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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
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For the Quarter Ended November 1,1997 Commission File No. 1-6695
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FABRI-CENTERS OF AMERICA, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 34-0720629
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5555 Darrow Road
Hudson, Ohio 44236
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(Address of principal executive offices) (Zip Code)
(330) 656 - 2600
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(Registrant's telephone number)
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
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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 November 28, 1997: 9,365,871
Shares of Class B Common Stock outstanding at November 28, 1997: 9,255,107
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FABRI-CENTERS OF AMERICA, INC.
Form 10-Q Index
For the quarter ended November 1, 1997
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PART I. FINANCIAL INFORMATION: Page Numbers
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of November 1, 1997 and February 1, 1997 3
Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks
Ended November 1, 1997 and October 26, 1996 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended November 1, 1997 and October 26, 1996 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 5. Other Events 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Fabri-Centers of America, Inc.
(Thousands of dollars)
November 1, February 1,
1997 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 19,480 $ 12,631
Merchandise inventories 327,700 296,104
Prepaid expenses and other current assets 11,843 9,532
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Total current assets 359,023 318,267
Property and equipment, at cost:
Land 1,792 1,709
Buildings 26,902 23,905
Furniture and fixtures 123,205 108,684
Leasehold improvements 48,026 42,118
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199,925 176,416
Less accumulated depreciation and amortization 94,368 81,798
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105,557 94,618
Mortgage receivable 6,939 7,136
Other assets 9,484 9,159
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Total assets $ 481,003 $ 429,180
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,159 $ 99,458
Accrued expenses 21,421 28,898
Accrued income taxes 489 10,697
Deferred income taxes 3,469 2,167
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Total current liabilities 159,538 141,220
Long-term debt 88,500 15,100
Convertible subordinated debentures --- 56,983
Deferred income taxes 13,886 13,357
Other long-term liabilities 3,795 3,110
Shareholders' equity:
Common Stock:
Class A 521 507
Class B 519 503
Additional paid-in capital 82,511 76,614
Other (1,238) (1,248)
Retained earnings 151,166 141,397
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233,479 217,773
Treasury stock, at cost (18,195) (18,363)
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Total shareholders' equity 215,284 199,410
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Total liabilities and shareholders' equity $ 481,003 $ 429,180
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See notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Fabri-Centers of America, Inc.
(Thousands of dollars, except per share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
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November 1, October 26, November 1, October 26,
1997 1996 1997 1996
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Net sales $ 247,180 $ 229,587 $ 663,480 $ 621,480
Costs and expenses:
Cost of goods sold 132,611 125,517 364,517 346,922
Selling, general and administrative expenses 97,899 88,502 276,576 255,363
Interest expense, net 1,789 2,831 4,938 8,611
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232,299 216,850 646,031 610,896
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Earnings before income taxes 14,881 12,737 17,449 10,584
Income taxes 5,581 4,776 6,544 3,969
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Net earnings before extraordinary item 9,300 7,961 10,905 6,615
Extraordinary loss on debt prepayment, net of
tax benefit of $682 --- --- (1,136) ---
------------ ----------- ----------- -----------
Net earnings $ 9,300 $ 7,961 $ 9,769 $ 6,615
============ =========== =========== ===========
Net earnings per common share:
Before extraordinary item $ 0.47 $ 0.43 $ 0.56 $ 0.36
Extraordinary loss on debt prepayment --- --- (0.06) ---
------------ ----------- ----------- -----------
Net earnings per common share $ 0.47 $ 0.43 $ 0.50 $ 0.36
============ =========== =========== ===========
Net earnings per common share--assuming full dilution $ 0.47 $ 0.41 $ 0.50 $ 0.36
============ =========== =========== ===========
See notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Fabri-Centers of America, Inc.
(Thousands of dollars)
November 1, October 26,
Thirty-Nine Weeks Ended 1997 1996
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Operating activities:
Net earnings $ 9,769 $ 6,615
Extraordinary loss on debt prepayment 1,136 ---
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Net earnings before extraordinary item 10,905 6,615
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cancellation of restricted stock awards (148) (65)
Depreciation, amortization and other non-cash expenses 15,919 15,803
Loss on disposal of fixed assets 461 453
Deferred income taxes 2,024 1,179
Working capital changes:
Merchandise inventories (31,596) (17,410)
Prepaid expenses and other current assets (2,311) 2,331
Accounts payable 34,701 30,538
Accrued expenses (7,477) 597
Accrued income taxes (9,719) 291
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Net cash provided by operating activities 12,759 40,332
Investing activities:
Capital expenditures (26,299) (9,241)
Mortgage receivable 197 207
Other, net (986) 142
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Net cash used for investing activities (27,088) (8,892)
Financing activities:
Proceeds from long-term debt 87,300 13,100
Repayment of long-term debt (13,900) (31,700)
Redemption of convertible subordinated debentures (56,983) ---
Debt prepayment premium and issuance costs (1,818) ---
Other long-term liabilities 685 115
Issuance of common stock upon conversion of debentures 1,061 ---
Proceeds from exercise of stock options 4,221 1,166
Issuance of treasury shares 634 ---
Purchase of common stock (22) (9,009)
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Net cash provided by (used for) financing activities 21,178 (26,328)
Net increase in cash 6,849 5,112
Cash and cash equivalents at beginning of period 12,631 11,552
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Cash and cash equivalents at end of period $ 19,480 $ 16,664
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,870 $ 8,887
Income taxes $ 14,229 $ 2,499
See notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fabri-Centers of America, Inc.
November 1, 1997, February 1, 1997 and October 26, 1996
1. Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Fabri-Centers of America, Inc., and its wholly owned
subsidiaries (the "Company") 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
generally accepted accounting principles 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. 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 1, 1997 (fiscal 1997).
The Company's business is seasonal, therefore, earnings or losses
for a particular interim period are not necessarily indicative of
full year results. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary for a
fair statement of results for the interim periods.
2. Earnings Per Share
Primary earnings per common share and earnings per common share
assuming full dilution equal net earnings divided by the weighted
average number of common shares outstanding, after giving effect
for the assumed exercise of dilutive stock options under the
treasury stock method. The Company's 6 1/4% Convertible
Subordinated Debentures, which were redeemed on June 30, 1997,
are considered a common share equivalent in calculating earnings
per common share assuming full dilution, unless the effect of
conversion is anti-dilutive.
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The following table presents information necessary to calculate primary earnings
per common share and earnings per common share assuming full dilution for the
periods presented:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
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November 1, October 26, November 1, October 26,
1997 1996 1997 1996
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Common shares outstanding-primary:
Weighted average shares outstanding 18,511,034 17,812,547 18,290,597 17,952,262
Share equivalents--stock options 1,249,101 705,578 1,275,930 629,777
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19,760,135 18,518,125 19,566,527 18,582,039
================= ================ ================= ================
Common shares outstanding-assuming full dilution:
Weighted average shares outstanding 18,511,034 17,812,547 18,290,597 17,952,262
Share equivalents--stock options 1,254,675 709,539 1,314,692 651,250
Share equivalents--convertible
debentures --- 2,337,764 --- ---
----------------- ---------------- ----------------- ----------------
19,765,709 20,859,850 19,605,289 18,603,512
================= ================ ================= ================
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per
Share," in March 1997, which will revise the calculation methods
and disclosures regarding earnings per share. As required by the
Statement, the Company will adopt SFAS No. 128 in the fourth
quarter of Fiscal 1998.
The Company's pro forma earnings per common share that would have
been reported had the new standard been previously in effect are
as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
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November 1, October 26, November 1, October 26,
1997 1996 1997 1996
----------------- ---------------- ----------------- ----------------
Basic earnings per common share 0.50 0.45 0.53 0.37
Diluted earnings per common share 0.47 0.41 0.50 0.36
3. Amendment to Revolving Credit Facility
On June 2, 1997, the Company amended its unsecured $200,000,000
revolving credit facility (the "Credit Facility") with a group of
eight banks. The amended Credit Facility expires on May 31, 2001.
The Company pays a facility fee on the revolving commitment
amount which as a result of the amendment, now ranges from .10%
to .375% based on the achievement of certain financial covenants.
Under the amendment, the Company no longer pays a commitment fee
on the unused portion of the Credit Facility. Interest on
borrowings under the Credit Facility is payable at an applicable
margin over prime, federal
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funds or LIBOR rates. The applicable margin has been amended and
now ranges between .25% and 1.00%, based on the achievement of
certain financial covenants.
The amended Credit Facility contains financial covenants which
limit the Company's capital expenditures and defined leverage
ratio, as well as require the Company to maintain a minimum
tangible net worth, fixed charge coverage ratio and current
funded indebtedness ratio. As a result of the amendment, certain
financial covenants were eliminated. The Company is in compliance
with the financial covenants contained in the Credit Facility.
4. Convertible Subordinated Debentures
On June 30, 1997, the Company redeemed all outstanding 6 1/4%
Convertible Subordinated Debentures due March 1, 2002 at a price
of 101.785 percent of principal. The debenture holders had the
option to convert their debentures into common shares at a
conversion price of $24.375 per share, or to accept redemption at
the stated premium.
Of the $56,983,000 of debentures outstanding, $1,076,000 were
converted, resulting in the issuance of 22,062 Class A and 22,062
Class B Common Shares. The remaining $55,907,000 of debentures
were redeemed. During the second quarter of fiscal year 1998, the
Company recorded an extraordinary loss, net of taxes, of
$1,136,000, or $0.06 per share, consisting of the redemption
premium, unamortized debenture issuance costs and other related
expenses.
5. Capital Stock
During the first quarter of fiscal year 1997, the Company
purchased 407,525 Class A and 450,506 Class B Common Shares on
the open market. The aggregate purchase price of these shares was
approximately $9,000,000 which was funded through the Company's
revolving credit facility.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED NOVEMBER 1, 1997 VS. OCTOBER 26, 1996
Net sales for the third quarter of fiscal 1998 increased 7.7 percent, or
$17,593,000, compared to the third quarter of fiscal 1997. The sales growth
continues to be well-distributed across all product lines with sales of
craft-related merchandise continuing to show strength. Comparable store sales
increased 4.4 percent in the third quarter of fiscal 1998 over the same quarter
a year earlier.
Gross profit increased $10,499,000 in the third quarter of fiscal 1998
compared to the same quarter of fiscal 1997. As a percentage of net sales,
fiscal 1998 third quarter gross profit was 46.3 percent, an increase of 1.0
percentage points from the same quarter a year earlier. The improvement in gross
profit margin percentage resulted from smaller markdowns on seasonal merchandise
and focus on inventory control disciplines including enhanced shrinkage controls
and improved merchandise allocation methods.
Selling, general and administrative expenses as a percentage of net sales
were 39.6 percent for the third quarter of fiscal 1998, an increase of 1.0
percentage points from the same quarter a year earlier. The increase, as a
percent of sales, consisted primarily of advertising, distribution service
center, and store level payroll expenses. The impact of an increase in hourly
wage rates (resulting principally from the change in federal minimum hourly
wage) was partially offset by improvements in store level payroll productivity.
The Company's effective income tax rate was 37.5 percent for the third
quarter of fiscal 1998 and fiscal 1997.
Net earnings for the third quarter of fiscal 1998 increased 16.8% to
$9,300,000, or $0.47 per common share, compared to net earnings of $7,961,000,
or $0.43 per common share, for the same quarter a year earlier.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 VS. OCTOBER 26, 1996
Net sales for the first three quarters of fiscal 1998 increased 6.8
percent, or $42,000,000 compared to the first three quarters of fiscal 1997. The
sales growth continues to be well-distributed across all product lines, both in
the Jo-Ann Fabrics and Crafts stores and in the Cloth World stores. Comparable
store sales increased 4.9 percent in the first three quarters of fiscal 1998
over the same period a year earlier.
Gross profit increased $24,405,000 in the first three quarters of fiscal
1998 compared to the same period of fiscal 1997. As a percentage of net sales,
gross profit for the first nine months of fiscal 1998 was 45.1 percent, an
increase of 0.9 percentage points from the same period a year earlier. The
improvement in gross profit margin percentage resulted from smaller markdowns on
seasonal merchandise and focus on inventory control disciplines.
Selling, general and administrative expenses as a percentage of net sales
were 41.7 percent in the first three quarters of fiscal 1998, an increase of 0.6
percentage points from the same period a year earlier. The increase, as a
percent of sales, consisted primarily of advertising, occupancy and store level
payroll expenses. The impact of an increase in hourly wage rates (resulting
principally from the change in federal minimum hourly wage) was partially offset
by improvements in store level payroll productivity.
The Company's effective income tax rate was 37.5 percent for the first
nine months of fiscal 1998 and fiscal 1997.
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Net earnings for the first three quarters of fiscal 1998, before an
extraordinary charge related to the early redemption of debt, were $10,905,000,
or $0.56 per common share compared to net earnings of $6,615,000, or $0.36 per
common share, for the same period a year earlier, a 64.9 percent improvement in
net earnings.
During the second quarter of fiscal 1998, the Company incurred an
extraordinary loss of $1,136,000, or $0.06 per share related to the early
redemption of the 6 1/4% Convertible Subordinated Debentures due March 1, 2002.
The redemption was funded through the use of the Company's long-term credit
facilities. 22,062 Class A and 22,062 Class B Common Shares were issued to
holders of $1,076,000 par value of debentures who exercised their conversion
rights.
The Company's business exhibits seasonality that is typical for most
retail companies, with much stronger sales in the second half of the year than
in the first half of the year. In general, net earnings are highest during the
months of September through December, when sales volumes provide significant
operating leverage. Conversely, net earnings are substantially lower during the
relatively low-volume sales months of January through August. Capital
requirements needed to finance the Company's operations fluctuate during the
year and reach their highest levels during the second and third fiscal quarters
as the Company increases its inventory in preparation for its peak selling
season.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $199,485,000 at the end of the third quarter of
fiscal 1998, a decrease of $21,053,000 from one year ago. The decrease in
working capital was the result of planned reductions in merchandise inventories.
Long-term debt to total capitalization improved to 29.1 percent at November 1,
1997 from 43.2 percent at October 26, 1996, as debt declined by $48,383,000.
The Company generated $12,759,000 of cash from operating activities in
the first three quarters of fiscal 1998 compared to $40,332,000 in the first
three quarters of the prior year. During the first three quarters of fiscal
1998, cash from operating activities was reduced by $14,229,000 of income tax
payments and a $3,280,000 payment to settle a Securities and Exchange Commission
enforcement proceeding. The cost of the Securities and Exchange Commission
settlement was recognized in the fourth quarter of fiscal 1997.
Capital expenditures were $26,299,000 for the first three quarters of
fiscal 1998 as compared to $9,241,000 for the same period of fiscal 1997. For
the full year of fiscal 1998, capital expenditures are expected to be
approximately $40,000,000, as compared to $13,191,000 in the prior year. The
higher level of fiscal 1998 capital expenditures over fiscal 1997 is principally
related to an increase in store openings. The Company expects to open 65 to 70
new stores and close 75 to 80 smaller stores during fiscal 1998. The expected
openings include six Jo-Ann etc stores, a new 45,000 square foot megastore
format, already opened during fiscal year 1998.
During the first quarter of fiscal 1997, the Company purchased 407,525
Class A and 450,506 Class B Common Shares on the open market at an aggregate
purchase price of approximately $9,000,000. As of November 1, 1997, the
remaining number of shares that can be acquired pursuant to prior authorization
by the Board of Directors is 597,025 Class A and 557,025 Class B Common Shares.
On June 2, 1997, the Company amended its $200,000,000 revolving credit
facility (the "Credit Facility") with a group of eight banks. The amendment
extended the expiration to May 31, 2001 and made various changes, including
amendments to or elimination of certain financial covenants. The Company is in
compliance with the financial covenants contained in the Credit Facility. The
Company may borrow up to a maximum of $220,000,000, subject to further
limitations during specified time frames, by utilizing funds available under the
Credit Facility and other lines of credit. As of November 1, 1997, the Company
had borrowings of $88,500,000 under the Credit Facility and other lines of
credit. The Company continues to maintain excellent vendor and banking
relationships and has sufficient resources, including unused credit facilities,
to meet its operating needs and to fund its capital expenditures for fiscal
1998.
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During the first three quarters of fiscal 1998, the Company opened 48
stores and closed 55 smaller or under-performing stores. The openings include
four Jo-Ann etc stores, bringing the total of these stores opened to five. As of
November 1, 1997, the Company operated 907 stores in 48 states primarily under
the names Jo-Ann Fabrics and Crafts, Cloth World, New York Fabrics and Crafts
and Jo-Ann etc.
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," "expects,"
"believes," and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's 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, changes in customer demand, changes in trends
in the fabric and craft industry, changes in the competitive pricing for
products, the impact of competitor store openings and closings, the availability
of acceptable store locations, the availability of merchandise and general
economic conditions.
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PART II OTHER INFORMATION
Item 5. Other Events
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On October 27, 1997, Leslie H. Duncan joined the Company as
Senior Vice President and Chief Information Officer. On November
3, 1997, Brian P. Carney joined the Company as Executive Vice
President and Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
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a) Exhibits
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See the Exhibit Index on page 14 of this report.
b) Reports on Form 8-K
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No reports on Form 8-K were filed during the 13-week
period ended November 1, 1997.
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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.
FABRI-CENTERS OF AMERICA, INC.
DATE: December 15, 1997 /s/Alan Rosskamm
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BY: Alan Rosskamm
Chairman, President and Chief Executive Officer
/s/Brian P. Carney
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BY: Brian P. Carney
Executive Vice President and Chief Financial
Officer
/s/ Robert R. Gerber
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BY: Robert R. Gerber
Senior Vice President, Controller and
Chief Accounting Officer
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FABRI-CENTERS OF AMERICA, INC.
FORM 10-Q FOR THE THIRTEEN AND THIRTY-NINE WEEK
PERIODS ENDED NOVEMBER 1, 1997
EXHIBIT INDEX
Sequential
EXHIBIT NO. Description Page No.
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11 Statement re Computation of Earnings per Common 15
Share
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