P. (a
predecessor to the Company), a general partner of which was an affiliate of ZS
Fund, a private investment firm, acquired substantially all of the assets of
Mazel's wholesale and retail businesses. In December 1995, Odd Job Holdings,
Inc., wholly-owned by another affiliate of ZS Fund, acquired Odd Job, which
operated a chain of 12 retail stores in the New York metropolitan area, and
acquired Peddlers Mart, which operated one store. In connection with a
restructuring that occurred immediately prior to the Offering in November
1996, the Company acquired all of the assets of Mazel Company L.P. and the
Stock of Odd Job Holdings, Inc. The Company (including its predecessors) has
opened or acquired ten (10) stores in fiscal 1996; it plans to open nine
stores in fiscal 1997, 12 stores in fiscal 1998 and 15 stores in fiscal 1999.
The Combined Financial Statements of Mazel Company L.P. and Odd Job
Holdings, Inc. represent the historical assets, liabilities and results of
operations of the Company.
In the fourth quarter fiscal 1996, the Company took a one-time, pre-tax
charge of $4.2 million representing compensation and other charges arising in
connection with the Company's initial public offering. Included as part of the
charge are the effects of the issuance, of a total of 206,898 shares of Common
Stock to certain employees of the Company in return for ongoing reductions in
their salaries and potential bonuses. The Company also realized a one-time
$1.5 million tax benefit in fiscal 1996 arising from cumulative differences
between the net book and tax basis of Mazel Company L.P.'s assets and
liabilities.
The Company believes that it generally requires approximately $600,000
to open a new store of 17,000 square feet, including the cost of leasehold
improvements, store equipment and fixtures and inventory (net of associated
accounts payable) and pre-opening costs. The Company anticipates that new stores
generally become profitable (excluding the store's share of interest carrying
charges or corporate overhead) within the first six to nine months of operation,
with stores opened in the third and fourth quarters achieving profitability more
quickly than stores opened in the first and second quarters.
On a continuous basis, the Company remodels and refurbishes stores at a
modest cost. Because the first full year of operations includes unusually strong
sales in the opening quarter associated with grand opening promotions, second
year net sales may be lower than first year net sales, but generally increase
thereafter. Store opening expenses are charged to operations as incurred. The
timing of store openings and the number of stores in the maturation process will
have an effect on quarter-to-quarter comparisons. Comparable store net sales
means a comparison of net sales from all stores open at the beginning of both
fiscal periods compared.
Wholesale net sales reflect both warehouse and drop shipment sales.
Drop shipment sales generally have lower gross margins than sales requiring
distribution from the Company's warehouses; however, they also have lower
associated selling, general and administrative costs.
The Company's wholesale operations have grown from $57.4 million in
fiscal 1992 to $95.7 million in fiscal 1996. The Company anticipates that net
sales of the retail operations should grow
A-5
21
more quickly than those of its wholesale operations because of an emphasis on
opening and acquiring new stores and anticipated increases in comparable store
sales. As the Company's retail operations grow, the wholesale operations will
sell a larger percentage of its products to the Company's retail stores.
Because the gross margin on sales from the wholesale to retail operations are
below the margin on sales to third parties, to the extent that sales to the
retail operations becomes a higher percentage of wholesale's net sales,
wholesale's margin will be negatively affected. The wholesale operations gross
margin on sales to the Company's retail operations of inventory remaining on
the retail operations books at the end of a reporting period is eliminated in
the combined statements. Consequently, the wholesale operations gross margins
will be slightly affected on a quarter-to-quarter basis based on the level of
any changes to retail inventory.
In the past two years, the Company has made a substantial investment in
executive personnel and infrastructure to accommodate the Company's anticipated
growth, particularly with respect to its retail operations. The Company has
hired three senior executives and six buyers, and has expanded its Solon, Ohio
and Englewood, NJ warehouse and distribution facilities. The Company believes
that this level of investment in senior management and distribution facilities
will be sufficient to support its growth until the Company's retail operations
expands to approximately 60 stores.
RESULTS OF OPERATIONS
The results of operations set forth below describe: (i) the Company's
retail operations; and (ii) its wholesale operations. Retail operations include
the results of the Odd Job and Peddlers Mart operations both prior and
subsequent to their acquisitions by the Company. Wholesale operations include
the results of Mazel Company L.P. for each of the periods presented. The Ohio
stores, sold in October 1995, are treated as a discontinued operation. Although
the presentation of retail operation results prior to its acquisition in
December 1995 ("predecessor") is not required, the Company believes that
presentation of such data assist the reader in a better understanding of the
business.
A-6
22
RETAIL SEGMENT STATEMENT OF OPERATION DATA
RETAIL SEGMENT
(IN THOUSANDS)
Successor Predecessor
------------------------------- ---------------------
Fiscal Year Fiscal Year
1996 Fiscal Year 1995 1994
------------- ---------------------------- ----------
December 7, February 1
Year Ended 1995 to 1995 to Year Ended
January 25, January 27, December 7, January 31,
1997(1) 1996(2) 1995 1995(3)
------------- ------------ ------------- ----------
(in thousands of dollars)
Net sales $84,202 $14,775 $45,289 $56,511
Cost of sales 51,299 9,637 27,904 35,481
------- ------- ------- -------
Gross profit 32,903 5,138 17,385 21,030
SG & A expense 29,086 4,658 16,199 18,907
Special charges 0 300 0 0
------- ------- ------- -------
Operating profit-retail $3,817 $180 $1,186 $2,123
======= ======= ======= =======
PERCENTAGE OF NET SALES
--------------------------------------
FISCAL YEAR
--------------------------------------
1996 1995 1994
-------- --------- --------
Net sales 100.00% 100.00% 100.00%
Cost of sales 60.92 62.50 62.79
------ ------ ------
Gross margin 39.08 37.50 37.21
SG & A expense 34.54 34.72 33.46
Special charges 0.00 0.50 0.00
------ ------ ------
Operating profit-retail 4.53% 2.27% 3.76%
====== ====== ======
<FN>
(1) Reflects a reclassification of $312 for the year ended January 25, 1997
from selling, general and administrative expense retail, to corporate.
(2) As a result of the purchase accounting method applied to the Odd Job
Acquisition, the financial information for the periods after the Odd
Job Acquisition is presented on a different cost basis than for the
periods before the Odd Job Acquisition. The Company information
post-acquisition includes the results of Peddlers Mart for the 12
months ended January 27, 1996 and Odd Job for the period from December
7, 1995 to January 27, 1996.
(3) Reflects a freight reclassification of $839 for the year ended January
31, 1995, from cost of sales to selling, general and administrative
expense.
A-7
23
Fiscal 1996 Results versus Fiscal 1995 (Combined Predecessor and Successor)
Net sales increased $24.1 million, or 40.2%, to $84.2 million in fiscal
1996 from $60.1 million for fiscal 1995. Comparable store net sales increased
approximately 15.8%, contributing $9.5 million of the increase in net sales.
Comparable store net sales increased primarily due to expanded store hours
including seven-day-a-week operations following the Odd Job acquisition, as well
as an expanded product mix and enhanced merchandising techniques. The remaining
$14.6 million increase is attributable to two stores acquired March 1, 1996,
one store acquired in December 1996, and seven additional stores opened during
fiscal 1996. Net sales in fiscal 1995 were marginally negatively affected by
the relocation of one of the Company's Manhattan stores during August of that
year.
Gross profit increased $10.4 million, or 46.1%, to $32.9 million in
fiscal 1996, from $22.5 million in fiscal 1995. Gross margin increased to 39.1%
in fiscal 1996, from 37.5% in fiscal 1995. The increase was due to increased
purchasing opportunities resulting from the ability to buy for both the retail
and wholesale operations, as well as the efforts of the Company's eight new
senior buyers in acquiring higher margin products.
Selling, general and administrative expenses increased $8.2 million, or
39.5%, to $29.1 million in fiscal 1996, from $20.9 million in fiscal 1995.
Selling, general and administrative expenses, as a percentage of net sales,
decreased slightly to 34.5% in fiscal 1996 from 34.7% in the comparable 1995
year. The $8.2 million increase primarily resulted from $4.7 million of
increased store level expenses. Approximately $1.7 million of the increase
resulted primarily from an increase in administrative cost, principally
attributable to costs associated with the new buying and advertising personnel
and costs associated with store management trainees. In addition, warehouse and
store delivery costs increased $1.7 million due to costs associated with
increased inventory levels, new store opening support costs, and costs
associated with setup of the expanded warehouse square footage. A more
aggressive advertising program, including periodic circulars, resulted in an
increase of approximately $173,000 in advertising costs.
Operating profit increased to $3.8 million for fiscal 1996, from $1.4
million for fiscal 1995. As a percentage of net sales, operating profit
increased to 4.5% from 2.3%. This increase was primarily due to the factors
described above.
Fiscal 1995 (Combined Predecessor and Successor) versus Fiscal 1994
Net sales increased $3.6 million, or 6.3%, to $60.1 million in fiscal
1995, from $56.5 million in fiscal 1994. Comparable store net sales decreased
4.4%, or $2.2 million. Comparable store net sales decreased primarily due to the
Company carrying lower levels of inventory in anticipation of a difficult retail
environment in the last half of fiscal 1995 and additionally reflects the impact
of the predecessor management's focus on the Odd Job Acquisition. Fiscal 1995
net sales include $5.2 million of sales attributable to Peddlers Mart.
Gross profit increased $1.5 million, or 7.1%, to $22.5 million in fiscal
1995, from $21.0 million in fiscal 1994. Gross margin remained relatively
constant, increasing modestly to 37.5% in fiscal 1995, from 37.2% in fiscal
1994.
Selling, general and administrative expenses increased $2.0 million, or
10.3%, to $20.9 million in fiscal 1995, from $18.9 million in fiscal 1994.
Selling, general and administrative expenses as a percentage of net sales
increased to 34.7% in fiscal 1995, from 33.5% in fiscal 1994. The increase in
selling, general and administrative expenses was due primarily to $1.7 million
of increased store operating expenses due to the inclusion of Peddlers Mart in
fiscal 1995, a $300,000
A-8
24
increase in Odd Job store payroll due in part to the relocation of one
Manhattan store, and a $200,000 legal expense.
Special charges were $300,000 in fiscal 1995, reflecting signing bonuses
paid to former owners of Odd Job payable upon completion of the Odd Job
Acquisition. There were no special charges in fiscal 1994.
Operating profit decreased $757,000, or 35.7% in fiscal 1995, to $1.4
million versus $2.1 million in fiscal 1994. As a percentage of net sales,
operating margin decreased to 2.3% in fiscal 1995, versus 3.8% in fiscal 1994.
This decrease was a result of all of the factors described above.
A-9
25
WHOLESALE SEGMENT
STATEMENT OF OPERATION DATA
WHOLESALE SEGMENT AND CORPORATE EXPENSES
(IN THOUSANDS)
Fiscal Years
---------------------------------------------------
1996 1995 1994
-------- -------- --------
Net sales(1) $95,675 $73,817 $62,748
Cost of sales 70,083 53,476 45,790
------- ------- -------
Gross profit 25,592 20,341 16,958
SG & A expense 11,577 9,689 10,478
Special charges 0 332 0
------- ------- -------
Operating profit - wholesale $14,015 $10,320 $ 6,480
======= ======= =======
Corporate expenses(2) $ 5,139 $ 3,342 N/A
======= ======= =======
<FN>
(1) Sales between Mazel and Odd Job have been eliminated in fiscal years
1996 and 1995 in the amounts of $9,057,000 and $3,496,000,
respectively. Wholesale gross profit remaining in retail inventory as
a result of the previously mentioned sales has been eliminated for
fiscal years 1996 and 1995 in the amounts of $336,000 and $95,000,
respectively. The combination of Mazel and Odd Job occurred in fiscal
1995 and, accordingly, intercompany sales and profit in inventory have
not been eliminated in fiscal 1994.
(2) Corporate expenses consist of shared administrative costs between
retail and wholesale.
PERCENTAGE OF NET SALES
----------------------------------------------
Fiscal Years
----------------------------------------------
1996 1995 1994
-------- -------- --------
Net sales 100.00% 100.00% 100.00%
Cost of sales 73.25 72.44 72.97
------ ------ ------
Gross margin 26.75 27.56 27.03
SG & A expense 12.10 13.13 16.70
Special charges 0.00 0.45 0.00
------ ------ ------
Operating profit - wholesale 14.65% 13.98% 10.33%
====== ====== ======
Corporate expenses 2.86% 2.50% N/A
====== ====== ======
A-10
26
Fiscal 1996 Versus Fiscal 1995
Net sales increased $21.9 million, or 29.6%, to $95.7 million in fiscal
1996, from $73.8 million in fiscal 1995. Fiscal 1996 net sales were positively
affected by a higher levels of sales to existing customers, including one key
customer whose secondary distribution center had been damaged early in the
second quarter of 1996. The Company also benefited from the addition of new
customers.
Gross profit increased $5.3 million, or 25.8%, to $25.6 million in
fiscal 1996, from $20.3 million in fiscal 1995. Gross margin decreased to 26.7%
in fiscal 1996, from 27.6% in fiscal 1995. The increase in gross profit was
driven by the large increase in sales volume, while the gross margin decline
resulted from a change in merchandise mix and a reduced gross margin on stock
sales in fiscal year 1996.
Selling, general and administrative expenses increased $1.9 million, or
19.5%, to $11.6 million in fiscal 1996, from $9.7 million in fiscal 1995. The
increase in selling, general and administrative expenses was principally due to
increases in variable expense (such as sales commission and travel). As a
percentage of net sales, selling, general and administrative expenses decreased
to 12.1% in fiscal 1996, from 13.1% in fiscal 1995.
Special charges of $332,000 in fiscal 1995 resulted from one-time
contractual obligations relating to hiring of senior executives. There were no
special charges in 1996.
Wholesale operating profit increased to $14.0 million in fiscal 1996,
from $10.3 million in fiscal 1995. As a percentage of net sales, operating
margin increased to 14.6 % in the 1996 fiscal year from 14.0% in the comparable
1995 year due to the factors described above.
Fiscal 1995 Versus Fiscal 1994
Net sales increased $11.1 million, or 17.6% to $73.8 million in fiscal
1995, from $62.7 million in fiscal 1994, which included $2.2 million of sales to
Odd Job. Fiscal 1995 net sales were positively affected by a $4.5 million
increase in levels of inventory available for sale, and higher levels of sales
to existing customers, as well as the addition of new customers.
Gross profit increased $3.4 million, or 19.9%, to $20.3 million in
fiscal 1995, from $17.0 million in fiscal 1994. Gross margin increased slightly
to 27.6% in fiscal 1995, from 27.0% in fiscal 1994. Gross margin increase
slightly due to changes in product mix sold.
Selling, general and administrative expenses decreased $789,000 or
7.5%, to $9.7 million in fiscal 1995, from $10.5 million in fiscal 1994.
Selling, general and administrative expenses as a percentage of net sales
decreased to 13.1% in fiscal 1995 from 16.7% in fiscal 1994. The decrease in
expenses and percentages are reflective of a reclassification in 1995 of certain
expenses relating to key executives and shared administrative services to
Corporate expenses.
Special charges of $332,000 in fiscal 1995 resulted from one-time
contractual obligations relating to the hiring of senior executives. There were
no special charges in 1994.
Operating profit increased $3.8 million or 59.3%, in fiscal 1995, to
$10.3 million, versus $6.5 million in fiscal 1994. Operating margin increased to
14.0% in fiscal 1995, versus 10.3% in fiscal 1994. This increase was primarily a
result of the exclusion and reclassification of corporate expenses in 1995.
A-11
27
CORPORATE EXPENSES
Fiscal Year 1996 Versus Fiscal Year 1995
Corporate expenses consist of the cost of senior management and shared
administrative resources which are utilized by both segments of the business.
Corporate expense increased $1.8 million or 53.8% to $5.1 million during fiscal
1996 from $3.3 million for fiscal 1995. The increase is primarily due to the
addition of two key executives, their respective signing bonuses, expenses
associated with the opening of a Columbus, Ohio office and increases in other
expenses, including insurance expense. Corporate expense in 1995 includes a
$600,000 special charge for legal fees. As a result, corporate expense increased
as a percentage of total Company's sales to 2.9% in 1996 from 2.5% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchases of
inventory, expenditures related to new store openings and the working capital
requirements for new and existing stores. The Company takes advantage of
closeout and other special situation purchasing opportunities which 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 maintains a high level of
committed credit, so that it can 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 November 21, 1996 the Company completed an initial public offering of
2,960,100 shares of Common Stock, no par value, at $16 per share. The offering
generated net proceeds of approximately $43.0 million, after deducting
underwriting fees and offering expenses. The net proceeds were used to repay
$33.4 million of indebtedness to a senior institutional lender and $4.0 million
of Partners' notes, to fund approximately $2.9 million in tax loans to certain
executives and former shareholders of the Company, $900,000 in compensation
buyouts to certain executives and the remaining $1.9 million was used for
general corporate purpose.
Historically, the Company's growth has been financed through cash flow
from operations, borrowings under its bank credit facility and the extension of
trade credit. Prior to the Company's initial public offering, the Company
maintained a $38.5 million Credit Facility secured by a lien on substantially
all of the Company's assets. As a result of the offering, in December 1996, the
Company entered into a new $40 million credit facility. Loans under the new
facility are secured by liens only on the Company's receivables and warehouse
inventories. The facility has a maturity date of April 30, 1999. Borrowings
under the new facility bear interest, at the Company's option, at either LIBOR
plus 200 basis points or prime less 50 basis points. The credit facility
contains restrictive covenants which require minimum net worth levels,
maintenance of certain financial ratios and limitations on capital expenditures
and investments.
For fiscal year 1996, cash provided by consolidated operating activities
was $878,000 as compared to cash used in fiscal 1995 of $2.2 million. Net income
and increases in trade payables, offset by increases in inventory and trade
receivables, accounted for the cash provided in fiscal 1996. In fiscal year 1995
increased inventory levels and decreased trade payables accounted for the
majority of cash used in operations. Cash used in investing activities increased
slightly to $7.1 million in fiscal 1996 from $7.0 million in fiscal 1995. The
majority of the cash used in fiscal 1995 was related to the acquisition of the
assets of Odd Job Holdings, Inc. Capital expenditures in 1995 were offset by the
proceeds of the sale of fixtures and equipment used in the Ohio retail operation
which was sold in October 1995. Cash was used in 1996 primarily for capital
expenditures related
A-12
28
to corporate growth and loans to related parties made in connection with the
Company's public offering completed in November 1996. Cash provided by
financing activities increased to $12.7 million in fiscal 1996 from $10.5
million in fiscal 1995. The majority of financing provided was from the
Company's public offering, offset by the payment of corporate debt and partner
distributions. In fiscal 1995 the cash provided was from borrowings on the
Company's revolving line of credit and term loans. Capital expenditures for
fiscal 1996 were $3.9 million. Fiscal 1997 capital expenditures are budgeted at
approximately $5.6 million, primarily for new stores, the management
information systems upgrade and the warehouse and distribution facilities'
expansion.
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.
Management believes that the proceeds of its initial public offering,
together with cash flow from operations and borrowings under its new loan
facility, will be adequate to fund the operations and internal expansion plans
of the Company for at least the next twelve months.
A-13
29
INFLATION
During fiscal year 1996, lease expense and salaries and wages have
increased modestly. The increases have not had a significant effect on the
Company's results of operations because the impact of rising costs has been
offset by price increases. As a result, inflation has not had nor is it expected
to have a significant impact on the Company's operations.
GENERAL ECONOMIC TREND, SEASONALITY AND QUARTERLY FLUCTUATION
Historically, the Company's retail stores have experienced their
highest net sales and operating income levels during the fourth quarter, which
includes the holiday selling season.
The Company's results of operations may also fluctuate from
quarter to quarter as a result of the amount and timing of sales contributed by
new stores, the level of advertising and pre-opening expenses associated with
the opening of new stores, the integration of new stores into the operations of
the Company and the timing of large opportunistic purchases and sales in the
Company's wholesale operations as well as other factors.
During the first quarter of fiscal 1997, the Company has experienced an
increase of approximately 25% in total retail sales, but a 4-5% decrease in
comparable store sales compared with the 1996 quarter, when the Company's
comparable store sales were up 14.7% from 1995 levels. Comparable store sales
are based on a small platform of only 13 stores, and the Company believes the
10 new stores added in fiscal 1996 have siphoned and are expected to continue
to siphon, some sales from the 13 mature stores located in the same market. The
Company believes that the softness in its retail operation was also due to the
results of lower shipments to the stores in the early portion of the quarter
versus prior year's levels and the later timing of Passover, which impacted
sales in the Company's New York and New Jersey markets. The Company made an
unusually large, opportunistic purchase late in the 1997 first quarter, whereas
a comparable size purchase occurred earlier in the 1996 first quarter. As a
consequence of the timing of the 1997 purchase, the Company did not begin
recognizing the benefit of retail or wholesale sales from this opportunistic
purchase until late in the 1997 first quarter when retail sales strengthened to
previously anticipated levels.
The Company's wholesale operations have also experienced an
approximately 14% decline in sales (exclusive of intercompany sales) for the
first quarter of 1997 versus sales for the comparable 1996 period, when the
wholesale operations experienced a 50% increase from the 1995 comparable
quarter. Management believes that a portion of the decline is due to additional
sales from the wholesale business to the retail business, which is consistent
with management's longer term plan.
QUARTERLY RESULTS (UNAUDITED)
The following table represents certain selected financial information of
the Company's wholesale and retail operations for the quarters indicated. For
purposes of analysis, the wholesale operations consists of Mazel Company L.P.
and the retail operations consists of Odd Job for each of the quarters presented
in the fiscal years 1996 and 1995, as if the Odd Job operation had been acquired
at the beginning of fiscal 1995. Sales and profits between Mazel and Odd Job
have been eliminated from wholesale results in both years.
A-14
30
QUARTERLY STATEMENTS OF OPERATION
FISCAL 1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ------------ ----------- -----------
(IN THOUSANDS)
Sales
Retail $16,882 $18,157 $19,785 $29,378
Wholesale 25,572 24,554 24,602 20,947
------- ------- ------- -------
Total sales 42,454 42,711 44,387 50,325
Gross profit
Retail 6,501 7,170 7,768 11,464
Wholesale 6,398 6,582 6,950 5,662
------- ------- ------- -------
Total gross profit 12,899 13,752 14,718 17,126
Operating income before
corporate and special charges
Retail 609 469 510 2,229
Wholesale 3,574 3,714 3,929 2,798
------- ------- ------- -------
Total 4,183 4,183 4,439 5,027
Corporate 1,183 1,355 1,282 1,319
Special charges 0 0 0 4,243
------- ------- ------- -------
Operating income (loss) $3,000 $2,828 $3,156 $(535)
======= ======= ======= =======
FISCAL 1995 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS)
Sales
Retail $13,975 $14,238 $13,249 $18,602
Wholesale 16,903 15,209 20,858 28,475
------- ------- ------- -------
Total sales 30,878 29,447 34,107 39,449
Gross Profit
Retail 5,324 5,423 4,970 6,806
Wholesale 4,825 4,668 5,619 5,229
------- ------- ------- -------
Total gross profit 10,149 10,091 10,589 12,035
Operating income before
corporate and special charges
Retail 385 439 (239) 1,081
Wholesale 2,391 2,177 3,066 3,018
------- ------- ------- -------
Total 2,776 2,616 2,827 4,099
Corporate 533 533 1,233 1,043
Discontinued operations 235 220 1,748 0
Special charges 0 0 0 632
------- ------- ------- -------
Operating income (loss) $2,008 $1,863 $(154) $ 2,424
======= ======= ======= =======
A-15
31
RECENT ACCOUNTING DEVELOPMENTS
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", which provides
guidance for recognition of impairment losses to long-lived assets. The
Statement is effective for fiscal years beginning after December 15, 1995. The
Company recognized no impairment loss as a result of adoption.
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which provides a basis for measurement and recognition of all
stock-based employee compensation plans. The disclosure requirements of this
Statement are effective for fiscal years beginning after December 15, 1995. The
Company chose to maintain its current accounting method for stock-based
compensation and disclose the pro forma effects on net income and earnings per
share of the fair market value method as permitted by the Statement.
FORWARD LOOKING STATEMENT
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. Readers
are cautioned not to place undue reliance on these forward looking statements
which speak only as of the date hereof. Such risks and uncertainties include,
but are not limited to, the successful implementation 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 on comparable store sales of the small platform of stores and the
disproportionate impact caused by individual buying transactions, growth into
new geographic areas, availability of appropriate retail locations, the lack of
any unanticipated problems at the Company's distribution facilities or in
transportation of merchandise, in general, and general economic conditions.
Please refer to the Company's subsequent SEC filings under the Securities
Exchange Act of 1934, as amended, for further information.
A-16
32
INDEPENDENT AUDITORS' REPORT
---------------------------
The Board of Directors and Stockholders
Mazel Stores, Inc.:
We have audited the consolidated balance sheets of Mazel Stores, Inc. as of
January 25, 1997 and January 31, 1996, and the related consolidated statements
of operations, stockholders' equity and partners' capital, and cash flows
for each of the years in the three-year period ended January 25, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mazel Stores, Inc.
as of January 25, 1997 and January 31, 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 25, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
March 21, 1997
A-17
33
MAZEL STORES, INC.
Consolidated Balance Sheets
(Dollars in thousands)
January 25, January 31,
Assets 1997 1996
------ ----------- -----------
Current assets
Cash and cash equivalents $ 8,010 $ 1,470
Accounts receivable - trade, less allowance for doubtful
accounts of $195 in both years presented 10,565 10,067
Notes and other receivables 96 352
Inventories 40,399 29,212
Prepaid expenses 1,186 440
Deferred income tax asset (note 8) 3,006 314
------- -------
Total current assets 63,262 41,855
Equipment, furniture, and leasehold improvements, net (note 4) 6,251 3,097
Other assets 1,107 987
Notes receivable - related parties (note 6) 2,936 --
Goodwill, net (note 1[g]) 10,876 9,000
Deferred income tax asset (note 8) 1,929 1,695
------- -------
$86,361 $56,634
======= =======
Liabilities, Stockholders' Equity and Partners' Capital
-------------------------------------------------------
Current liabilities
Long-term debt, current portion (note 5) $ 17 $ 1,361
Accounts payable 15,447 11,732
Accrued expenses 3,050 2,376
Other current liabilities 275 193
------- -------
Total current liabilities 18,789 15,662
Revolving line of credit (note 5) -- 13,496
Long-term debt, net of current portion (note 5) 53 12,525
Other liabilities (note 9[a]) 2,091 2,037
Deferred income tax liability (note 8) 666 44
------- -------
Total liabilities 21,599 43,764
Stockholders' equity and partners' capital
Common stock, no par value; 14,000,000 shares authorized;
9,170,100 shares issued and outstanding -- --
Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued or outstanding -- --
Additional paid-in capital 64,742 100
Retained earnings (deficit) 20 (204)
Partners' capital -- 12,974
------- -------
Total stockholders' equity and partners' capital 64,762 12,870
Commitments and contingencies (notes 5 and 9)
------- -------
$86,361 $56,634
======= =======
See accompanying notes to consolidated financial statements.
A-18
34
MAZEL STORES, INC.
Consolidated Statements of Operations
(Dollars in thousands)
Fiscal Year Ended
---------------------------------------------
January 25, January 31, January 31,
1997 1996 1995
------------- ------------- -----------
Net sales $ 179,877 $ 98,106 $ 76,254
Cost of sales 121,382 70,208 55,183
----------- ----------- -----------
Gross profit 58,495 27,898 21,071
Selling, general, and administrative expense 45,802 20,753 15,317
Special charges (note 11) 4,243 2,203 --
----------- ----------- -----------
Operating profit 8,450 4,942 5,754
Other income (expense)
Interest expense, net (2,254) (1,265) (894)
Other 34 (559) 26
----------- ----------- -----------
Income before income taxes 6,230 3,118 4,886
Income tax expense (benefit) (note 8) (1,987) 19 71
----------- ----------- -----------
Net income $ 8,217 $ 3,099 $ 4,815
=========== =========== ===========
Pro forma as adjusted data (unaudited) (note 13)
Income before income taxes $ 6,230 $ 3,118
Supplemental pro forma adjustments
Income of Odd Job retail operation -- 1,365
Loss on discontinued Ohio retail operation -- 2,210
Management compensation adjustments 1,235 1,404
Special charges 4,243 600
Reduction in interest expense, net 2,460 2,040
Provision for income taxes (5,667) (4,295)
----------- -----------
Pro forma as adjusted
net income (unaudited) $ 8,501 $ 6,442
=========== ===========
Pro forma as adjusted net income per
share (unaudited) $ 0.93 $ 0.70
Pro forma as adjusted shares outstanding 9,170,100 9,170,100
See accompanying notes to consolidated financial statements.
A-19
35
MAZEL STORES, INC.
Consolidated Statements of Stockholders' Equity and Partners' Capital
Years ended January 25, 1997 and January 31, 1996 and 1995
(Dollars in thousands)
Mazel
Additional Retained Company L.P.
Paid-In Earnings Partners'
Capital (Deficit) Capital Total
---------- -------- ------------ -------
Balance as of January 31, 1994 $ -- $ -- $ 9,453 $ 9,453
ZS Peddlers Mart, Inc. common stock 100 -- -- 100
Partners' withdrawals -- -- (2,806) (2,806)
Partnership net income -- -- 4,809 4,809
ZS Peddlers Mart, Inc. net income -- 6 -- 6
------- ------- ------- -------
Balance as of January 31, 1995 100 6 11,456 11,562
Capital contributed -- -- 92 92
Partners' withdrawals -- -- (1,773) (1,773)
Dividends paid -- (110) -- (110)
Partnership net income -- -- 3,199 3,199
Odd-Job Holdings, Inc. net loss -- (100) -- (100)
------- ------- ------- -------
Balance as of January 31, 1996 100 (204) 12,974 12,870
Capital contributed -- -- 4,000 4,000
Net proceeds from issuance and sale of
2,960,100 shares of common stock
in connection with the initial public
offering, net of issuance costs of
$1,038 (note 2) 43,008 -- -- 43,008
Stock issued pursuant to compensation
arrangements 3,646 -- -- 3,646
Conversion of debt (note 5) 1,000 -- -- 1,000
Partners' withdrawals -- -- (7,979) (7,979)
Net income -- 224 7,993 8,217
Exchange of partnership equity for stock 16,988 -- (16,988) --
------- ------- ------- -------
Balance as of January 25, 1997 $64,742 $ 20 $ -- $64,762
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
A-20
36
MAZEL STORES, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal Year Ended
---------------------------------------
January 25, January 31, January 31,
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities
Net income $ 8,217 $ 3,099 $ 4,815
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization 1,075 646 475
Deferred income taxes (2,304) (12) 5
Allowance for doubtful accounts -- -- (55)
Loss on sale of Ohio retail operations -- 1,571 --
Noncash charges on sale of Ohio retail operations -- (3,038) --
Noncash compensation expense 2,928 -- --
Changes in operating assets and liabilities
Accounts receivable - trade (2,077) (672) (1,077)
Notes and other receivables 256 (196) 31
Inventories (10,735) (1,686) (57)
Prepaid expenses (704) 266 (135)
Other assets (31) 113 (82)
Accounts payable 3,627 (2,107) 1,668
Accrued expenses and other liabilities 626 (178) 86
-------- -------- --------
Total adjustments (7,339) (5,293) 859
-------- -------- --------
Net cash provided by (used in) operating activities 878 (2,194) 5,674
-------- -------- --------
Cash flows from investing activities
Capital expenditures (3,923) (450) (497)
Cash paid for acquisitions, net of cash acquired (266) (8,395) 23
Cash received at acquisition, net of cash expenses 70 -- --
Issuance of notes receivable - related parties (2,936) -- --
Security deposits -- -- (16)
Proceeds from sale of Ohio retail operations -- 1,818 --
-------- -------- --------
Net cash used in investing activities (7,055) (7,027) (490)
-------- -------- --------
Cash flows from financing activities
Proceeds from term loan -- 10,925 4,000
Repayment of debt (33,414) (4,151) (12,636)
Net borrowings under credit facility 7,102 6,220 6,858
Repayment of subordinated notes payable -- (500) (500)
Equity contributions 4,000 92 100
Partners' withdrawals (7,979) (1,773) (2,806)
Dividends paid -- (110) --
Loan fees -- (155) (75)
Net proceeds of initial public offering 43,008 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 12,717 10,548 (5,059)
-------- -------- --------
Net increase in cash and cash equivalents 6,540 1,327 125
Cash and cash equivalents at beginning of year 1,470 143 18
-------- -------- --------
Cash and cash equivalents at end of year $ 8,010 $ 1,470 $ 143
======== ======== ========
Supplemental disclosures
Cash paid for interest $ 2,503 $ 1,225 $ 887
======== ======== ========
See accompanying notes to consolidated financial statements.
A-21
37
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
January 25, 1997 and January 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Description of Business
-----------------------
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 operates a chain of 23 closeout retail stores,
including 14 in New York (5 of which are in Manhattan) and 9 in New
Jersey.
(b) Organization
------------
The Company was incorporated as a wholly owned subsidiary of Mazel
Company L.P. ("Partnership") in preparation for an initial public
offering that occurred as of November 21, 1996 (see note 2). The
Partnership was controlled by ZS Mazel L.P. ("ZS"), a limited
partnership that was also the sole stockholder of Odd-Job Holdings,
Inc. ("Holdings"), which owned all of the outstanding common stock
of Odd Job Acquisition Corp., which had been organized to acquire
the retail businesses of a commonly owned group of corporations and
partnerships (collectively, "Odd Job"). On December 9, 1994, ZS
acquired Peddler's Mart, Inc. ("Peddlers"), which was merged with
Odd Job upon the acquisition of Odd Job on December 7, 1995.
Immediately prior to the initial public offering, the Partnership
contributed all of its assets and liabilities to the Company in
exchange for 5,690,602 shares of common stock. The Company then
exercised its option to acquire the stock of Holdings from ZS for
$1,400,000, which included the cancellation of a $1,350,000 note
from ZS.
(c) Basis of Presentation
---------------------
The financial statements of the Company give effect to the common
control of the Partnership, Peddlers, and Odd Job prior to the
initial public offering and, accordingly, are comprised of the
operations of the Partnership for all years presented, including the
Peddlers and Odd Job operations as of December 9, 1994 and December
7, 1995, respectively. The transfer of assets and liabilities among
these commonly controlled entities has been accounted for at
historical cost in a manner similar to a pooling of interests. All
significant balances and transactions between these entities and
among the consolidated group have been eliminated in the
consolidated financial statements.
(Continued)
A-22
38
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(d) Cash and Cash Equivalents
-------------------------
For financial reporting purposes, the Company considers all
investments purchased with an original maturity of three months or
less to be cash equivalents.
(e) Inventories
-----------
Wholesale inventories are valued at the lower of cost or market,
with cost determined by the first-in, first-out (FIFO) method.
Retail inventories are valued by use of the retail method.
(f) Equipment, Furniture, and Leasehold Improvements
------------------------------------------------
Depreciation and amortization are provided for the cost of
depreciable properties at rates based on their estimated useful
lives, which range from 3 to 10 years for furniture and equipment
or, for leasehold improvements, over the life of the related lease.
The rates so determined are applied on a straight-line basis.
Maintenance and repairs are charged to expense as incurred.
(g) Goodwill
--------
Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized using the straight-line method over
periods not exceeding 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired businesses.
During the most recent fiscal year goodwill increased by $934,000
due to the settlement of pre-acquisition contingencies related to
the Odd Job acquisition and by $1,248,000 as a result of the
acquisition of three retail stores. At January 25, 1997 and January
31, 1996, accumulated amortization amounted to $393,000 and $87,000,
respectively.
(h) Income Taxes
------------
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any operating
loss, deduction, or tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
A-23
39
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
Income taxes attributable to the operations of the Partnership were
obligations of the individual partners and have not been reflected
in the historical amounts shown in the accompanying consolidated
financial statements. The consolidated financial statements reflect
a one-time tax benefit of $1,489,000 arising from cumulative
differences between the net book and tax basis of the Partnership's
assets and liabilities upon their transfer to the Company.
(i) Advertising
-----------
The Company expenses advertising costs as incurred. Advertising
expense was approximately $598,000 in the year ended January 25,
1997 and $470,000 and $464,000 in the years ended January 31, 1996
and 1995, respectively.
(j) Fiscal Year
-----------
Effective February 1, 1996, the Company changed its fiscal year end
from January 31 to a 52- or 53-week year ending on the Saturday
nearest to January 31. Accordingly, the current fiscal year ended on
January 25, whereas the two previous fiscal years ended on January
31.
(k) New Accounting Pronouncements
-----------------------------
During 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which provides guidance for
recognition of impairment losses to long-lived assets. The Statement
is effective for fiscal years beginning after December 15, 1995. The
Company recognized no impairment loss as a result of adoption.
During 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which
provides a basis for measurement and recognition of all stock-based
employee compensation plans. The disclosure requirements of this
Statement are effective for fiscal years beginning after December
15, 1995. The Company chose to maintain its current accounting
method for stock-based compensation and disclose the pro forma
effects on net income and net income per share of the fair market
value method, if material, as permitted by the Statement.
(l) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(m) Reclassifications
-----------------
Certain reclassifications were made to the Company's prior period
financial statements to conform to the January 25, 1997
presentation.
(Continued)
A-24
40
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(2) Initial Public Offering
-----------------------
On November 21, 1996, the Company completed its initial public offering
of 2,574,000 shares of common stock, no par value, at $16 per share,
generating net proceeds of approximately $37.3 million, after deducting
underwriting fees and offering expenses. On December 13, 1996, the
underwriters exercised their over-allotment option to purchase an
additional 386,100 common shares, generating an additional $5.7 million
of cash proceeds to the Company. The net proceeds were used to repay
approximately $33.4 million of indebtedness to a senior institutional
lender and $4.0 million of partners' notes and to fund $2.9 million in
tax loans and $900,000 in compensation buyouts to certain executives; the
remaining $1.9 million was used for the Company's general corporate
purposes.
(3) Odd Job Acquisition
-------------------
On December 7, 1995, Odd Job was acquired by ZS for $10,500,000 and an
additional $1,013,000 in related expenses, in a transaction accounted for
by the purchase accounting method. In connection with the acquisition,
the purchase price allocation and liabilities assumed were as follows (in
thousands):
Current assets $12,197
Equipment, furniture, and leasehold improvements 1,568
Goodwill 8,801
Other noncurrent assets 1,866
Expenses incurred in connection with the acquisition (1,013)
Cash paid for stock and partnership units (9,050)
--------
Liabilities assumed $14,369
========
The following unaudited pro forma combined results of operations assume
that the combination had occurred at the beginning of fiscal year 1995
(in thousands):
Fiscal Year Ended
-----------------------------
January 31, January 31,
1996 1995
------------ ------------
Net sales $133,881 $120,860
Net income 4,054 6,324
The unaudited pro forma information is presented for comparative purposes
and is not necessarily indicative of results of operations that would
have occurred had the combination been made at the beginning of fiscal
year 1995.
(Continued)
A-25
41
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(4) Equipment, Furniture, and Leasehold Improvements
------------------------------------------------
The major classes of equipment, furniture, leasehold improvements, and
construction in progress are summarized at cost, as follows (in
thousands):
January 25, January 31,
1997 1996
---------- ----------
Furniture, fixtures, and equipment $4,620 2,687
Leasehold improvements 3,177 2,203
Construction in progress 1,016 --
------ ------
8,813 4,890
Less accumulated depreciation and amortization 2,562 1,793
------ ------
$6,251 3,097
====== ======
(5) Long-Term Debt
--------------
As of January 25, 1997, the Company's debt consists of a $136,000
subordinated note related to the acquisition of Peddlers, payable in
quarterly installments of $4,250 with a final payment due on
September 30, 2002, to be reduced by payments made under one of the
contingent subordinated notes (see note 9[c]), as defined. As of
January 25, 1997, $93,500 was outstanding on this note. The present value
of the outstanding amount, discounted at a rate of 10 percent, is
$69,411, consisting of a current portion of $17,000 and long-term portion
of $52,411.
The Company has a revolving line of credit with The Provident Bank
("Provident"), secured by substantially all of its assets. The revolving
credit facility has a maturity date of April 30, 1999, bears interest at
the prime rate less 50 basis points as published by Provident or a "LIBOR
Rate" as defined plus 200 basis points, and is subject to a commitment
fee on the unused portion. Availability on the revolving credit facility
is the lesser of $40,000,000 or a borrowing base computation based on
accounts receivable and inventories. As of January 25, 1997, there were
no outstanding borrowings on the revolving line of credit.
At January 31, 1996, the Partnership was obligated to Provident under a
term loan and revolving line of credit in the amounts of $5,342,000 and
$12,084,000, respectively. At January 31, 1996, Odd Job was also
obligated to Provident under a term loan and revolving line of credit in
the amounts of $7,000,000 and $1,412,000, respectively. Obligations of
the Partnership and Odd Job under these arrangements were repaid from the
proceeds of the initial public offering. The senior subordinated note in
the amount of $1,000,000 issued in conjunction with the Odd Job
acquisition and outstanding at January 31, 1996 was converted into 62,500
shares of common stock in conjunction with the initial public offering.
(Continued)
A-26
42
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(6) Related Party Transactions
--------------------------
As of January 25, 1997, notes receivable consists principally of
$2,932,409 relating to tax loans provided to certain key executives
related to stock issued in lieu of compensation reductions, and to former
shareholders of the Company in payment of indebtedness, at the time of
the Company's initial public offering. Such amount includes accrued
interest of $14,773 accrued at a rate of 6.6 percent.
Prior to the acquisition of Odd Job, the Partnership conducted
transactions with Odd Job as both vendor and customer. During the years
ended January 31, 1996 and 1995, sales by the Partnership to Odd Job
amounted to approximately $1,835,000 and $2,051,000, respectively, and
purchases from Odd Job approximated $909,000 and $2,653,000,
respectively, for such pre-acquisition periods.
During the years ended January 25, 1997 and January 31, 1996 and 1995,
the Partnership paid its managing partner a management fee of $289,444,
$100,000 and $100,000, respectively. The management fee paid for the year
ended January 25, 1997 included a one-time management fee buyout of
$200,000.
(7) Financial Instruments
---------------------
The carrying value of cash and cash equivalents, accounts receivable,
notes and other receivables, accounts payable, and accrued expenses is
considered to approximate their fair value due to their short maturity.
The interest rates on debt instruments and notes receivable are
considered to approximate market rates, and accordingly, their cost is
reflective of fair value.
(8) Income Taxes
------------
Prior to the public offering, the portion of the Company's income that
was attributable to the Partnership was passed through to the respective
partners, and no federal or state tax liability was recorded.
Income tax expense (benefit) attributable to income from continuing
operations is as follows (in thousands):
Fiscal Year Ended
----------------------------------------
January 25, January 31, January 31,
1997 1996 1995
----------- ----------- -----------
Federal
Current $ -- -- --
Deferred (1,975) (12) 5
------- --- ---
(1,975) (12) 5
State and local
Current 316 31 66
Deferred (328) -- ---
------- --- ---
(12) 31 66
------- --- ---
$(1,987) 19 71
======= === ===
(Continued)
A-27
43
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
The income tax benefit attributable to income from continuing operations
for the fiscal year ended January 25, 1997 was $1,987,000, which differed
from the "expected" amount computed by applying the U.S. federal tax rate
of 35 percent to pretax income from continuing operations as a result of
the following (in thousands):
Computed "expected" tax expense $ 2,181
Nonrecurring tax benefit (1,489)
Corporate state and local taxes, net of federal benefit 159
Partnership period earnings taxed to respective partners (2,797)
Partnership local taxes 72
Other (113)
-------
$(1,987)
=======
Pretax income for the years ended January 31, 1996 and 1995, was
attributable principally to the Partnership, and accordingly, the income
tax expense recorded for those years reflects local taxes for which the
Partnership was liable.
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are
presented below (in thousands):
January 25, January 31,
1997 1996
----------- -----------
Deferred tax assets
Current
Inventory capitalization and reserve $ 1,741 235
Accrued expenses 352 --
Net operating loss carryforward 827 72
Other 86 7
------- ------
3,006 314
Noncurrent
Equipment, furniture, and leasehold
improvements basis differences 1,296 1,035
Accrued lease obligations 747 660
------- ------
2,043 1,695
------- ------
Total gross deferred tax assets 5,049 2,009
Deferred tax liabilities
Noncurrent
Goodwill (643) --
Amortizable asset (137) --
Other -- (44)
------- ------
Total gross deferred tax liabilities (780) (44)
------- ------
Net deferred tax asset $ 4,269 1,965
======= ======
A net operating loss of approximately $2,067,000 is available to offset
future taxable income. This loss carryforward expires in 15 years.
(Continued)
A-28
44
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
Under Statement 109, a valuation allowance is established to reduce the
deferred tax asset if it is more likely than not that the related tax
benefit will not be realized. In management's opinion, it is more likely
than not that the tax benefits will be realized; consequently, no
valuation allowance has been established as of January 25, 1997.
(9) Commitments and Contingencies
-----------------------------
(a) Leases
------
The Company is obligated for office, warehouse, and retail space
under operating lease agreements which expire at various dates
through fiscal 2009. Some of these leases are subject to certain
escalation clauses based upon real estate taxes and other
occupancy expense, and several leases provide for additional rent
based on a percentage of sales. One of the lessors is a
corporation in which certain executives of the Company have a
minority ownership interest.
At January 25, 1997, minimum annual rental commitments under
noncancelable leases for the Company as a whole are as follows (in
thousands), for the fiscal year ending:
1998 $ 6,512
1999 5,538
2000 5,503
2001 4,983
2002 4,421
Thereafter 13,047
------
Total minimum lease payments $40,004
======
Rent expense for the aforementioned operating leases was
approximately $5,815,000 for the year ended January 25, 1997 and
$2,469,000, and $1,345,000 for the years ended January 31, 1996
and 1995, respectively. Rent paid to the related party lessor was
approximately $1,471,000 in fiscal 1997, $1,330,000 in fiscal
1996, and $1,241,000 in fiscal 1995.
In conjunction with the Odd Job acquisition, a portion of the
purchase price was assigned to leases based on the excess of the
contractual lease payments over the estimated current market
rentals in the amount of approximately $1,891,000. This amount is
shown with other liabilities and is reduced as lease payments are
made.
(b) Letters of Credit
-----------------
Included in the $40,000,000 revolving line of credit is a letter
of credit facility totaling $15,000,000 for use in the normal
operations of the business. At January 25, 1997, the Company had
outstanding letters of credit issued to various parties
aggregating approximately $2,461,000.
(Continued)
A-29
45
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(c) Contingent Subordinated Notes
-----------------------------
The Company has two subordinated notes due to Peddlers' former
owner, both of which mature on December 31, 2002. Payments are to
be made annually to a maximum of $675,000 and $275,000, based on
Peddlers' distribution profits, as defined. No amounts have been
paid or are payable on these notes through January 25, 1997.
(d) Litigation
----------
At January 25, 1997, the Company was a party to certain lawsuits
incurred in the normal course of business, none of which
individually or in the aggregate is considered material by
management in relation to the Company's consolidated financial
position or results of operations.
(e) Retail Lease Obligations
------------------------
In connection with the sale of the Ohio retail stores in October
1995 (see note 11), the Company remains contingently liable for
the retail store lease obligations in the event that the buyer
should default on its lease payments. The lease obligations for
the remaining fiscal years are as follows: 1998 - $575,000; 1999 -
$418,000; 2000 - $212,000; 2001 - $157,000; and 2002 - $214,000.
(10) Retirement and Savings Plan
---------------------------
The Company maintains a contributory savings plan under Section 401(k) of
the Internal Revenue Code for the benefit of all collectively bargained
employees who meet certain age and service requirements. The Company is
required to make contributions under the savings plan, up to 25 percent
of the employee contributions to an annual maximum of $250 per employee.
Contributions to the plan by the Company have not been significant.
(11) Special Charges
---------------
Special charges for the fiscal year ended January 25, 1997 resulted from
compensation and other charges arising in connection with the Company's
initial public offering. Special charges for the fiscal year ended
January 31, 1996 resulted from a loss of $1,571,000 on the Partnership's
disposal of the 12 closeout stores comprising the Ohio retail business
and $632,000 relating to executive signing bonuses.
(12) Compensatory Plans
------------------
(a) Stock Option Plan
-----------------
The Mazel Stores, Inc. 1996 Stock Option Plan ("Stock Option
Plan") was adopted by the Board of Directors and approved by the
shareholders of the Company effective October 1, 1996. Pursuant to
the provisions of the Stock Option Plan, employees of the Company
may be offered the opportunity to acquire common stock by the
grant of stock options ("Options"), including both incentive stock
options ("ISOs") and nonqualified stock options ("NQSOs").
Consultants may receive only NQSOs under the Stock Option Plan.
Non-employee directors automatically receive, upon
(Continued)
A-30
46
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
the date they first become directors, a grant of Options to
purchase 15,000 shares of common stock of the Company. The
purchase price of a share of common stock pursuant to an Option
shall not be less than the fair market value of a share of common
stock at the grant date. As of January 25, 1997, options for a
total of 734,250 shares of common stock have been granted to
employees and non-employee directors of the Company, of which
15,900 have been canceled and 18,750 are exercisable. The Options
outstanding as of January 25, 1997 have an exercise price equal to
$16 per share, vest in five equal annual installments of 20
percent of the grant, and have a term of 10 years.
The effect of applying the fair value method as prescribed by
Statement of Financial Accounting Standards No. 123 to the
Company's stock option awards results in net income and pro forma
net income per share that are not materially different from
amounts reported.
(b) Restricted Stock Plan
---------------------
The Company's Restricted Stock Plan ("Restricted Stock Plan") was
adopted by the Board of Directors and approved by the Company's
shareholders effective October 1, 1996. The Restricted Stock Plan
serves as the successor to the Partnership's Employee Equity Plan
("Equity Plan"). The Restricted Stock Plan relates to 220,090
unvested shares of common stock issued, initially as partnership
units under the Equity Plan. Shares have the same vesting terms
as provided in the Equity Plan.
The Equity Plan provided for the purchase of partnership units by
key executives of the Company, with exercisability subject to
vesting restrictions, generally over a five-year period. Employees
of the Company purchased a total of 1,660 units (representing
528,428 shares of common stock) under the Equity Plan during the
year ended January 31, 1996, resulting in a total of 1,730 units
outstanding. A total of 588 units were vested at such date, and an
additional 450 units vested upon the effectiveness of the initial
public offering. In conjunction with the public offering, all
vested units (aggregating 330,295 shares of common stock) were
distributed to Equity Plan participants and all unvested units
(aggregating 220,090 shares of common stock) are being held
pursuant to the Restricted Stock Plan. The Company has recorded
compensation expense in accordance with the vesting provisions of
the Restricted Stock Plan at a value of $225 per unit, which
represents the difference between the purchase price and fair
value of each unit at the grant date as established by an
independent appraisal.
(Continued)
A-31
47
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(13) Pro Forma Information (Unaudited)
---------------------------------
The following unaudited pro forma net income per share information
assumes that the Company was subject to income taxes at the beginning of
the current fiscal year at an effective rate of 40 percent. The
supplemental net income per share information is calculated in accordance
with Accounting Principles Board Opinion No. 15, Earnings Per Share, to
give effect to the number of shares from the public offering used to
repay debt ($33,410,000/$16 per share) and the related elimination of
interest expense at the Company's weighted average borrowing rate of 8.68
percent.
Fiscal Year Ended
January 25, 1997
-----------------------------------
Net
Net Income
Shares Income per Share
---------- ------- ------
(in thousands)
Shares issued with respect to existing capital
and debt holders' pretax income 6,210,000 $6,230
Pro forma income taxes 2,492
--------- -----
Pro forma net income per share information
after taxes 6,210,000 3,738 .60
===
Adjustment for debt repayment from proceeds 2,088,375 1,476
--------- ------
Supplemental net income per share information 8,298,375 $5,214 .63
========= ====== ===
The unaudited pro forma as adjusted data, as shown on the accompanying
consolidated statements of operations, gives effect to the public
offering as of the beginning of the two most recent fiscal years and as
if the combination of the Partnership, Odd Job, and Peddlers had
occurred at the beginning of such periods. Such data excludes
certain one-time charges (principally compensation adjustments) incurred
in connection with the public offering and organization of the Company,
provides for income taxes at an effective rate of 40 percent, and
excludes the one-time tax benefit of $1,489,000 attributable to the
change in the Company's tax status.
A-32
48
MAZEL STORES, INC.
Notes to Consolidated Financial Statements
(14) Business Segment Information
----------------------------
The Company operates in two business segments: wholesale and retail. The
retail segment is comprised of the operations of the Ohio retail business
sold in October 1995 and the Peddlers and Odd Job business as of their
respective acquisition dates. Wholesale operating profit for the year
ended January 25, 1997 is shown net of corporate expenses and other
special charges of $5,139 and $4,243, respectively. Summarized
financial information by business segment as of and for the years ended
January 25, 1997 and January 31, 1996 is as follows (in thousands):
Capital Depreciation
Operating Total Expen- and
Net Sales Profit Assets ditures Amortization
--------- --------- ------ ------- ------------
January 25, 1997
Wholesale $ 95,675 4,633 65,735 1,197 369
Retail 84,202 3,817 20,626 2,726 706
-------- ------ ------- ------ ------
$179,877 8,450 86,361 3,923 1,075
======== ====== ======= ====== ======
January 31, 1996
Wholesale $ 75,652 3,830 35,185 435 497
Retail 22,454 1,112 21,449 15 149
-------- ------ ------- ------ ------
$ 98,106 4,942 56,634 450 646
======== ====== ======= ====== ======
Sales to the Company's largest customer accounted for approximately 20.0
percent and 18.6 percent of total sales during the years ended January
25, 1997 and January 31, 1996, respectively.
(15) Unaudited Quarterly Financial Data
----------------------------------
The following is a summary of unaudited quarterly results of operations
for the years ended January 25, 1997 and January 31, 1996 (in thousands):
Quarter
-------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Year ended January 25, 1997
Net sales $42,454 42,711 44,387 50,325
Gross profit 12,899 13,752 14,718 17,126
Net income 2,338 2,194 2,416 1,269
Year ended January 31, 1996
Net sales 21,419 19,888 24,850 31,949
Gross profit 6,189 6,081 6,828 8,800
Net income (loss) 1,465 1,274 (249) 609
A-33
49
PROXY
MAZEL STORES, INC
Annual Meeting of Shareholders, June 3, 1997
The undersigned shareholder of MAZEL STORES, INC. (the "Company") hereby
appoints Reuven D. Dessler and Brady Churches, or either one of them, each with
full power of substitution and revocation as Proxies to represent and vote all
the Common Shares of the Company held of record by the undersigned at the
above-stated Annual Meeting and at any adjournment(s) thereof with all of the
powers the undersigned would possess if present, as specified on the reverse
side.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED
IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE HEREOF. UNMARKED
PROXIES WILL BE VOTED IN FAVOR OF EACH OF THE MATTERS LISTED ON THE REVERSE
SIDE UNLESS SPECIFIED TO THE CONTRARY. THE PROXIES WILL USE THEIR DISCRETION
WITH RESPECT TO ANY MATTER REFERRED TO IN ITEM (3). THIS PROXY IS REVOCABLE AT
ANY TIME BEFORE IT IS EXERCISED.
The undersigned hereby acknowledges receipt of the Notice of Meeting
and Proxy Statement dated May 6, 1997 for the Annual Meeting of Shareholders.
(Continued and to be signed and dated on reverse side)
Please Detach and Mail in the Envelope Provided
- -------------------------------------------------------------------------------
A [ X ] Please mark your
votes as in this
example
FOR WITHHOLD FOR AGAINST ABSTAIN
Item 1. [ ] [ ] Nominees: Phillip Cohen Item 2. Approval of the appointment of [ ] [ ] [ ]
Election of Jacob Koval KPMG Peat Marwick LLP as auditors
directors duly Jerry Sommers for the fiscal year ending
nominated January 31, 1998
WITHHELD FOR: (Write that nominee's Item 3. Upon such other business as may properly come before the
name in the space provided below). meeting, or any adjournment thereof.
The Board of Directors recommend a vote FOR the nominees and FOR
- -------------------------- proposal 2.
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Change of Addresses/ [ ]
Comments at left
I plan to [ ] I do not [ ]
attend the plan to
meeting attend the
meeting
SIGNATURE(S) DATE , 1997
------------------------------------------------- ----------
NOTE; Please sign EXACTLY as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give FULL title as such.