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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 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 December 14, 2001: 9,812,960
Shares of Class B Common Stock outstanding at December 14, 2001: 8,806,211
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JO-ANN STORES, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED NOVEMBER 3, 2001
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION: Page Numbers
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of November 3, 2001 and February 3, 2001 3
Consolidated Statements of Operations for the Thirteen and Thirty-Nine
Weeks Ended November 3, 2001 and October 28, 2000 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
November 3, 2001 and October 28, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Page 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JO-ANN STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
NOVEMBER 3, FEBRUARY 3,
2001 2001
- -------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS,
EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and temporary cash investments $ 29.1 $ 17.5
Inventories 467.1 451.0
Prepaid expenses and other current assets 39.9 37.3
-------------- --------------
Total current assets 536.1 505.8
Property, equipment and leasehold improvements, net 220.9 190.2
Goodwill, net 26.7 27.2
Other assets 19.1 19.0
-------------- --------------
Total assets $802.8 $742.2
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $151.5 $164.0
Accrued expenses 51.4 59.5
-------------- --------------
Total current liabilities 202.9 223.5
Long-term debt 356.0 240.0
Deferred income taxes 23.5 22.5
Other long-term liabilities 8.1 7.4
Shareholders' equity:
Common stock:
Class A, stated value $0.05 per share; issued and outstanding
9,798,356 and 9,320,725, respectively 0.6 0.6
Class B, stated value $0.05 per share; issued and outstanding
8,806,211 and 8,842,998 respectively 0.5 0.5
Additional paid-in capital 99.8 99.2
Unamortized restricted stock awards (0.8) (1.2)
Retained earnings 154.0 187.8
Accumulated other comprehensive income (loss) (4.4) --
-------------- --------------
249.7 286.9
Treasury stock, at cost (37.4) (38.1)
-------------- --------------
Total shareholders' equity 212.3 248.8
-------------- --------------
Total liabilities and shareholders' equity $802.8 $742.2
============== ==============
See notes to consolidated financial statements
Page 3
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------------------------------------------
NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
Net sales $413.0 $362.5 $1,072.1 $986.9
Cost of sales 230.4 190.1 599.2 526.3
----------------------------- -----------------------------
Gross margin 182.6 172.4 472.9 460.6
Selling, general and administrative expenses 182.4 148.2 472.3 414.0
Depreciation and amortization 9.9 9.6 29.7 28.4
----------------------------- -----------------------------
Operating profit (loss) (9.7) 14.6 (29.1) 18.2
Interest expense 8.6 7.9 24.5 21.1
----------------------------- -----------------------------
Income (loss) before income taxes (18.3) 6.7 (53.6) (2.9)
Income tax provision (benefit) (7.0) 2.5 (20.4) (1.1)
----------------------------- -----------------------------
Income(loss) before equity loss (11.3) 4.2 (33.2) (1.8)
Equity loss from minority investment -- (1.1) -- (2.1)
----------------------------- -----------------------------
Income (loss) before extraordinary item (11.3) 3.1 (33.2) (3.9)
Extraordinary item, loss related to early retirement of
debt, net of tax benefit of $0.4 million -- -- (0.6) --
----------------------------- -----------------------------
Net income (loss) $(11.3) $ 3.1 $ (33.8) $ (3.9)
============================= =============================
Net income (loss) per common share - basic and diluted:
Net income (loss) before extraordinary item $(0.61) $0.17 $ (1.81) $(0.21)
Extraordinary item, net of tax benefit -- -- $ (0.03) --
----------------------------- -----------------------------
Net income (loss) $(0.61) $0.17 $ (1.84) $(0.21)
============================= =============================
Weighted average shares outstanding (millions):
Basic 18.5 18.1 18.4 18.0
============================= =============================
Diluted 18.5 18.1 18.4 18.0
============================= =============================
See notes to consolidated financial statements
Page 4
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
-------------------------------------
NOVEMBER 3, OCTOBER 28,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------
(MILLIONS OF DOLLARS)
Net cash flows from operating activities:
Net loss $ (33.8) $ (3.9)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 29.7 28.4
Equity loss from minority investment -- 2.1
Extraordinary item, net of tax 0.6 --
Changes in operating assets and liabilities:
Increase in inventories (16.1) (114.6)
Decrease in prepaid expenses and other current assets 0.9 0.4
Increase (decrease) in accounts payable (12.5) 78.5
Decrease in accrued expenses (13.1) (5.6)
Other, net 3.7 (1.4)
---------------- ----------------
Net cash used for operating activities (40.6) (16.1)
---------------- ----------------
Net cash flows used for investing activities:
Capital expenditures (60.4) (26.5)
Minority investment -- (6.5)
Other, net (1.1) 1.0
---------------- ----------------
Net cash used for investing activities (61.5) (32.0)
---------------- ----------------
Net cash flow provided by financing activities:
Net increase in credit facilities 116.0 51.5
Other, net (2.3) 2.6
---------------- ----------------
Net cash provided by financing activities 113.7 54.1
---------------- ----------------
Net increase in cash and temporary investments 11.6 6.0
Cash and temporary cash investments at beginning of period 17.5 21.4
---------------- ----------------
Cash and temporary cash investments at end of period $ 29.1 $ 27.4
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 25.9 $ 21.6
Income taxes, net of refunds 0.8 5.7
See notes to consolidated financial statements
Page 5
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 974 retail stores in 49 states at December 6, 2001. The 904
traditional and 70 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
thirty-nine weeks ended November 3, 2001 and the thirty-nine weeks ended October
28, 2000, as their inclusion would be anti-dilutive.
NOTE 3 - STORE CLOSING CHARGE
The Company has communicated since the fourth quarter of fiscal 2001, when
its turnaround plan was announced, and a charge for the SKU Reduction Initiative
and 42 store closings was taken, that it expected to take a second charge for
store closings in the current fiscal year.
During the third quarter of fiscal 2002, the Company recorded a $19.7
million store closing charge. This store closing charge includes asset
write-downs associated with the closing of 102 traditional stores and either the
downsizing or buyout of the remaining lease obligation of four superstores that
are under-performing relative to the Company's required performance levels. The
charge also includes the estimated cash closing costs and the estimated amount
of any remaining rent liability, under non-cancelable lease agreements after the
store closing date, for the 77 store closings that are expected to be completed
in the next year.
Approximately $8.0 million of the $19.7 million charge represents asset
write-downs that are non-cash in nature. The majority of the charge, $17.1
million, is recorded in selling, general and
Page 6
administrative expenses with the balance, $2.6 million, recorded in cost of
sales. The Company expects this to be the final charge related to initiatives
undertaken as part of its turnaround plan.
NOTE 4 - 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.
NOTE 5 - 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. Interest rate swaps
are primarily utilized 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.
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 THIRTY-NINE WEEKS ENDED
------------------------------ ---------------------------------
NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28,
2001 2000 2001 2000
-------------- ------------- --------------- ---------------
Net income (loss) $(11.3) $3.1 $(33.8) $(3.9)
Cumulative effect of change in accounting principle -- -- (1.7) --
Other comprehensive income (loss) (1.7) -- (2.7) --
-------------- ------------- --------------- ---------------
Comprehensive income (loss) $(13.0) $3.1 $(38.2) $(3.9)
============== ============= =============== ===============
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS No. 141"), which supersedes Accounting
Principles Board 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
Page 7
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. The elimination of goodwill amortization will have a $0.7 million
annual positive impact to the Company's reported results of operations.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143") and in August 2001, issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). SFAS No. 143 requires the recognition of a liability for the
estimated cost of disposal as part of the initial cost of a long-lived asset.
SFAS No. 144 supersedes SFAS No. 121 to supply a single accounting approach for
measuring impairment of long-lived assets, including a segment of a business
accounted for as a discontinued operation or those to be sold or disposed of
other than by sale. The Company is required to adopt SFAS No. 143 in fiscal 2004
and SFAS No. 144 in fiscal 2003. The Company does not expect these statements to
have a significant impact on the Company's results of operations or financial
position.
Page 8
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 November 3, 2001 and February 3, 2001 and for the
thirteen and thirty-nine weeks ended November 3, 2001 and October 28, 2000 are
as follows:
CONSOLIDATING BALANCE SHEETS
NOVEMBER 3, 2001
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------- ---------- ------------ ------------ -----------
(Millions of dollars)
ASSETS
Current assets:
Cash and temporary cash investments $ 24.7 $ 4.4 $ -- $ 29.1
Inventories 206.4 260.7 -- 467.1
Prepaid expenses and other current assets 25.8 14.1 -- 39.9
---------- ----------- ----------- -----------
Total current assets 256.9 279.2 -- 536.1
Property, equipment and leasehold improvements,
net 70.6 150.3 -- 220.9
Goodwill, net -- 26.7 -- 26.7
Other assets 17.4 1.7 -- 19.1
Investment in subsidiaries 14.9 -- (14.9) --
Intercompany receivable 453.7 -- (453.7) --
---------- ----------- ----------- -----------
Total assets $813.5 $457.9 $(468.6) $802.8
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 142.7 $ 8.8 $ -- $151.5
Accrued expenses 83.3 (31.9) -- 51.4
---------- ----------- ----------- -----------
Total current liabilities 226.0 (23.1) -- 202.9
Long-term debt 356.0 -- -- 356.0
Deferred income taxes 14.7 8.8 -- 23.5
Other long-term liabilities 4.5 3.6 -- 8.1
Intercompany payable -- 453.7 (453.7) --
Shareholders' equity:
Common stock 1.1 -- -- 1.1
Additional paid-in capital 99.8 -- -- 99.8
Unamortized restricted stock awards (0.8) -- -- (0.8)
Retained earnings 154.0 14.9 (14.9) 154.0
Accumulated other comprehensive income
(loss) (4.4) -- -- (4.4)
---------- ----------- ----------- -----------
249.7 14.9 (14.9) 249.7
Treasury stock, at cost (37.4) -- -- (37.4)
---------- ----------- ----------- -----------
Total shareholders' equity 212.3 14.9 (14.9) 212.3
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity $813.5 $457.9 $(468.6) $802.8
========== =========== =========== ===========
Page 9
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
========== =========== =========== ===========
Page 10
NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $227.2 $423.4 $(237.6) $413.0
Cost of sales 139.4 328.6 (237.6) 230.4
----------- ------------ ----------- -----------
Gross margin 87.8 94.8 -- 182.6
Selling, general and administrative
expenses 104.1 78.3 -- 182.4
Depreciation and amortization 3.7 6.2 -- 9.9
----------- ------------ ----------- -----------
Operating profit (loss) (20.0) 10.3 -- (9.7)
Interest expense 4.1 4.5 -- 8.6
----------- ------------ ----------- -----------
Income (loss) before income taxes (24.1) 5.8 -- (18.3)
Income tax benefit (7.0) -- -- (7.0)
----------- ------------ ----------- -----------
Net income (loss) before equity losses (17.1) 5.8 -- (11.3)
Equity income from subsidiaries 5.8 -- (5.8) --
----------- ------------ ----------- -----------
Net income (loss) $(11.3) $ 5.8 $ (5.8) $(11.3)
=========== ============ =========== ===========
OCTOBER 28, 2000
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $200.6 $425.7 $(263.8) $362.5
Cost of sales 118.3 335.6 (263.8) 190.1
----------- ------------ ----------- -----------
Gross margin 82.3 90.1 -- 172.4
Selling, general and administrative
expenses 74.3 73.9 -- 148.2
Depreciation and amortization 4.1 5.5 -- 9.6
----------- ------------ ----------- -----------
Operating profit 3.9 10.7 -- 14.6
Interest expense (2.8) 10.7 -- 7.9
----------- ------------ ----------- -----------
Income before income taxes 6.7 -- -- 6.7
Income tax provision (benefit) 2.6 (0.1) -- 2.5
----------- ------------ ----------- -----------
Net income before equity losses 4.1 0.1 -- 4.2
Equity loss from minority investment (1.1) -- -- (1.1)
Equity income from subsidiaries 0.1 -- (0.1) --
----------- ------------ ----------- -----------
Net income (loss) $ 3.1 $ 0.1 $ (0.1) $ 3.1
=========== ============ =========== ===========
Page 11
NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $585.1 $1,110.8 $(623.8) $1,072.1
Cost of sales 360.1 862.9 (623.8) 599.2
----------- ----------- ----------- -----------
Gross margin 225.0 247.9 -- 472.9
Selling, general and administrative expenses 250.8 221.5 -- 472.3
Depreciation and amortization 11.8 17.9 -- 29.7
----------- ----------- ----------- -----------
Operating profit (loss) (37.6) 8.5 -- (29.1)
Interest expense 10.8 13.7 -- 24.5
----------- ----------- ----------- -----------
Loss before income taxes (48.4) (5.2) -- (53.6)
Income tax benefit (20.2) (0.2) -- (20.4)
----------- ----------- ----------- -----------
Net loss before equity loss and extraordinary
item (28.2) (5.0) -- (33.2)
Equity loss from subsidiaries (5.0) -- 5.0 --
--------------------------------------------------
Net income (loss) before extraordinary item (33.2) (5.0) 5.0 (33.2)
Extraordinary item, net of tax benefit (0.6) -- -- (0.6)
----------- ----------- ----------- -----------
Net income (loss) $(33.8) $ (5.0) $ 5.0 $ (33.8)
=========== =========== =========== ===========
OCTOBER 28, 2000
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------- ------------ ------------ ------------
(Millions of dollars)
Net sales $541.1 $1,016.2 $(570.4) $986.9
Cost of sales 316.9 779.8 (570.4) 526.3
----------- ------------ ----------- -----------
Gross margin 224.2 236.4 -- 460.6
Selling, general and administrative
expenses 212.4 201.6 -- 414.0
Depreciation and amortization 12.8 15.6 -- 28.4
----------- ------------ ----------- -----------
Operating profit (loss) (1.0) 19.2 -- 18.2
Interest expense (5.1) 26.2 -- 21.1
----------- ------------ ----------- -----------
Income (loss) before income taxes 4.1 (7.0) -- (2.9)
Income tax benefit (1.0) (0.1) -- (1.1)
----------- ------------ ----------- -----------
Net income (loss) before equity losses 5.1 (6.9) -- (1.8)
Equity loss from minority investment (2.1) -- -- (2.1)
Equity loss from subsidiaries (6.9) -- 6.9 --
----------- ------------ ----------- -----------
Net income (loss) $ (3.9) $ (6.9) $ 6.9 $ (3.9)
=========== ============ =========== ===========
Page 12
NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------- ------------ ------------ -----------
(Millions of dollars)
Net cash provided by (used for) operating activities $(93.2) $ 52.6 $ -- $(40.6)
Net cash flows used for investing activities:
Capital expenditures (8.3) (52.1) -- (60.4)
Other, net (1.3) 0.2 -- (1.1)
----------- ----------- ------------ -----------
Net cash used for investing activities (9.6) (51.9) -- (61.5)
Net cash flows provided by financing activities:
Net increase in credit facilities 116.0 -- -- 116.0
Other, net (2.3) -- -- (2.3)
----------- ----------- ------------ -----------
Net cash provided by financing activities 113.7 -- -- 113.7
----------- ----------- ------------ -----------
Net increase in cash 10.9 0.7 -- 11.6
Cash and temporary cash investments at beginning of
period 13.8 3.7 -- 17.5
----------- ----------- ------------ -----------
Cash and temporary cash investments at end of period $ 24.7 $ 4.4 $ -- $ 29.1
=========== =========== ============ ===========
OCTOBER 28, 2000
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------- ------------ ------------ -----------
(Millions of dollars)
Net cash provided by (used for) operating activities $(30.8) $ 14.7 $ -- $(16.1)
Net cash flows used for investing activities:
Capital expenditures (10.3) (16.2) -- (26.5)
Minority investment (6.5) -- -- (6.5)
Other, net (0.2) 1.2 -- 1.0
----------- ----------- ------------ -----------
Net cash used for investing activities (17.0) (15.0) -- (32.0)
Net cash flows provided by financing activities:
Net increase in credit facilities 51.5 -- -- 51.5
Other, net 2.7 (0.1) -- 2.6
----------- ----------- ------------ -----------
Net cash provided by financing activities 54.2 (0.1) -- 54.1
----------- ----------- ------------ -----------
Net increase (decrease) in cash 6.4 (0.4) -- 6.0
Cash and temporary cash investments at beginning of
period 16.9 4.5 -- 21.4
----------- ----------- ------------ -----------
Cash and temporary cash investments at end of period $ 23.3 $ 4.1 $ -- $ 27.4
=========== =========== ============ ===========
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
Management has communicated since the fourth quarter of fiscal 2001, when
our turnaround plan was announced, and a charge for the SKU Reduction Initiative
and 42 store closings was taken, that we expected to take a second charge for
store closings in the current fiscal year.
During the third quarter of fiscal 2002, we recorded a $19.7 million store
closing charge ("Store Closing Charge"). This Store Closing Charge includes
asset write-downs associated with the closing of 102 traditional stores and
either the downsizing or buyout of the remaining lease obligation of four
superstores that are under-performing relative to our required performance
levels. The charge also includes the estimated cash closing costs and the
estimated amount of any remaining rent liability, under non-cancelable lease
agreements after the store closing date, for the 77 store closings that are
expected to be completed in the next year.
Approximately $8.0 million of the $19.7 million charge represents asset
write-downs that are non-cash in nature. The majority of the charge, $17.1
million, is recorded in selling, general and administrative expenses with the
balance, $2.6 million, recorded in cost of sales. Management expects this to be
the final charge related to initiatives undertaken as part of its turnaround
plan.
Net sales for the third quarter of fiscal 2002 increased 13.9%, or $50.5
million, to $413.0 million from $362.5 million in the prior year. Sales from
stores open one year or more ("same-store sales") increased 8.0% for the third
quarter of fiscal 2002 compared with a same-store sales decrease of 0.4% for the
prior year third quarter. Same-store sales accounted for $28.9 million, or
approximately 57% 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 November 3, 2001, 70 superstores were in operation compared with
55 superstores at October 28, 2000.
By store format, our same-store sales performance for traditional stores
increased 6.1%. This was driven by a 3.3% increase in customer traffic with the
balance of the increase due to a higher average ticket. Same-store sales for
superstores increased 9.2% for the quarter, which was driven by a 5.0% increase
in customer traffic with the balance of the increase due to a higher average
ticket. All major product categories experienced positive same-store sales gains
for the quarter.
Management attributes the improvement in same-store sales over last year to
an improved inventory in-stock position in its stores. Sales performance was
particularly strong in our hardlines and home decor categories. Clearance sales
associated with the SKU Reduction Initiative contributed approximately $13.0
million in sales during the third quarter, but were recorded at a zero gross
margin. At the end of the third quarter, we are approximately 65% sold through
on this clearance product. We currently anticipate that the SKU Reduction
Initiative will be completed by the end of our first quarter of fiscal 2003.
As a percent of net sales, gross margin was 44.2% for the third quarter of
fiscal 2002 compared with 47.6% for the same quarter a year earlier, a decrease
of 3.4%. Of this decrease, 1.5% is attributable to the zero gross margin sales
from the SKU Reduction Initiative and 0.6% is attributable to the Store Closing
Charge recorded during the quarter. Excluding these two items, a more normalized
margin rate for the quarter was 46.3%, a decrease of 1.3% from a year ago. The
primary causes for this decrease were lower income from vendor purchase
discounts during the quarter, resulting from successful execution of our plans
to lower inventory levels, and higher shrink expense.
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The shrink expense increase resulted from a deterioration in our shrink
rates versus the prior year, consistent with the trend identified in the first
half of the year and disclosed in our first and second quarter Form 10-Q filings
this year. Our store shrink accrual rates are adjusted based upon 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 third quarter, we inventoried, reconciled and recorded the
inventory results of approximately 25% of our stores bringing our year-to-date
results to 100% of our stores inventoried, reconciled and recorded. Shrink
expense was $2.5 million worse than our shrink expense in the prior year third
quarter.
Selling, general and administrative ("SG&A") expenses were 44.2% of net
sales for the third quarter of fiscal 2002, versus 40.9% for the third quarter
of fiscal 2001, an increase of 3.3%. The Store Closing Charge recorded in SG&A
in the third quarter fiscal 2002 increased SG&A expenses as a percentage of
sales by 4.2%. Excluding this charge, positive expense leverage was realized in
both store and non-store expenses, with good cost controls complementing the
favorable impact of improved same-store sales growth.
Depreciation and amortization expense increased $0.3 million to $9.9
million from $9.6 million. This increase is attributable to capital expenditures
completed in the current and prior year.
Operating income for the third quarter of fiscal 2002, excluding the Store
Closing Charge of $19.7 million, was $10.0 million, compared to an operating
income of $14.6 million for the third quarter of fiscal 2001.
Interest expense increased $0.7 million to $8.6 million from $7.9 million
in the third quarter of fiscal 2001. The increase is primarily due to the impact
of higher average borrowings partially offset by a lower effective interest
rate. Average borrowings on the revolver for the third quarter of fiscal 2002
increased $81.2 million, to $226.6 million from $145.4 million in the prior year
third 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 third quarter of fiscal 2002
was consistent with the rate for the third quarter of fiscal 2001.
Net loss for the third quarter was $11.3 million, or $0.61 per diluted
share, compared to net income of $3.1 million, or $0.17 earnings per diluted
share, for the prior year third quarter. Excluding the Store Closing Charge, net
income for the current year third quarter was $0.05 earnings per diluted share.
COMPARISON OF THE THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
Net sales for the first three quarters of fiscal 2002 increased 8.6%, or
$85.2 million, to $1,072.1 million from $986.9 million in the prior year.
Same-store sales increased 5.2% year-to-date compared to a same-store sales
increase of 1.8% for the same period of the prior year. Same-store sales
accounted for $50.1 million, or approximately 59% of the increase. The balance
of the increase was primarily due to the increased number of superstores in
operation.
By store format, our same-store sales performance for traditional stores
increased 4.2%. This was driven by a 3.2% increase in the average ticket with
the balance of the increase driven by increased customer traffic. Same-store
sales for superstores increased 6.4% year-to-date, driven by a 6.7% increase in
customer traffic as the average ticket fell slightly against the prior year. All
of our major product lines experienced positive same-store sales growth
year-to-date.
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Management attributes the improvement in same-store sales year over year to
an improved store inventory in-stock position in its stores. Sales performance
was particularly strong in our hardlines and home decor categories. Clearance
sales associated with the SKU Reduction Initiative contributed approximately
$30.0 million in sales year-to-date, but were recorded at a zero gross margin.
At the end of the third quarter, we are approximately 65% sold through on this
clearance product. We currently anticipate that the SKU Reduction Initiative
will be completed by the end of our first quarter of fiscal 2003.
As a percent of net sales, gross margin was 44.1% for year-to-date fiscal
2002 versus 46.7% for the same period a year earlier, a decrease of 2.6%. Of
this decrease, 1.3% is attributable to the zero gross margin sales from the SKU
Reduction Initiative and 0.2% is attributable to the Store Closing Charge
recorded during the third quarter. Excluding these two items, a more normalized
margin rate year-to-date was 45.6%, a decrease of 1.1% from the same period a
year ago. The primary cause for this decrease was higher shrink expense.
The shrink expense increase resulted from a deterioration in our shrink
rate versus the prior year, consistent with the trend identified in the first
half of the year and disclosed in our first and second quarter Form 10-Q filings
this year. Our store shrink accrual rates are adjusted based upon the
performance of annual physical inventories taken throughout the year. Physical
inventories are concentrated in the nine months between January and September.
At the end of the third quarter, we had inventoried, reconciled and recorded the
inventory results of all our stores. Shrink expense for the year-to-date period
was $15.6 million, or 1.2% as a percentage of sales, worse than our shrink
expense for the year-to-date period last year.
SG&A expenses were 44.1% of net sales for the first three quarters of
fiscal 2002, versus 41.9% for fiscal 2001, an increase of 2.2%. The Store
Closing Charge increased SG&A expenses as a percentage of sales by 1.7%.
Excluding this charge, SG&A expense leverage was negatively impacted primarily
by higher distribution expenses due to the opening of our second owned
distribution center in Visalia, California. The opening of this distribution
center necessitated operating a three distribution center network for
approximately the first eight months of this year until the contract facility
was closed in September.
Depreciation and amortization expense increased $1.3 million to $29.7
million from $28.4 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 begun depreciating in
April 2000.
The operating loss for year-to-date fiscal 2002, excluding the Store
Closing Charge of $19.7 million, was $9.4 million, compared to an operating
income of $18.2 million for fiscal 2001.
Year-to-date interest expense increased $3.4 million to $24.5 million from
$21.1 million in fiscal 2001. The increase is primarily due to the impact of
higher average borrowings partially offset by a lower effective interest rate.
Average borrowings on the revolver for fiscal 2002 increased $64.3 million, to
$184.3 million from $120.0 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 three quarters of
fiscal 2002 was consistent with the rate used in the prior year.
Page 16
Net loss for the first three quarters was $33.8 million, or $1.84 per
diluted share, compared with a net loss of $3.9 million, or $0.21 loss per
diluted share, for the prior year. Excluding the extraordinary item discussed
below and the Store Closing Charge, net loss year-to-date was $21.0 million, or
$1.15 loss per diluted share.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary cash investments, increased $11.6 million during
the first three quarters of fiscal 2002 to $29.1 million as of November 3, 2001.
Net cash used for operating activities was $40.6 million in the first three
quarters of fiscal 2002, compared to net cash used for operating activities of
$16.1 million in the first three quarters of fiscal 2001.
Inventories increased $16.1 million, compared with an increase of $114.6
million in the first three quarters of the prior year. Inventories typically
increase during the first three quarters of the fiscal year as the Company
builds for the peak selling season. The smaller increase in fiscal 2002 is
attributable to the Company successfully executing its plans to reduce overall
inventory levels by fiscal year-end through a combination of the SKU Reduction
Initiative and better utilization of the forecasting and replenishment
capabilities aided by the installation of new enterprise-wide merchandising
information systems in the prior year. Management has a stated objective of
reducing inventory levels to $420 million by the end of the fiscal year.
Accounts payable decreased $12.5 million in the first three quarters 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 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 three quarters of
fiscal 2002 totaled $61.5 million compared to $32.0 million in the first three
quarters of fiscal 2001. Capital expenditures of $60.4 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 $20.4 million during the first three
quarters of fiscal 2002 related primarily to the opening of 12 new superstores
and other store related projects.
During the first three quarters of fiscal 2002, we opened 12 superstores,
relocated or expanded nine traditional stores and closed 30 smaller or
under-performing traditional stores. For the balance of fiscal 2002, we expect
to relocate one traditional store and to close 30 smaller traditional stores.
Financing
Page 17
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 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 December 14, 2001,
excess availability under this facility was $166.2 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 appropriate assets and debt
obligation of $40 million on our balance sheet in the first quarter of fiscal
2002.
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 believe that we will demonstrate further progress in our turnaround plan
by returning to profitability in the fourth quarter and continuing into the next
fiscal year. Provided we are able to achieve our sales goals for the fourth
quarter, which call for a same-store sales increase of 5-6% versus a 0.2%
same-store sales increase in the fourth quarter of last year, we should see a
modest improvement in operating performance in the fourth quarter. However, our
actual results in the fourth quarter are highly dependent on the sales
performance we are able to achieve.
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
Page 18
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, our failure to
execute our productivity initiatives, including the SKU Reduction Initiative and
the store base productivity initiative, the availability of merchandise, changes
in the competitive pricing for products, and the impact of our and our
competitors store openings and closings.
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. 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. Interest rate swaps are primarily utilized to achieve
this objective, effectively converting a portion of its variable-rate exposures
to fixed interest rates (See Note 5 - Fair Value of Derivative Financial
Instruments).
Page 19
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
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
No exhibits are filed with this report.
b) REPORTS ON FORM 8-K
Not Applicable.
Page 20
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: December 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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