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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 AUGUST 3, 2002
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 10, 2002: 10,130,718
Shares of Class B Common Stock outstanding at September 10, 2002: 9,139,473
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JO-ANN STORES, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED AUGUST 3, 2002
- --------------------------------------------------------------------------------
Page Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of August 3, 2002, February 2, 2002
and August 4, 2001 3
Consolidated Statements of Operations for the Thirteen and Twenty-Six
Weeks Ended August 3, 2002 and August 4, 2001 4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended August 3, 2002 and August 4, 2001 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 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 19
Signatures 20
Certification by Chief Executive Officer 21
Certification by Chief Financial Officer 22
Page 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JO-ANN STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED)
AUGUST 3, FEBRUARY 2, AUGUST 4,
2002 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and temporary cash investments $ 15.7 $ 21.1 $ 22.3
Inventories 496.2 369.0 483.0
Prepaid expenses and other current assets 45.1 48.1 38.0
---------------- ---------------- ----------------
Total current assets 557.0 438.2 543.3
Property, equipment and leasehold improvements, net 200.1 210.1 222.8
Goodwill, net 26.5 26.5 26.9
Other assets 17.7 18.9 21.0
---------------- ---------------- ----------------
Total assets $ 801.3 $ 693.7 $ 814.0
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162.9 $ 123.1 $ 142.9
Accrued expenses 72.7 82.3 41.3
---------------- ---------------- ----------------
Total current liabilities 235.6 205.4 184.2
Long-term debt 286.4 223.7 375.0
Deferred income taxes 23.6 23.6 22.5
Other long-term liabilities 8.7 8.2 7.9
Shareholders' equity:
Common stock:
Class A, stated value $0.05 per share; issued and outstanding
10,114,234, 9,825,802 and 9,581,893, respectively 0.5 0.5 0.5
Class B, stated value $0.05 per share; issued and outstanding
9,054,912, 8,806,211 and 8,806,211, respectively 0.5 0.4 0.4
Additional paid-in capital 104.3 99.7 99.4
Unamortized restricted stock awards (0.4) (0.6) (0.9)
Retained earnings 183.6 172.9 165.3
Accumulated other comprehensive loss (3.2) (3.0) (2.7)
---------------- ---------------- ----------------
285.3 269.9 262.0
Treasury stock, at cost (38.3) (37.1) (37.6)
---------------- ---------------- ----------------
Total shareholders' equity 247.0 232.8 224.4
---------------- ---------------- ----------------
Total liabilities and shareholders' equity $ 801.3 $ 693.7 $ 814.0
================ ================ ================
See notes to consolidated financial statements
Page 3
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------------------------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Net sales $353.7 $330.2 $726.1 $659.1
Cost of sales 182.1 191.0 373.7 368.8
----------------------------- -----------------------------
Gross margin 171.6 139.2 352.4 290.3
Selling, general and administrative expenses 153.0 146.4 304.2 289.9
Depreciation and amortization 8.7 10.1 17.9 19.8
----------------------------- -----------------------------
Operating profit (loss) 9.9 (17.3) 30.3 (19.4)
Interest expense 6.6 8.7 13.0 15.9
----------------------------- -----------------------------
Income (loss) before income taxes 3.3 (26.0) 17.3 (35.3)
Income tax provision (benefit) 1.3 (9.9) 6.6 (13.4)
----------------------------- -----------------------------
Income(loss) before extraordinary item 2.0 (16.1) 10.7 (21.9)
Extraordinary item, loss related to early retirement of
debt, net of tax benefit of $0.4 million -- -- -- (0.6)
----------------------------- -----------------------------
Net income (loss) $ 2.0 $(16.1) $ 10.7 $(22.5)
============================= =============================
Net income (loss) per common share - basic:
Net income (loss) before extraordinary item $ 0.11 $(0.88) $ 0.57 $(1.20)
Extraordinary item, net of tax benefit -- -- -- (0.03)
----------------------------- -----------------------------
Net income (loss) $ 0.11 $(0.88) $ 0.57 $(1.23)
============================= =============================
Net income (loss) per common share - diluted:
Net income (loss) before extraordinary item $ 0.10 $(0.88) $ 0.53 $(1.20)
Extraordinary item, net of tax benefit -- -- -- (0.03)
----------------------------- -----------------------------
Net income (loss) $ 0.10 $(0.88) $ 0.53 $(1.23)
============================= =============================
Weighted average shares outstanding (millions):
Basic 19.0 18.4 18.9 18.3
============================= =============================
Diluted 20.7 18.4 20.3 18.3
============================= =============================
See notes to consolidated financial statements
Page 4
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------------
AUGUST 3, AUGUST 4,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Operating activities:
Net income (loss) $ 10.7 $ (22.5)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 17.9 19.8
Other 1.4 0.6
Changes in operating assets and liabilities:
Increase in inventories (127.2) (32.0)
Decrease in prepaid expenses and other current assets 3.0 1.0
Increase (decrease) in accounts payable 39.8 (21.1)
Decrease in accrued expenses and other (8.6) (19.0)
---------------- ----------------
Net cash used for operating activities (63.0) (73.2)
Investing activities:
Capital expenditures (7.9) (52.5)
Other, net -- (1.1)
---------------- ----------------
Net cash used for investing activities (7.9) (53.6)
Financing activities:
Net increase in bank credit facilities 82.5 135.0
Repurchase of senior subordinated notes (20.6) --
Other, net 3.6 (3.4)
---------------- ----------------
Net cash provided by financing activities 65.5 131.6
---------------- ----------------
Net (decrease) increase in cash (5.4) 4.8
Cash and temporary cash investments at beginning of period 21.1 17.5
---------------- ----------------
Cash and temporary cash investments at end of period $ 15.7 $ 22.3
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12.2 $ 13.9
Income taxes, net of refunds 4.0 0.4
See notes to consolidated financial statements
Page 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JO-ANN STORES, INC.
NOTE 1 - BASIS OF PRESENTATION
Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric
and craft retailer operating 945 retail stores in 49 states at August 3, 2002.
The 875 traditional and 70 superstores feature a broad line of apparel, craft
and home decorating fabrics, notions, crafts, seasonal and home 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 2002 year-end and
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 2, 2002.
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. Due to the seasonal
nature of the Company's business, a comparable balance sheet as of August 4,
2001 has been provided. 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
(loss) by the weighted average number of shares outstanding during the period.
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 week periods ended August 4, 2001, as their inclusion would be
anti-dilutive.
The following table presents information necessary to calculate basic
and diluted earnings per common share for the periods presented (shares in
millions).
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------ -------------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
- ------------------------------------------------------ --------------- -------------- --- --------------- ---------------
BASIC EARNINGS PER COMMON SHARE:
Weighted average shares outstanding 19.0 18.4 18.9 18.3
============================== ===============================
DILUTED EARNINGS PER COMMON SHARE:
Weighted average shares outstanding 19.0 18.4 18.9 18.3
Incremental shares from assumed exercise of stock
options 1.7 -- 1.4 --
------------------------------ -------------------------------
20.7 18.4 20.3 18.3
============================== ===============================
Page 6
NOTE 3 - STORE CLOSING CHARGES
As part of the Company's previously announced turnaround plan, the
Company undertook a comprehensive review of its existing store base. During
fiscal years 2001 and 2002, a total of 144 traditional stores were identified
for closing. In addition, the Company identified four superstores to either
downsize or buyout the remaining lease obligations. A total of $26.4 million in
pre-tax charges were recorded for these 148 store closings (the "Store Closing
Charges") in fiscal years 2001 and 2002. The Store Closing Charges included
asset write-downs associated with the identified stores, and the estimated
closing costs for stores whose closings will be completed by the end of this
fiscal year. Through the end of the second quarter of fiscal 2003, 92 of the 148
stores identified for closing have been closed, and the Company estimates that
20 to 25 additional stores will be closed during the balance of fiscal year
2003. The balance of the stores identified for closing are expected to close in
fiscal 2004.
In accordance with Emerging Issues Task Force Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)," Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Staff
Accounting Bulletin No. 100, "Restructuring and Impairment Charges,") the
Company recorded a $6.7 million pre-tax ($4.1 million after-tax) charge to
operating expenses during the fourth quarter of fiscal 2001 and $17.1 million
pre-tax ($10.6 million after-tax) charge to operating expenses during the third
quarter of fiscal 2002 for restructuring and asset impairment costs resulting
from the 148 identified store closings.
Below is a summary of the activity in the Store Closing Charges
liability balance for the first half of fiscal 2003. The Company believes that
the remaining reserve balance at August 3, 2002 is adequate to cover the
remaining obligations associated with the Store Closing Charges.
NONCANCELABLE
Dollars in millions LEASE OBLIGATIONS OTHER TOTAL
------------------- ----------------- -----------------
Balance - February 2, 2002 $9.6 $1.2 $10.8
Cash payments (0.6) (0.8) (1.4)
------------------- ----------------- -----------------
Balance - August 3, 2002 $9.0 $0.4 $ 9.4
=================== ================= =================
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No.146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaces EITF Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
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. Interest
rate swaps are primarily utilized to achieve this objective, effectively
converting a portion of its variable-rate exposures to fixed interest rates. The
Company has interest rate swap agreements on $90 million of its borrowings under
its Credit Facility, $50.0 million of which expire in May 2003 and $40.0 million
which expire in April 2005.
Page 7
In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", 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 TWENTY-SIX WEEKS ENDED
------------------------------- --------------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
Dollars in millions 2002 2001 2002 2001
-------------- -------------- --------------- ---------------
Net income (loss) $ 2.0 $(16.1) $10.7 $(22.5)
Cumulative effect of change in accounting principle -- -- -- (1.7)
Other comprehensive loss (0.5) (0.2) (0.2) (1.0)
-------------- -------------- --------------- ---------------
Comprehensive income (loss) $ 1.5 $(16.3) $10.5 $(25.2)
============== ============== =============== ===============
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 establishes accounting standards for
intangible assets and goodwill. The Company adopted SFAS No. 142 on February 3,
2002. The Company performed the first of the required impairment tests of
goodwill and based upon the transition impairment test performed on recorded
goodwill, no impairment to goodwill exists. Application of the non-amortization
provision of SFAS No. 142 reduces amortization expense by approximately $0.7
million for the fiscal year ending February 1, 2003. The prior fiscal year
second quarter and first half year-to-date included amortization expense of $0.2
million and $0.4 million, respectively.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS No. 145 concludes that debt extinguishments used
as part of a company's risk management strategy should not be classified as an
extraordinary item. SFAS No. 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 is effective for transactions
occurring after May 15, 2002. Management believes that SFAS No. 145 will not
have a significant impact on the Company's consolidated financial statements.
Page 8
NOTE 6 - 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 3, 2002 and February 2, 2002 and for the
thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001 are as
follows:
CONSOLIDATING BALANCE SHEETS
AUGUST 3, 2002
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------- ---------- ------------ ------------ ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and temporary cash investments $ 12.7 $ 3.0 $ -- $ 15.7
Inventories 167.7 328.5 -- 496.2
Prepaid expenses and other current assets 33.3 11.8 -- 45.1
---------- ----------- ----------- -----------
Total current assets 213.7 343.3 -- 557.0
Property, equipment and leasehold improvements, net 62.6 137.5 -- 200.1
Goodwill, net -- 26.5 -- 26.5
Other assets 16.1 1.6 -- 17.7
Investment in subsidiaries 14.9 -- (14.9) --
Intercompany receivable 491.5 -- (491.5) --
---------- ----------- ----------- -----------
Total assets $798.8 $ 508.9 $ (506.4) $ 801.3
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 142.8 $ 20.1 $ -- $162.9
Accrued expenses 103.0 (30.3) -- 72.7
---------- ----------- ----------- -----------
Total current liabilities 245.8 (10.2) -- 235.6
Long-term debt 286.4 -- -- 286.4
Deferred income taxes 14.6 9.0 -- 23.6
Other long-term liabilities 5.0 3.7 -- 8.7
Intercompany payable -- 491.5 (491.5) --
Shareholders' equity:
Common stock 1.0 -- -- 1.0
Additional paid-in capital 104.3 -- -- 104.3
Unamortized restricted stock awards (0.4) -- -- (0.4)
Retained earnings 183.6 14.9 (14.9) 183.6
Accumulated other comprehensive loss (3.2) -- -- (3.2)
---------- ----------- ----------- -----------
285.3 14.9 (14.9) 285.3
Treasury stock, at cost (38.3) -- -- (38.3)
---------- ----------- ----------- -----------
Total shareholders' equity 247.0 14.9 (14.9) 247.0
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 798.8 $ 508.9 $(506.4) $801.3
========== =========== =========== ===========
Page 9
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING BALANCE SHEETS
FEBRUARY 2, 2002
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------- ---------- ------------ ------------ -----------
(Dollars in millions)
ASSETS
Current assets:
Cash and temporary cash investments $ 17.5 $ 3.6 $ -- $ 21.1
Inventories 152.8 216.2 -- 369.0
Prepaid expenses and other current assets 35.8 12.3 -- 48.1
---------- ----------- ----------- -----------
Total current assets 206.1 232.1 -- 438.2
Property, equipment and leasehold improvements, net 64.7 145.4 -- 210.1
Goodwill, net -- 26.5 -- 26.5
Other assets 17.3 1.6 -- 18.9
Investment in subsidiaries 3.6 -- (3.6) --
Intercompany receivable 418.0 -- (418.0) --
---------- ----------- ----------- -----------
Total assets $ 709.7 $ 405.6 $(421.6) $ 693.7
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 122.7 $ 0.4 $ -- $ 123.1
Accrued expenses 111.2 (28.9) -- 82.3
---------- ----------- ----------- -----------
Total current liabilities 233.9 (28.5) -- 205.4
Long-term debt 223.7 -- -- 223.7
Deferred income taxes 14.6 9.0 -- 23.6
Other long-term liabilities 4.7 3.5 -- 8.2
Intercompany payable -- 418.0 (418.0) --
Shareholders' equity:
Common stock 0.9 -- -- 0.9
Additional paid-in capital 99.7 -- -- 99.7
Unamortized restricted stock awards (0.6) -- -- (0.6)
Retained earnings 172.9 3.6 (3.6) 172.9
Accumulated other comprehensive loss (3.0) -- -- (3.0)
---------- ----------- ----------- -----------
269.9 3.6 (3.6) 269.9
Treasury stock, at cost (37.1) -- -- (37.1)
---------- ----------- ----------- -----------
Total shareholders' equity 232.8 3.6 (3.6) 232.8
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 709.7 $ 405.6 $(421.6) $ 693.7
========== =========== =========== ===========
Page 10
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF OPERATIONS
THIRTEEN WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
AUGUST 3, 2002
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ ----------- ------------ ------------ -----------
(Dollars in millions)
Net sales $ 191.0 $ 269.3 $(106.6) $ 353.7
Cost of sales 111.1 177.6 (106.6) 182.1
----------- ----------- ----------- -----------
Gross margin 79.9 91.7 -- 171.6
Selling, general and administrative expenses 73.9 79.1 -- 153.0
Depreciation and amortization 3.1 5.6 -- 8.7
----------- ----------- ----------- -----------
Operating profit 2.9 7.0 -- 9.9
Interest expense 2.7 3.9 -- 6.6
----------- ----------- ----------- -----------
Income before income taxes 0.2 3.1 -- 3.3
Income tax provision (benefit) 1.4 (0.1) -- 1.3
----------- ----------- ----------- -----------
Income (loss) before equity losses (1.2) 3.2 -- 2.0
Equity income from subsidiaries 3.2 -- (3.2) --
----------- ----------- ----------- -----------
Net income $ 2.0 $ 3.2 $ (3.2) $ 2.0
=========== =========== =========== ===========
AUGUST 4, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ ----------- ------------ ------------ ------------
(Dollars in millions)
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 benefit (9.8) (0.1) -- (9.9)
----------- ----------- ----------- -----------
Loss before equity losses (0.3) (15.8) -- (16.1)
Equity loss from subsidiaries (15.8) -- 15.8 --
----------- ----------- ----------- -----------
Net loss $(16.1) $(15.8) $ 15.8 $(16.1)
=========== =========== =========== ===========
Page 11
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
AUGUST 3, 2002
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------- ----------- ------------ ------------ -----------
(Dollars in millions)
Net sales $396.1 $548.9 $(218.9) $726.1
Cost of sales 228.0 364.6 (218.9) 373.7
----------- ------------ ----------- -----------
Gross margin 168.1 184.3 -- 352.4
Selling, general and administrative expenses 149.8 154.4 -- 304.2
Depreciation and amortization 6.5 11.4 -- 17.9
----------- ------------ ----------- -----------
Operating profit 11.8 18.5 -- 30.3
Interest expense 5.6 7.4 -- 13.0
----------- ------------ ----------- -----------
Income before income taxes 6.2 11.1 -- 17.3
Income tax provision (benefit) 6.8 (0.2) -- 6.6
----------- ------------ ----------- -----------
Income (loss) before equity income (0.6) 11.3 -- 10.7
Equity income from subsidiaries 11.3 -- (11.3) --
----------- ------------ ----------- -----------
Net income $ 10.7 $ 11.3 $ (11.3) $ 10.7
=========== ============ =========== ===========
AUGUST 4, 2001
---------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------- ----------- ------------ ------------ -----------
(Dollars in millions)
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 benefit (13.2) (0.2) -- (13.4)
----------- ------------ ----------- -----------
Loss before equity loss and extraordinary (11.1) (10.8) -- (21.9)
item
Equity loss from subsidiaries (10.8) -- 10.8 --
----------- ------------ ----------- -----------
Loss before extraordinary item (21.9) (10.8) 10.8 (21.9)
Extraordinary item, net of tax benefit (0.6) -- -- (0.6)
----------- ------------ ----------- -----------
Net loss $(22.5) $(10.8) $ 10.8 $(22.5)
=========== ============ =========== ===========
Page 12
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
AUGUST 3, 2002
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ----------- ------------ ------------ ------------
(Dollars in millions)
Net cash provided by (used for) operating activities $(64.3) $ 1.3 $ -- $ (63.0)
Net cash flows used for investing activities:
Capital expenditures (6.0) (1.9) -- (7.9)
----------- ----------- ------------ -----------
Net cash used for investing activities (6.0) (1.9) -- (7.9)
Net cash flows provided by financing activities:
Net increase in credit facilities 61.9 -- -- 61.9
Other, net 3.6 -- -- 3.6
----------- ----------- ------------ -----------
Net cash provided by financing activities 65.5 -- -- 65.5
----------- ----------- ------------ -----------
Net decrease in cash (4.8) (0.6) -- (5.4)
Cash and temporary cash investments at beginning of period 17.5 3.6 -- 21.1
----------- ----------- ------------ -----------
Cash and temporary cash investments at end of period $ 12.7 $ 3.0 $ -- $ 15.7
=========== =========== ============ ===========
AUGUST 4, 2001
--------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ----------- ------------ ------------ ------------
(Dollars in millions)
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
=========== =========== ============ ===========
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 AUGUST 3, 2002 AND AUGUST 4, 2001
Net sales for the second quarter of fiscal 2003 increased 7.1%, or
$23.5 million, to $353.7 million from $330.2 million in the prior year. Sales
from stores open one year or more ("same-store sales") increased 7.7% for the
second quarter of fiscal 2003 compared with a same-store sales increase of 9.7%
for the prior year second quarter. Same-store sales generated substatially all
of the overall sales increase for the quarter, as we operated 43 fewer stores
at the end of the second quarter this year versus the prior year. At August 3,
2002, we operated 875 traditional and 70 superstores versus 923 traditional and
65 superstores a year ago at this time.
By store format, our same-store sales performance for traditional
stores increased 7.9% for the quarter. Same-store sales for superstores
increased 7.1% for the quarter. For both store formats, the sales increase was
driven entirely by an increase in average ticket. We attribute the improvement
in same-store sales to improved merchandising initiatives as well as an improved
inventory in-stock position on key basic items and advertised items in our
stores. We also continued to see strong sales trends in our home decor and
seasonal businesses. In addition, trends in the sewing and crafting industry
continue to be strong, as evidenced not only by our increased same-store sales
but that of our major competitors as well.
As a percent of net sales, gross margin was 48.5% for the second
quarter of fiscal 2003 compared with 42.2% for the same quarter a year earlier,
an increase of 630 basis points. This increase was driven by higher realized
selling margins in a majority of our product categories, due to improved
merchandising initiatives, an improved promotional merchandising strategy, the
non-recurring impact of clearance sales recorded at zero margin during the prior
year from the SKU Reduction Initiative ($17.0 million of sales in the prior year
second quarter), as well as improvements in store shrink rates. Approximately
220 basis points of the improvement related to the non-recurring impact of the
clearance sales, while improvement in the store shrink rate accounted for an
additional 180 basis points.
Selling, general and administrative ("SG&A") expenses were $153.0
million in the second quarter of fiscal 2003 versus $146.4 million in the prior
year second quarter. As a percentage of sales, SG&A expenses decreased 1.0% to
43.3% of net sales versus 44.3% of net sales for the second quarter of fiscal
2002. This decrease was due to positive expense leverage realized in both store
and non-store expenses, with strong cost controls complementing the favorable
impact of improved same-store sales growth.
Depreciation and amortization expense decreased $1.4 million to $8.7
million from $10.1 million. This decrease is attributable to discontinuing
goodwill amortization and the slowdown of our capital expenditures as a result
of the Turnaround Plan decision to discontinue new store growth for fiscal 2003.
Operating income for the second quarter of fiscal 2003, was $9.9
million, compared to an operating loss of $17.3 million for the second quarter
of fiscal 2002.
Interest expense in the second quarter of fiscal 2003 decreased $2.1
million to $6.6 million from $8.7 million in the second quarter of fiscal 2002.
The decrease is due primarily to the impact of lower average borrowings. Average
borrowings for the second quarter of fiscal 2003 decreased $118.0 million, to
$238.0 million from $356.0 million in the prior year second quarter. The
decrease in average borrowings is due to improved operating performance, as well
as a reduction in average working capital of $64.9 million year-over-year.
During the second quarter, we repurchased, in the open market, $17.5 million of
our 10-3/8% subordinated notes at a purchase price of approximately 4.9% over
par. The premium we paid on the purchase plus a pro-rata portion of the
capitalized deferred finance charges,
Page 14
totaling $1.4 million pre-tax, $0.9 million after-tax or $0.04 per share, were
written off during the second quarter. These charges were recorded in SG&A
expense.
Our effective income tax rate of 38.0% for the second quarter of fiscal
2003 was consistent with the rate for the second quarter of fiscal 2002.
COMPARISON OF THE TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
Net sales for the first half of fiscal 2003 increased 10.2%, or $67.0
million, to $726.1 million from $659.1 million in the prior year. Same-store
sales increased 10.6% for the fiscal 2003 second quarter year-to-date compared
with a same-store sales increase of 3.5% for the same period in the prior year.
Same-store sales generated substantially all of the overall sales increase, as
we operated 43 fewer stores at the end of the second quarter this year than a
year ago.
By store format, our same-store sales performance for traditional
stores increased 10.6% for the first half of fiscal 2003. Same-store sales for
superstores increased 10.8% year-to-date with approximately two-thirds of this
increase in both store formats attributable to a higher average ticket with the
balance of the increase due to increased customer traffic. We attribute the
improvement in same-store sales to improved merchandising initiatives as well as
an improved inventory in-stock position on key basic items and advertised items
in our stores, as well as continued strong sales trends in our home decor and
seasonal businesses. In addition, trends in the sewing and crafting industry
continue to be strong, as evidenced not only by our increased same-store sales
but that of our major competitors as well.
As a percent of net sales, gross margin was 48.5% for the first half of
fiscal 2003 compared with 44.0% for the first half of fiscal 2002, an increase
of 450 basis points. This increase was driven by higher realized selling margins
in a majority of our product categories, due to improved merchandising
initiatives, an improved promotional merchandising strategy, the non-recurring
impact of clearance sales recorded at zero margin during the prior year from the
SKU Reduction Initiative ($17.0 million of sales in the prior year), as well as
improvements in store shrink rates. Approximately 115 basis points of the
improvement related to the non-recurring impact of the clearance sales, while
improvement in the store shrink rate accounted for an additional 170 basis
points.
SG&A expenses were $304.2 million for the first half of fiscal 2003
versus $289.9 million in the same period of the prior year. As a percentage of
sales, SG&A expenses decreased 210 basis points to 41.9% of net sales versus
44.0% of net sales for the same period of fiscal 2002. This decrease was due to
positive expense leverage realized in both store and non-store expenses, with
strong cost controls complementing the favorable impact of improved same-store
sales growth.
Depreciation and amortization expense in the first half of fiscal 2003
decreased $1.9 million to $17.9 million from $19.8 million. This decrease is
attributable to discontinuing goodwill amortization and the slowdown of our
capital expenditures as a result of the Turnaround Plan decision to discontinue
new store growth for fiscal 2003.
Operating income for the first half of fiscal 2003, was $30.3 million,
compared to an operating loss of $19.4 million for the first half of fiscal
2002.
Interest expense in the first half of fiscal 2003 decreased $2.9
million to $13.0 million from $15.9 million in the same period of fiscal 2002.
The decrease is due primarily to the impact of lower average borrowings. Average
borrowings for fiscal 2003 year-to-date decreased $84.0 million, to $229.0
million from $313.0 million in the prior year. The decrease in average
borrowings is due to improved operating performance, as well as a reduction in
average working capital of $58.9 million year-over-year. During the first half
of fiscal 2003, we repurchased, in the open market, $19.7 million of our 10-3/8%
Page 15
subordinated notes at a purchase price of approximately 4.2% over par. The
premium we paid on the purchase plus a pro-rata portion of the capitalized
deferred finance charges totaling $1.4 million pre-tax, $0.9 million after-tax
or $0.04 per share, were written off and recorded in SG&A expense.
Our effective income tax rate of 38.0% for the first half of fiscal
2003 was consistent with the rate for the first half of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
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.
Cash, including temporary cash investments, decreased $5.4 million
during the first half of fiscal 2003 to $15.7 million as of August 3, 2002.
Net cash used by operating activities was $63.0 million, compared with
$73.2 million in the first half of fiscal 2002. Inventories, net of payables
support, increased $87.4 million in the first half of fiscal 2003, compared
with an increase of $53.1 million in the first half of the prior year.
Inventory typically builds during the first three quarters of the fiscal year
as we build for the peak selling season in the fourth quarter.
Net cash used for investing activities totaled $7.9 million compared
with $53.6 million in the first half of fiscal 2002. Capital expenditures during
the first half of fiscal 2003 totaled $7.9 million and related primarily to
store projects. Capital expenditures in fiscal 2002 totaled $52.5 million and
included approximately $40.0 million related to the unwind of a synthetic lease
facility. The synthetic lease facility was used to finance the construction of
our West Coast distribution center, that was replaced by our new Credit
Facility.
Capital spending for the full year fiscal 2003 is anticipated to be
approximately $15 to $20 million. This capital spending level represents our
lowest capital spending budget in six years, as we limit capital spending to
focus on our previously communicated strategy of further debt reduction. We have
no material commitments in connection with our planned capital expenditures.
During the first half of fiscal 2003, we did not open any new stores. We
relocated two and closed 14 smaller or under-performing traditional stores. For
the balance of fiscal 2003, we expect to relocate one traditional store to a
new superstore location, relocate two traditional stores and close 20 to 25
more traditional stores. All stores closed or to be closed in the current year
are store locations that were identified for closing in fiscal year 2002 as
part of our turnaround plan.
Net cash provided by financing activities was $65.5 million compared
with $131.6 million in the first half of fiscal 2002, reflecting approximately
an $89 million reduction in borrowings under our Credit Facility between
quarters, due to our improved operating performance and continued focus on
working capital management. We expect to reduce our year-end debt levels at the
end of fiscal 2003 by approximately $50 million from our year-end fiscal 2002
levels of $223.7 million.
BUSINESS OUTLOOK
We expect to generate between $1.80 to $1.90 in net income per diluted
share in fiscal 2003. This earnings per share guidance is predicated upon
approximately 21.5 million fully diluted shares outstanding. We raised earlier
provided guidance primarily based on the strength of the first half
performance, although some adjustments have been made to the outlook for the
third and fourth quarters. Same-store sales growth is expected to approximate
3% for the balance of the year.
Page 16
Much more difficult same-store sales comparisons exist in the third and
fourth quarters versus during the first half of this fiscal year. (Last year's
same-store sales increased 8.0% and 7.4%, in the third and fourth quarters,
respectively). In the second half of last year, clearance sales from our SKU
Reduction Initiative generated $18 million of sales in the third and fourth
quarters. In addition, the fourth quarter performance last year benefited from
mild weather and six additional selling days between Thanksgiving and Christmas.
Last year, virtually no store days were lost due to inclement winter weather.
Offsetting the difficult sales comparisons as discussed above, we
expect operating margins to continue to expand in the second half of fiscal
2003, although at a much more modest level than the first half performance. We
estimate that operating margins will expand approximately 100 basis points in
the second half, primarily in the third quarter. Operating margin benefits are
expected to occur in the areas of store shrink as well as the lack of clearance
sales from the SKU Reduction Initiative.
Summarized below is specific guidance on our expectations for real
estate activity, interest expense, and depreciation and amortization expense:
- - For the balance of the fiscal year, we anticipate the closing of an
additional 20 to 25 traditional stores, all of which have been previously
reserved for. Substantially all of these closings will occur in the fourth
quarter after the holiday sales season.
- - Interest expense is now estimated to be between $27 and $28 million this
year, slightly lower than earlier guidance due to additional cash flow
generated during the first half, the repurchase of senior subordinated debt
and current debt levels being below our original plan. We will continue to
pursue opportunistic repurchases of our senior subordinated debt.
- - Depreciation expense will be approximately $1 to $2 million less than last
year's depreciation expense figure of $39 million.
SEASONALITY AND INFLATION
Our business exhibits seasonality, which is typical for most retail
companies. Our net 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, the availability of merchandise, changes in the
competitive pricing for products, and the impact of our and our competition's
store openings and closings.
Page 17
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. We are subject to risk
resulting from interest rate fluctuations, as interest on our credit facility is
based on variable rates. Our objective in managing our 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 4 - Fair Value of Derivative Financial Instruments).
Page 18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various litigation matters in the ordinary course
of our business. We are not currently involved in any litigation which we
expect, either individually or in the aggregate, will have a material adverse
effect on our financial condition 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 6, 2002.
b) Frank Newman and Betty Rosskamm and Beryl Raff were elected to the
Board of Directors in the class whose term of office expires in 2005.
Ira Gumberg and Alma Zimmerman continued as 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.
c) The nominees for Directors as listed in the proxy statement were
elected with the following vote:
-----------------------------------------------------------------------------
Nominee Votes For Votes Withheld
-----------------------------------------------------------------------------
Frank Newman 9,206,262 57,857
-----------------------------------------------------------------------------
Betty Rosskamm 9,018,502 245,617
-----------------------------------------------------------------------------
Beryl Raff 9,206,218 57,901
-----------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
--------
Exhibit 99.1 - Section 906 Certificate of Principal Executive
Officer
Exhibit 99.2 - Section 906 Certificate of Principal Financial
Officer
b) Reports on Form 8-K
-------------------
Not Applicable.
Page 19
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 17, 2002 /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
Page 20
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Alan Rosskamm, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jo-Ann Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Dated: September 17, 2002
/s/ Alan Rosskamm
-------------------------
By: Alan Rosskamm
President and Chief Executive Officer
Page 21
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Brian P. Carney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jo-Ann Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Dated: September 17, 2002
/s/ Brian P. Carney
---------------------------
By: Brian P. Carney
Executive Vice President and Chief Financial Officer
Page 22