1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 4, 2001
COMMISSION FILE NO. 1-6695
--------------------------
JO-ANN STORES, INC.
(Exact name of Registrant as specified in its charter)
OHIO 34-0720629
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
5555 DARROW ROAD, HUDSON, OHIO 44236
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 656-2600
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Class A Common Stock outstanding at September 14, 2001:
9,622,651
Shares of Class B Common Stock outstanding at September 14, 2001:
8,806,211
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JO-ANN STORES, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED AUGUST 4, 2001
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PART I. FINANCIAL INFORMATION: Page Numbers
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of August 4, 2001 and February 3, 2001 3
Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended
August 4, 2001 and July 29, 2000 4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended August 4,
2001 and July 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Page 2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JO-ANN STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AUGUST 4, FEBRUARY 3,
2001 2001
-------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS,
EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and temporary cash investments $ 22.3 $ 17.5
Inventories 483.0 451.0
Prepaid expenses and other current assets 38.0 37.3
-------------- --------------
Total current assets 543.3 505.8
Property, equipment and leasehold improvements, net 222.8 190.2
Goodwill, net 26.9 27.2
Other assets 21.0 19.0
-------------- --------------
Total assets $814.0 $742.2
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $142.9 $164.0
Accrued expenses 41.3 59.5
-------------- --------------
Total current liabilities 184.2 223.5
Long-term debt 375.0 240.0
Deferred income taxes 22.5 22.5
Other long-term liabilities 7.9 7.4
Shareholders' equity:
Common stock:
Class A, stated value $0.05 per share; issued and outstanding
9,581,893 and 9,364,896, respectively 0.6 0.6
Class B, stated value $0.05 per share; issued and outstanding
8,806,211 and 8,842,123, respectively 0.5 0.5
Additional paid-in capital 99.4 99.2
Unamortized restricted stock awards (0.9) (1.2)
Retained earnings 165.3 187.8
Accumulated other comprehensive income (loss) (2.7) --
-------------- --------------
262.2 286.9
Treasury stock, at cost (37.8) (38.1)
-------------- --------------
Total shareholders' equity 224.4 248.8
-------------- --------------
Total liabilities and shareholders' equity $814.0 $742.2
============== ==============
See notes to consolidated financial statements
Page 3
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JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------------------------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
Net sales $330.2 $299.0 $659.1 $624.4
Cost of sales 191.0 163.1 368.8 336.2
----------------------------- -----------------------------
Gross margin 139.2 135.9 290.3 288.2
Selling, general and administrative expenses 146.4 134.2 289.9 265.8
Depreciation and amortization 10.1 9.9 19.8 18.8
----------------------------- -----------------------------
Operating profit (loss) (17.3) (8.2) (19.4) 3.6
Interest expense 8.7 6.3 15.9 13.2
----------------------------- -----------------------------
Loss before income taxes (26.0) (14.5) (35.3) (9.6)
Income tax benefit (9.9) (5.5) (13.4) (3.6)
----------------------------- -----------------------------
Loss before equity loss (16.1) (9.0) (21.9) (6.0)
Equity loss from minority investment -- (1.0) -- (1.0)
----------------------------- -----------------------------
Loss before extraordinary item (16.1) (10.0) (21.9) (7.0)
Extraordinary item, loss related to early retirement of
debt, net of tax benefit of $0.4 million -- -- (0.6) --
----------------------------- -----------------------------
Net loss $ (16.1) $ (10.0) $ (22.5) $ (7.0)
============================= =============================
Net loss per common share - basic and diluted:
Net loss before extraordinary item $ (0.88) $ (0.55) $ (1.20) $ (0.39)
Extraordinary item, net of tax benefit -- -- (0.03) --
----------------------------- -----------------------------
Net loss $ (0.88) $ (0.55) $ (1.23) $ (0.39)
============================= =============================
Weighted average shares outstanding (millions):
Basic and diluted 18.4 18.0 18.3 17.9
============================= =============================
See notes to consolidated financial statements
Page 4
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JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------------
AUGUST 4, JULY 29,
2001 2000
----------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS)
Net cash flows from operating activities:
Net loss $ (22.5) $ (7.0)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 19.8 18.8
Equity loss from minority investment -- 1.0
Extraordinary item, net of tax 0.6 --
Changes in operating assets and liabilities:
Increase in inventories (32.0) (45.8)
Decrease in prepaid expenses and other current assets 1.0 0.3
Increase (decrease) in accounts payable (21.1) 37.1
Decrease in accrued expenses (20.8) (16.6)
Other, net 1.8 0.5
---------------- ----------------
Net cash used for operating activities (73.2) (11.7)
---------------- ----------------
Net cash flows used for investing activities:
Capital expenditures (52.5) (16.6)
Minority investment -- (6.5)
Other, net (1.1) 1.2
---------------- ----------------
Net cash used for investing activities (53.6) (21.9)
---------------- ----------------
Net cash flow provided by financing activities:
Net increase in credit facilities 135.0 30.1
Other, net (3.4) 2.5
---------------- ----------------
Net cash provided by financing activities 131.6 32.6
---------------- ----------------
Net increase (decrease) in cash and temporary investments 4.8 (1.0)
Cash and temporary cash investments at beginning of period 17.5 21.4
---------------- ----------------
Cash and temporary cash investments at end of period $ 22.3 $ 20.4
================ ================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 13.9 $ 13.2
Income taxes, net of refunds 0.4 5.5
See notes to consolidated financial statements
Page 5
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JO-ANN STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric
and craft retailer with 988 retail stores in 49 states at August 4, 2001. The
923 traditional and 65 superstores feature a large variety of competitively
priced, high quality apparel, craft and home decorating fabrics, notions,
crafts, seasonal and home decor accessories, and floral and framing products.
The consolidated financial statements include the accounts of the
Company and its subsidiaries and have been prepared without audit, pursuant to
the rules of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures herein are adequate to make the
information not misleading. Certain amounts in the fiscal 2001 interim financial
statements have been reclassified in order to conform to the current year
presentation. The statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 3, 2001.
Typical of most retail companies, the Company's business is highly
seasonal with the majority of revenues and operating profits generated in the
second half of the fiscal year; therefore, earnings or losses for a particular
interim period are not indicative of full year results. In the opinion of
management, the consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary for a fair statement of
results for the interim periods presented.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by
the weighted average number of shares outstanding during the period. If
applicable, diluted earnings per share include the effect of the assumed
exercise of dilutive stock options under the treasury stock method. Stock
options have not been included in the earnings per common share calculation for
the thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000, as
their inclusion would be anti-dilutive.
NOTE 3 - FINANCING
In April 2001, the Company entered into a new $365 million senior
secured credit facility (the "Credit Facility") which replaced the Company's
prior senior credit and synthetic lease facilities and expires on April 30,
2005. The Credit Facility consists of a $325 million revolving credit facility
and a $40 million term loan.
Deferred finance charges written-off under the prior senior credit
facility totaled $1.0 million, or $0.6 million after tax, and were recorded as
an extraordinary item in the first quarter of fiscal 2002. The deferred costs
written-off under the synthetic lease facility totaled $0.6 million, or $0.4
million after tax, and were included in selling, general and administrative
expenses in the first quarter of fiscal 2002.
Page 6
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NOTE 4 - FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company is subject to risk resulting from interest rate
fluctuations, as interest on the Company's Credit Facility is based on variable
rates. The Company's objective in managing its interest rate exposure is to
limit the impact of interest rate changes on earnings and cash flows. The
Company primarily utilizes interest rate swaps to achieve this objective,
effectively converting a portion of its variable-rate exposures to fixed
interest rates.
Effective February 4, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended. In accordance with SFAS No. 133, the
Company has reviewed and designated all of its interest rate swap agreements as
cash flow hedges and now recognizes the fair value of its interest rate swap
agreements on the balance sheet. Changes in the fair value of these agreements
are recorded in other comprehensive income (loss) and reclassified into earnings
as the underlying hedged item affects earnings.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS No. 141"), which supercedes
Accounting Principles Board (APB) Opinion No. 16, "Business Combinations". The
provisions of this statement apply to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 does not have any effect on the
Company's results of operations or financial position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 eliminates the current requirement to
amortize goodwill and intangible assets with indefinite useful lives and
addresses the amortization of intangible assets with finite useful lives. In
addition, goodwill will be subject to at least an annual assessment for
impairment by applying a fair value based test. The Company is required to adopt
this standard in fiscal 2003, which begins on February 3, 2002. The Company is
currently in the process of evaluating the potential impact of this statement on
the Company's financial statements.
NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes the effects of derivative
transactions accounted for under SFAS No. 133, net of related tax. Comprehensive
income (loss) consists of the following:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------------- ---------------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Net loss $(16.1) $(10.0) $(22.5) $(7.0)
Cumulative effect of change in
accounting principle -- -- (1.7) --
Other comprehensive income (loss) (0.2) -- (1.0) --
---------------- ---------------- --------------- ---------------
Comprehensive income (loss) $(16.3) $(10.0) $(25.2) $(7.0)
================ ================ =============== ===============
Page 7
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NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
The Company's 10-3/8% senior subordinated notes and Credit Facility are
fully and unconditionally guaranteed, on a joint and several basis, by the
wholly-owned subsidiaries of the Company. The senior subordinated notes are
subordinated to the Company's Credit Facility. Summarized consolidating
financial information of the Company (excluding its subsidiaries) and the
guarantor subsidiaries as of August 4, 2001 and February 3, 2001 and for the
thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000 are as
follows:
CONSOLIDATING BALANCE SHEETS
AUGUST 4, 2001
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------- ---------- ------------ ----------- -----------
(Millions of dollars)
ASSETS
Current assets:
Cash and temporary cash investments $ 18.8 $ 3.5 $ -- $ 22.3
Inventories 200.3 282.7 -- 483.0
Prepaid expenses and other current assets 28.8 9.2 -- 38.0
---------- ----------- ----------- -----------
Total current assets 247.9 295.4 -- 543.3
Property, equipment and leasehold improvements,
net 72.5 150.3 -- 222.8
Goodwill, net -- 26.9 -- 26.9
Other assets 19.3 1.7 -- 21.0
Investment in subsidiaries 9.1 -- (9.1) --
Intercompany receivable 457.7 -- (457.7) --
---------- ----------- ----------- -----------
Total assets $806.5 $474.3 $(466.8) $814.0
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $116.3 $ 26.6 $ -- $142.9
Accrued expenses 72.2 (30.9) -- 41.3
---------- ----------- ----------- -----------
Total current liabilities 188.5 (4.3) -- 184.2
Long-term debt 375.0 -- -- 375.0
Deferred income taxes 14.2 8.3 -- 22.5
Other long-term liabilities 4.4 3.5 -- 7.9
Intercompany payable -- 457.7 (457.7) --
Shareholders' equity:
Common stock 1.1 -- -- 1.1
Additional paid-in capital 99.4 -- -- 99.4
Unamortized restricted stock awards (0.9) -- -- (0.9)
Retained earnings 165.3 9.1 (9.1) 165.3
Accumulated other comprehensive income
(loss) (2.7) -- -- (2.7)
---------- ----------- ----------- -----------
262.2 9.1 (9.1) 262.2
Treasury stock, at cost (37.8) -- -- (37.8)
---------- ----------- ----------- -----------
Total shareholders' equity 224.4 9.1 (9.1) 224.4
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity $806.5 $474.3 $(466.8) $814.0
========== =========== =========== ===========
Page 8
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NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING BALANCE SHEETS
FEBRUARY 3, 2001
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ -----------
(Millions of dollars)
ASSETS
Current assets:
Cash and temporary cash investments $ 13.8 $ 3.7 $ -- $ 17.5
Inventories 181.9 269.1 -- 451.0
Prepaid expenses and other current assets 25.0 12.3 -- 37.3
---------- ----------- ----------- -----------
Total current assets 220.7 285.1 -- 505.8
Property, equipment and leasehold improvements,
net 74.6 115.6 -- 190.2
Goodwill, net -- 27.2 -- 27.2
Other assets 17.9 1.1 -- 19.0
Investment in subsidiaries 19.9 -- (19.9) --
Intercompany receivable 387.1 -- (387.1) --
---------- ----------- ----------- -----------
Total assets $720.2 $429.0 $(407.0) $742.2
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $127.3 $ 36.7 $ -- $164.0
Accrued expenses 85.3 (25.8) -- 59.5
---------- ----------- ----------- -----------
Total current liabilities 212.6 10.9 -- 223.5
Long-term debt 240.0 -- -- 240.0
Deferred income taxes 14.2 8.3 -- 22.5
Other long-term liabilities 4.6 2.8 -- 7.4
Intercompany payable -- 387.1 (387.1) --
Shareholders' equity:
Common stock 1.1 -- -- 1.1
Additional paid-in capital 99.2 -- -- 99.2
Unamortized restricted stock awards (1.2) -- -- (1.2)
Retained earnings 187.8 19.9 (19.9) 187.8
Accumulated other comprehensive income
(loss) -- -- -- --
---------- ----------- ----------- -----------
286.9 19.9 (19.9) 286.9
Treasury stock, at cost (38.1) -- -- (38.1)
---------- ----------- ----------- -----------
Total shareholders' equity 248.8 19.9 (19.9) 248.8
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity $720.2 $429.0 $(407.0) $742.2
========== =========== =========== ===========
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NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000
AUGUST 4, 2001
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------- ------------ ------------ -----------
(Millions of dollars)
Net sales $178.9 $330.4 $(179.1) $330.2
Cost of sales 111.3 258.8 (179.1) 191.0
----------- ------------ ----------- -----------
Gross margin 67.6 71.6 -- 139.2
Selling, general and administrative
expenses 74.2 72.2 -- 146.4
Depreciation and amortization 4.0 6.1 -- 10.1
----------- ------------ ----------- -----------
Operating loss (10.6) (6.7) -- (17.3)
Interest expense (0.5) 9.2 -- 8.7
----------- ------------ ----------- -----------
Loss before income taxes (10.1) (15.9) -- (26.0)
Income tax provision (benefit) (9.8) (0.1) -- (9.9)
----------- ------------ ----------- -----------
Net loss before equity losses (0.3) (15.8) -- (16.1)
Equity loss from subsidiaries (15.8) -- 15.8 --
----------- ------------ ----------- -----------
Net income (loss) $ (16.1) $ (15.8) $ 15.8 $ (16.1)
=========== ============ =========== ===========
JULY 29, 2000
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------- ------------ ------------ -----------
(Millions of dollars)
Net sales $161.8 $348.1 $(210.9) $299.0
Cost of sales 98.3 275.7 (210.9) 163.1
----------- ------------ ----------- -----------
Gross margin 63.5 72.4 -- 135.9
Selling, general and administrative
expenses 66.2 68.0 -- 134.2
Depreciation and amortization 4.4 5.5 -- 9.9
----------- ------------ ----------- -----------
Operating loss (7.1) (1.1) -- (8.2)
Interest expense (2.8) 9.1 -- 6.3
----------- ------------ ----------- -----------
Loss before income taxes (4.3) (10.2) -- (14.5)
Income tax provision (benefit) (5.4) (0.1) -- (5.5)
----------- ------------ ----------- -----------
Net income (loss) before equity losses 1.1 (10.1) -- (9.0)
Equity loss from minority investment (1.0) -- -- (1.0)
Equity loss from subsidiaries (10.1) -- 10.1 --
----------- ------------ ----------- -----------
Net income (loss) $ (10.0) $ (10.1) $ 10.1 $ (10.0)
=========== ============ =========== ===========
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NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000
AUGUST 4, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $357.9 $687.4 $(386.2) $659.1
Cost of sales 220.7 534.3 (386.2) 368.8
----------- ----------- ----------- -----------
Gross margin 137.2 153.1 -- 290.3
Selling, general and administrative expenses 146.7 143.2 -- 289.9
Depreciation and amortization 8.1 11.7 -- 19.8
----------- ----------- ----------- -----------
Operating loss (17.6) (1.8) -- (19.4)
Interest expense 6.7 9.2 -- 15.9
----------- ----------- ----------- -----------
Loss before income taxes (24.3) (11.0) -- (35.3)
Income tax provision (benefit) (13.2) (0.2) -- (13.4)
----------- ----------- ----------- -----------
Net loss before equity loss extraordinary
item (11.1) (10.8) -- (21.9)
Equity loss from subsidiaries (10.8) -- 10.8 --
--------------------------------------------------
Net income (loss) before extraordinary item (21.9) (10.8) 10.8 (21.9)
Extraordinary item, net of tax benefit (0.6) -- -- (0.6)
----------- ----------- ----------- -----------
Net income (loss) $ (22.5) $ (10.8) $ 10.8 $ (22.5)
=========== =========== =========== ===========
JULY 29, 2000
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $340.5 $590.5 $(306.6) $624.4
Cost of sales 198.6 444.2 (306.6) 336.2
----------- ------------ ----------- -----------
Gross margin 141.9 146.3 -- 288.2
Selling, general and administrative
expenses 138.1 127.7 -- 265.8
Depreciation and amortization 8.7 10.1 -- 18.8
----------- ------------ ----------- -----------
Operating profit (loss) (4.9) 8.5 -- 3.6
Interest expense (2.3) 15.5 -- 13.2
----------- ------------ ----------- -----------
Loss before income taxes (2.6) (7.0) -- (9.6)
Income tax provision (benefit) (3.6) -- -- (3.6)
----------- ------------ ----------- -----------
Net income (loss) before equity losses 1.0 (7.0) -- (6.0)
Equity loss from minority investment (1.0) -- -- (1.0)
Equity loss from subsidiaries (7.0) -- 7.0 --
----------- ------------ ----------- -----------
Net income (loss) $ (7.0) $ (7.0) $ 7.0 $ (7.0)
=========== ============ =========== ===========
Page 11
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NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000
AUGUST 4, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------- ----------- ------------ -----------
(Millions of dollars)
Net cash provided by (used for) operating activities $(119.0) $ 45.8 $ -- $(73.2)
Net cash flows used for investing activities:
Capital expenditures (6.7) (45.8) -- (52.5)
Other, net (0.9) (0.2) -- (1.1)
----------- ----------- ------------ -----------
Net cash used for investing activities (7.6) (46.0) -- (53.6)
Net cash flows provided by financing activities:
Net increase in credit facilities 135.0 -- -- 135.0
Other, net (3.4) -- -- (3.4)
----------- ----------- ------------ -----------
Net cash provided by financing activities 131.6 -- -- 131.6
----------- ----------- ------------ -----------
Net increase (decrease) in cash 5.0 (0.2) -- 4.8
Cash and temporary cash investments at beginning of
period 13.8 3.7 -- 17.5
----------- ----------- ------------ -----------
Cash and temporary cash investments at end of period $ 18.8 $ 3.5 $ -- $ 22.3
=========== =========== ============ ===========
JULY 29, 2000
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net cash provided by (used for) operating activities $(29.1) $ 17.4 $ -- $(11.7)
Net cash flows used for investing activities:
Capital expenditures (5.1) (11.5) -- (16.6)
Minority investment (6.5) -- -- (6.5)
Other, net (0.1) 1.3 -- 1.2
----------- ----------- ------------ -----------
Net cash used for investing activities (11.7) (10.2) -- (21.9)
Net cash flows provided by financing activities:
Net increase in credit facilities 30.1 -- -- 30.1
Other, net 2.5 -- -- 2.5
----------- ----------- ------------ -----------
Net cash provided by financing activities 32.6 -- -- 32.6
----------- ----------- ------------ -----------
Net increase (decrease) in cash (8.2) 7.2 -- (1.0)
Cash and temporary cash investments at beginning of
period 16.9 4.5 -- 21.4
----------- ----------- ------------ -----------
Cash and temporary cash investments at end of period $ 8.7 $ 11.7 $ -- $ 20.4
=========== =========== ============ ===========
Page 12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000
Net sales for the second quarter of fiscal 2002 increased 10.4%, or
$31.2 million, to $330.2 million from $299.0 million in the prior year. Sales
from stores open one year or more ("same-store sales") increased 9.7% for the
second quarter of fiscal 2002 compared with a same-store sales increase of 0.7%
for the prior year second quarter. Same-store sales accounted for $27.4 million,
or approximately 88% of the overall sales increase for the quarter. The balance
of the increase was primarily due to the increased number of superstores in
operation. At August 4, 2001, 65 superstores were in operation compared with 51
superstores at July 29, 2000. Sales benefited in part from the Company's
previously announced SKU Reduction Initiative to sell off discontinued
merchandise. Clearance sales began in May and contributed approximately $17.0
million in sales during the second quarter, but were recorded at a zero gross
margin.
By store format, our same-store sales performance for traditional
stores increased 9.2%. This was driven by a 5.2% increase in the average ticket
with the balance of the increase driven by increased customer traffic.
Same-store sales for superstores increased 10.8% for the quarter, substantially
driven by an increase in customer traffic as average ticket held relatively
constant with the prior year. All product categories experienced positive
same-store sales gains for the quarter, with our seasonal and floral categories
performing strongly, generating double-digit same-store sales growth for the
quarter.
As a percent of net sales, gross margin decreased 3.3% to 42.2% for the
second quarter of fiscal 2002, from 45.5% for the same quarter a year earlier.
Gross margin, as a rate to sales, was negatively impacted by higher shrink
expense (1.6%) and zero gross margin sales from the SKU Reduction Initiative
(2.3%).
The shrink expense increase resulted from a deterioration in our shrink
rates versus the prior year, consistent with the trend identified in the first
quarter. We adjust our store shrink accrual rates through the performance of
annual physical inventories taken throughout the year. Physical inventories are
typically concentrated in the nine months between January and September. During
the second quarter, we inventoried, reconciled and recorded the inventory
results of approximately 40% of our stores, bringing our year-to-date results to
75% of our stores inventoried, reconciled and recorded. The impact on second
quarter results stemmed both from stores actually inventoried during the quarter
and to an increased shrink accrual required on uninventoried sales based on the
results of the inventoried stores. Consequently, shrink expense was $6.2
million, or 1.6%, worse than our shrink expense in the prior year second
quarter.
Selling, general and administrative ("SG&A") expenses were 44.3% of net
sales for the second quarter of fiscal 2002, versus 44.9% for the second quarter
of fiscal 2001. SG&A expense leverage was positively impacted by the overall
strong same-store sales growth. SG&A expense leverage improved despite the
operation of three distribution centers for the entire quarter, resulting in
incrementally higher distribution expense of approximately $1.0 million, and a
$1.4 million charge for severance costs associated with a corporate downsizing
that was undertaken and completed during the second quarter. The downsizing
resulted in an 8% reduction in corporate payroll costs.
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Depreciation and amortization expense increased $0.2 million to $10.1
million from $9.9 million. This increase is attributable to capital expenditures
completed in the current and prior year.
The operating loss for the second quarter of fiscal 2002 was $17.3
million, compared to an operating loss of $8.2 million for the second quarter of
fiscal 2001.
Interest expense increased $2.4 million to $8.7 million from $6.3
million in the second quarter of fiscal 2001. The increase is primarily due to
the impact of higher average borrowings and amortization of deferred fees
associated with the new credit facility finalized in the first quarter. These
increases were partially offset by a lower effective interest rate. Average
borrowings for the second quarter of fiscal 2002 increased $87.6 million, to
$356.2 million from $268.6 million in the prior year second quarter. The
increase in average borrowings is due primarily to the unwind of our synthetic
lease facility and a change in our import letter of credit terms from 120 days
to "site", as discussed further under "Liquidity and Capital Resources" below.
Our effective income tax rate of 38.0% for the second quarter of fiscal
2002 was consistent with the rate for the second quarter of fiscal 2001.
Net loss for the second quarter was $16.1 million, or $0.88 per diluted
share, compared to a net loss of $10.0 million, or $0.55 per diluted share, for
the prior year second quarter. The second quarter of the prior year included an
equity loss from our minority investment in IdeaForest.com of $1.0 million, or
$0.05 per diluted share.
COMPARISON OF THE TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000
Net sales for the first half of fiscal 2002 increased 5.6%, or $34.7
million, to $659.1 million from $624.4 million in the prior year. Same-store
sales increased 3.5% for fiscal 2002 compared to a same-store sales increase of
3.2% for the prior year. Same-store sales accounted for $21.2 million, or
approximately 61% of this increase. The balance of the increase was primarily
due to the increased number of superstores in operation. Sales benefited in part
from the Company's previously announced SKU Reduction Initiative to sell off
discontinued merchandise. Clearance sales began in May and contributed
approximately $17.0 million in sales during the second quarter, but were
recorded at a zero gross margin.
By store format, our same-store sales performance for traditional
stores increased 2.9%. This was driven by a 4.1% increase in the average ticket,
partially offset by a slight reduction in customer traffic. Same-store sales for
superstores increased 4.5% year-to-date, driven by a 6.4% increase in customer
traffic as average ticket fell slightly against the prior year.
As a percent of net sales, gross margin decreased 2.2% to 44.0% for
year-to-date fiscal 2002, from 46.2% for the same period a year earlier. Gross
margin, as a rate to sales, was negatively impacted by higher shrink expense
(1.9%) and zero gross margin sales from the SKU Reduction Initiative (1.2%).
The shrink expense increase resulted from a deterioration in our shrink
versus the prior year. We adjust our store shrink accrual rates through the
performance of annual physical inventories taken throughout the year. Physical
inventories are concentrated in the nine months between January and September.
Year-to-date through the second quarter, we have inventoried, reconciled and
recorded the inventory results of over 75% of our stores. The impact on results
stemmed both from stores actually inventoried year-to-date and to an increased
shrink accrual required on uninventoried sales based on the
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results of the inventoried stores. Consequently, shrink expense for the
year-to-date period was $13.1 million, or 1.9%, worse than our shrink expense
for the year-to-date period last year.
SG&A expenses were 44.0% of net sales for the first half of fiscal
2002, versus 42.6% for fiscal 2001. SG&A expense leverage was negatively
impacted by higher distribution expenses due to the opening of our second owned
distribution center in Visalia, California, higher store expenses, primarily due
to pressure on store expenses resulting from the greater number of etc stores
open and higher utility costs, and the accrual of severance costs of $1.4
million associated with a corporate downsizing that was undertaken during the
second quarter.
Depreciation and amortization expense increased $1.0 million to $19.8
million from $18.8 million. This increase is attributable to capital
expenditures completed in the current and prior year and two additional months
of depreciating the cost of the SAP retail project, which we began depreciating
in April 2000.
The operating loss for the second quarter year-to-date of fiscal 2002
was $19.4 million, compared with an operating profit of $3.6 million for fiscal
2001.
Year-to-date interest expense increased $2.7 million to $15.9 million
from $13.2 million in fiscal 2001. The increase is primarily due to the impact
of higher average borrowings and amortization of deferred fees associated with
the new credit facility finalized in the first quarter. These increases were
partially offset by a lower effective interest rate. Average borrowings for
fiscal 2002 increased $55.9 million, to $313.2 million from $257.3 million in
the prior year. The increase in average borrowings is due primarily to the
unwind of the synthetic lease facility and the change in import letter of credit
terms from 120 days to "site", as discussed under "Liquidity and Capital
Resources" below.
Our effective income tax rate of 38.0% for the first two quarters of
fiscal 2002 was consistent with the rate used in the prior year.
Net loss before extraordinary item for the first two quarters was $21.9
million, or $1.20 per diluted share, compared with a net loss of $6.0 million,
or $0.39 per diluted share, for the prior year.
In April 2001, we entered into a new four-year $365 million senior
secured credit facility (the "Credit Facility"), consisting of a $325 million
revolving credit facility and a $40 million term loan facility (the "Term
Loan"). The Credit Facility replaced our prior senior credit and synthetic lease
facilities. Deferred finance charges written-off under the prior senior credit
facility totaled $0.6 million after-tax, or $0.03 per diluted share, and were
recorded as an extraordinary item. See the discussion under "Liquidity and
Capital Resources - Financing" below.
Net loss for the first two quarters of fiscal 2002 was $22.5 million,
or $1.23 per diluted share, compared with a net loss of $7.0 million, or $0.39
per diluted share, for the prior year. The prior year included an equity loss
from our minority investment in IdeaForest.com of $1.0 million, or $0.05 per
diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary cash investments, increased $4.8 million
during the first two quarters of fiscal 2002 to $22.3 million as of August 4,
2001.
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Net cash used for operating activities was $73.2 million in the first
half of fiscal 2002, compared to net cash used for operating activities of $11.7
million in the first half of fiscal 2001.
Inventories increased $32.0 million, compared with an increase of $45.8
million in the prior year first half. Inventories typically increase during the
first three quarters of the fiscal year as the Company builds for the peak
selling season.
Accounts payable decreased $21.1 million in the first half of fiscal
2002 despite the increased inventory levels due to payment changes we initiated
under our import letter of credit arrangements. We utilize letters of credit in
the procurement of imported product for resale. Imported product represents
approximately 20% of our total annual purchases. Beginning in late fiscal 2001,
we have been changing our dating on import letters of credit to approximately 10
day, or "site terms", from our historic terms of 120 days, in exchange for more
favorable cash discount terms from our vendors. This has resulted in an
approximately $30 million decrease in accounts payable and a corresponding
increase in our debt outstanding.
Net cash used for investing activities for the first half of fiscal 2002
totaled $53.6 million compared to $21.9 million in the first half of fiscal
2001. Capital expenditures of $52.5 million for the first half of fiscal 2002
include approximately $40.0 million related to the unwind of a synthetic lease
facility which was replaced by our new Credit Facility (discussed further under
"Financing" below). Excluding the unwind of the synthetic lease, capital
expenditures of $12.5 million during the first half of fiscal 2002 related
primarily to the opening of seven new superstores and other store related
projects.
During the first half of fiscal 2002, we opened seven superstores,
relocated or expanded seven traditional stores and closed 26 smaller or
under-performing traditional stores. For the balance of fiscal 2002, we expect
to open an additional five superstores, and to relocate or expand three
traditional stores. We have no material commitments in connection with these
planned capital expenditures.
Financing
We believe that our Credit Facility, coupled with cash on hand and cash
from operations, will be sufficient to cover our working capital, capital
expenditure and debt service requirement needs for the foreseeable future. In
April 2001, we entered into a new senior secured credit facility which expires
on April 30, 2005 and which, as explained below, replaced our prior senior
credit and synthetic lease facilities. The Credit Facility consists of a $365
million credit facility providing for $325 million in revolving loans and a $40
million term loan, both secured by a first priority perfected security interest
in our inventory, accounts receivable, property and other assets. The Credit
Facility is fully and unconditionally guaranteed by each of our subsidiaries. As
of September 14, 2001, excess availability under this facility was $97.3
million. Interest on borrowings under the Credit Facility is calculated at the
bank's base rate or London Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%,
depending on the level of excess availability (as defined in the Credit
Agreement) that is maintained. Proceeds from the Credit Facility were used to
repay all outstanding borrowings under our prior senior credit facility and
synthetic lease facility.
The term loan portion of the Credit Facility replaces a $40 million
synthetic lease facility that we used to finance the construction of our West
Coast distribution center located in Visalia, California. The synthetic lease
facility was accounted for as an operating lease, with interest payments
capitalized until the facility began operations. As a result of the unwind of
the synthetic lease facility, we recorded the
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appropriate assets and debt obligation of $40 million in the first quarter of
fiscal 2002. The term loan, while outstanding, reduces availability under the
Credit Facility.
Effective May 15, 2001, the agent for the Credit Facility assumed
assignment of our two interest rate swap agreements existing as of February 3,
2001, and on May 16, 2001, terminated those interest rate swap agreements and
established a new interest rate swap with a fixed LIBOR rate of 6.72% and
notional amount of $90.0 million, reducing to $40.0 million on May 1, 2003,
until its expiration on April 30, 2005.
BUSINESS OUTLOOK
We estimate that we will generate a profit, before any non-recurring
charges, for the second half of fiscal 2002 in the range of $0.65 to $0.75 per
share. Although we expect to report an earnings improvement over the last year
beginning in the fourth quarter, third quarter operating results, before
non-recurring charges, will most likely yield a net loss. Our actual results in
the third and fourth quarter are highly dependent on the sales performance we
are able to achieve. As a result, our guidance is subject to further refinement
which we will be providing in our future quarterly reports.
In addition, we estimate that non-recurring charges associated with
additional store closings and other turnaround initiatives, the evaluation of
which is currently being finalized and we expect to have completed by the end of
the third quarter, could increase the fiscal 2002 expected loss by $0.30 to
$0.50 per share. This estimate could change based on the final number of stores
we ultimately identify for closing.
SEASONALITY AND INFLATION
Our business exhibits seasonality, which is typical for most retail
companies. Our sales are much stronger in the second half of the year than the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on net sales
or on net income. There can be no assurance, however, that our operating results
will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "estimates,"
"expects," "believes," and similar expressions as they relate to us are intended
to identify such forward-looking statements. Our actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, changes in customer demand, changes in trends in the fabric
and craft industry, seasonality, our failure to manage our growth or transition
to our new Visalia distribution center, our failure to execute our productivity
initiatives, including the SKU Reduction Initiative and the store base
productivity review, loss of key management, the availability of merchandise,
changes in the competitive pricing for products, and the impact of our and our
competitors store openings and closings.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative financial instruments at various times to manage the
risk associated with interest rate fluctuations. These agreements are
insignificant to our operations and financial position.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 16, 2000, Sandy Lortz, a former employee of the Company,
filed a purported class action complaint (the "Lortz Complaint") against the
Company, on behalf of the Company's former and current California store
management employees. The Lortz Complaint was filed in the Superior Court of
California and alleges the Company violated certain California laws by
erroneously treating its store management employees as "exempt" employees who
are not entitled to overtime compensation. The Lortz Complaint seeks
compensatory damages, penalties, attorneys' fees and injunctive relief. This
case has been consolidated with a similar class action complaint filed on behalf
of Regina Salas, filed on October 24, 2000 in the Superior Court of California.
The case is in the discovery phase and no trial date has been set. The Company
intends to defend this lawsuit vigorously.
The Company is a defendant from time to time in lawsuits incidental to
its business. Based on currently available information, the Company believes
that resolution of all known contingencies, including the litigation described
above, is uncertain, and there can be no assurance that future costs of such
litigation would not be material to the Company's financial position or results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) An Annual Meeting of Shareholders of the Company was held June 7,
2001.
b) Ira Gumberg and Alma Zimmerman were elected to the Board of
Directors in the class whose term of office expires in 2004. Alan
Rosskamm, Scott Cowen and Gregg Searle continued as Directors in
the class whose term of office expires in 2003. Frank Newman and
Betty Rosskamm continued as Directors in the class whose term of
office expires in 2002.
c) The nominees for Directors as listed in the proxy statement were
elected with the following vote:
Nominee Votes For Votes Withheld
Ira Gumberg 5,814,381 943,493
Alma Zimmerman 5,806,151 951,723
ITEM 5. OTHER INFORMATION
Not Applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
--------
No exhibits are filed with this report.
b) Reports on Form 8-K
-------------------
On August 7, 2001, the Company filed a Current Report on Form
8-K, under Item 5, to report the election of Beryl Raaf to the
Company's Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JO-ANN STORES, INC.
DATE: September 18, 2001 /s/ Alan Rosskamm
------------------
By: Alan Rosskamm
President and Chief Executive Officer
/s/ Brian P. Carney
---------------------------
By: Brian P. Carney
Executive Vice President and Chief
Financial Officer
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