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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 MAY 3, 2003
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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 June 6, 2003: 10,449,864
Shares of Class B Common Stock outstanding at June 6, 2003: 9,508,460
================================================================================
JO-ANN STORES, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED MAY 3, 2003
- --------------------------------------------------------------------------------
Page Numbers
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of May 3, 2003, February 1, 2003
and May 4, 2002 3
Consolidated Statements of Operations for the Thirteen Weeks
Ended May 3, 2003 and May 4, 2002 4
Consolidated Statements of Cash Flows for the Thirteen Weeks
Ended May 3, 2003 and May 4, 2002 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
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 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)
MAY 3, FEBRUARY 1, MAY 4,
2003 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS,
EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 26.0 $ 63.2 $ 19.8
Inventories 369.1 363.1 400.1
Deferred income taxes 28.1 28.2 30.3
Prepaid expenses and other current assets 17.0 17.2 17.6
-------- -------- --------
Total current assets 440.2 471.7 467.8
Property, equipment and leasehold improvements, net 183.5 190.3 203.9
Goodwill, net 26.5 26.5 26.5
Other assets 15.1 16.0 18.2
-------- -------- --------
Total assets $ 665.3 $ 704.5 $ 716.4
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 136.0 $ 129.9 $ 142.4
Accrued expenses 59.9 75.9 75.4
-------- -------- --------
Total current liabilities 195.9 205.8 217.8
Long-term debt 124.9 162.9 223.5
Deferred income taxes 37.2 37.2 23.6
Other long-term liabilities 9.6 9.2 8.4
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none
issued -- -- --
Common stock:
Class A, stated value $0.05 per share; 75,000,000 authorized, issued
and outstanding 10,441,566, 10,241,884 and 10,013,152, 0.6
respectively 0.5 0.5
Class B, stated value $0.05 per share; 75,000,000 authorized, issued
and outstanding 9,481,340, 9,300,936 and 8,822,536, respectively 0.5 0.5 0.5
Additional paid-in capital 120.1 113.9 100.8
Unamortized restricted stock awards (2.5) (0.4) (0.5)
Retained earnings 221.9 217.8 181.6
Accumulated other comprehensive loss (2.5) (2.6) (2.7)
-------- -------- --------
338.0 329.7 280.3
Treasury stock, at cost (40.3) (40.3) (37.2)
-------- -------- --------
Total shareholders' equity 297.7 289.4 243.1
-------- -------- --------
Total liabilities and shareholders' equity $ 665.3 $ 704.5 $ 716.4
======== ======== ========
See notes to consolidated financial statements
Page 3
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED
-------------------------------
MAY 3, MAY 4,
2003 2002
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT
SHARE AND PER SHARE DATA)
Net sales $ 374.8 $ 372.4
Cost of sales 194.3 191.6
-------- --------
Gross margin 180.5 180.8
Selling, general and administrative expenses 153.1 150.3
Store pre-opening and closing costs 2.1 0.9
Depreciation and amortization 9.1 9.2
Stock-based compensation expense 1.2 --
Debt repurchase expenses 3.4 --
-------- --------
Operating profit 11.6 20.4
Interest expense, net 5.0 6.4
-------- --------
Income before income taxes 6.6 14.0
Income tax provision 2.5 5.3
-------- --------
Net income $ 4.1 $ 8.7
======== ========
Basic net income per common share $ 0.21 $ 0.46
======== ========
Diluted net income per common share $ 0.20 $ 0.43
======== ========
See notes to consolidated financial statements
Page 4
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTEEN WEEKS ENDED
-------------------------------------
MAY 3, MAY 4,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Net cash flows from operating activities:
Net income $ 4.1 $ 8.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9.1 9.2
Deferred income taxes 0.1 0.2
Stock-based compensation expense 1.2 --
Loss on disposal of fixed assets 0.1 --
Loss associated with purchase of senior subordinated notes 3.4 --
Changes in operating assets and liabilities:
Increase in inventories (6.0) (31.1)
Increase in accounts payable 6.1 19.3
Decrease in accrued expenses (16.0) (6.9)
Other, net 1.2 1.2
------- -------
Net cash provided by operating activities 3.3 0.6
Net cash flows used for investing activities:
Capital expenditures (2.7) (2.9)
------- -------
Net cash used for investing activities (2.7) (2.9)
Net cash flows (used for) provided by financing activities:
Net increase (decrease) in revolving credit facility 7.9 (0.2)
Purchase of senior subordinated notes (48.4) --
Proceeds from exercise of stock options 1.3 0.2
Other, net 1.4 1.0
------- -------
Net cash (used for) provided by financing activities (37.8) 1.0
------- -------
Net decrease in cash and cash equivalents (37.2) (1.3)
Cash and cash equivalents at beginning of period 63.2 21.1
------- --------
Cash and cash equivalents at end of period $ 26.0 $ 19.8
======= ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 9.6 $ 9.9
Income taxes, net of refunds 2.3 0.2
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 917 retail stores in 48 states at May 3, 2003. The
840 traditional and 77 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 2003 year-end and
interim financial statements have been reclassified in order to conform to the
current year presentation. The financial 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, 2003. The fiscal year refers to the year in which the period ends
(e.g., fiscal 2003 refers to the year ended February 1, 2003).
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. Accordingly, 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 May 4, 2002
has been provided. In the opinion of management, the consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) 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.
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
-----------------------------------
MAY 3, MAY 4,
2003 2002
--------------- ---------------
BASIC COMMON SHARES:
Weighted average shares outstanding 19.7 18.7
=============== ===============
DILUTED COMMON SHARES:
Weighted average shares outstanding 19.7 18.7
Incremental shares from assumed exercise of stock options 0.4 1.3
--------------- ---------------
20.1 20.0
=============== ===============
Page 6
NOTE 3 - STOCK-BASED COMPENSATION
Effective February 2, 2003, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". Under the modified
prospective method of adoption selected by the Company under the provisions of
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure", compensation cost recognized in fiscal year 2004 is the same as
that which would have been recognized had the recognition provisions of SFAS No.
123 been applied from its original effective date. Results for prior years have
not been restated. No stock-based compensation expense was reflected in fiscal
year 2003 net income, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
believes that this change is to the preferred method of accounting for
stock-based compensation.
The following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period (dollars in millions, except per share data):
THIRTEEN WEEKS ENDED
------------------------------------
MAY 3, MAY 4,
2003 2002
---------------- ----------------
Net income, as reported $4.1 $8.7
Add: Stock-based compensation expense included in reported net
income, net of tax 0.7 --
Less: Stock-based compensation expense determined under the fair
value method, net of tax (0.7) (0.6)
---------------- ----------------
Pro forma net income $4.1 $8.1
================ ================
Earnings per share:
Basic - as reported $0.21 $0.46
Basic - pro forma $0.21 $0.43
Diluted - as reported $0.20 $0.43
Diluted - pro forma $0.20 $0.41
NOTE 4 - STORE CLOSINGS
The Company is pursuing a growth strategy that is driven by the
replacement of traditional stores with superstores. During the first quarter,
the Company opened three new superstores and closed three traditional stores as
a result. In addition, the Company continually reviews the productivity of its
store base, actively manages its real estate to preserve maximum flexibility in
lease terms, and closes locations that do not meet certain financial performance
thresholds.
Page 7
During the first quarter of this year the Company closed a total of six
traditional stores, either because of superstore openings or because of
operating performance. The charges to the statement of operations for the first
quarter ending May 3, 2003 related to store closings and a roll-forward of the
store closing reserve balances is summarized in the following table.
NON-CANCELABLE
LEASE ASSET OTHER
Dollars in millions OBLIGATIONS IMPAIRMENTS COSTS TOTAL
---------------- -------------- -------------- ---------------
BALANCE AT FEB 1, 2003 $3.5 $ -- $0.9 $4.4
Amounts charged to income -- 0.3 -- 0.3
Utilization:
Cash (0.2) -- (0.1) (0.3)
Non-Cash -- (0.3) -- (0.3)
---------------- -------------- -------------- ---------------
BALANCE AT MAY 3, 2003 $3.3 $ -- $0.8 $4.1
================ ============== ============== ===============
The Company has segregated the costs of store openings and closings as
a separate line item in the statement of operations. Over the next several
years, as the Company pursues its strategy of growing revenues and market share
with the expansion of the superstore concept, management believes that
segregating the costs of real estate activity provides better insight into the
core performance of the Company.
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. The
Company does not enter into financial instruments for trading purposes.
At May 3, 2003, the Company had a $40.0 million interest rate swap with
a fixed LIBOR rate of 6.72% that expires on April 30, 2005. The interest rate
swap agreement requires the Company to pay a fixed interest rate while receiving
a floating interest rate based on LIBOR. In accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the Company has
reviewed and designated its interest rate swap agreement as a cash flow hedge
and recognizes the fair value of its interest rate swap agreement on the balance
sheet. Changes in the fair value of this agreement are recorded in other
comprehensive income and reclassified into earnings as the underlying hedged
item affects earnings.
Other comprehensive income includes the effects of derivative
transactions accounted for under SFAS No. 133, net of related tax. Comprehensive
income consists of the following:
THIRTEEN WEEKS ENDED
------------------------------
MAY 3, MAY 4,
Dollars in millions 2003 2002
-------------- --------------
Net income $4.1 $8.7
Other comprehensive income 0.1 0.3
-------------- --------------
Comprehensive income $4.2 $9.0
============== ==============
Page 8
NOTE 6 - SHARE RECLASSIFICATION PROPOSAL
On May 19, 2003, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission to register securities to be issued
in connection with a proposed reclassification of its two classes of common
shares into one voting class. As part of the proposal, the Company will also
seek to amend certain provisions of its code of regulations. The Company expects
to hold a special meeting of shareholders on or about August 13, 2003 to vote on
the proposal.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in the statement of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We do not expect the adoption of SFAS No.
150 to have a significant impact on our operating results or financial position.
During April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The guidance should be applied prospectively. We do not expect the
adoption of SFAS No. 149 to have a significant impact on our operating results
or financial position.
In November 2002, the EITF reached a consensus on EITF 02-16,
"Accounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor". Among other conclusions reached, EITF 02-16 requires
that consideration received from a vendor be presumed to be a reduction of the
cost of the vendor's products or services. This presumption can be overcome if
the consideration can be shown to represent either a payment for assets or
services delivered to the vendor or a reimbursement of costs incurred by the
reseller to sell the vendor's products. Under the transition rules set forth in
EITF 02-16 this treatment is required for all agreements entered into or
modified after December 31, 2002. This guidance was adopted by the Company and
did not have a material impact on its results of operations or financial
position.
Page 9
NOTE 8 - 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 May 3, 2003 and February 1, 2003 and for the
thirteen weeks ended May 3, 2003 and May 4, 2002 are as follows:
CONSOLIDATING BALANCE SHEETS
MAY 3, 2003
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents................ $ 21.4 $ 4.6 $ -- $ 26.0
Inventories ............................. 144.7 224.4 -- 369.1
Deferred income taxes.................... 21.3 6.8 -- 28.1
Prepaid expenses and other current assets 10.9 6.1 -- 17.0
-------- ---------- --------- ----------
Total current assets ........................ 198.3 241.9 -- 440.2
Property, equipment and leasehold improvements,
net ....................................... 63.6 119.9 -- 183.5
Goodwill, net ............................... 26.5 -- 26.5
Other assets ................................ 13.7 1.4 -- 15.1
Investment in subsidiaries................... 35.4 -- (35.4) --
Intercompany receivable...................... 341.1 -- (341.1) --
-------- ---------- --------- ----------
Total assets ................................ $ 652.1 $ 389.7 $ (376.5) $ 665.3
======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 127.6 $ 8.4 $ -- $ 136.0
Accrued expenses ........................ 78.6 (18.7) -- 59.9
-------- ---------- --------- ----------
Total current liabilities ................... 206.2 (10.3) -- 195.9
Long-term debt .............................. 124.9 -- -- 124.9
Deferred income taxes ....................... 17.6 19.6 -- 37.2
Other long-term liabilities ................. 5.7 3.9 -- 9.6
Intercompany payable......................... -- 341.1 (341.1) --
Shareholders' equity:
Common stock............................. 1.0 -- -- 1.0
Additional paid-in capital .............. 120.1 -- -- 120.1
Unamortized restricted stock awards ..... (2.5) -- -- (2.5)
Retained earnings ....................... 221.9 35.4 (35.4) 221.9
Accumulated other comprehensive loss .... (2.5) -- -- (2.5)
-------- ---------- --------- ----------
338.0 35.4 (35.4) 338.0
Treasury stock, at cost.................. (40.3) -- -- (40.3)
-------- ---------- --------- ----------
Total shareholders' equity .................. 297.7 35.4 (35.4) 297.7
-------- ---------- --------- ----------
Total liabilities and shareholders' equity .. $ 652.1 $ 389.7 $ (376.5) $ 665.3
======== ========== ========= ==========
Page 10
NOTE 8 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING BALANCE SHEETS
FEBRUARY 1, 2003
GUARANTOR
CONSOLIDATING BALANCE SHEETS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------- ------------ ------------ ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents................ $ 60.2 $ 3.0 $ -- $ 63.2
Inventories.............................. 132.9 230.2 -- 363.1
Deferred income taxes.................... 21.5 6.7 -- 28.2
Prepaid expenses and other current assets 11.2 6.0 -- 17.2
-------- --------- -------- -------
Total current assets......................... 225.8 245.9 -- 471.7
Property, equipment and leasehold
improvements, net ...................... 65.8 124.5 -- 190.3
Goodwill, net................................ -- 26.5 -- 26.5
Other assets................................. 14.6 1.4 -- 16.0
Investment in subsidiaries................... 22.6 -- (22.6) --
Intercompany receivable...................... 371.4 -- (371.4) --
-------- --------- -------- -------
Total assets................................. $ 700.2 $ 398.3 $ (394.0) $ 704.5
======== ========= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 130.3 $ (0.4) $ -- $ 129.9
Accrued expenses......................... 94.7 (18.8) -- 75.9
-------- --------- -------- -------
Total current liabilities.................... 225.0 (19.2) -- 205.8
Long-term debt............................... 162.9 -- -- 162.9
Deferred income taxes........................ 17.6 19.6 -- 37.2
Other long-term liabilities.................. 5.3 3.9 -- 9.2
Intercompany payable......................... -- 371.4 (371.4) --
Shareholders' equity:
Common stock............................. 1.0 -- -- 1.0
Additional paid-in capital............... 113.9 -- -- 113.9
Unamortized restricted stock awards...... (0.4) -- -- (0.4)
Retained earnings........................ 217.8 22.6 (22.6) 217.8
Accumulated other comprehensive
loss................................ (2.6) -- -- (2.6)
-------- --------- -------- -------
329.7 22.6 (22.6) 329.7
Treasury stock, at cost.................. (40.3) -- -- (40.3)
-------- --------- -------- -------
Total shareholders' equity................... 289.4 22.6 (22.6) 289.4
-------- --------- -------- -------
Total liabilities and shareholders' equity... $ 700.2 $ 398.3 $ (394.0) $ 704.5
======== ========= ======== =======
Page 11
NOTE 8 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 3, 2003 AND MAY 4, 2002
MAY 3, 2003
------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ------------ ------------ -----------
(Dollars in millions)
Net sales ................................. $ 205.5 $ 286.5 $ (117.2) $ 374.8
Cost of sales ............................. 122.8 188.7 (117.2) 194.3
------- ------- -------- -------
Gross margin ......................... 82.7 97.8 -- 180.5
Selling, general and administrative
expenses ................................ 83.2 76.6 -- 159.8
Depreciation and amortization ............. 3.4 5.7 -- 9.1
------- ------- -------- -------
Operating (loss) profit .............. (3.9) 15.5 -- 11.6
Interest expense, net ..................... 2.2 2.8 -- 5.0
------- ------- -------- -------
(Loss) income before income taxes ... (6.1) 12.7 -- 6.6
Income tax provision (benefit) ............ 2.6 (0.1) -- 2.5
------- ------- -------- -------
(Loss) income before equity income ... (8.7) 12.8 -- 4.1
Equity income from subsidiaries ........... 12.8 -- (12.8) --
------- ------- -------- -------
Net income ................................ $ 4.1 $ 12.8 $ (12.8) $ 4.1
======= ======= ======== =======
MAY 4, 2002
------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ------------ ------------ -----------
(Dollars in millions)
Net sales.................................. $ 205.1 $ 279.6 $ (112.3) $ 372.4
Cost of sales ............................. 116.9 187.0 (112.3) 191.6
------- ------- -------- -------
Gross margin ......................... 88.2 92.6 -- 180.8
Selling, general and administrative
expenses ................................ 75.9 75.3 -- 151.2
Depreciation and amortization ............. 3.4 5.8 -- 9.2
------- ------- -------- -------
Operating profit...................... 8.9 11.5 -- 20.4
Interest expense, net ..................... 2.9 3.5 -- 6.4
------- ------- -------- -------
Income before income taxes .......... 6.0 8.0 -- 14.0
Income tax provision (benefit) ............ 5.4 (0.1) -- 5.3
------- ------- -------- -------
Income before equity income .......... 0.6 8.1 -- 8.7
Equity income from subsidiaries ........... 8.1 -- (8.1) --
------- ------- -------- -------
Net income................................. $ 8.7 $ 8.1 $ (8.1) $ 8.7
======= ======= ======== =======
Page 12
NOTE 8 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS
THIRTEEN WEEKS ENDED MAY 3, 2003 AND MAY 4, 2002
MAY 3, 2003
------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ------------ ------------ -----------
(Dollars in millions)
Net cash provided by operating activities ...... $ 0.1 $ 3.2 $ -- $ 3.3
Net cash flows used for investing activities:
Capital expenditures ....................... (1.1) (1.6) -- (2.7)
------- ------- -------- -------
Net cash used for investing activities (1.1) (1.6) -- (2.7)
Net cash flows used for financing activities:
Net change in revolving credit facility..... 7.9 -- -- 7.9
Purchase of senior subordinated notes ...... (48.4) -- -- (48.4)
Proceeds from exercise of stock options .... 1.3 -- -- 1.3
Other, net ................................. 1.4 -- -- 1.4
------- ------- -------- -------
Net cash used for financing activities ......... (37.8) -- -- (37.8)
------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents................................... (38.8) 1.6 -- (37.2)
Cash and cash equivalents at beginning
of period .................................... 60.2 3.0 -- 63.2
------- ------- -------- -------
Cash and cash equivalents at end of period ..... $ 21.4 $ 4.6 $ -- $ 26.0
======= ======= ======== =======
MAY 4, 2002
------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------- ------------ ------------ -----------
(Dollars in millions)
Net cash provided by operating activities ...... $ 0.1 $ 0.5 $ -- $ 0.6
Net cash flows used for investing activities:
Capital expenditures ....................... (2.1) (0.8) -- (2.9)
------- ------- -------- -------
Net cash used for investing activities ......... (2.1) (0.8) -- (2.9)
Net cash flows provided by financing activities:
Net change in revolving credit facility..... (0.2) -- -- (0.2)
Proceeds from exercise of stock options .... 0.2 -- -- 0.2
Other, net ................................. 1.0 -- -- 1.0
------- ------- -------- -------
Net cash provided by financing activities ...... 1.0 -- -- 1.0
------- ------- -------- -------
Net decrease in cash and cash equivalents....... (1.0) (0.3) -- (1.3)
Cash and cash equivalents at beginning
of period .................................... 17.5 3.6 -- 21.1
------- ------- -------- -------
Cash and cash equivalents at end of period ..... $ 16.5 $ 3.3 $ -- $ 19.8
======= ======= ======== =======
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth our results of operation through
operating profit, expressed as a percentage of net sales. The following
discussion should be read in conjunction with our consolidated financial
statements and related notes thereto.
PERCENTAGE OF NET SALES
-------------------------------------
THIRTEEN WEEKS ENDED
-------------------------------------
MAY 3, 2003 MAY 4, 2002
------------------- ----------------
Net sales.......................................... 100.0% 100.0%
Gross margin.................................. 48.2 48.5
Selling, general and administrative expenses ...... 40.8 40.4
Store pre-opening and closing costs ............... 0.6 0.2
Depreciation and amortization...................... 2.5 2.5
Stock-based compensation expense................... 0.3 --
Debt repurchase expenses .......................... 0.9 --
------------------- ----------------
Operating profit.............................. 3.1% 5.4%
=================== ================
COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 3, 2003 AND MAY 4, 2002
Net sales for the first quarter of fiscal 2004 increased 0.6%, or $2.4
million, to $374.8 million from $372.4 million in the prior year. Sales from
stores open one year or more ("same-store sales") increased 2.6% compared with a
same-store sales increase of 13.5% for the prior year first quarter. Same-store
sales generated all of the overall net sales increase, as we operated fewer
stores at the end of first quarter versus a year ago. The Company's total store
count for the quarter was down 34 units, or 3.6% from last year's first quarter;
however, the number of superstores in operation increased to 77 from 70 in last
year's first quarter. Store square footage decreased 1.8% from last year's first
quarter.
By store format, our same-store sales performance for traditional
stores increased 2.7% versus a same-store sales increase of 13.2% for the prior
year first quarter. This was driven primarily by an increase in customer
traffic. Same-store sales for superstores increased 2.2% for the quarter versus
a same-store sales increase of 14.6% for the prior year first quarter. The
increase was driven entirely by customer traffic with average ticket down
slightly. Management attributes the improvement in same-store sales to
aggressive promotion and clearance activities compared to the prior year first
quarter.
As a percent of net sales, gross margin was 48.2% for the first quarter
of fiscal 2004 compared with 48.5% for the same quarter a year earlier, a
decrease of 30 basis points. This decrease in margin rate resulted from reduced
selling margins due to promotional and clearance activities, partially offset by
improvements in store shrink expense rates. Selling gross margins decreased 170
basis points, store shrink expense rates improved 160 basis points.
Selling, general and administrative ("SG&A") expenses were $153.1
million in the first quarter of fiscal 2004 versus $150.3 million in the prior
year first quarter. As a percentage of net sales, SG&A expenses increased to
40.8% versus 40.4% for the first quarter of fiscal 2003. This decrease in
expense leverage primarily related to increases in store payroll and
distribution costs due to normal inflationary increases that outpaced the
overall growth rate in sales.
Page 14
Store pre-opening and closing costs increased $1.2 million during the
first quarter of fiscal 2004, to $2.1 million due to increased store opening
activity. We opened three superstores in this year's first quarter, compared
with no openings in the prior year.
Depreciation and amortization expense decreased $0.1 million to $9.1
million from $9.2 million.
Stock-based compensation expense of $1.2 million resulted from our
adoption of the fair-value based method of accounting for stock options under
SFAS No. 123 "Accounting for Stock-Based Compensation Expense." We adopted SFAS
No. 123 under the modified-prospective method allowed under the transition
provisions provided for under SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure an amendment of FASB Statement No. 123".
Debt repurchase expenses of $3.4 million were incurred to repurchase
approximately $46.0 million of our 10-3/8% senior subordinated notes. The charge
recorded includes the cash premium paid for early redemption and a write-off of
the related deferred finance charges.
Operating profit for the first quarter of fiscal 2004 was $11.6
million, compared to $20.4 million for the first quarter of fiscal 2003.
Interest expense in the first quarter of fiscal 2004 decreased $1.4
million to $5.0 million from $6.4 million in the first quarter of fiscal 2003.
The decrease is primarily due to a decrease of approximately $64 million in our
average debt levels between years. Our average debt levels during the first
quarter of fiscal 2004 were approximately $157 million, compared with
approximately $221 million in the prior year first quarter.
Our effective income tax rate of 38.0% for the first quarter of fiscal
2004 was consistent with the rate for the first quarter of fiscal 2003.
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 and cash equivalents decreased $37.2 million during the first
quarter of fiscal 2004 to $26.0 million as of May 3, 2003.
Net cash provided by operating activities was $3.3 million in the first
quarter of fiscal 2004 compared to $0.6 million in the first quarter of fiscal
2002. Inventories, net of payables support, decreased $0.1 million, compared
with an increase of $11.8 million in the first quarter of the prior year.
Net cash used for investing activities totaled $2.7 million in fiscal
2004 compared with $2.9 million in the first quarter of fiscal 2003 and
consisted entirely of capital spending for both periods.
We anticipate capital expenditures for the full year fiscal 2004 to be
approximately $50 million. The majority of this spending will pertain to new
store openings and continued improvements in the existing store base. We plan to
open approximately 20 new stores during fiscal 2004, the majority of them
superstores. During the first quarter of fiscal 2004, we opened three
superstores and one traditional store. We converted two larger traditional
stores to our superstore format and we closed six traditional stores. For the
balance of fiscal 2004, we expect to open approximately 14 superstores and three
traditional stores, convert two more large traditional stores to superstores,
and close 34 traditional stores.
Page 15
Net cash used for financing activities was $37.8 million during the
first quarter of fiscal 2004 compared with $1.0 million of net cash provided by
financing activities during the first quarter of fiscal 2003. The net cash used
for financing activities for fiscal 2004 primarily related to a $38.0 million
decrease in long-term debt. During the first quarter of fiscal 2004 we gave
notice to the trustee for our 10-3/8% senior subordinated notes that on May 1,
2003, we intended to redeem $41.5 million face value of those notes in
accordance with call provisions of the indenture. During the first quarter we
redeemed or repurchased in the open market, approximately $46.0 million of
senior subordinated notes at an aggregate premium of 105.4% to par value. The
$3.4 million pre-tax charge for debt repurchase expenses include the cash
premium to par value and the write-off of deferred costs and original issue
discount.
Our debt-to-capitalization ratio was 29.6% at May 3, 2003, 36.0% at
February 1, 2003 and 47.9% at May 4, 2002. We have a goal to further reduce debt
levels during fiscal 2004 by utilizing cash provided by operating activities.
BUSINESS OUTLOOK
In a press release dated May 19, 2003, which was filed on Form 8-K with
the Securities and Exchange Commission, the Company updated its previously
stated earnings guidance of $2.45-$2.50 per diluted share due to the adoption of
SFAS No. 123, the repurchase of the senior subordinated notes in the first
quarter and the reclassification proposal for its dual class shares. The Company
now expects fiscal 2004 earnings per share to be in the range of $2.00 to $2.10
diluted per share.
Our actual results in the second through fourth quarters are highly
dependent on the sales and operating margin performance we are able to achieve.
As a result, our estimates are subject to further refinement which we will
provide as appropriate based on developments throughout the year. Below are
assumptions that we used for our full year 2004 earnings per share guidance.
o Estimated pre-tax interest savings of $2.7 million for the second
through fourth quarters, due to the debt repurchases completed in
the first quarter.
o Pre-tax charges of $3.4 million recorded in the first quarter to
recognize the premium paid for the senior subordinated notes and the
write-off related to deferred finance charges.
o Non-cash pre-tax charges of $4.0 million for the remainder of the
fiscal year relating to stock-based compensation expense. In the
first quarter, we recorded pre-tax expense of $1.2 million.
o Approximately $1.2 million in pre-tax costs related to the common
share reclassification proposal.
o Approximately 8% additional diluted shares outstanding assuming the
reclassification proposal for dual class shares is approved by
shareholders in August. The reclassification proposal will increase
diluted shares outstanding by an estimated 1.6 million shares, to
approximately 22.3 million diluted shares for fiscal year 2004.
For the second quarter, historically the Company's weakest quarter of
the year, the Company expects to lose between $0.15 to $0.20 per diluted share.
The second quarter performance is expected to be impacted by $1.4 million of
stock-based compensation expense, approximately $1.2 million in costs related to
the reclassification proposal for dual class shares, and approximately $1.5
million in incremental store pre-opening costs.
In the second quarter, the Company plans to open an additional eight
stores, all but one of which are superstores.
Page 16
SHARE RECLASSIFICATION PROPOSAL
On May 19, 2003, we filed a Form S-4 Registration Statement with the
Securities and Exchange Commission to register securities to be issued in
connection with a proposed reclassification of our two classes of common shares
into one voting class. As part of the proposal, we will also seek to amend
certain provisions of our code of regulations. That Form S-4 Registration
Statement has not yet become effective.
The Company expects to hold a special meeting of shareholders on or
about August 13, 2003 to vote on the proposal. Prior to that time, each
shareholder will receive a written prospectus and proxy statement describing the
proposed reclassification and the amendments to our code of regulations. Our
shareholders should read that information when it becomes available because it
will contain important information.
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.
Working 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.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparation of these statements requires management to make judgments
and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical
may be found in our 2003 Annual Report on Form 10-K, filed on May 2, 2003, in
the notes to the consolidated financial statements, Note 1 and the Critical
Accounting Policies section.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements, which
reflects the Company's current views of future events and financial performance,
involve certain risks and uncertainties. When used herein, the terms
"anticipates," "plans," "estimates," "expects," "believes," and similar
expressions as they relate to us or future or conditional verbs such as "will",
"should", "would", "may", and "could" 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 competitors
store openings and closings, fuel and energy costs, changes in tariff and
freight rates, consumer debt levels, and other capital market and geo-political
conditions. We caution readers not to
Page 17
place undue reliance on these forward-looking statements. We assume no
obligation to update any of the forward-looking statements.
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 our variable-rate exposures
to fixed interest rates (See Note 5 - Fair Value of Derivative Financial
Instruments).
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date this Form 10-Q was filed with the
Securities and Exchange Commission, we carried out an evaluation, under the
supervision and with the participation of our management, including the Chairman
and Chief Executive Officer along with the Chief Financial Officer and Chief
Accounting Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)
and 15d-14(c)). Based upon that evaluation, our Chairman and Chief Executive
Officer along with our Chief Financial Officer and Chief Accounting Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company and its
consolidated subsidiaries required to be included in our periodic reports filed
with the SEC. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to
the date we carried out the evaluation.
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 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: June 11, 2003 /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.
(the "Registrant");
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;
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;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) Presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 11, 2003
/s/ Alan Rosskamm
-------------------------------------
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.
(the "Registrant");
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;
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;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) Presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 11, 2003
/s/ Brian P. Carney
--------------------------------------------
Brian P. Carney,
Executive Vice President and Chief Financial Officer
Page 22