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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended: February 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________________ to ________________.
Commission File No. 0-21597
MAZEL STORES, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 34-1830097
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31000 Aurora Road
Solon, Ohio 44139
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(Address of principal executive offices)
(Zip Code)
440-248-5200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $7,703,906 at April 30, 2001. The number of common
shares outstanding at April 30, 2001 was 9,141,798.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be mailed to
stockholders in connection with the registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13.
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Business 4
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosures 24
PART III
Item 10. Directors and Executive Officers of the Company 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
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PART I
ITEM 1. BUSINESS
GENERAL
Mazel Stores, Inc. (the "Company") consists of two complementary
operations: (i) a major regional closeout retail business; and (ii) the nation's
largest closeout wholesale business. The Company sells quality, value-oriented
consumer products at a broad range of price points offered at a substantial
discount to the original retail or wholesale price. The Company's merchandise
primarily consists of new, frequently brand-name products that are available to
the Company for a variety of reasons, including overstock positions of a
manufacturer, wholesaler or retailer; the discontinuance of merchandise due to a
change in style, color, shape or repackaging; a decrease in demand for a product
through traditional channels; or the termination of business by a manufacturer,
wholesaler or retailer. At February 3, 2001 (fiscal 2000 year-end), the Company
operated a chain of 79 closeout retail stores in New York, New Jersey,
Pennsylvania, Connecticut, Delaware, Ohio, Michigan, and Kentucky. The Company
had fiscal 2000 sales of $328.5 million, including retail sales of $239.7
million and wholesale sales of $88.8 million.
The Company was founded in 1975 as a wholesaler of closeout
merchandise. Management's business strategy has expanded from a primary focus on
wholesale operations to an emphasis on growth of its Odd Job stores, a chain
founded in 1974, and the initial 12 of which were acquired by the Company in
1995. The Company's long-term strategic goal is to establish itself as the
leading closeout retailer in its Northeast, Mid-Atlantic and Midwest markets.
The Company believes that the combination of its wholesale and retail
operations have provided significant synergies that have enabled the Company to
expand its retail operation and increase sales of both the wholesale and retail
operations.
INDUSTRY OVERVIEW
Closeout retailing is an important segment of the retailing industry in
the United States. Closeout retailers and wholesalers provide a valuable service
to manufacturers by purchasing excess products. Closeout merchandisers also take
advantage of generally lower prices in the off-season by buying and warehousing
seasonal merchandise for future sale. As a result of acquiring merchandise at a
deeper discount, closeout merchandisers can offer merchandise at prices
significantly lower than those offered by traditional retailers and wholesalers.
The closeout sector has benefitted from several industry trends.
Consolidation in the retail industry and the expansion of just-in-time inventory
requirements have generally had the effect of shifting inventory risk from
retailers to manufacturers. In addition, a trend toward shorter product cycles,
particularly in the consumer goods sector, has increased the frequency of new
product and new product packaging introductions. These factors have increased
the reliance
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of manufacturers on closeout retailers and wholesalers like the Company, who
frequently are able to purchase larger quantities of excess inventory and
successfully control the distribution of such goods.
RETAIL OPERATIONS
General. The Company's chain of 79 retail stores as of February 3, 2001
operate under the names "Odd Job," "Odd Job Trading" and "Mazel's" and are
located in New York (31, including 9 in Manhattan), New Jersey (24), Ohio (8),
Pennsylvania (7), Michigan (4), Connecticut (3), Delaware (1), and Kentucky (1).
The retail stores generated sales of $239.7 million in fiscal 2000.
Merchandising and Marketing. The Company believes that its customers
are attracted to its stores principally because of the availability of a large
assortment of quality consumer items, which are frequently brand-name, at
attractive prices. The Company offers certain general categories of merchandise
on a continual basis, although specific lines, products and manufacturers change
continuously. Inventories depend primarily on the types of merchandise that the
Company is able to acquire at any given time. The Company believes that this
changing variety of merchandise from one day to the next results in customers
shopping at the stores more frequently than they might otherwise. The Company
refers to such frequent shoppers as "treasure hunters" due to their regular
visits to the Company's stores in an effort to seek out bargains. The Company's
stores offer substantial savings on housewares, domestics, cards and stationery,
books, candles, party supplies, health and beauty aids, food, toys, hardware,
giftware, electronics and garden supplies. Brands carried by the Company's
stores may include, at any given time, Enesco, American Greetings, Sunbeam,
Keebler, M&M Mars, Mattel, Mikasa, Newell/Rubbermaid and Sony. In addition, the
Company has increased the breadth and quality of its seasonal merchandise and
has sought to promote these items through in-store displays designed around
specific holidays.
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The Company believes its large selection of brand-name products often
attracts a customer seeking a particular brand or product, who will check the
Company's stores in search of the lowest price before resorting to a large
discount store where the customer assumes the product is in stock. In addition,
the Company's stores carry, on a consistent basis, selected goods manufactured
to the Company's specifications. The Company is able to negotiate competitive
prices with manufacturers of these products, many of whom are located outside
the United States. Such products enable the Company to provide high-quality,
cost-effective merchandise on a continuity basis.
Management believes the presentation of its merchandise is critical to
communicating value and quality to its customers. The Company uses a variety of
adaptable merchandising fixtures and displays that add flexibility in the
presentation of a changing merchandise mix. Some merchandise is displayed in its
initial packaging, stacked floor-to-ceiling. A message board appears in every
store, indicating both new arrivals and coming merchandise, in an effort to
appeal to the "treasure hunters." The Company relies on attractive exterior
signage and in-store merchandising as primary forms of advertising. The
Company's print advertising program uses mailers, in-paper ads, and circulars,
on a periodic basis, to promote up to 40 value-oriented and easily recognizable
items. As a result of its merchandise mix, visual merchandising methods and
high-traffic store locations, the retail operation's average inventory turn rate
is approximately 3.1 per year.
Purchasing. The Company believes that the primary factor contributing
to the success of its business is its ability to locate and take advantage of
opportunities to purchase large quantities of quality brand-name merchandise at
prices that allow the Company to resell the merchandise at prices that are
substantially below traditional retail prices. Its retail operations maintain a
buying staff in Columbus, Ohio, New York City, and South Plainfield, New Jersey.
The retail buyers work closely with the wholesale buyers to identify the most
attractive closeout purchasing opportunities available. Synergies created
through the combined buying power and expertise of the retail and wholesale
purchasing staffs enable the Company to identify and purchase large quantities
of quality, brand-name closeout merchandise and then sell the merchandise
through its retail stores, its wholesale distribution channels or both. The
Company believes the combined wholesale and retail operations enable the retail
buying staff to broaden the scope and the quantities of quality merchandise that
it purchases and offer better value to its customers. The Company's retail
buyers purchase merchandise from approximately 2,000 suppliers throughout the
world.
Store Operations. Each store is staffed with section managers who have
primary responsibility for helping customers and monitoring sales floor
inventory in several merchandise categories. Section managers continually
replenish the shelves, communicate information as to fast-selling items to store
managers and identify slow-moving products for clearance. Each store has between
six and 14 check-out stations and provides sales personnel for customer
assistance. Sales are primarily for cash and personal checks, although credit
cards are accepted. The Company's Manhattan stores offer free daily storage that
enables customers to pick up items
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purchased during the day on their way home from work, and UPS shipment for
larger purchases. The Company's stores have seven day-a-week operations and have
extended weekend hours. The Company has created an infrastructure consisting of
Regional Vice Presidents and District Managers each responsible for the
operations of approximately 12 stores, reporting directly to the Director-Store
Operations.
Store Locations. The Company's 70 suburban stores at February 3, 2001
are located in strip shopping centers. The nine Manhattan stores are located in
high-traffic urban corridors (i.e. near Grand Central Station, Rockefeller
Center, Port Authority, Wall Street, Penn Station, Empire State Building, City
Hall Park, Union Square, and across from Bloomingdales) that provide access to
large numbers of commuters. As a result, the Manhattan stores generate higher
sales volumes during the work week. The Company's suburban stores are generally
near a major highway or thoroughfare, making them easily accessible to
customers. The suburban stores generate higher sales volumes during the
weekends. The Company attempts to tailor its merchandising and marketing
strategies to respond to the differences in its urban and suburban stores. The
Company's stores range in size from 6,500 to 30,000 square feet. On average,
approximately 65% of the area of each store represents selling space. All of the
stores are located in leased facilities.
The Company opened 15 new stores during fiscal 2000. The Company will
not open new stores in fiscal 2001, but is continually evaluating future
expansion plans. These plans will consider new stores in the Northeast,
Mid-Atlantic, and Midwest markets, which are serviceable from the Company's
South Plainfield, New Jersey warehouse and distribution facility and other
warehouse facilities used on an as needed basis. Stores may be opened in other
geographic areas if favorable conditions exist.
In choosing specific sites for expansion, the Company considers
numerous factors including demographics, traffic patterns, location of
competitors, rent costs in relation to current market, and overall retail
activity. The Company's standards for evaluating these factors are flexible and
are based on the nature of the market. The Company will seek to expand in both
suburban and urban markets. Due to its broader selection of closeout merchandise
than other closeout retailers, the Company seeks high volume regional centers
with a strong anchor tenant.
The Company has historically sought existing structures which it can
refurbish in a manner consistent with its merchandising concept. This strategy,
which typically requires minimal leasehold improvements by the Company, enables
the Company to open stores in new locations generally within six to twelve weeks
following occupancy of the space.
Warehousing and Distribution. Merchandise is distributed to the retail
stores primarily from the Company's 535,000 square foot South Plainfield, New
Jersey warehouse and distribution facility. The Company relocated to this
facility in the third quarter of 1998 from its former 253,000 square foot
facility located in Englewood, New Jersey. The Company believes the South
Plainfield facility has the capacity to support its longer-term retail expansion
plans.
The majority of the Company's retail inventory is shipped directly from
suppliers to the Company's South Plainfield, New Jersey warehouse and
distribution facility. Since the South Plainfield, New Jersey warehouse and
distribution facility maintains back-up inventory and provides deliveries
several times per week to each store, in-store inventory requirements are
reduced and the Company is able to operate with smaller stores. Off-hours
stocking is utilized to support the store's inventory turnover, particularly
during the busy fourth quarter. The Company's inventory is delivered to the
stores by a contract carrier, as well as by direct vendor shipments.
During fiscal 1999, the Company commenced an automation initiative at
the South Plainfield warehouse and distribution facility. The first phase of the
project was to install product storage racking. This phase was complete by
fiscal 1999 year-end. The second phase
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was the installation of a computerized conveyor system, that was completed in
fiscal 2000. The combination of the racking and conveyor have and will continue
to increase the facility's productivity and reduce its operating costs.
Distribution to the stores is controlled by the Company's product
allocators, buyers and senior management. The Company's merchandise is
distributed based on variables such as store volume and certain demographic and
physical characteristics of each store. Stores receive shipments of merchandise
several times per week based on budgeted inventory requirements, distribution
models, available storage and direct communications between store managers,
product allocators and the Company's buyers and senior management.
WHOLESALE OPERATIONS
General. The Company is the nation's largest wholesaler of closeout
merchandise, with fiscal 2000 sales of $88.8 million. The Company's wholesale
operations purchase and resell many of the same lines of merchandise sold
through the Company's retail operations. The wholesale operations acquire
closeout merchandise at prices substantially below traditional wholesale prices
and sell such merchandise through a variety of channels. In general, the Company
does not have long-term or exclusive arrangements with any manufacturer or
supplier for the wholesale distribution of specified products. Rather, the
Company's wholesale inventory, like its retail inventory, consists primarily of
merchandise obtained through specific purchase opportunities.
Purchasing. The Company's wholesale buyers purchase merchandise from
approximately 1,000 suppliers throughout the world and continually seek
opportunities created by manufacturers and other closeout circumstances, such as
packaging changes, the overstock inventory of wholesalers and retailers,
buybacks, receiverships, bankruptcies and financially distressed businesses. The
Company's experience and expertise in buying merchandise from such suppliers has
enabled it to develop relationships with many manufacturers and wholesalers who
offer some or all of their closeout merchandise to the Company prior to
attempting to dispose of it through other channels. By selling their inventories
to the Company, suppliers can reduce warehouse expenses and avoid the sale of
products at concessionary prices through their normal distribution channels. In
addition to closeout merchandise purchased from suppliers, approximately 30% and
38%, respectively, of the Company's wholesale purchases for fiscal years 2000
and 1999 consisted of selected items manufactured to the Company's
specifications by domestic and foreign suppliers.
The Company's primary sources of merchandise are manufacturers, barter
agents, distributors and retailers. The Company accommodates the needs of its
vendors by (i) making rapid purchasing decisions; (ii) taking immediate delivery
of large quantities of closeout merchandise; (iii) purchasing the entire product
assortment offered by a particular vendor; (iv) minimizing disruption to the
supplier's ordinary distribution channels; and (v) making prompt and reliable
payments. The Company believes that its flexibility and expertise has
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established the Company as a preferred customer of many key sources of closeout
merchandise. In many cases, the Company has developed valuable sources from
which it obtains certain lines of merchandise on a continuing basis.
The Company's wholesale and retail buyers work closely together to
identify attractive purchasing opportunities and negotiate and complete the
purchase of significant quantities of closeout consumer items. The Company
believes the expertise and resources of the retail operations have enabled the
wholesale operations to broaden the categories and quantities of merchandise
offered to its customers.
Sales and Marketing. The Company maintains a direct sales force of 10
people in its wholesale operations and also sells its merchandise through eight
independent representatives. In addition to a showroom at its Solon, Ohio
facility, the Company and its representatives maintain showrooms in New York
City, Columbus, Chicago, and Boston. The Company sells to approximately 2,000
wholesale customers, which include a wide range of major regional and national
retailers as well as smaller retailers and other wholesalers and distributors.
No customer accounted for more than 10% of total sales in fiscal years 2000 or
1999.
Warehousing and Distribution. The Company conducts its wholesale
operations primarily from a 740,000 square foot leased warehouse and
distribution facility in Solon, Ohio. During fiscal 2000, the Company operated a
113,000 square foot secondary leased facility in Solon, Ohio. The lease on this
secondary storage facility expired in March 2001. In addition, the Company
leases space at public warehouses on an as needed basis. Generally, the Company
does not have a prospective customer prior to purchasing merchandise, although
in some cases a customer willing to purchase part or all of the goods will be
found immediately prior to, or soon after, a purchase. In the latter case, the
Company attempts, whenever possible, to drop ship the goods directly to the
customer from the point of purchase. In other cases, the Company ships the
merchandise to its warehouse and distribution facility via back haulers and
common carriers. Approximately 70% and 78% of the Company's wholesale sales in
fiscal years 2000 and 1999, respectively, were of merchandise shipped through
its warehouse and distribution facility, with the remainder drop shipped
directly to customers.
VALUE CITY JOINT VENTURE
On August 3, 1997, the Company commenced operation of VCM, Ltd.
("VCM"), a 50 percent owned joint venture with Value City Department Stores,
Inc. VCM operates the toy, sporting goods, health and beauty care, and other
departments in the Value City department store chain. The Company coordinates
merchandise purchasing on behalf of VCM, some of which is sourced from the
Company's wholesale segment. The Company's initial investment in VCM was
$9,637,000. In addition to its 50 percent share of VCM's net profit or loss, the
Company receives a management fee equal to three percent of VCM's net sales.
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MANAGEMENT INFORMATION SYSTEMS
The Company's retail and wholesale operations are supported by an IBM
AS400-based computer system. The system utilizes proprietary software that
allows the Company to monitor and integrate its distribution, order entry,
showroom, product management, purchasing, inventory control, shipping, and
accounts receivable systems. The Company uses a vendor purchased general ledger
accounting system. During fiscal 2000, the Company's completed the installation
of its vendor purchased retail purchasing and perpetual inventory systems. The
Company has installed radio frequency equipment in its wholesale warehouse and
showrooms to expedite order processing. Also during fiscal 2000, the Company
developed a digital image catalog of its wholesale inventory to assist and
expedite the sales process.
The Company has installed point-of-sale (POS) systems in all retail
locations to fully capture store transactions and provide updated data to its
purchasing staff and other corporate personnel, and for transfer into the
Company's accounting, merchandising and distribution systems.
COMPETITION
In its retail operations, the Company competes with other closeout
retailers, discount stores, deep discount drugstore chains, supermarkets and
other value-oriented specialty retailers. In its wholesale operations, the
Company competes with numerous national and regional wholesalers, retailers,
jobbers, dealers and others which sell many of the items sold by the Company.
Certain of these competitors have substantially greater financial resources and
wider distribution capabilities than those of the Company, and competition is
often intense. Competition is based primarily on product selection and
availability, price and customer service. The Company believes that by virtue of
its ability to make purchases of closeout, bulk and surplus items, its prices
compare favorably with those of its competitors.
In addition to competition in the sale of merchandise at wholesale and
retail, the Company encounters significant competition in locating and obtaining
closeout, overproduction and similar merchandise for its operations. There is
increasing competition for the purchase of such merchandise. However, the
Company believes that it will have sufficient sources to enable it to continue
purchasing such merchandise in the future.
TRADEMARKS
The Company has registered "Odd Job" and "Mazel's" as trademarks in the
United States. The Company has registered or has filed registration applications
for certain other trademarks and trade names.
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EMPLOYEES
At February 3, 2001, the Company had 2,283 employees. Retail employees
included 2,019 in direct retail and warehouse operations, and 93 in support
operations. Wholesale employees included 159 in direct wholesale, support and
warehouse operations. Corporate employees included 12 in general management and
administrative positions. The Company considers its relationship with its
employees to be good. Approximately 75 of the Company's Solon, Ohio hourly
warehouse employees are subject to a five-year collective bargaining agreement
that expires on December 31, 2004. Approximately 133 of the warehouse employees
in South Plainfield, New Jersey, are subject to a 48-month collective bargaining
agreement that expires on January 28, 2005. The Company is not a party to any
other labor agreements.
ITEM 2. PROPERTIES
The Company leases its office and warehouse and distribution facility
in Solon, Ohio from a corporation in which certain of the Company's executive
officers are minority owners. The Company currently occupies approximately
740,000 square feet at such facility, of which approximately 22,000 square feet
is used as office and showroom space and the remainder of which is used as
warehouse space for the Company's wholesale operations. The lease for the
facility, as amended, expires December 31, 2008. The wholesale operation ceased
to utilize a 113,000 square foot secondary facility in Solon, Ohio, when the
lease expired in March 2001. The Company leases a 535,000 square foot facility
in South Plainfield, New Jersey from a limited liability company which certain
of the Company's executive officers are minority owners. Housing the Company's
retail operations, approximately 510,000 square feet of the facility is utilized
by the warehouse and distribution operation, with the remainder used for office
space. The lease for the facility expires November 30, 2018. The Company
believes its facilities will be generally adequate for its retail and wholesale
operational requirements for the foreseeable future.
The Company leases its offices and showrooms in Columbus, Ohio, Chicago
and New York City. The Columbus lease expires on July 31, 2008, the Chicago
lease expires on October 21, 2002, and the New York City lease expires on
December 31, 2001.
The Company leases all of its stores. Store leases generally provide
for fixed monthly rental payments, plus the payment, in most cases, of real
estate taxes, utilities, liability insurance and common area maintenance. In
certain locations, the leases provide formulas requiring the payment of a
percentage of sales as additional rent. Such payments are generally only
required when sales reach a specified level. The typical store lease is for an
initial term of five or ten years, with certain leases having renewal options.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. The Company believes that the amount
of any ultimate liability with respect to all actions will not have a material
adverse effect on the Company's liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company and their ages as
of April 30, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Reuven D. Dessler 53 Chairman of the Board and Chief
Executive Officer
Brady Churches 42 President, Director
Jacob Koval 53 Executive Vice President - Wholesale,
Director
Jerry Sommers 50 Executive Vice President - Retail,
Director
Susan Atkinson 50 Senior Vice President - Chief Financial
Officer and Treasurer
Charles Bilezikian 64 Director
Phillip Cohen 82 Director
Robert Horne 42 Director
Mark Miller 48 Director
Ned L. Sherwood 51 Director
William A. Shenk 58 Director
Marc H. Morgenstern 51 Secretary
Reuven Dessler has been Chairman of the Board and Chief Executive
Officer of the Company since November 1996. Mr. Dessler co-founded the Company
in 1975 and served as its President until November 1996.
Brady Churches has served as the Company's President and a Director
since November 1996 and served as President - Retail from August 1995 until such
date. From 1978 until April 1995, Mr. Churches held various senior management
positions at Consolidated Stores, Inc., a large national retailer, including
President from August 1993 until April 1995.
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Jacob Koval has been Executive Vice President - Wholesale and a
Director of the Company since November 1996. Mr. Koval co-founded the Company in
1975.
Jerry Sommers has served as Executive Vice President - Retail of the
Company since November 1995, and as a Director since November 1996. From 1984
through April 1995, Mr. Sommers held various senior management positions with
Consolidated Stores, including Executive Vice President from August 1993 until
April 1995.
Susan Atkinson has served as Senior Vice President - Chief Financial
Officer and Treasurer of the Company since January 1993. From August 1988
through December 1992, she was employed by Harris Wholesale Company, a
pharmaceutical wholesaler, serving as Chief Financial Officer and Vice President
- - Finance/Administration from January 1991 until December 1992.
Charles Bilezikian, has served as Director since January 1997. Mr.
Bilezikian has been the President of Christmas Tree Shops, Inc., a specialty New
England retailer, since its formation in 1971.
Phillip Cohen has served as a Director of the Company since November
1996. 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.
Robert Horne has served as a Director of the Company since November
1996. Mr. Horne has been a principal of ZS Fund L.P., a Company engaged in
making private investments, for more than five years.
Mark Miller has served as a Director of the Company since November
1999. Mr. Miller has been the President of RedTagBiz.com, and Chief
Merchandising Officer of Boom Buy, Inc. since 2000. Previously, Mr. Miller was
Executive Vice President and Chief Operating Officer for the Home Products
Division of Value City Department Stores from July 1999 to July 2000, and
President of the Closeout Division of Consolidated Stores from the 1998
acquisition of MacFrugal's Bargain Close-out's, Inc. through March 1999. Mr.
Miller was MacFrugal's Executive Vice President of Merchandise and Stores from
1995 until the acquisition by Consolidated Stores.
William A. Shenk has been a private investor for over five years. Prior
thereto, Mr. Shenk served as an attorney in Columbus and as Vice President and
General Counsel for Consolidated Stores.
Ned L. Sherwood has served as a Director of the Company since November
1996. Mr. Sherwood has been a principal and President of ZS Fund L.P. for more
than five years. Mr. Sherwood is currently a member of the Board of Directors of
Kaye Group, Inc.
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Marc H. Morgenstern has served as Secretary of the Company since
November 1996. He has been a principal in the Cleveland, Ohio law firm of Kahn,
Kleinman, Yanowitz & Arnson Co., L.P.A. serving as President of the firm and
Chairman of its Executive Committee, for more than five years.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market sm under
the symbol "MAZL." The following table shows the quarterly high and low closing
sale prices of the Common Stock for the periods presented.
Fiscal Year 2000 Fiscal Year 1999
---------------- ----------------
Fiscal Quarter High Low High Low
-------------- -------- ------- ------- -------
First Quarter $11.375 $8.688 $14.000 $8.750
Second Quarter 9.625 8.250 10.875 8.875
Third Quarter 8.406 4.000 10.188 8.500
Fourth Quarter 5.125 2.250 9.813 8.938
As of April 30, 2001, the Company believes that there were 600
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 to finance
the expansion of its business and for general corporate purposes and 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 prohibits declaring or paying any dividends without
the prior written consent of the Lender.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented under the captions
Statement of Operations Data and Balance Sheet Data for the fiscal years ended
January 25, 1997, January 31, 1998, January 30, 1999, January 29, 2000, and
February 3, 2001 (fiscal years 1996, 1997, 1998, 1999, and 2000, respectively)
were derived from the consolidated financial statements of the Company. The
selected data referred to above should be read in conjunction with the
consolidated financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this filing.
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FISCAL YEAR
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PRO FORMA
AS ADJUSTED
1996 1996(1) 1997 1998 1999 2000
---- ------- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS):
Net sales $179,877 179,877 208,326 237,134 284,673 328,507
Cost of sales 121,382 121,382 136,446 152,792 178,705 214,316
Special charge -- -- -- -- -- 11,953
-------- ---------- ---------- ---------- ----------- --------
Gross profit 58,495 58,495 71,880 84,342 105,968 102,238
SG & A expense 45,802 44,567 55,839 71,643 93,251 116,690
Special charge 4,243 -- -- 1,387 -- 2,371
-------- ---------- ---------- ---------- ----------- --------
Operating profit (loss) 8,450 13,928 16,041 11,312 12,717 (16,823)
Interest expense (income) 2,254 (206) 943 2,062 2,795 4,305
Other expense (income) (34) (34) 662 627 (1,338) 240
-------- ---------- ---------- ---------- ----------- --------
Income (loss) before
income taxes 6,230 14,168 14,436 8,623 11,260 (21,368)
Income tax expense
(benefit) (1,987) 5,667 5,919 3,450 4,503 (8,334)
-------- ---------- ---------- ---------- ----------- --------
Net income (loss) $ 8,217 8,501 8,517 5,173 6,757 (13,034)
======== ========== ========== ========== =========== ========
Net income (loss) per share $ 0.93 $ 0.93 0.57 0.74 (1.43)
(basic)
Net income (loss) per share $ 0.91 $ 0.92 0.57 0.74 (1.43)
(diluted)
Shares outstanding (basic) 9,170,100 9,162,100 9,141,600 9,141,800 9,141,800
Shares outstanding (diluted) 9,386,000 9,265,400 9,146,800 9,154,700 9,141,800
BALANCE SHEET DATA
(DOLLARS IN THOUSANDS):
Working capital $ 44,473 44,473 55,862 53,960 65,522 58,426
Total assets 86,361 86,644 113,884 129,754 149,101 147,782
Long term debt 70 70 19,781 24,002 32,083 40,297
Total liabilities 21,599 21,599 41,045 51,724 64,314 76,029
Stockholders' equity and
partners' capital 64,762 65,045 72,839 78,030 84,787 71,753
SELECTED RETAIL OPERATIONS DATA:
Number of stores 23 32 47 64 79
Total square footage 336,905 466,716 689,750 943,545 1,236,610
Total store sales growth 40.2% 34.4% 38.0% 30.4% 17.6%
Comparable store net sales 15.8% 1.8% 0.1% 4.1% -4.8%
Avg. net sales per gross sqft $ 354 $ 294 $ 258 $ 257 $ 223
(1) Pro forma as adjusted data gives effect to the Company's initial public
offering (IPO) as of the beginning of the periods presented, and includes
the combination of: (i) the Mazel wholesale operations and (ii) the Odd Job
retail operations, as if the combination of entities had occurred at the
beginning of fiscal 1996. Pro forma as adjusted data excludes certain
non-recurring charges, and gives effect to the use of proceeds resulting
from the Company's IPO, as well as certain adjustments to compensation
expense.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company consists of two complementary operations: (i) a major regional
closeout retail business; and (ii) the nation's largest closeout wholesale
business. The Company sells quality, value-oriented consumer products at a broad
range of price points offered at a substantial discount to the original retail
or wholesale price. The Company's merchandise primarily consists of new,
frequently brand-name, products that are available to the Company for a variety
of reasons, including overstock positions of a manufacturer, wholesaler or
retailer; the discontinuance of merchandise due to a change in style, color,
shape or repackaging; a decrease in demand for a product through traditional
channels; or the termination of business by a manufacturer, wholesaler or
retailer.
The Company was founded in 1975 as a wholesaler of closeout merchandise. In
fiscal 1996, the Company purchased the established Odd Job retail business
(founded in 1974), consisting of 12 retail stores and a warehouse and
distribution facility, from an affiliate of ZS Fund L.P., a shareholder of the
Company. The Company's business strategy has expanded from a primary focus on
wholesale operations to an emphasis on the growth of its retail operations. The
Company opened 15 retail stores during fiscal 2000. At the end of fiscal 2000,
the Company operated 79 closeout retail stores, including 31 in New York (nine
of which are in Manhattan), 24 in New Jersey, eight in Ohio, seven in
Pennsylvania, four in Michigan, three in Connecticut, and one each in Delaware
and Kentucky. In fiscal 2001, the Company plans to open no new stores to allow
management to focus its efforts on improving the return on its existing retail
locations.
The growth of the Company's retail operations, coupled with the fiscal 1997
investment in VCM, Ltd., has transformed the Company into a "retailer", with
quarterly sales and earnings patterns similar to other retail operations.
In the fiscal 2000 fourth quarter, the Company's Board of Directors adopted a
strategic plan to focus the operations of the Company on increasing its return
on invested assets. The Company identified the increase of inventory turns as a
key facet of that initiative and to that end has realigned its targeted
inventory by department to include new categories and to discontinue other
categories or groups of items that do not meet its productivity standards in
both the retail and wholesale operation. As a result, the Company recorded a
special pre-tax charge totaling $14.3 million ($8.7 million after-tax, or $0.95
per share). Of the charge, $11.9 million related to inventory realignment and
was recorded to cost of sales, and $2.4 related to other non-recurring business
costs and was recorded to selling, general and administrative expense.
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17
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
The results of operations set forth below describe the Company's retail and
wholesale segments and the Company's combined corporate structure.
(Dollars in thousands, except per share data)
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Net Sales Amount Net Sales Amount Net Sales
Net sales
Retail $ 239,695 72.96% $ 203,799 71.59% $ 156,242 65.89%
Wholesale 88,812 27.04% 80,874 28.41% 80,892 34.11%
--------- ------ --------- ------ --------- ------
328,507 100.00% 284,673 100.00% 237,134 100.00%
Gross profit
Retail 85,506 35.67% 81,776 40.13% 61,153 39.14%
Wholesale 16,732 18.84% 24,192 29.91% 23,189 28.67%
--------- ------ --------- ------ --------- ------
102,238 31.12% 105,968 37.22% 84,342 35.57%
Segment operating (loss) profit
Retail (15,568) -6.49% 3,643 1.79% 2,231 1.43%
Wholesale (135) -0.15% 9,403 11.63% 9,600 11.87%
Corporate (1,120) -0.34% (329) -0.12% (519) -0.22%
--------- ------ --------- ------ --------- ------
(16,823) -5.12% 12,717 4.47% 11,312 4.77%
Interest expense, net 4,305 1.31% 2,795 0.98% 2,062 0.87%
Other (income) expense 240 0.07% (1,338) -0.47% 627 0.26%
Income tax (benefit) expense (8,334) -2.54% 4,503 1.56% 3,450 1,46%
--------- ------ --------- ------ --------- ------
Net (loss) income $ (13,034) -3.97% $ 6,757 2.37% $ 5,173 2.18%
========= ====== ========= ====== ========= ======
Net (loss) income per share
Basic $ (1.43) $ 0.74 $ 0.57
Diluted $ (1.43) $ 0.74 $ 0.57
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RETAIL SEGMENT
Fiscal 2000 Results versus Fiscal 1999
Net sales were $239.7 million for fiscal 2000, compared to $203.8 million for
fiscal 1999, an increase of $35.9 million, or 17.6%. The increase in net sales
was attributable to the full year impact of the 17 stores opened during fiscal
1999, and the partial year sales from the 15 stores opened during fiscal 2000.
Comparable store (47 stores for fiscal 2000) net sales decreased approximately
4.8%.
Gross profit was $85.5 million for fiscal 2000, compared to $81.8 million for
fiscal 1999. Excluding the special charge related to the write-down of inventory
($4.6 million) , gross profit was $90.1 million for fiscal 2000, an increase of
$8.3 million, or 10.1%. Excluding the special charge, gross margin decreased to
37.6% in fiscal 2000, from 40.1% in fiscal 1999, due primarily to higher shrink
results, higher levels of seasonal and other markdowns, and lower levels of
vendor allowances.
Selling, general and administrative expense reflects the four-wall cost of the
stores, the retail distribution facility, and administrative support. During
fiscal 2000, selling, general and administrative expense was $101.1 million,
compared to $78.1 million for fiscal 1999. Excluding the special charge ($1.0
million), selling, general and administrative expense was $100.1 million for
fiscal 2000, an increase of $22.0 million, or 28.1%. The increase resulted
primarily from a $17.6 million increase in store level expenses, attributable
mostly to the full year operation of 17 stores opened in fiscal 1999, and
expenses relating to the 15 stores opened during fiscal 2000, and advertising
expense, which increased $2.1 million primarily due to the larger store base and
the cost of additional circulars. Store level expenses include preopening costs,
which are expensed as incurred, and decreased $1.0 million to $2.1 million in
fiscal 2000. Warehouse costs increased $1.7 million, primarily due to higher
rent for additional occupied space, higher depreciation expense related to the
completed racking and automation project, and higher levels of normal operating
expenses due to the higher level of shipments in support of the larger store
base. Administrative support expenses increased $2.7 million, reflecting
increased training and store operations expense, higher professional fees, and
increased depreciation expense related to the purchasing and inventory systems
implemented in mid-fiscal 2000. Selling, general and administrative expense
excluding the special charge, as a percentage of net sales, increased to 41.7%
in fiscal 2000, from 38.3% in fiscal 1999.
The operating loss was $15.6 million for fiscal 2000. Excluding the special
charge, the operating loss was $10.0 million, or -4.2% of sales, for fiscal
2000, compared to an operating profit of $3.6 million, or 1.8% of sales, for
fiscal 1999. This decrease was primarily due to the factors described above.
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Fiscal 1999 Results versus Fiscal 1998
Net sales were $203.8 million for fiscal 1999, compared to $156.2 million for
fiscal 1998, an increase of $47.6 million, or 30.4%. The increase in net sales
was attributable to the increase in comparable store sales, the full year impact
of the 15 stores opened during fiscal 1998, and the partial year sales from the
17 stores opened during fiscal 1999. Comparable store (32 stores for fiscal
1999) net sales increased approximately 4.1%.
Gross profit was $81.8 million for fiscal 1999, compared to $61.2 million for
fiscal 1998, an increase of $20.6 million, or 33.7%. Gross margin increased to
40.1% in fiscal 1999, from 39.1% in fiscal 1998, due primarily to higher initial
product markup and vendor allowances, partially offset by higher inventory
shrink results.
Selling, general and administrative expense for fiscal 1999 was $78.1 million,
compared to $57.5 million for fiscal 1998, an increase of $20.6 million, or
35.8%. The increase resulted primarily from a $17.2 million increase in store
level and distribution costs, attributable mostly to the full year operation of
15 stores opened in fiscal 1998, plus expenses relating to the 17 stores opened
during fiscal 1999. Preopening costs totaled $3.1 million in fiscal 1999,
compared to $1.9 million in fiscal 1998. Also included in store level costs is
advertising expense, which increased $1.2 million primarily due to the larger
store base and the cost of additional circulars. Warehouse costs increased $2.2
million, primarily due to the higher level of shipments in support of the larger
store base, and continued start-up inefficiencies based on the relocation to the
current facility in the fiscal 1998 third quarter. Administrative support
expenses increased $3.4 million, reflecting added support personnel costs and
higher levels of incentive based compensation, legal expenses and merchandise
contributions. Selling, general and administrative expense also includes
approximately $200,000 for ongoing costs of the former warehouse and
distribution facility. Selling, general and administrative expense, as a
percentage of net sales, increased to 38.3% in fiscal 1999, from 36.8% in fiscal
1998.
Operating profit was unchanged at $3.6 million for fiscal 1999 and 1998. As a
percentage of net sales, operating profit decreased to 1.8% from 2.3%. This
decrease was primarily due to the factors described above.
WHOLESALE SEGMENT
Fiscal 2000 Results versus Fiscal 1999
Net sales were $88.8 million for fiscal 2000, compared to $80.9 million for
fiscal 1999, an increase of $7.9 million, or 9.8%.
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20
Gross profit was $16.7 million for fiscal 2000, compared to $24.2 million for
fiscal 1999. Excluding the special charge related to the write-down of inventory
($7.4 million) , gross profit was $24.1 million for fiscal 2000. Gross margin
excluding the special charge declined to 27.2% in fiscal 2000, from 29.9% in
fiscal 1999. The decrease in gross margin was due primarily to the higher
percentage of lower-margin dropship sales to total sales, and a reduction in
gross margin from warehouse shipments.
Selling, general and administrative expense was $16.9 million for fiscal 2000,
compared to $14.8 million for fiscal 1999. Excluding the special charge ($1.0
million), selling, general and administrative expense was $15.9 million for
fiscal 2000, an increase of $1.1 million, or 7.3%. The increase includes higher
levels of warehouse expense, sales salary and commissions expenses related to
the larger sales base, and administrative salary expense. As a percentage of net
sales, selling, general administrative expense excluding the special charge
decreased to 17.9% in fiscal 2000, from 18.3% in fiscal 1999.
Wholesale operating loss was $135,000 for fiscal 2000, compared to operating
profit of $9.4 million for fiscal 1999. Excluding the special charge, wholesale
operating profit was $8.3 million for fiscal 2000, a decrease of $1.1 million,
or 12.0%. As a percentage of net sales, operating profit excluding the special
charge decreased to 9.3% in fiscal 2000, from 11.6% in fiscal 1999, due to the
factors described above.
Fiscal 1999 Results versus Fiscal 1998
Net sales were unchanged at $80.9 million for fiscal 1999 and 1998. However,
excluding sales to the former largest customer that was acquired by a competitor
in 1998, sales increased 24.9%.
Gross profit was $24.2 million for fiscal 1999, compared to $23.2 million for
fiscal 1998, an increase of $1.0 million, or 4.3%. The increase in gross profit
was due to a strong deal flow. Gross margin improved to 29.9% in fiscal 1999,
from 28.7% in fiscal 1998.
Selling, general and administrative expense was $14.8 million for fiscal 1999,
compared to $13.6 million for fiscal 1998, an increase of $1.2 million, or 8.8%.
The increase includes higher rent expense, incentive based compensation, sales
commissions and bad debt expense. As a percentage of net sales, selling, general
and administrative expense increased to 18.3% in fiscal 1999, from 16.8% in
fiscal 1998.
Wholesale operating profit was $9.4 million for fiscal 1999, compared to $9.6
million for fiscal 1998, a decrease of $197,000, or 2.1%. As a percentage of net
sales, operating profit decreased to 11.6% in fiscal 1999, from 11.9% in fiscal
1998, due to the factors described above.
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21
CORPORATE EXPENSES AND SPECIAL CHARGES
Fiscal 2000 Results versus Fiscal 1999
Corporate expenses consist of the cost of senior management and shared
administrative resources which are utilized by both segments of the business.
Corporate expense also includes management fee revenue received from VCM, Ltd.,
the 50% owned joint venture with Value City Department Stores, Inc., and other
buying commissions. Corporate expense was $1.1 million for fiscal 2000, compared
to $329,000 for fiscal 1999. Excluding the special charge, corporate expense was
$745,000, with the increase due primarily to higher professional fees, partially
offset by higher VCM management fee revenue, which increased to $4.2 million for
fiscal 2000, from $3.4 million in fiscal 1999, and higher buying commissions.
Corporate expenses for fiscal 2000 also included the write-off of a $500,000
investment related to certain business-to-business Internet developments. As a
result, net corporate expense excluding the special charge increased as a
percentage of total Company sales to 0.2% in fiscal 2000 from 0.1% in fiscal
1999.
In the fiscal 2000 fourth quarter, the Company's Board of Directors adopted a
strategic plan to focus the operations of the Company on increasing its return
on invested assets. The Company identified the increase of inventory turns as a
key facet of that initiative and to that end has realigned its targeted
inventory by department to include new categories and to discontinue other
categories or groups of items that do not meet its productivity standards in
both the retail and wholesale operation. As a result, the Company recorded a
special pre-tax charge totaling $14.3 million ($8.7 million after-tax, or $0.95
per share). Of the charge, $11.9 million related to inventory realignment and
was recorded to cost of sales, and $2.4 related to other non-recurring business
costs and was recorded to selling, general and administrative expense.
Interest expense was $4.3 million for fiscal 2000, compared to $2.8 million for
fiscal 1999, reflecting higher average borrowings primarily in support of retail
store growth. Other (loss) income comprised the Company's 50% equity share in
VCM. Ltd., which generated a net loss of $0.2 million for fiscal 2000 compared
to a net profit of $1.3 million for fiscal 1999. This decline was due in part
to higher levels of shrink and more aggressive markdown initiatives.
Fiscal 1999 Results versus Fiscal 1998
Corporate expense was $329,000 for fiscal 1999, compared to $519,000 for fiscal
1998. The decrease was due primarily to higher VCM management fee revenue, which
increased to $3.4 million for fiscal 1999, from $3.1 million in fiscal 1998. As
a result, net corporate expense decreased as a percentage of total Company sales
to 0.1% in fiscal 1999 from 0.2% in fiscal 1998.
Special charge for fiscal 1998 totaling $1.4 million resulted from the
relocation of the Company's retail warehouse and distribution facility to South
Plainfield, New Jersey. The charges reflect the estimated costs of exiting the
former retail warehouse located in Englewood, New Jersey, and related long-lived
asset write-offs and employee severance.
21
22
Interest expense was $2.8 million for fiscal 1999, compared to $2.1 million for
fiscal 1998, reflecting higher average borrowings primarily in support of retail
store growth. Other income was $1.3 million for fiscal 1999, comprising the
Company's 50% equity share in VCM. Ltd. Other expense was $627,000 for fiscal
1998, which includes VCM net loss of $477,000 and a $150,000 charge relating to
contingent obligations for retail operations disposed of in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of inventory purchases,
expenditures related to new store openings, existing store remodeling, warehouse
enhancements, MIS initiatives, and other working capital needs. The Company
takes advantage of closeout and other special situation purchasing opportunities
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's high level of
committed credit allows it to take immediate advantage of special situation
purchasing opportunities.
The Company's growth has been financed through cash flow from operations,
borrowings under its revolving credit facility and the extension of trade
credit. The Company currently has a $50.0 million revolving line of credit and a
$4.0 million term loan, expiring on November 15, 2002. The revolving line of
credit increases to $60.0 million from May 1 to December 31 to provide for
increased seasonal inventory levels. The term loan requires quarterly payments
of $500,000 plus accrued interest. Borrowings under the facility bear interest,
at the Company's option, at either the banks' prime rate less 50 basis points or
LIBOR plus a spread. Availability on the facility is the lesser of the total
credit commitment or a borrowing base calculation based upon the Company's
accounts receivable and inventories. At fiscal 2000 year-end , the Company had
$11.7 million available under the facility. The facility contains restrictive
covenants which require minimum net worth levels, maintenance of certain
financial ratios and limitations on capital expenditures and investments.
Primarily as a result of the special charge recorded in the fiscal 2000 fourth
quarter, the Company was in violation of certain financial covenants at fiscal
2000 year-end. In April 2001, the Company finalized an agreement on the terms of
an amendment and restatement of its revolving credit facility that includes
modification of such covenants as of fiscal 2000 year-end. The Company expects
to execute a definitive document in the next few weeks. The agreement provides
for payment of an amendment fee of 50 basis points of the face amount, an
increase in the interest rate (to prime plus 100 basis points) on the revolving
credit facility, and an increase in the interest rate (to 25%) on the amortizing
term loan. Additional fees, increases in interest rates, and the issuance of
warrants exercisable at $0.01 per share for up to 10% of the Company will be
incurred if the Company fails to obtain a commitment to replace the current
revolving credit facility or raise $10.0 million in subordinated capital by
July 1, 2001 and finalized such commitment by August 1, 2001. The Company
believes that the proposed amended and restated credit facility and cash
flow from operations will be sufficient to fund operating activities and other
obligations through the next twelve months. The Company is actively seeking new
credit arrangements and other capital, and is currently in discussions with
several alternate financial institutions. There can be no assurance that the
Company will be able to find replacement capital on acceptable terms.
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23
For fiscal years 2000 and 1999, cash provided by operating activities was $2.7
million and $3.9 million, respectively. For fiscal 2000, cash provided was
comprised primarily of lower inventory ($16.4 million), higher accounts payable
($2.0 million), higher accrued expenses and other liabilities ($1.5 million),
and depreciation and amortization ($6.5 million), offset by the net loss ($4.3
million, excluding the special charge), higher deferred tax assets ($5.8
million), and higher accounts and notes receivable ($3.6 million). For fiscal
1999, cash provided was comprised primarily of net income ($6.8 million), higher
accrued expenses and other liabilities ($4.4 million), and depreciation and
amortization ($4.1 million), offset by higher inventory ($9.4 million) and
higher accounts receivable ($1.3 million). Cash used in investing activities
decreased to $11.0 million in fiscal 2000, from $11.3 million in fiscal 1999.
Cash provided by financing activities of $8.2 million for fiscal 2000 and $8.1
million for fiscal 1999 was the result of net borrowings from the Company's
credit facility.
Total assets were $147.8 million and $149.1 million at the end of fiscal year's
2000 and 1999, respectively. Working capital decreased to $58.4 million in
fiscal 2000, from $65.5 million at the prior year end, due primarily to the
effect of the special charge on inventory, accounts receivable, and accrued
expenses. The current ratio was 2.8 to 1 at fiscal 2000 year end, compared to
3.2 to 1 at fiscal year-end 1999. Net fixed assets were $30.5 million at the end
of fiscal 2000, an increase of $5.4 million over the prior year, primarily
related to capital expenditures for new stores, and improvements at existing
stores and the retail warehouse and distribution facility.
The Company has previously announced that it will open no new stores in fiscal
2001, having elected to focus management efforts on the return of the existing
stores.
SEASONALITY
The Company, with the growth of its retail operations and the retail orientation
of the VCM, Ltd. joint venture, has shifted its business mix more toward retail.
This shift has and will continue to effect the net sales and earnings pattern of
the Company, with a greater weighting toward the second half of the fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
Effective February 4, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments."
SFAS No. 133, was amended by SFAS N0. 138, "Accounting for Derivative
Instruments and Hedging
23
24
Activities, An Amendment of SFAS No. 133." SFAS No. 133 as amended by SFAS No.
138 requires that derivative instruments be measured at fair value and be
recorded as assets and liabilities on the balance sheet. The adoption of SFAS
No. 133 as amended by SFAS No 138 will not have a material effect on the
Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Reform Act of 1995. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to: (i) the Company's execution of
final documentation for the proposed amendment and restatement of its existing
credit facility and the obtainment of satisfactory financing alternatives, (ii)
the Company's execution of a plan to return its retail stores to profitability;
(iii) the ability to purchase sufficient quality closeout merchandise at
acceptable terms, (iv) the profitability of both the wholesale division and the
VCM joint venture; (v) the ability of the Company to attract and retain
qualified management and store personnel; and (vi) the seasonal nature of the
Company's retail operations. Please refer to the Company's subsequent SEC
filings under the Securities Exchange Act of 1934, as amended, for further
information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item (other than the information
regarding executive officers set forth at the end of Item 4(a) of Part I of this
Form 10-K) will be contained in the Company's definitive Proxy Statement for its
2001 Annual Meeting of Shareholders, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
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26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of February 3, 2001 and
January 29, 2000.
Consolidated Statements of Operations for the Fiscal Years
Ended February 3, 2001, January 29, 2000, and January 30,
1999.
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended February 3, 2001, January 29, 2000, and
January 30, 1999.
Consolidated Statements of Cash Flows for the Fiscal Years Ended
February 3, 2001, January 29, 2000, and January 30, 1999.
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules:
Schedule II - Valuation of Qualifying Accounts
(a) (3) Exhibits
See the Index to Exhibits included on page 47.
(b) Reports on Form 8-K
None
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mazel Stores, Inc.:
We have audited the consolidated financial statements of Mazel Stores, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
and subsidiaries as of February 3, 2001 and January 29, 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended February 3, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Cleveland, Ohio
March 19, 2001, except as to note 3, which is as of April 19, 2001
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MAZEL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
February 3, January 29,
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 2,318 2,367
Receivables, less allowance for doubtful
accounts of $408 in both periods 14,769 13,784
Income tax receivable (note 6) 2,625 --
Notes and accounts receivable-related parties (notes 4 and 13) 7,432 3,929
Inventories 53,778 70,178
Prepaid expenses 1,805 1,584
Deferred income taxes (note 6) 8,863 4,112
-------- -------
Total current assets 91,590 95,954
Equipment, furniture, and leasehold improvements, net (note 2) 30,479 25,082
Other assets 3,961 3,959
Investment in VCM, Ltd. (note 13) 9,421 9,687
Notes and accounts receivable-related parties (note 4) -- 2,838
Goodwill, net 9,761 10,074
Deferred income taxes (note 6) 2,570 1,507
-------- -------
$147,782 149,101
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (note 3) $ 2,017 2,017
Accounts payable 22,763 20,769
Accrued expenses and other current liabilities (note 9) 8,384 7,646
-------- -------
Total current liabilities 33,164 30,432
Revolving line of credit (note 3) 35,769 25,542
Long-term debt, net of current portion (note 3) 2,511 4,524
Other liabilities 4,585 3,816
-------- -------
Total liabilities 76,029 64,314
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, no par value; 14,000,000 shares authorized;
9,141,800 shares issued and
outstanding, respectively 64,320 64,320
Retained earnings 7,433 20,467
-------- -------
Total stockholders' equity 71,753 84,787
Commitments and contingencies (note 7) $147,782 149,101
======== =======
See accompanying notes to consolidated financial statements
28
29
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended
--------------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Net sales $ 328,507 284,673 237,134
Cost of sales 214,316 178,705 152,792
Special charge (note 9) 11,953 -- --
----------- ---------- ----------
Gross profit 102,238 105,968 84,342
Selling, general, and administrative expense 116,690 93,241 71,643
Special charge (note 9) 2,371 -- 1,387
----------- ---------- ----------
Operating (loss) profit (16,823) 12,717 11,312
Other income (expense)
Interest expense, net (4,305) (2,795) (2,062)
Other (note 13) (240) 1,338 (627)
----------- ---------- ----------
(Loss) income before income taxes (21,368) 11,260 8,623
Income tax (benefit) expense (note 6) (8,334) 4,503 3,450
----------- ---------- ----------
Net (loss) income $ (13,034) 6,757 5,173
=========== ========== ==========
Net (loss) income per share (note 14)
As reported - basic $ (1.43) 0.74 0.57
As reported - diluted $ (1.43) 0.74 0.57
Average shares outstanding - basic 9,141,800 9,141,800 9,141,600
Average shares outstanding - diluted 9,141,800 9,154,700 9,146,800
See accompanying notes to consolidated financial statements
29
30
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Common Common Retained
Shares Stock Earnings Total
------ ----- -------- -----
Balance as of January 31, 1998 9,144,200 64,302 8,537 72,839
Stock retirement (3,800) (4) -- (4)
Sale of common shares 1,400 22 -- 22
Net income -- -- 5,173 5,173
-------- -------- -------- --------
Balance as of January 30, 1999 9,141,800 64,320 13,710 78,030
Net income -- -- 6,757 6,757
-------- -------- -------- --------
Balance as of January 29, 2000 9,141,800 64,320 20,467 84,787
Net loss -- -- (13,034) (13,034)
-------- -------- -------- --------
Balance as of February 3, 2001 9,141,800 $ 64,320 $ 7,433 $ 71,753
======== ======== ======== ========
See accompanying notes to consolidated financial statements
30
31
MAZEL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Fiscal Year Ended
---------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net (Loss) income $(13,034) 6,757 5,173
Adjustments to reconcile net (loss) income
to net cash provided by operating activities
Depreciation and amortization 6,508 4,130 2,514
Deferred income taxes (5,814) (478) (812)
Equity in net (income) loss from VCM, Ltd. 266 (1,286) 478
Other non-cash activity -- -- (4)
Changes in operating assets and liabilities
Receivables (4,275) (1,301) 2,799
Inventories 16,400 (9,389) (7,113)
Prepaid expenses (221) 1,556 (705)
Other assets (589) 665 (3,178)
Accounts payable 1,994 (1,113) 6,279
Accrued expenses and other liabilities 1,507 4,381 179
-------- ------- -------
Net cash provided by operating activities 2,742 3,922 5,610
-------- ------- -------
Cash flows from investing activities:
Capital expenditures 11,005 (11,079) (8,155)
Cash paid for lease acquisitions -- (225) (1,270)
-------- ------- -------
Net cash used in investing activities (11,005) (11,304) (9,425)
-------- ------- -------
Cash flows from financing activities:
Repayment of debt (74,697) (63,060) (70,534)
Net borrowings under credit facility 82,911 71,141 74,755
Net proceeds from sale of common shares -- -- 22
-------- ------- -------
Net cash provided by financing activities 8,214 8,081 4,243
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (49) 699 428
Cash and cash equivalents at beginning of year 2,367 1,668 1,240
-------- ------- -------
Cash and cash equivalents at end of year $ 2,318 2,367 1,668
======== ======= =======
Supplemental disclosures
Cash paid for interest $ 4,180 2,722 2,085
Cash paid for income taxes $ 2,100 3,230 4,892
======== ======= =======
See accompanying notes to consolidated financial statements
31
32
MAZEL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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) the nation's largest
closeout wholesale business. The Company sells quality,
value-oriented consumer products at a broad range of price points
offered at a substantial discount to the original retail or
wholesale price. The Company operates a chain of 79 closeout retail
stores, including 31 in New York (nine of which are in Manhattan),
24 in New Jersey, eight in Ohio, seven in Pennsylvania, four in
Michigan, three in Connecticut, and one each in Kentucky and
Delaware.
(B) PRINCIPLES OF CONSOLIDATION
The financial statements of the Company are presented on a
consolidated basis to reflect the economic substance of activities
arising from their common management and control. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(C) 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.
(D) INVENTORIES
Wholesale inventories are valued at the lower of cost or market,
with cost determined by the first-in, first-out (FIFO) method, and
retail inventories are valued by use of the retail method.
(E) 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, extending to the life of the related
lease. The rates so determined are applied on a straight-line basis.
32
33
(F) 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.
At February 3, 2001 and January 29, 2000, accumulated amortization
amounted to $1,608 and $1,294, respectively.
(G) INCOME TAXES
The Company accounts for income taxes by the asset and liability
method. Under this method, 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 the period that includes the enactment date.
(H) ADVERTISING
The Company expenses advertising costs as incurred. Advertising
expense was $6,377, $4,225, and $3,107, for the fiscal years ended
February 3, 2001, January 29, 2000, and January 30, 1999,
respectively.
(I) FISCAL YEAR
The Company follows the reporting calendar as published by the
National Retail Federation. Fiscal years 2000, 1999, and 1998 are
defined as the fiscal years ended February 3, 2001, January 29,
2000, and January 30, 1999, respectively. Fiscal 2000 was a 53-week
year and fiscal years 1999 and 1998 were 52-week years.
(J) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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
33
34
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(K) RECLASSIFICATIONS
Certain reclassifications were made to the Company's prior period
financial statements to conform to the February 3, 2001
presentation.
(L) REVENUE RECOGNITION
Revenue from product sales is recognized when the related goods are
sold through the Company's retail chain, or shipped to the Company's
wholesale customers and all significant obligations have been
satisfied.
(2) EQUIPMENT, FURNITURE, AND LEASEHOLD IMPROVEMENTS
The major classes of equipment, furniture, leasehold improvements, and
construction in progress are summarized at cost, as follows:
February 3, January 29,
2001 2000
----------- -----------
Equipment and furniture $ 23,660 15,058
Leasehold improvements 20,919 15,969
Construction in progress 280 2,924
-------- ------
44,859 33,951
Less accumulated depreciation and amortization 14,380 8,869
-------- ------
$ 30,479 25,082
======== =======
(3) LONG-TERM DEBT
The Company's long-term debt as of February 3, 2001 and January 29, 2000
consisted of the following:
February 3, January 29,
2001 2000
----------- -----------
Revolving credit facility $ 35,769 25,542
Term debt 4,528 6,541
Less current portion (2,017) (2,017)
-------- -------
$ 38,280 30,066
======== =======
The Company currently has a $50,000 revolving line of credit and a $4,000
term loan. The revolving line of credit increases to $60,000 from May
through December annually. The credit facility is secured by substantially
all of the Company's assets and expires on November 15, 2002. The term
debt requires quarterly payments of $500 plus accrued interest. Borrowings
under the facility bear interest, at the Company's option, at the banks'
prime rate less 50 basis points or LIBOR plus a spread, and are subject to
a commitment fee on the unused portion. The weighted-average interest rate
was 8.0% at both February 3, 2001 and January 29, 2000. Availability on
the facilities is the lesser of the total credit commitment or a borrowing
base calculation based primarily on the Company's accounts receivable and
inventories. At fiscal year-end 2000 and 1999, the Company had
availability under the credit facility of $11.7 million and $20.1 million,
respectively.
The facility contains restrictive covenants that require minimum net
worth levels, maintenance of certain financial ratios, and limitations on
capital expenditures and investments. Primarily as a result of the
special charge recorded in the fiscal fourth quarter, the Company was in
violation of certain financial covenants at February 3, 2001. In April
2001, the Company finalized an agreement on the terms of an amendment and
restatement of its revolving credit facility that includes modification
of such covenants as of February 3, 2001. The Company expects to execute
a definitive document in the next few weeks. The agreement provides for
payment of an amendment fee of 50 basis points of the face amount, an
increase in the interest rate (to prime plus 100 basis points) on the
revolving credit facility, and an increase in the interest rate (to 25%)
on the amortizing term loan. Additional fees, increases in interest
rates, and the issuance of warrants exercisable at $0.01 per share for up
to 10% of the Company will be incurred if the Company fails to obtain a
commitment to replace the current revolving credit facility or raise
$10.0 million in subordinated capital by July 1, 2001 and finalized such
commitment by August 1, 2001. The Company believes that the proposed
amended and restated credit facility and cash flow from operations will
be sufficient to fund operating activities and other obligations through
the next twelve months. The Company is actively seeking new credit
arrangements and other capital, and is currently in discussions with
several alternate financial institutions. There can be no assurance that
the Company will be able to find replacement capital on acceptable terms.
34
35
(4) RELATED PARTY TRANSACTIONS
As of February 3, 2001 and January 29, 2000, tax loans to certain key
executives relating 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 IPO totaled $2,864 and $2,822, respectively. Such
amounts include accrued interest of $551 and $415, respectively at a rate
of 6.6 percent. These loans are due in fiscal 2001, and thus are recorded
as a current asset at February 3, 2001.
(5) 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.
35
36
(6) INCOME TAXES
Income tax expense attributable to income from operations is as follows:
Fiscal Year Ended
-------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Federal
Current $ (2,625) 4,012 3,819
Deferred (4,167) (25) (772)
-------- ------ ------
(6,792) 3,987 3,047
State and local
Current 105 520 443
Deferred (1,647) (4) (40)
-------- ------ ------
(1,542) 516 403
-------- ------ ------
$ (8,334) 4,503 3,450
======== ====== ======
The income tax expense differed from the "expected" amount computed by
applying the U.S. federal tax rate of 35 percent to pretax income from
operations as a result of the following:
Fiscal Year Ended
-------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Computed "expected" tax expense $ (7,479) 3,941 3,018
Corporate state and local taxes,
net of federal benefit (1,002) 338 262
Other 147 224 170
-------- ------ ------
$ (8,334) 4,503 3,450
======== ====== ======
36
37
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
February 3, January 29,
2001 2000
----------- -----------
Deferred tax assets
Current
Inventory capitalization and reserve $ 5,840 2,335
Accrued expenses 1,445 581
Other 1,578 1,196
-------- ------
8,863 4,112
Noncurrent
Equipment, furniture, and leasehold
improvements basis differences 806 1,414
Accrued lease obligations 1,841 1,128
Net operating loss carryforward - state 1,039 --
-------- ------
3,686 2,542
Total gross deferred tax assets 12,549 6,654
Noncurrent deferred tax liabilities - goodwill (1,116) (1,035)
-------- ------
Net deferred tax asset $ 11,433 5,619
======== ======
At February 3, 2001, state net operating losses totaling $13,335 will be
carried forward to offset state taxable income in future years. The loss
carryforward period varies by state, but will expire in a range of seven
to 20 years.
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 that the tax benefits
will be realized; consequently, no valuation allowance has been
established as of February 3, 2001 and January 29, 2000.
37
38
(7) 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 2018. 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.
Three of the lessors are organizations that certain executives of the
Company have a minority ownership interest.
At February 3, 2001, minimum annual rental commitments under
noncancellable leases for the Company as a whole are as follows, for
the fiscal year ending:
2001 $ 18,710
2002 17,585
2003 15,956
2004 15,194
2005 14,237
Thereafter 40,046
---------
$ 121,728
=========
Rent expense under all operating leases for the fiscal years ended
February 3, 2001, January 29, 2000, and January 30, 1999 was
$20,467, $16,203, and $13,006, respectively. These amounts include
rent paid to a related party lessor of $2,080, $1,892, and $1,967,
respectively, and contingent rentals of $234, $213, and $286,
respectively.
(B) LETTERS OF CREDIT
The $50,000 revolving line of credit includes a letter of credit
facility totaling $15,000 for use in the normal operations of the
business. At February 3, 2001 and January 29, 2000, the Company had
outstanding letters of credit issued to various parties aggregating
$2,536 and $4,345, respectively.
(C) CONTINGENT SUBORDINATED NOTES
The Company has two subordinated notes due to a former owner of a
retail store acquired in December 1995. Both notes mature on
December 31, 2002. Payments are to be made annually to a maximum of
$675 and $275, based on the store's profits, as defined. No amounts
have been paid or are payable on these notes through February 3,
2001.
38
39
(D) LITIGATION
At February 3, 2001, 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.
(8) RETIREMENT AND SAVINGS PLAN (DOLLARS AS STATED)
The Company maintains separate contributory savings plans, under Section
401(k) of the Internal Revenue Code, for its non-union and union employees
who meet certain age and service requirements. In early fiscal 1998, the
Company amended its Section 401(k) plan covering non-union employees. The
Company's contribution for the non-union plan is equal to 25 percent of
employee contributions up to three percent of employee compensation, with
the Company's contributions vesting ratably over five years. The Company
contribution to the union plan is equal to 25 percent of the employee
contributions, to an annual per employee maximum of $350 in 2000 and $325
in 1999, and vests immediately. Contributions to these plans by the
Company were $161,000, $78,000, and $40,000 for fiscal years 2000, 1999,
and 1998, respectively.
(9) SPECIAL CHARGE
In the fiscal 2000 fourth quarter, the Company's Board of Directors
adopted a strategic plan to focus the operations of the Company on
increasing its return on invested assets. The Company identified the
increase of inventory turns as a key facet of that initiative and to that
end has realigned its targeted inventory by department to include new
categories and to discontinue other categories or groups of items that do
not meet its productivity standards in both the retail and wholesale
operation. As a result, the Company recorded a special pre-tax charge
totaling $14.3 million ($8.7 million after-tax, or $0.95 per share). Of
the charge, $11.9 million related to inventory realignment and was
recorded to cost of sales, and $2.4 related to lease terminations and the
write-down of other assets was recorded to selling, general and
administrative expense. At February 3, 2001, $1,371 is included in accrued
expenses and other current liabilities related to special charges to be
expended in the next fiscal year.
Special charges for the fiscal year ended January 30, 1999 resulted from
the relocation of the Company's retail warehouse and distribution facility
to South Plainfield, New Jersey. The charges totaling $1,387 reflect the
estimated costs of exiting the former retail warehouse located in
Englewood, New Jersey, and related long-lived asset write-offs and
employee severance.
39
40
(10) 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. The Stock
Option Plan, which was amended with a shareholder vote at the 1998
Annual Meeting of Shareholders, increased the shares for issuance by
600,000 to 1,500,000 stock options ("Options") to acquire common
stock of the Company. Pursuant to the provisions of the Stock Option
Plan, employees of the Company may be granted Options, including
both incentive stock options and nonqualified stock options
("NQSO"). Consultants may receive only NQSO under the Stock Option
Plan. Non-employee directors automatically receive, upon 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 at the grant date. The Options typically vest in
five equal annual installments of 20 percent of the grant, and have
a term of 10 years.
The Company applies the intrinsic value method to account for stock
based compensation. Accordingly, no compensation expense has been
recognized. The following table provides net income and net income
per share reduced to the pro forma amounts calculating compensation
expense consistent with the fair value method. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in the fiscal years ended
February 3, 2001, January 29, 2000, and January 30, 1999,
respectively: expected volatility of 75 percent for fiscal year
2000, 50 percent for fiscal year 1999, and 40 percent for fiscal
year 1998, risk-free interest rates of 5.1, 6.7, and 5.0 percent and
expected lives of 7.7, 7.7, and 8.2 years, respectively, and a
dividend yield of zero percent for all fiscal years.
Fiscal Year Ended
-------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Net (loss) income
As reported $(13,034) 6,757 5,173
Pro forma (13,279) 6,381 4,907
Basic net (loss) income per share
As reported $ (1.43) 0.74 0.57
Pro forma (1.45) 0.70 0.54
Diluted net (loss) income per share
As reported $ (1.43) 0.74 0.57
Pro forma (1.45) 0.70 0.54
40
41
The above results may not be representative of the effect of the
fair value method on net income for future years.
The following is a summary of option activity for the fiscal years
ended February 3, 2001 and January 29, 2000 and related
weighted-average exercise price:
February 3, 2001 January 29, 2000
---------------------------- --------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
--------- -------------- -------- --------------
Outstanding at beginning of fiscal year 1,157,780 $ 14.30 926,125 $ 15.85
Granted at market 550,100 4.94 271,650 9.04
Exercised - - - - -
Expired or forfeited (99,875) 13.70 (39,995) 14.37
--------- ------- --------- -------
Outstanding at end of fiscal year 1,608,005 $ 11.12 1,157,780 $ 14.30
========= ======= ========= =======
Options available for grant at end of year - 342,220
Weighted average fair value of options
granted during the year $1.30 $4.77
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted Avg. Weighted Weighted
No. of Remaining Avg. No. of Avg.
Options Contractual Exercise Options Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- ---------
Range of exercise prices:
Fiscal year 1996 grants at $16.00 611,775 5.80 $16.00 489,420 $16.00
Fiscal year 1997 grants at $13.87-25.75 31,000 6.66 16.83 18,600 16.83
Fiscal year 1998 grants at $10.00-17.50 177,880 6.28 15.22 71,152 15.22
Fiscal year 1999 grants at $9.00-9.63 237,250 7.49 9.05 47,450 9.05
Fiscal year 2000 grants at $2.50-9.250 550,100 9.66 4.94 -- --
--------- ------ ------ ------- ------
1,608,005 7.67 $11.12 626,622 $15.41
========= ====== ====== ======= ======
(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. At February 3, 2001, all
shares of common stock issued in The Restricted Stock Plan were
vested. In fiscal 1996, the Company recorded compensation expense,
in accordance with the vesting provisions of the Restricted Stock
Plan, that represents the difference between the purchase price and
the fair value at the grant date as established by an independent
appraisal.
41
42
(11) BUSINESS SEGMENT INFORMATION
The Company's business segments are: retail, wholesale and corporate. Both
retail and wholesale purchase quality, frequently brand name,
value-oriented consumer products. Retail sells its product through its
store chain (79 stores at fiscal 2000 year-end) while wholesale sells to
retailers, including the Company's retail operation, other wholesalers,
and distributors. Corporate includes shared administrative expenses net of
management fee revenue from VCM, Ltd. and other buying commission.
Summarized financial information by business segment as of the fiscal
years ended February 3, 2001, January 29, 2000, and January 30, 1999 is as
follows:
Capital Depreciation
Operating Total Expen- and
Net Sales (Loss) Profit Assets ditures Amortization
--------- ------------- ------ ------- ------------
February 3, 2001
Retail $ 239,695 (15,568) 86,155 10,244 5,966
Wholesale 97,549 (135) 47,672 761 542
Intersegment sales (8,737)
Corporate -- (1,120) 13,955 -- --
--------- -------- ------- ------ -----
$ 328,507 (16,823) 147,782 11,005 6,508
========= ======== ======= ====== =====
January 29, 2000
Retail $ 203,799 3,643 77,242 10,809 3,622
Wholesale 91,246 9,403 55,964 270 508
Intersegment sales (10,372)
Corporate -- (329) 15,895 -- --
--------- -------- ------- ------ -----
$ 284,673 12,717 149,101 11,079 4,130
========= ======== ======= ====== =====
January 30, 1999
Retail $ 156,242 3,618 61,984 7,730 2,114
Wholesale 90,709 9,600 52,416 425 400
Intersegment sales (9,817)
Corporate -- (519) 15,354 -- --
--------- -------- ------- ------ -----
$ 237,134 11,312 129,754 8,155 2,514
========= ======== ======= ====== =====
Corporate operating profit is shown net of VCM Ltd. management fee revenue
of $4,207, $3,370, and $3,085 for fiscal years 2000, 1999, and 1998,
respectively.
42
43
(12) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly results of operations
for the fiscal years ended February 3, 2001, January 29, 2000, and January
30, 1999:
Quarter
------------------------------------------------------------
First Second Third Fourth
----- ------ ------- ------
Year ended February 3, 2001
Net sales $72,790 73,141 74,222 108,354
Gross profit - before special charge 26,200 26,642 26,528 34,821
Special charge -- -- -- (14,324)
Net (loss) income 6 (654) (2,571) (9,815)
Net (loss) income per share - basic $ 0.00 (0.07) (0.28) (1.08)
Net (loss) income per share - diluted 0.00 (0.07) (0.28) (1.08)
Year ended January 29, 2000
Net sales $59,307 60,954 67,727 96,685
Gross profit 21,131 22,750 25,629 36,458
Net income 78 69 1,103 5,507
Net income per share - basic $ 0.01 0.01 0.12 0.60
Net income per share - diluted 0.01 0.01 0.12 0.60
Year ended January 30, 1999
Net sales $48,907 53,333 60,324 74,570
Gross profit 17,321 19,071 20,856 27,094
Special charge -- -- 1,387 --
Net income 922 881 26 3,344
Net income per share - basic $ 0.10 0.10 0.00 0.37
Net income per share - diluted 0.10 0.10 0.00 0.37
(13) VCM, LTD.
On August 3, 1997, the Company commenced operation of VCM, Ltd. ("VCM"), a
50 percent owned joint venture with Value City Department Stores, Inc.
whereby VCM operates the toy, sporting goods, expanded health and beauty
care, and other departments for the Value City department store chain. The
Company coordinates merchandise purchasing on behalf of VCM, some of which
is sourced from the Company's wholesale segment. The Company's initial
investment in VCM, which is accounted for under the equity method, was
$9,637. In addition to its 50 percent equity share of VCM's net profit or
loss, the Company receives a management fee equal to three percent of net
sales. Sales to VCM were $4,026, $2,861, and $3,132 for fiscal years 2000,
1999, and 1998, respectively. The Company recorded an
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account receivable from VCM of $4,418 and $3,386 at February 3, 2001 and
January 29, 2000, respectively, representing sales, management fees and
invoices paid on behalf of VCM.
(14) EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share
and the effect on the weighted-average number of shares of dilutive
potential common stock.
Fiscal Year Ended
-----------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
NUMERATOR:
Net (loss) income available to common
shareholders used in basic and
diluted net income per share $ (13,034) 6,757 5,173
========== ========= =========
DENOMINATOR:
Weighted-average number of
common shares - basic 9,141,800 9,141,800 9,141,600
Net dilutive effect of stock options - 12,900 5,200
---------- --------- ---------
Weighted-average number of
common shares - diluted 9,141,800 9,154,700 9,146,800
========== ========= =========
Net (loss) income per share - basic $ (1.43) 0.74 0.57
Net (loss) income per share - diluted $ (1.43) 0.74 0.57
Certain stock options to purchase common shares were outstanding at
February 3, 2001, but were not included in the computation of diluted net
(loss) income per share because their effect would be antidilutive.
These options would have increased the weighted-average number of common
shares by 21,700.
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Mazel Stores, Inc.
Schedule II - Valuation and Qualifying Accounts
(Dollars in Thousands)
Balance at Charge to Charge to Balance at
Beginning Costs and Other End
Description of Period Expense Accounts Deductions of Period
----------- --------- --------- --------- ---------- ---------
Allowance for
Doubtful Accounts
Fiscal 1998 $ 195 60 - 60 195
Fiscal 1999 195 446 - 233 408
Fiscal 2000 408 1,141 - 1,141 408
Inventory Reserve
Fiscal 1998 $ 1,050 - - - 1,050
Fiscal 1999 1,050 223 - 63 1,210
Fiscal 2000 1,210 11,953 - 1,809 11,354
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAZEL STORES, INC.
By: /s/ Reuven Dessler
------------------------------
Reuven Dessler
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on April 17, 2000.
SIGNATURES
----------
/s/ Reuven Dessler Chairman of the Board and
- -------------------------- Chief Executive Officer
Reuven Dessler (Principal Executive Officer) and Director
/s/ Sue Atkinson Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer)
Sue Atkinson
DIRECTORS:
----------
/s/ Charles Bilezikian /s/ Brady Churches
- -------------------------- ---------------------------
Charles Bilezikian Brady Churches
/s/ Phillip Cohen /s/ Robert Horne
- -------------------------- ---------------------------
Phillip Cohen Robert Horne
/s/ Jacob Koval /s/ Mark Miller
- -------------------------- ---------------------------
Jacob Koval Mark Miller
/s/ Ned L. Sherwood /s/ William A. Shenk
- -------------------------- ---------------------------
Ned L. Sherwood William A. Shenk
/s/ Jerry Sommers
- --------------------------
Jerry Sommers
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Code of Regulations*
4.1 Asset Based Loan and Security Agreement dated March 10, 1998 by and
among the lending institutions and registrant and subsidiaries***
4.2 First Amendment dated August 16, 1999 to Asset Based Loan and Security
Agreement*****
4.3 Second Amendment dated May 15, 2000 to Asset Based Loan and Security
Agreement******
10.1 Amended and Restated Employment Agreement of Reuven Dessler dated
September 30, 1996*
10.2 Amended and Restated Employment Agreement of Jacob Koval dated
September 30, 1996*
10.3 Amendment to Employment Agreement of Reuven Dessler dated
October, 1999
10.4 Amendment to Employment Agreement of Jacob Koval dated October, 1999
10.5 2000 Employment Agreement of Brady Churches dated
February 25, 2000*****
10.6 2000 Employment Agreement of Jerry Sommers dated
February 25, 2000*****
10.7 Amended and Restated Employment Agreement of Susan Atkinson dated
September 30, 1996*
10.8 Amendment to Susan Atkinson Employment Agreement dated February 1,
1998***
10.9 Second Amendment to Susan Atkinson Employment Agreement dated January
1, 2000*****
10.10 1996 Stock Option Plan*
10.11 Solon, Ohio Facility Lease, dated as of January 1, 1989, including
three amendments thereto*
10.12 South Plainfield, New Jersey Facility Lease****
10.13 VCM, Ltd. Agreement dated July 14, 1997**
21 List of Subsidiaries
23 Consent of Independent Auditors
24.1 Powers of Attorney
* Incorporated by reference to exhibit with same exhibit number included
in the Registrant's Registration Statement on Form S-1
(File #333-11739) as amended.
** Incorporated by reference to an exhibit included in the Quarterly
Statement on Form 10-Q for the quarter ended October 26, 1997.
*** Incorporated by reference to an exhibit included in the Annual Statement
on Form 10-K for the fiscal year ended January 31, 1998.
**** Incorporated by reference to an exhibit included in the Annual Statement
on Form 10-K for the fiscal year ended January 30, 1999.
***** Incorporated by reference to an exhibit included in the Annual Statement
on Form 10-K for the fiscal year ended January 29, 2000.
****** Incorporated by reference to an exhibit included in the Quarterly
Statement on Form 10-Q for the quarter ended July 29, 2000.
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