MAZEL STORES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 2, 2002

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
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MAZEL STORES, INC.
(Exact name of Registrant as specified in its charter)

OHIO 34-1830097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 HELEN STREET 07080
SOUTH PLAINFIELD, NJ (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
908-222-1000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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. Yes [X] 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 $17.4 million at May 3, 2002. The number of common
shares outstanding at April 30, 2002 was 9,046,945.

DOCUMENTS INCORPORATED BY REFERENCE

None.
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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

Mazel Stores, Inc. (the "Company") is a major regional closeout retail
business. The Company sells quality, value-oriented consumer products at a broad
range of price points offered at a substantial discount to the original retail.
The Company's merchandise primarily consists of new, frequently brand-name
products that are available to the Company for a variety of reasons, including
overstock positions of a manufacturer, wholesaler or retailer; the
discontinuance of merchandise due to a change in style, color, shape or
repackaging; a decrease in demand for a product through traditional channels; or
the termination of business by a manufacturer, wholesaler or retailer. At
February 2, 2002 (fiscal 2001 year-end), the Company operated a chain of 76
closeout retail stores in New York, New Jersey, Pennsylvania, Connecticut,
Delaware, Ohio, Michigan, and Kentucky. The Company had fiscal 2001 sales of
$258.1 million.

The Company was founded in 1975 as a wholesaler of close out merchandise.
Management's business strategy has primarily focused on the growth of its Odd
Job stores, the initial 12 stores having been acquired by the Company in 1995.
In February 2002, the Company sold its Wholesale Division to focus exclusively
on the growth and profitability of the retail stores. The stores which operate
primarily under the name Odd Job, are located in the Mid-Atlantic and Midwest
region with a concentration in metropolitan New York. The company has
consolidated management, buying and administrative functions to its 200 Helen
Street, South Plainfield, New Jersey corporate office. The Company expects to
change its corporate name to "Odd Job Stores, Inc." later this year.

INDUSTRY OVERVIEW

Closeout retailing is an important segment of the retailing industry in the
United States. Closeout retailers 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.

The closeout sector has benefited 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 of manufacturers on closeout retailers like the Company, who
frequently are able to purchase larger quantities of excess inventory and
successfully control the distribution of such goods.

OPERATIONS

General. The Company's chain of 76 retail stores as of February 2, 2002
operate under the names "Odd Job," "Odd Job Trading" and "Mazel's" and are
located in New York (30, including 8 in Manhattan), New Jersey (23), Ohio (7),
Pennsylvania (7), Michigan (4), Connecticut (3), Delaware (1), and Kentucky (1).
The retail stores generated sales of $258.1 million in fiscal 2001.

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

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stores offer substantial savings on housewares, domestics, cards and stationary,
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, Kodak, 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.

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 continuous 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 average inventory turn rate is approximately 4
times 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. The Company's buyers purchase
merchandise from approximately 1,500 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 fourteen check-out stations and provides sales personnel for customer
assistance. Sales are primarily for cash, personal checks and credit cards. The
Company's Manhattan stores offer free daily storage that enables customers to
pick up items 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 District Managers each responsible for the
operations of approximately eleven stores, reporting directly to the Senior Vice
President-Store Operations.

Store Locations. The Company's 68 suburban stores at February 2, 2002 are
located in strip shopping centers. The 8 Manhattan stores are located in
high-traffic urban corridors (i.e. near Grand Central Station, Rockefeller
Center, Port Authority, 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 80% of the area of
each store represents selling space. All of the stores are located in leased
facilities.

The Company did not open new stores in fiscal 2001 nor does it expect to
open any new stores in the first half of 2002. The Company is evaluating its
future expansion strategy. When the Company returns to its expansion program it
will consider new stores in the Northeast, Mid-Atlantic, and Midwest markets,
which

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are serviceable from the Company's South Plainfield, New Jersey warehouse and
distribution facility. Stores may be opened in other geographic areas if
favorable conditions exist. In fiscal 2001, the Company permanently closed two
stores and temporarily closed a third store due to fire damage. That store was
reopened in April 2002.

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 may 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.

In selecting new store locations, 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 believes the South
Plainfield facility has the capacity to support its longer-term retail expansion
plans.

The majority of the Company's 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 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.

MANAGEMENT INFORMATION SYSTEMS

The Company's operations are supported by a third party owned and
internally managed IBM AS400-based computer system. The system utilizes vendor
purchased integrated distribution, merchandising, inventory and warehousing
software. The Company also uses a vendor purchased general ledger accounting
system. During fiscal 2000, the Company completed the installation of its vendor
purchased retail purchasing and perpetual inventory systems.

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.

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COMPETITION

The Company competes with other closeout retailers, discount stores, deep
discount drugstore chains, supermarkets and other value-oriented specialty
retailers. 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, 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", "Odd Job Trading" 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.

In connection with the sale of its Wholesale Division, the Company sold the
"Mazel" name. It expects to change its corporate name to "Odd Job Stores, Inc."
this summer and will change the name of its Midwest stores over the next several
years.

EMPLOYEES

At February 2, 2002, excluding those employees from the sold Wholesale
Division, the Company had 1,879 employees including 1,762 in direct retail and
warehouse operations. Corporate employees included 117 in general management,
administrative and support positions. The Company considers its relationship
with its employees to be good. Approximately 143 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.

DISCONTINUED OPERATIONS

On February 11, 2002, the Company effected the sale of its Wholesale
Division. As a result of the divestiture, the Company has repositioned itself
solely as a closeout retailer. The financial statements and notes have been
reclassified for all periods presented to reflect the wholesale segment as a
discontinued operation. Initial proceeds from the sale of approximately $23
million in cash were received on February 11, 2002, which was after the
Company's February 2, 2002 year end and, therefore, not reflected at that time.
Proceeds from the sales were primarily used to pay down existing borrowings
under the Company's Revolving Credit Facility. An additional payment is expected
based upon the final revised balance sheet as of February 11, 2002.

TERMINATION OF JOINT VENTURE

On February 2, 2002, the Registrant and Value City Department Stores (VCDS)
reached an agreement on the terms of the previously announced termination of
their VCM, Ltd. joint venture that operated various departments in VCDS stores.
VCDS now operates such departments directly. Under the terms of the Agreement,
VCDS paid the Registrant $8.4 million in consideration of the termination of
Registrant's rights in and to the joint venture. Registrant also received $4.1
million in management fees for the year ended February 2, 2002.

ITEM 2. PROPERTIES

The Company leases a 535,000 square foot facility in South Plainfield, New
Jersey from a limited liability company in which two of its Directors are
minority owners. Housing the Company's corporate offices, 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.

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The Company believes its facilities will be generally adequate for its
operational requirements for the foreseeable future.

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.

ITEM 3. LEGAL PROCEEDINGS

In April 2002, Brady J. Churches, a director and former officer of the
Company, filed an action against the Company in the Common Pleas Court of
Franklin County, Ohio (No. 02 CVH 04-4337) alleging a breach of his Employment
Agreement, following the termination of his employment in February 2002. Mr.
Churches claims damages in excess of $1.4 million. The Company denies any
liability to Mr. Churches claiming that he voluntarily terminated his employment
and commenced working for Value City Department Stores ("VCDS") in connection
with the termination by VCDS of the VCM, Ltd. joint venture. The Company intends
to vigorously contest Mr. Churches' claims.

The Company is subject to various other 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

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.

As of May 3, 2002, the Company believes that there were approximately 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.
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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
February 2, 2002, February 3, 2001, January 29, 2000, January 30, 1999, and
January 31, 1998 (fiscal years 2001, 2000, 1999, 1998 and 1997, 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.

The financial statements have been reclassified for all periods presented
to reflect the wholesale segment as a discontinued operation.

STATEMENT OF OPERATIONS DATA

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(1) The Company's portion of the VCM, Ltd., a joint venture with Value City
Department Stores, operations income/(loss) is reported as other
(income)/expense. Also reported as other (income)/expense is the $650 loss
related to the sale of the joint venture in fiscal 2001.

(2) In the fiscal 2000 fourth quarter, the Company recorded a special pre-tax
charge totaling $5,546 related to investment realignment and other costs.

BALANCE SHEET DATA:

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a major regional closeout retailer. 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,
consisting of 12 retail stores and a warehouse and distribution facility. The
Company's business strategy has expanded from a primary focus on wholesale
operations to an emphasis on the growth of its retail operations. At the end of
fiscal 2001, the Company operated 76 closeout retail stores, including 30 in New
York (eight of which are in Manhattan), 23 in New Jersey, 7 in Ohio, 7 in
Pennsylvania, 4 in Michigan, 3 in Connecticut, and 1 each in Delaware and
Kentucky. In fiscal 2001, the Company opened no new stores to allow management
to focus its efforts on improving the return on its existing retail locations.

In fiscal 2001, the Company's Board of Directors approved the termination
of VCM, Ltd., the joint venture owned 50% with Value City Department Stores,
Inc., and the sale of the Wholesale Division. As a result of the VCM
termination, the Company received approximately $8.4 million for its 50%
ownership and $4.1 million in management fees for fiscal 2001. The proceeds
received prior to February 2, 2002 were used by the Company at that time to
paydown its debt under the Revolving Credit Facility. Subsequent to fiscal year
end, the Company paid off all term loans.

On February 11, 2002, the Company effected the sale of its Wholesale
Division and received cash proceeds at that time of approximately $23 million.
Although the proceeds were not recorded at the Company's February 2, 2002 year
end, they were subsequently used to payoff the remaining debt on the Company's
Revolving Credit Facility.

As a result of the divestiture of the Wholesale Division, the Company has
now repositioned itself solely as a closeout retailer. The company has
consolidated management, buying and administrative functions to its South
Plainfield NJ, corporate office. During the fourth quarter, this strategic
repositioning resulted in a $3.7 million charge, net of tax. This charge,
reported as discontinued operations, represents sale-related costs, including
severance, legal and professional expenses.

CRITICAL ACCOUNTING POLICIES

The Company's critical accounting policies include the following:

- Valuation of inventory;

- Accounting for income taxes; and

- Valuation of goodwill

Valuation of Inventory. The Company uses the retail method of accounting.
Inventories are not recorded in excess of market value. Management tracks the
inventory for changes in circumstances, such as changes in customer merchandise
preference, which could cause the Company's inventory to be exposed to
obsolescence or slow moving merchandise.

Accounting for income taxes. As part of the process of preparing the
Company's financial statements, management is required to estimate income taxes.
This process involves estimating the Company's actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items. These differences result in deferred tax assets and liabilities. If
the Company assesses the recovery of deferred tax assets is not likely, a
valuation allowance must be established.

The Company considers projections of future taxable income, reversals of
deferred tax liabilities and amounts available for carryback in arriving at a
valuation allowance.

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Valuation of goodwill. The Company periodically evaluates whether events
and circumstances have occurred that indicate that the remaining useful life of
any goodwill may warrant revision or that the remaining balance might not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the company uses an estimate of the future undiscounted
cash flows generated by the underlying assets to determine if a write-down is
required. If a write-down is required, the Company adjusts the book value of the
underlying goodwill to fair value. The related charges are recorded as an asset
impairment in the consolidated statements of operations.

MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
Statement of Operations data as a percentage of total revenue.

FISCAL 2001 RESULTS VERSUS FISCAL 2000

Net sales were $258.1 million for fiscal 2001, compared to $239.7 million
for fiscal 2000, an increase of $18.4 million, or 7.7%. The increase in net
sales was attributable to a comparable store (62 stores for fiscal 2001) net
sales increase of 5.5% with the balance of the increase occurring in stores
opened in fiscal 2000 offsetting the loss of sales from the three stores closed
in 2001.

Gross profit was $99.9 million for fiscal 2001, compared to $90.1 million
for fiscal 2000, excluding a special charge related to the write-down of
inventory. Gross profit increased $9.8 million or 10.9% excluding the fiscal
2000 special charge. Excluding the special charge, gross margin increased to
38.7% in fiscal 2001 from 37.6% in fiscal 2000 due primarily to improved shrink
results.

Selling, general and administrative expense reflects the four-wall cost of
the stores, the distribution facility, and corporate support. During fiscal
2001, selling, general and administrative expense was $100.7 million, compared
to $102.2 million for fiscal 2000 which included a $1 million special charge.
Selling, general and administrative expense decreased .5% excluding the fiscal
2000 special charge. The decrease resulted from the absence of any pre-opening
costs in 2001 as compared to $2.1 million in 2000. Additional factors include an
$0.8 million reduction in corporate support expense and a $0.2 million reduction
in warehouse costs, offset, in part, by a $0.1 million decline in management fee
revenue received from VCM, Ltd., store level expense increase of $1.6 million
primarily attributable to the full year operation of stores opened during fiscal
2000, and increased advertising expense of $0.9 million primarily due to the
larger store base. Selling, general and administrative expense excluding the
fiscal 2000 special charge, as a percentage of net sales, decreased to 39.0% in
fiscal 2001, from 42.2% in fiscal 2000.

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The operating loss was $0.7 million or .3% of sales for fiscal 2001,
compared to an operating loss of $16.7 million for fiscal 2000. Excluding the
special charge, the operating loss was $11.1 million, or (4.6%) of sales, for
fiscal 2000. This improvement was primarily due to the factors described above.

Interest expense was $2.3 million for fiscal 2001, compared to $3.1 million
for fiscal 2000, reflecting lower average borrowings. Other (loss) income was
comprised of the Company's 50% equity share in VCM, Ltd., a net loss of $1.0
million in fiscal 2001 compared to a net loss of $0.2 million in fiscal 2000.
Included in the 2001 loss was a $0.7 million loss on the sale of the joint
venture to Value City Department Stores, Inc.

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 distribution facility, and corporate support. During fiscal
2000, selling, general and administrative expense was $102.2 million, compared
to $78.5 million for fiscal 1999. Excluding the special charge ($1.0 million),
selling, general and administrative expense was $101.2 million for fiscal 2000,
an increase of $22.6 million, or 28.8%. 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. Corporate
expenses increased $3.3 million reflecting increased training and store
operations expenses, higher professional fees, and increased expense related to
the purchasing and inventory systems implemented in mid-fiscal 2000. Corporate
expense also includes management fee revenue received from VCM, Ltd., the 50%
owned joint venture with Value City Department Stores, Inc., which increased to
$4.2 million for fiscal 2000 from $3.4 million in fiscal 1999. Also included in
corporate expenses in fiscal 2000 was the write-off of a $0.5 million investment
related to certain business-to-business internet developments. Selling, general
and administrative expense excluding the special charge, as a percentage of net
sales, increased to 42.2% in fiscal 2000, from 38.6% in fiscal 1999.

The special charge for fiscal 2000 totaling $5.5 million related to the
Company's Board of Directors initiative to improve return on invested assets and
increase inventory turns. As a result, the Company recorded a charge of $4.5
million related to inventory realignment and $1.0 million for other costs.

The operating loss was $16.7 million for fiscal 2000. Excluding the special
charge, the operating loss was $11.1 million, or (4.6%) of sales, for fiscal
2000, compared to an operating profit of $3.3 million, or 1.6% of sales, for
fiscal 1999. This decrease was primarily due to the factors described above.

Interest expense was $3.1 million for fiscal 2000, compared to $2.0 million
for fiscal 1999, reflecting higher average borrowings primarily in support of
store growth. Other (loss) income was comprised of the Company's 50% equity
share in VCM, Ltd., a net loss of $0.2 million for fiscal 2000 compared to a net
profit of $1.3 million for fiscal 1999.

10

LIQUIDITY AND CAPITAL RESOURCES

The Company's growth has been financed through cash flow from operations,
borrowings under its revolving credit facility and the extension of trade
credit.

The Company's primary requirements for capital consist of inventory
purchases, expenditures related to new store openings, existing store
remodeling, warehouse enhancements, MIS initiatives, and other working capital
needs. The Company takes advantage of closeout and other special situation
purchasing opportunities 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. Having such credit availability
provides the Company with a competitive advantage measured against many of its
competitors.

As a result of terminating the VCM, Ltd., joint venture with Value City
Department Stores, Inc., the Company received $8.4 million for its 50% ownership
and $4.1 million in management fees for fiscal 2001 in cash prior to the
Company's February 2, 2002 year-end. The cash proceeds were used to completely
paydown the debt under its prior Revolving Credit Facility. At February 2, 2002,
the Company had no debt under the credit facility and term loans of
approximately $9.1 million.

On February 11, 2002, the Company effected the sale of the Wholesale
Division. The cash proceeds of approximately $23 million were used by the
Company to payoff all the term loans, all debt under its Revolving Credit
Facility and resulted in a $10 million positive cash position at that time. As a
result of the VCM, Ltd. termination and Wholesale divestiture, the Company
amended its credit facility which now provides for $30 million of revolving
credit. The Facility expires in August of 2004. Because the debt was eliminated
after February 2, 2002, the Company will record an after tax charge of
approximately $0.7 million in the first quarter of fiscal 2002 as a result of
the loss on the extinguishment of debt. The Company currently anticipates the
use of its credit facility to cover seasonal and potentially larger
opportunistic inventory purchases.

For fiscal years 2001 and 2000, cash provided by operating activities was
$26.8 million and $2.7 million, respectively. The fluctuation is due primarily
to the net loss of $13 million in fiscal 2000 decreasing to a net loss of $3.8
million for fiscal 2001. Also, for fiscal 2001, cash provided was comprised
primarily of discontinued operations of $11.9 million, depreciation and
amortization of $7.1 million, lower notes and accounts receivable from related
parties of $4.9 million, and lower inventory levels of $2.6 million. For fiscal
2000, cash provided by operating activities was comprised primarily of
discontinued operations of $11.7 million, depreciation and amortization of $6
million, and higher deferred tax assets of $5.3 million.

Cash provided by (used in) investing activities increased to $7.5 million
in fiscal 2001 from ($11.0 million) in fiscal 2000, due primarily to capital
expenditures of $0.5 million in fiscal 2001 compared to capital expenditures of
$10.2 million in fiscal 2000, as well as proceeds from the sale of VCM, Ltd. in
fiscal 2001 of $8.4 million. Cash used in financing activities of $32.6 million
for fiscal 2001 and cash provided by financing activities of $8.2 million for
fiscal 2000 was primarily the result of net payments for fiscal 2001 and net
borrowings for fiscal 2000 from the Company's credit facility.

Total assets were $107.6 million and $138.4 million at the end of fiscal
year's 2001 and 2000, respectively. Working capital decreased to $39.6 million
in fiscal 2001, from $61.6 million at the prior year end, due primarily to the
repayment of the Company's credit facility. The current ratio was 2.4 to 1 at
fiscal 2001 year end, compared to 3.6 to 1 at fiscal year-end 2000. Net fixed
assets were $22.3 million at the end of fiscal 2001, a decrease of $5.6 million
over the prior year, primarily related to depreciation.

The Company will open no new stores in the first half of 2002 and is
currently evaluating its expansion policy to determine when such program will
recommence. When the Company resumes its expansion program, it does not
anticipate opening more than 6-12 stores in the first year of the program.

11

SEASONALITY

The Company's retail orientation results in a greater weighting of sales
and earnings toward the second half of the fiscal year.

MARKET RISK

The Company does not have significant exposure to changing interest rates,
other than the Company's variable-rate on its Revolving Credit Facility. The
Company does not undertake any specific actions to cover its exposure to
interest rate risk and the Company is not party to any interest rate risk
management transactions. The Company does not purchase or hold any derivative
financial instruments.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria for intangible assets acquired and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144. The Company adopted the provisions of SFAS No. 141
as of July 1, 2001 and SFAS No. 142 effective February 3, 2002 and had
unamortized goodwill totaling approximately $9.4 million all of which will be
subject to the provisions of SFAS Nos. 141 and 142. Amortization expense related
to goodwill was $314,000 for the years ended February 2, 2002 and February 3,
2001. Management is currently assessing the impact that adopting SFAS No. 142
will have on the Company's financial position, results of operations and cash
flows and anticipates taking an impairment charge in the first quarter of fiscal
2002.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 14, 2002. The Company has reviewed the
provisions of SFAS No. 143, and believes that upon adoption, it will not have a
material impact on its financial position, results of operations or cash flow.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of SFAS No. 121,
SFAS No. 144 significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. This distinction is important because assets
held-for-sale are stated at the lower of their fair values or carrying amounts
and depreciation is no longer recognized. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company believes the adoption of SFAS No. 144 will not
have a material impact on its financial position, results of operations or cash
flows.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this release are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Such risks
and uncertainties include, but are not limited to, (i) the Company's continuing
execution of its plan to restore its retail stores to profitability; (ii) the
ability to purchase sufficient quality closeout and other merchandise at
acceptable terms; and (iii) the ability of the Company to attract and retain
qualified management and store personnel. Please refer to the Company's SEC
filings for further information.
12

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the Market Risk Section under the Management's Discussion and Analysis.

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.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the Directors
and executive officers of the Company as of May 1, 2002.

Peter J. Hayes has been Chief Executive Officer of the Company since May
2001 and its Chairman since February 2002. From October 1999 until joining the
Company, he served as President of Sales of RetailerExchange.com, an internet
B2B exchange. From 1995 to 1999, Mr. Hayes served as President and founder of
Lemax Hong Kong Ltd., a manufacturer and importer of household ceramic products
and candles. He has served as a Director since his hiring in May 2001.

Edward Cornell has been Executive Vice President and Chief Financial
Officer of the Company since October 2001 having served since June 2001 as
interim Chief Financial Officer. From February 1992 until joining the Company,
he served as Executive Vice President and CFO as well as Executive Vice
President, Non-Retail for Office Max, Inc.

Charles Bilezikian has been the President of Christmas Tree Shops, Inc., a
specialty New England retailer, since its formation in 1971. He has served as a
Director since January 1997.

Brady Churches has served as President of VCM, a division of Value City
Department Stores, Inc., since February 2002. Prior thereto, he served over five
years as President of the Company. He has served as a Director since November
1996.

Reuven Dessler is Chief Executive Officer of MZ Wholesale Acquisition, LLC
d/b/a Mazel Company, which purchased the Company's Wholesale Division in
February 2002. Mr. Dessler served as Chairman of

13

the Board of the Company from November 1996 to February 2002 and as its Chief
Executive Officer from November 1996 to May 2001. He has served as a Director
since November 1996.

Robert Horne has been a principal of ZS Fund L.P., a Company engaged in
making private investments, for more than five years. He has served as a
Director of the Company since November 1996.

Jacob Koval is Chief Operating Officer of MZ Wholesale Acquisition, LLC
d/b/a Mazel Company, which purchased the Company's Wholesale Division in
February 2002. Mr. Koval served as Executive Vice President -- Wholesale of the
Company from November 1996 to May 2001. He has served as a a Director since
November 1996.

Mark Miller has been the Executive Vice President of RedTagBiz.com, 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. He has served as
a Director of the Company since November 1999.

Joseph Nusim has been Co-Chairman of the Board for Loehmann's Stores since
October 2000 and Co-Chairman of the Board of Woodworkers Warehouse Stores since
November 2001. From 1985 through 1995, he had been the CEO for Channel Home
Centers and CEO for Makro USA. From 1971 through 1985, he served as Executive
Vice President responsible for merchandise and operations for Jamesway
Corporation, a discount chain of retail stores. He has served as a Director
since February 2002.

William A. Shenk has been a private investor for over five years. Prior
thereto, Mr. Shenk served as an attorney in Columbus and Atlanta, and previously
as Vice President and General Counsel for Consolidated Stores. He has served as
a Director since January 2001.

Ned L. 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. He has served as a Director since November 1996.

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.

14

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE OFFICERS' COMPENSATION

The following table sets forth certain information with respect to the
compensation earned during the fiscal years ended February 2, 2002, February 3,
2001 and January 29, 2000 respectively, by the Chief Executive Officer and
certain other named executive officers of the Company.

SUMMARY COMPENSATION TABLE

STOCK OPTION GRANTS IN FISCAL 2001

The following were stock option grants by the Company to executive officers
during the fiscal year ended February 2, 2002.

- ---------------

(a) Options are exercisable upon vesting 20% each year, commencing in May 2002.

(b) Options are exercisable upon vesting 20% each year, commencing October 2002.

15

AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND
FISCAL YEAR-END OPTION VALUES

The following table summarizes the fiscal year-end value of unexercised
options for each of the executive officers identified in the Summary
Compensation Table. No options were exercised by any executive officer in fiscal
2001.

- ---------------

(1) The closing price of Mazel Stores, Inc. Common Shares on February 1, 2002,
the last trading day prior to the fiscal year end, was $3.19.

COMPENSATION OF DIRECTORS

The Company pays each outside Director an annual fee of $15,000, payable
quarterly in payments of $3,750, anticipating that each Director will attend
four meetings of the Board. In addition, each outside Director receives $1,500
per meeting for each meeting attended after the four quarterly meetings. No
additional compensation is paid for committee meetings held on the same day as a
Board Meeting. Officers of the Company who are also Directors will receive no
additional compensation for serving as Directors. Outside Directors also
received a grant of 15,000 options upon their initial election to the Board.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

Peter J. Hayes entered into a three-year employment agreement effective May
7, 2001 providing him an annual base salary of $550,000 (subject to annual cost
of living adjustments). Mr. Hayes is entitled to receive an annual bonus of up
to $250,000 per year, subject to the Company achieving pre-determined annual
performance target, with a minimum fiscal 2001 bonus of $100,000. Under the
employment agreement, Mr. Hayes received ten-year stock options for 500,000
Common Shares at an exercise price of $2.60; the options vest in 20% annual
increments commencing May 2002. Mr. Hayes is entitled to one year's salary in
the event of his termination without cause. He has also received $55,000 to
cover the relocation costs of his family.

The Company has entered into an agreement with Mr. Cornell, its Chief
Financial Officer, that provides for payment of six months severance in the
event of a "change in control" or, in connection with the consolidation of
management and administrative functions and he is not offered a position similar
to his current position.

The Company and Jerry D. Sommers, former Executive Vice
President -- Retail, entered into a severance agreement dated May 3, 2002 (the
"Agreement"), terminating his February 2000 employment agreement. Under the
Agreement, Mr. Sommers received a cash payment of $728,000, and effected a sale
to the Company of 100,000 shares of Common Stock at $3.50 per share. The parties
executed mutual releases and, in general, Mr. Sommer's noncompetition
restriction has expired.

In connection with the sale of the Company's Wholesale Division, the
Company and Mark Hanners, Executive Vice President -- Wholesale, entered into a
severance agreement dated February 12, 2002 (the "Agreement") terminating his
February 2000 employment agreement. Under the Agreement, Mr. Hanners

16

received $250,000 cash payment, and is entitled to an additional $100,000
payment if any person (other than existing principal shareholders) acquire more
than 50% of the Company's Common Stock on or before October 31, 2003. Moreover,
Mr. Hanners has the option to require the Company to repurchase up to 53,658
shares of Common Stock at $3.00 per share on or prior to October 31, 2003. The
Company's obligation is secured by a letter of credit. Mr. Hanners was indebted
to the Company at fiscal 2001 year-end in the amount of $34,835, which amount is
to be repaid as part of the agreement.

BOARD COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors is generally
responsible for determining the nature and amount of compensation for executive
officers. The Compensation Committee met once in fiscal 2001.

The Company's compensation philosophy ties a significant portion of
executive compensation to the Company's success in meeting specified profit
growth and performance goals and to appreciation in the Company's stock price.
The Company's compensation objectives include attracting and retaining the best
possible executive talent, motivating executive officers to achieve the
Company's performance objectives, rewarding individual performance and
contributions, and linking executive and shareholder interests through
equity-based plans.

The Company's executive compensation consists of three key components: base
salary, annual bonus and stock options and restricted stock awards, each of
which is intended to complement the others and, taken together, to satisfy the
Company's compensation objectives.

Base Salary: The Compensation Committee led the Company's search for a new
Chief Executive Officer in fiscal 2001. Once Mr. Hayes was selected, his
employment agreement was negotiated by the Committee. The terms of his agreement
were deemed reasonable and necessary to attract a candidate of Mr. Hayes'
stature. Salaries for the other executive officers were also set by the
Committee, giving consideration to the salaries of other similar size retailers.

Annual Bonus: The Company had established a management incentive plan that
based its executives' annual bonuses on specified profit growth and performance
goals. Although the corporate target goals for fiscal 2001 were not met, the
Compensation Committee elected to pay certain officers bonuses based on
individual accomplishments. The 2002 bonus program is again based on a corporate
target, but contains elements that would pay a portion of the bonus based solely
on achievement of individual goals.

Stock-Related Compensation: The Compensation Committee believes that
equity-based compensation ensures that the Company's executives have a
continuing stake in the long-term success of the Company. Stock option awards
contain vesting provisions that ensures the executives have a financial
incentive to remain with the Company during the vesting period and beyond. In
determining the size of option awards, the Committee looks at several
measurements, including the value of options awarded to individuals in
comparable position in peer group companies, individual and Company performance
against plan, the number of shares and options currently held by the officer and
the relative proportion of long-term incentives within the total compensation
mix. An aggregate of 600,000 stock options were awarded to Mr. Hayes and Mr.
Cornell in connection with their initial employment.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain current information with respect to
the beneficial ownership of the Common Shares as of May 3, 2002. Unless
otherwise indicated below, the persons named below have the sole voting and
investment power with respect to the number of shares set forth opposite their
names. All

17

information with respect to beneficial ownership has been furnished by the
respective Director, officer or 5% or greater shareholder, as the case may be.

- ---------------

** Less than 1 percent

(1) The shares beneficially owned by ZS Fund L.P. include 1,992,001 shares held
by ZS Mazel L.P., 453,767 shares held by ZS Mazel II L.P., and 304,615
shares held by ZS Mazel, Inc. Messrs. Horne and Sherwood are officers of ZS
Fund L.P.

(2) Includes the share beneficially owned by ZS Fund L.P. as officers and/or
equity owners of the entities holding such shares. Messrs. Sherwood and
Horne have voting power with respect to such shares. Except to the extent
of their equity interests in the entities holding. Also includes 15,000
shares each subject to options currently exercisable or exercisable within
60 days hereof.

(3) Mazel/D&K, Inc. is a corporation owned by Messrs. Dessler and Koval and
members of their families. Messrs. Dessler and Koval are the Directors and
officers of Mazel/D&K, Inc.

(4) Includes 1,372,304 shares owned by Mazel/D&K, Inc. for the benefit of Mr.
Dessler and family members.

(5) Includes 685,801 shares owned by Mazel/D&K, Inc. for the benefit of Mr.
Koval and family members.

(6) Based on 13G's filed in February 2002.

(7) Includes 3,000 shares subject to options currently exercisable or
exercisable within 60 days hereof. National City Corp. is the shareholder
of record of 630,000 of Mr. Shenk's shares.

18

(8) Includes 100,000 shares subject to options currently exercisable or
exercisable within 60 days hereof.

(9) Includes 15,000 shares subject to options currently exercisable or
exercisable within 60 days hereof.

(10) Includes 6,000 shares subject to options currently exercisable or
exercisable within 60 days hereof.

(11) Includes 154,000 shares subject to options currently exercisable or
exercisable within 60 days hereof.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On February 11, 2002, the Company sold to MZ Wholesale Acquisition, LLC
d/b/a Mazel Company, an enterprise involving Reuven Dessler, former Chairman and
Chief Executive Officer, and Jacob Koval, former Executive Vice President, of
the Company (the "Buyer"), the assets of its Wholesale Division and certain
other assets, including the notes receivable from Messrs. Dessler and Koval
valued (together with accrued interest at fiscal 2001 fiscal year end) at
$1,147,136 and $808,586, respectively. Under the sale agreement, Company
received a cash payment of $22,292,000, based primarily on the book value of the
acquired assets and assumed liabilities. A post-closing adjustment payment based
on the revised book value of such assets and liabilities on the closing date is
anticipated to be received shortly. Under the terms of the sale agreement, the
Company has agreed not to compete in the wholesale sale of closeout merchandise,
subject to certain limitations, for a period expiring on the earlier of (i) the
three-year anniversary of the sale or (ii) the sale of a majority of the
Company's stock or assets to a third-party (the "Restricted Period"). In the
event the Company purchases closeout merchandise in quantities exceeding those
required by its retail operations, during the Restricted Period, it has the
right to put up to $3.5 million of such merchandise annually to a joint venture
(equally owned by Buyer and Company and managed by Buyer). Under the sale
agreement, Company has assigned the "Mazel" name to Buyer, but may continue the
use of the name on its retail stores for up to five (5) years. The Company
expects to change its corporate name change, to Odd Job Stores, Inc., later this
year. Messrs. Dessler, Koval and Jay L. Schottenstein ("MZ Related Parties") and
ZS Fund LP., the Company's largest beneficial shareholder, have entered into a
Standstill Agreement pursuant to which: (i) the MZ Related Parties have agreed
not to purchase additional shares of Common Stock that would cause their
aggregate ownership to exceed thirty-three percent (33%) of the outstanding
shares of Company without the consent of ZS Fund and a majority of the
disinterested directors of Company; and (ii) ZS Fund has agreed not to purchase
additional shares of Common Stock that would cause its aggregate ownership to
exceed thirty-six percent (36%) of the Company's outstanding shares without the
consent of Buyer's affiliates and a majority of the disinterested directors of
Company. The parties entered into an interim services agreement with respect to
certain transitional services, shared personnel and facilities. Finally, as part
of the sale, the Company and Messrs. Dessler and Koval each of who remains a
director of the Company, executed mutual releases resolving various compensator
and other claims of the parties.

Messrs. Dessler and Koval are partners in Aurora Road Realty Development
Company, a partnership that leased the office and warehouse facility located in
Solon, Ohio, to the Company prior to its assignment in the Buyer. Messrs.
Dessler and Koval own 40.0% and 6.0% interests, respectively, in such
partnership. The Company made rent payments totaling $1.9 million pursuant to
the lease for fiscal 2001. The Company believes the payments under the lease
were on terms no less favorable to the Company than could be obtained from
unrelated parties.

The Company's warehouse in South Plainfield, New Jersey is leased from a
limited liability company in which Messrs. Dessler and Koval own approximately
34% and 10% membership interests, respectively. Neither Mr. Dessler or Mr. Koval
is involved in the management of the lessor and the Company believes the terms
are no less favorable than could be obtained from unrelated parties.

19

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 2, 2002 and
February 3, 2001
Consolidated Statements of Operations for the Fiscal Years
Ended February 2, 2002, February 3, 2001, January 29, 2000.
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended February 2, 2002, February 3, 2001,
January 29, 2000.
Consolidated Statements of Cash Flows for the Fiscal Years
Ended February 2, 2002, February 3, 2001, January 29, 2000.
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts
(a)(3) Exhibits
See the Index to Exhibits included on page 40.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
February 2, 2002. However, 8-Ks were filed on February 5,
2002 and February 12, 2002 to report the termination of the
VCM, Ltd. joint venture and the sale of the Company's
Wholesale Division, respectively.

20

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 schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule 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 2, 2002 and February 3, 2001 and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 2, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects, the information set forth therein.

KPMG LLP

Cleveland, Ohio
April 19, 2002

21

MAZEL STORES, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements
22

MAZEL STORES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

See accompanying notes to consolidated financial statements.
23

MAZEL STORES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements

24

MAZEL STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements
25

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of Mazel Stores, Inc. ("Mazel" or
"Company"), which are summarized below, are consistent with accounting
principles generally accepted in the United States of America and reflect
practices appropriate to the industry in which the Company operates.

A. DESCRIPTION OF BUSINESS

The Company was originally established with two complimentary
operations: (i) a major regional closeout retail business; and (ii) one of
the nation's largest closeout wholesale business. As a result of the sale
of the Wholesale Division (see note 9) on February 11, 2002, the Company
will operate solely as a major regional closeout retail business. The
Company sells quality, value-oriented consumer products at a broad range of
price points offered at a substantial discount to the original retail
price. As of February 2, 2002, the Company operated a chain of 76 closeout
retail stores, including 30 in New York (8 of which are in Manhattan), 23
in New Jersey, 7 in Ohio, 7 in Pennsylvania, 4 in Michigan, 3 in
Connecticut, and 1 each in Delaware and Kentucky.

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 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 a original maturity date of three months or less
to be cash equivalents.

D. INVENTORIES

Inventories are valued at the lower of cost or market, with cost
determined by using the retail method.

E. PROPERTY AND EQUIPMENT

Depreciation is 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 extending to the life of the related lease
for leasehold improvements. All equipment, furniture and leasehold
improvements are depreciated on the straight-line basis over their
estimated useful lives.

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 to exceed 40 years. Goodwill is measured for impairment using
the estimated undiscounted cash flow method of the acquired business, and
is written down if necessary. Accumulated amortization of goodwill amounted
to $1,922 and $1,608, as of February 2, 2002, and February 3, 2001,
respectively.

G. INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and 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

26

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date.

H. ADVERTISING

The Company expenses advertising costs as incurred. Advertising
expense was $7,164, $6,245, and $4,107, for the fiscal years ended February
2, 2002, February 3, 2001, and January 29, 2000, respectively.

I. FISCAL YEAR

The Company follows the reporting calendar as published by the
National Retail Federation. Fiscal years 2001, 2000, and 1999 are defined
as the fiscal years ended February 2, 2002, February 3, 2001, and January
29, 2000, respectively. Fiscal years 2001 and 1999 were 52-week years and
fiscal 2000 was a 53-week year.

J. USE OF ESTIMATES

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, liabilities, revenues and expenses, as well as the
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual future results could differ from those
estimates.

K. RECLASSIFICATIONS

Certain reclassifications have been made to financial data reported in
prior periods in order to conform to the fiscal 2001 presentation.

L. REVENUE RECOGNITION

Revenue from merchandise sales is recognized when the related goods
are sold directly to the consumer through the Company's retail chain of
stores.

M. FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, 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.

(2) PROPERTY AND EQUIPMENT

The major classes of property and equipment consist of the following:

27

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(3) LONG-TERM DEBT

The Company's long-term debt as of February 2, 2002, and February 3, 2001
consisted of the following:

As of February 3, 2001, the Company maintained a $60,000 credit facility
with a bank syndicate providing for a $50,000 revolving line of credit and $10
million term loan. This credit facility also included a seasonal borrowing limit
increase of $10,000 from May to December annually. The credit facility was
secured by substantially all assets of the Company and expired on November 15,
2002. At February 3, 2001, borrowings under the credit facility would bear
interest, at the Company's option, at the banks' prime rate less 50 basis points
or LIBOR plus a variable spread, and was subject to a commitment fee on the
unused portion. This credit facility was amended in April 2001 to increase the
interest rate on borrowings under the line of credit to the prime rate plus 100
basis points, and the increase the interest on the term loan to 25%.

On August 21, 2001, the Company entered into a $70,000 three-year revolving
credit facility with IBJ Whitehall Retail Finance. Under this facility, the
Company also borrowed $8,000 through a Tranche B term loan with Wingate Capital,
and $1,000 through a Tranche C term loan with The Provident Bank and National
City Bank. Proceeds were used to repay all previous debt outstanding. Borrowings
under the revolving credit facility bear interest, at the Company's option, at
either the banks' prime rate or LIBOR plus a spread based upon an availability
grid. Interest on the Tranche B loan is based upon the greater of the banks'
prime rate plus 750 basis points or 15%, plus 3% deferrable at the Company's
option, plus an original issue discount of $300 due upon payment of the Tranche
B loan. Interest on the Tranche C loan was 20% through November 2001 and 25%
thereafter. The Tranche C loan also provided for the issuance of warrants for
2.5% of the Company's outstanding shares at $0.01 per share in the event that
the loan exists as of June 3, 2002. The warrants are not yet exercisable and
will terminate in their entirety if the Tranche C loan is repaid by June 3, 2002
(see below). Availability on the revolving credit facility and the Tranche B
loan is the lesser of the total credit commitment or a borrowing base
calculation based primarily upon the Company's accounts receivable and
inventories. The entire facility contains restrictive covenants that require
minimum EBITDA levels, maximum annual capital expenditure levels, and minimum
inventory leverage ratios.

During the third quarter of fiscal 2001, the Company recorded an
extraordinary loss as a result of the early extinguishment of debt relating to
the Company's former revolving credit facility. The extraordinary loss consists
of the write-off of debt issuance costs totaling $395, or $241 net of tax.

On February 3, and February 5, 2002, the Company paid off the entire
Tranche B and Tranche C loans, respectively, and on February 11, 2002, reduced
the borrowing limit of the revolving credit facility from $70,000 to $30,000,
and modified certain covenants. In connection with the repayment of one of the
term loans, the previously reported warrant for 2.5% of the Company's
outstanding shares has been extinguished. During the first quarter of fiscal
2002, the Company will record charges of $1,022 (pre-tax) related to the early
extinguishment of debt and modifications made to the line of credit.

As a result of the subsequent changes to the credit facility as discussed
above, the Company is in compliance with its debt covenants.

28

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(4) RELATED PARTY TRANSACTIONS

As of February 2, 2002, and February 3, 2001, 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 Initial Public Offering totaled $90 and $2,864, respectively. Such
amounts include accrued interest of $13 and $551, respectively at a rate of 6.6
percent. During fiscal 2001, certain loans were paid off (partially or in full)
via either cash or the retirement of Company stock owned by these individuals.
These loan payoffs resulted in the retirement of 160,100 common shares of the
Company's common stock.

Prior to the sale of the Wholesale Division, the Company leases the office
and warehouse facility located in Solon, Ohio, from the Aurora Road Realty
Development Company, a partnership 46 percent owned by two former key executives
and current members of the Board of Directors. Pursuant to the lease agreement
between the parties, the Company made rent payments totaling $1,930 for fiscal
years 2001, 2000 and 1999, at rental rates which approximate fair value.

The Company's warehouse in South Plainfield, New Jersey is leased from a
limited liability company which is 41% owned by two former key executives and
current members of the Board of Directors. Pursuant to the lease agreement
between the parties, the Company made rent payments totaling $1,941, $2,080 and
$1,892, for the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000, respectively, at rental rates which approximate fair value.

On February 11, 2002, the Company sold its Wholesale Division to a group
including two former key executives and current members of the Board of
Directors noted above (see note 9). As part of this transaction, the tax loans
due from these executives were included in the net assets sold. The amount
outstanding under these was loans was $2,038, at February 2, 2002.

(5) INCOME TAXES

Income tax expense (benefit) attributable to income from continuing
operations is as follows:

29

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Total income tax expense (benefit) was recorded as follows:

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
continuing operations as a result of the following:

The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:

At February 2, 2002, state net operating losses totaling $22,321 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 six to
21 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, based upon projections of future taxable
income it is more likely that the tax benefits will be realized;
consequently, no valuation allowance has been established as of February 2,
2002 and February 3, 2001.

30

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(6) COMMITMENTS AND CONTINGENCIES

A. LEASES

The Company is obligated for office, warehouse and retail space under
operating lease arrangements which expire at various dates through fiscal
2018. Some of these leases are subject to certain escalation clauses based
on real estate taxes and other occupancy expense, and several leases
provide for additional rent based on a percentage of sales.

At February 2, 2002, minimum annual rental commitments under
noncancellable leases for the Company are as follows, for the fiscal years
ending:

2002........................................................ $15,230
2003........................................................ 13,574
2004........................................................ 12,905
2005........................................................ 11,942
2006........................................................ 10,699
2007 and thereafter......................................... 22,505
-------
$86,855
=======

Rent expense for all leases for the fiscal years ended February 2,
2002, February 3, 2001, and January 29, 2000 was $18,471, $20,467, and
$16,203, respectively. These amounts include contingent rentals of $135,
$234, and $213, respectively.

B. LETTERS OF CREDIT

At February 2, 2002 and February 3, 2001, the Company had outstanding
letters of credit issued to various parties aggregating $2,802 and $2,536,
respectively.

C. CONTINGENT CONSIDERATION

In connection with prior store acquisitions, the Company may be
required to make additional payments annually to a maximum of $675 and
$275, based on the store's profits, as defined. This arrangement expires on
December 31, 2002. No amounts have been paid or are payable under these
agreements through February 2, 2002.

D. LITIGATION

In April 2002, Brady Churches, a director and former officer of the
Company filed an action against the Company in the Common Pleas Court of
Franklin County, Ohio, alleging a breach of his Employment Agreement,
following the termination of his employment in February 2002. Mr. Churches
claims damages in excess of $1.4 million. The Company denies any liability
to Mr. Churches claiming that he voluntarily terminated his employment and
commenced work for Value City Department Stores ("VCDS") in connection with
the termination by VCDS of the VCM, Ltd. joint venture. The Company intends
to vigorously contest Mr. Churches' claims.

31

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The Company is subject to various other 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.

(7) RETIREMENT AND SAVINGS PLAN (IN WHOLE DOLLARS)

The Company maintains separate defined contribution 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 $375 in 2001 and $350 in 2000. Contributions to these
plans by the Company were $67,450, $69,443 and $55,283 for fiscal years 2001,
2000, and 1999, respectively.

(8) COMPENSATORY PLANS

The Mazel Store, Inc. 1996 Stock Option Plan ("Stock Option Plan") as
amended provides for the issuance 1,500,000 stock options ("Options") to acquire
the 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
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 (in thousands, except per share information):

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 2, 2002, February
3, 2001, and January 29, 2000.

32

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The above results may not be representative of the effect of the fair value
method of net income on future years.

The following is a summary of option activity for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000, and the related
weighted average exercise price:

During fiscal 2000 and 2001, the Company's Board of Directors approved
option grants in excess of those allowed by the Stock Option Plan. These grants
were made pending shareholder approval at the 2002 Annual Shareholders Meeting
of an increase in the available number of shares.

(9) DISCONTINUED OPERATIONS

During the fourth quarter of fiscal 2001, the Company formally approved a
plan to dispose of its Wholesale Division ("Division"), and on February 11,
2002, the Company signed an agreement that sold substantially all assets of this
Division to MZ Wholesale Acquisition LLC (MZ), d/b/a Mazel Company a group
headed by two former executives and current members of the Board of Directors.
The Division was engaged in the business of acquiring closeout merchandise at
prices substantially below traditional wholesale prices and selling such
merchandise through a variety of channels. The Division's wholesale operations
purchased and resold many of the same lines of merchandise sold through the
Company's current retail operations.

33

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

On the date of the sale, MZ paid the Company $22,292 for the purchase of
the Wholesale Division, based on a preliminary estimate of the net assets of the
Division. On April 12, 2002, the preliminary revised balance sheet of the
division was submitted, and MZ is expected to pay the Company an additional
$5,000. The Company recorded an after-tax loss on the sale of this business of
$3,665, or $0.40 per diluted share, and reflected this business as a
discontinued operation in fiscal year 2001. The loss on the sale included
closing costs related to the transaction such as severance costs, professional
fees, and the write-down of long-lived assets, as well as a provision for the
operating loss of the discontinued business from February 3, 2002 through
February 11, 2002 (the disposal date). At February 2, 2002, and February 3,
2001, $3,266 and $0, respectively, were included in accrued expenses and other
current liabilities related to these losses on the disposal of the Wholesale
Division.

The Consolidated Financial Statements and related notes for the periods
ended February 3, 2001, and January 29, 2000, have been reclassified, where
applicable, to reflect the Wholesale Division as a discontinued operation.
Operating results of discontinued operations (after elimination of intercompany
losses) were as follows for fiscal years 2001, 2000 and 1999:

34

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The net assets of the Wholesale Division as of February 2, 2002, and
February 3, 2001, were as follows:

(10) INVESTMENT IN VCM, LTD.

On August 3, 1997, the Company commenced the operation of VCM, Ltd.
("VCM"), a 50 percent owned joint venture with VCDS, whereby VCM operates the
toy, sporting goods, and general merchandise departments for the Value City
Department Stores chain. The Company coordinates merchandise purchasing on
behalf of VCM, some of which is sourced from the Company's wholesale segment.
The Company's original investment in VCM, which is accounted for under the
equity method, was $9,637. In addition to its 50 percent equity share of VCM's
net profit or loss, the Company receives a management fee equal to three percent
of net sales. The Company's share of VCM's net profit (loss) was ($398), ($240)
and $1,338, for fiscal years 2001, 2000, and 1999, respectively. The Company
also recorded management fee revenue, within selling, general and administrative
costs, totaling $4,085, $4,206, and $2,861 for fiscal years 2001, 2000 and 1999.
The Company recorded amounts receivable from VCM for these management fees of $0
and $4,206 as of February 2, 2002 and February 3, 2001, respectively.

On July 19, 2001, the Company received a notice from VCDS with respect to
its election to terminate the VCM joint venture by fiscal 2001 year-end, and on
February 2, 2002, the parties reached an agreement to terminate the joint
venture. Under the terms of the agreement, VCDS paid Mazel $8,375 in
consideration of the termination of Mazel's 50 percent ownership rights in the
joint venture. As a result of this termination, the Company recorded a $650 loss
during the fourth quarter of fiscal 2001.

(11) EARNINGS PER SHARE

Basic earnings per common share are computed using net income available to
common shareholders divided by the weighted average number of common shares
outstanding. For computation of diluted earnings per share, the weighted average
number of common shares outstanding is increased to give effect to stock

35

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

options considered to be common stock equivalents. The following table shows the
amounts used in computing earnings per share for the years ended February 2,
2002, February 3, 2001, and January 29, 2000:

The effect of incremental shares from stock options (see note 8) of 16,400
and 21,700 at February 2, 2002, and February 3, 2001, respectively, have been
excluded from diluted weighted average shares, as the net loss for the related
periods would cause the incremental shares to be antidilutive.

(12) SPECIAL CHARGE

In the fourth quarter of fiscal 2000, 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 $5,446 ($3,322 after tax, or $0.36 per share).
Of the charge, $4,450 related to inventory realignment and was recorded to cost
of sales, and $996 related to lease terminations and the write-down of other
assets was recorded to selling, general and administrative expense. An
additional charge of $8,403 for inventory realignment charges, the write-off of
bad debts, and professional fees incurred was recorded by the wholesale segment
disposed of on February 11, 2002 (see note 9). At February 2, 2002, and February
3, 2001, $350 and $1,371, respectively were included in accrued expenses and
other current liabilities related to these special charges.

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,
including the write-off of related long-lived assets and employee severance
costs.

36

MAZEL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(13) UNAUDITED QUARTERLY FINANCIAL DATA

The following table represents certain unaudited financial information for
the periods indicated:

37

MAZEL STORES, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

(DOLLARS IN THOUSANDS)

38

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 on May 2, 2002.

MAZEL STORES, INC.

By: /s/ PETER HAYES
Peter Hayes
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 May 2, 2002.

39

EXHIBIT INDEX

- ---------------

* Incorporated by reference to exhibit 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 Current Statement
on Form 8-K dated February 11, 2002.

*** Incorporated by reference to an exhibit included in the Quarterly
Statement on Form 10-Q for the quarter ended May 5, 2001.

**** Incorporated by reference to an exhibit included in the Current Statement
on Form 8-K dated February 2, 2002.

***** Incorporated by reference to an exhibit included in the Annual Statement
on Form 10-K for the fiscal year ended January 30, 1999.

40