-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7ZdA1wnoHlovkiZEMc1WnNGsnAZIyLbiOnEVBNSR3FwvcEynqAgCMHopMlerfis XVyUNa1KVpE8F2QGTXOwzA== 0000950152-01-501490.txt : 20010507 0000950152-01-501490.hdr.sgml : 20010507 ACCESSION NUMBER: 0000950152-01-501490 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010203 FILED AS OF DATE: 20010504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JO-ANN STORES INC CENTRAL INDEX KEY: 0000034151 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 340720629 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06695 FILM NUMBER: 1622377 BUSINESS ADDRESS: STREET 1: 5555 DARROW RD CITY: HUDSON STATE: OH ZIP: 44236 BUSINESS PHONE: 2166562600 MAIL ADDRESS: STREET 1: 5555 DARROW ROAD CITY: HUDSON STATE: OH ZIP: 44236 FORMER COMPANY: FORMER CONFORMED NAME: FABRI CENTERS OF AMERICA INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CLEVELAND FABRIC SHOPS INC DATE OF NAME CHANGE: 19681216 FORMER COMPANY: FORMER CONFORMED NAME: CLEVELAND FABRIC SHOPS INC NUMBER THREE DATE OF NAME CHANGE: 19681216 10-K405 1 l87539ae10-k405.txt JO-ANN STORES, INC. 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001 COMMISSION FILE NO. 1-6695 ------------------------ JO-ANN STORES, INC. (Exact name of Registrant as specified in its charter) OHIO 34-0720629 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5555 DARROW ROAD, HUDSON, OHIO 44236 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 656-2600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- --------------------- Class A Common Shares, Without Par Value New York Stock Exchange Class B Common Shares, Without Par Value New York Stock Exchange
------------------------ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] As of April 13, 2001, there were 9,512,449 Class A common shares and 8,806,211 Class B common shares outstanding and the aggregate market value of these common shares (based upon the closing price on April 12, 2001 of these shares on the New York Stock Exchange) of the Registrant held by persons other than affiliates of the Registrant was approximately $51.5 million. Documents incorporated by reference: Portions of the following documents are or will be incorporated by reference: Proxy Statement for 2001 Annual Meeting of Shareholders -- Items 10, 11 and 12 of Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I Except as otherwise stated, the information contained in this report is given as of February 3, 2001, the end of our latest fiscal year. The words "Jo-Ann Stores, Inc.," "Jo-Ann Stores," "Jo-Ann Fabrics and Crafts," "Jo-Ann etc," "Jo-Ann," "Registrant," "Company," "we," "our," and "us" refer to Jo-Ann Stores, Inc. and, unless the context requires otherwise, to our subsidiaries. Our fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g., fiscal 2001 ended February 3, 2001). ITEM 1. BUSINESS We are the largest national category-dominant retailer, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating, and other creative endeavors. We were founded as a single retail store in 1943 and, as of February 3, 2001, we operated 949 Jo-Ann Fabrics and Crafts traditional stores in 49 states and 58 Jo-Ann etc superstores in 16 states. We serve the approximately 70% of U.S. households that engaged in crafts and hobbies during the past year by offering a large variety of competitively priced, high quality apparel, craft and home decorating fabrics, notions, crafts, seasonal and home accessories, and floral and framing products. Our traditional stores primarily serve small and middle markets, and our superstores serve selected markets where traditional store performance and area demographics are favorable. Our traditional stores average 14,100 square feet. Over the past five years we have strategically relocated certain traditional stores, increasing average square footage per store and sales per square foot by approximately 15%. As a result, net sales per traditional store have increased to approximately $1.2 million over this period. In November 1995, we opened our first large format "category killer" superstore which offers an expanded and more comprehensive product assortment than our traditional stores. Our superstores average 46,300 square feet and in fiscal 2001, on a per store basis, generated more than four and one-half times the revenue and over 30% higher sales per square foot than our traditional stores. We believe our superstores, which accounted for almost 20% of fiscal 2001 total net sales, present opportunities for future sales growth. Historically, we have grown and increased market share principally through existing store growth, new store openings and strategic acquisitions. In April 1998, we acquired House of Fabrics, Inc., a chain of 261 fabric and craft stores located primarily on the West Coast. By September 1998, we successfully integrated, remerchandised and rebranded the former House of Fabrics stores. 1 3 STORES The following table shows our stores by type and state at February 3, 2001:
TRADITIONAL SUPERSTORE TOTAL TRADITIONAL SUPERSTORE TOTAL ----------- ---------- ----- ----------- ---------- ----- Alabama.............. 3 -- 3 Nebraska.......... 6 -- 6 Alaska............... 5 -- 5 Nevada............ 5 2 7 Arizona.............. 16 3 19 New Hampshire..... 10 -- 10 Arkansas............. 3 -- 3 New Jersey........ 16 -- 16 California........... 116 3 119 New Mexico........ 6 -- 6 Colorado............. 15 -- 15 New York.......... 41 7 48 Connecticut.......... 16 2 18 North Carolina.... 9 -- 9 Delaware............. 3 -- 3 North Dakota...... 4 -- 4 Florida.............. 53 5 58 Ohio.............. 67 8 75 Georgia.............. 12 5 17 Oklahoma.......... 5 -- 5 Idaho................ 9 -- 9 Oregon............ 26 -- 26 Illinois............. 46 -- 46 Pennsylvania...... 60 -- 60 Indiana.............. 31 1 32 Rhode Island...... 3 -- 3 Iowa................. 12 -- 12 South Carolina.... 2 -- 2 Kansas............... 10 1 11 South Dakota...... 2 -- 2 Kentucky............. 5 -- 5 Tennessee......... 3 3 6 Louisiana............ 8 -- 8 Texas............. 67 -- 67 Maine................ 5 -- 5 Utah.............. 14 -- 14 Maryland............. 20 3 23 Vermont........... 4 -- 4 Massachusetts........ 26 -- 26 Virginia.......... 24 -- 24 Michigan............. 53 7 60 Washington........ 35 2 37 Minnesota............ 21 5 26 West Virginia..... 6 -- 6 Mississippi.......... 2 -- 2 Wisconsin......... 23 -- 23 Missouri............. 12 1 13 Wyoming........... 2 -- 2 --- -- ----- Montana.............. 7 -- 7 Total............. 949 58 1,007 === == =====
The following table reflects the number of stores opened, expanded or relocated, closed and acquired during each of the past five fiscal years:
TOTAL STORES IN SQUARE FISCAL STORES EXPANDED OR STORES STORES OPERATION AT FOOTAGE YEAR OPENED RELOCATED CLOSED ACQUIRED YEAR-END (000'S) ------ ------ ----------- ------ -------- ------------ ------- 1997 13 37 (35) -- 914 11,612 1998 24 42 (35) -- 903 12,119 1999 31 26 (47) 171(1) 1,058 15,270 2000 29 22 (61) -- 1,026 15,642 2001 18 9 (37) -- 1,007 16,068
- ------------------------------ (1) In April 1998, we completed a merger with House of Fabrics, Inc., a chain of 261 fabric and craft stores located primarily on the West Coast. Of the 261 stores acquired, 90 stores were consolidated with existing traditional stores. As a result, 171 net new units were added to the store base. During fiscal 2002, we expect to open 12 new superstores and to relocate 10 traditional stores. We have committed to leases for all but one of these 22 planned projects. Our new store opening costs depend on the building type, store size and general cost levels in the area. During fiscal 2001, we opened 2 new traditional stores, with an average square footage per store of 21,700 square feet. Our average net opening cost of these traditional stores was approximately $0.3 million per store, which included leasehold improvements, furniture, fixtures and equipment, and pre-opening expenses. The initial inventory investment, net of payables support, associated with each new traditional store during fiscal 2001 was approximately $0.3 million. Also during fiscal 2001, we opened 16 superstores, with an average square footage per store of approximately 45,600 square feet. Our average net opening cost of these superstores was approximately $1.3 million per store, which included leasehold improvements, furniture, 2 4 fixtures and equipment, and pre-opening expenses. The initial inventory investment, net of payables support, associated with each new superstore in fiscal 2001 was approximately $0.9 million. PRODUCT SELECTION Each of our stores offers a broad selection of softlines (apparel, craft and home decorating fabrics and notions) and hardlines (craft, seasonal, and home accessories and floral and framing merchandise). The following table shows our sales by principal product line as a percentage of total net sales:
FISCAL YEAR ENDED ----------------------------------------- FEBRUARY 3, JANUARY 29, JANUARY 30, 2001 2000 1999 ----------- ----------- ----------- Principal product line: Softlines........................... 63% 64% 66% Hardlines........................... 37 36 34 --- --- --- Total....................... 100% 100% 100% === === ===
Our traditional stores have historically carried a full selection of softlines and a convenience assortment of hardlines. Our superstores offer a competitive assortment of merchandise in all of our product lines and have a more diversified sales mix. During fiscal 2001, 48% of superstore net sales was derived from softlines and 52% from hardlines. Softlines We believe that we provide the most extensive offering of apparel, quilting, craft and home decorating fabrics and sewing-related products available to our customers. We offer the following softlines selection: - apparel fabrics, used primarily in the construction of garments, including a wide variety of solid and printed cottons, linens, wools, fleece and outerwear; - an upscale selection of fabrics, including satins, metallics, evening wear, bridal and special occasion; - craft fabrics, used primarily in the construction of quilts, craft and holiday projects, including calico, quilting, solids, holiday fabric and juvenile designs; - printed fabrics, including juvenile prints, seasonal designs for spring, summer, fall and winter, and logo-related prints such as team emblems of the National Football League; - proprietary print designs which are unique to our stores; - fabrics used in home decorating projects such as window treatments and furniture and bed coverings; and - notions, which represent all items incidental to sewing-related projects other than fabric, including cutting implements, threads, zippers, trims, tapes, pins, elastics, buttons and ribbons. We also sell patterns and a limited number of sewing machines. Our high volume stores offer a broader selection of sewing machines through leased departments with third parties, from whom we receive sublease income. Hardlines Our superstores offer a full line of hardline products, while our traditional stores offer a convenience assortment. We offer the following hardlines selection: - general craft materials, including items used for stenciling, doll making, jewelry making, woodworking, wall decor, rubber stamps, memory books and plaster; 3 5 - brand name fine art materials, including items such as pastels, water colors, oil paints, acrylics, easels, brushes, paper and canvas; - hobby items, including wooden and plastic model kits and related supplies, and paint-by-number kits; - home accessories, including baskets, candles and potpourri; - needlecraft items, including hand-knitting yarns, needles, canvas, needlepoint, embroidery and cross-stitching, knitting, crochet and other stitchery supplies; - framed art, photo albums and ready-made frames and, in superstores, full service framing departments with picture framing materials, including custom frames, mat boards, glass, backing materials and related supplies; and - floral products, including silk flowers, dried flowers, artificial plants sold separately or in ready-made and custom floral arrangements and a broad selection of accessories required for floral arranging and wreath making. In addition to the basic categories described above, our stores regularly feature seasonal products, which complement our core merchandising strategy. Our seasonal offering spans all product lines and includes decorations, gifts and supplies that focus on holidays including Easter, Halloween and Christmas, as well as seasonal categories such as patio/garden. We own several private label seasonal brands including the "Cottontale Collection," "Spooky Hollow" and "Santa's Workbench." During the Christmas selling season, a significant portion of floor and shelf space is devoted to seasonal crafts, decorating and gift-making merchandise. Due to the project-oriented nature of these items, our peak selling season extends longer than that of other retailers and generally runs from September through December. Accordingly, a fully developed seasonal merchandising program, including inventory, merchandise layout and instructional ideas, is implemented in every store during our third quarter of each fiscal year. This program includes increasing inventory levels so that each store is fully stocked during our peak selling season. During the fourth quarter of fiscal 2001, we commenced an inventory productivity initiative (the "SKU Reduction Initiative"), which entailed a thorough review of inventory investment and gross margin performance by item or stock-keeping unit ("SKU"). This analysis identified approximately 10,000 active items or approximately $60 million in merchandise, at cost, that we decided to discontinue. We will begin clearance programs in the second quarter of fiscal 2002 designed to aggressively clear this product. Our strategy for fiscal 2002 is to fund improved fill rates for our most productive items by eliminating investment in less-productive inventory. The SKU Reduction Initiative is an important step in this inventory productivity initiative. We believe the review process we completed in the fourth quarter for the SKU Reduction Initiative was thorough. We are committed to an ongoing disciplined, detailed review of our product mix. Although additional product may be targeted for reduction based on that analysis, we believe that the extent of such reduction decisions will be more comparable to what is normal course business practice in retailing. MARKETING We rebranded all of our stores under the Jo-Ann name in September 1998 and began a national advertising campaign. Our proprietary mailing list includes more than three million preferred customers who have shopped with us in the past year. This allows us to efficiently reach our target market. Through our national advertising campaign and proprietary mailing list, we believe that we are able to create high impact, low cost marketing campaigns. We focus our advertising on direct mail circulars for our traditional stores. For our superstores, we supplement our direct mail advertising program with newspaper advertising. Our circulars and newspaper inserts feature numerous products offered at competitive prices and emphasize the wide selection of merchandise available in our stores. 4 6 During fiscal 2001, we entered into a strategic relationship with IdeaForest.com, Inc. ("IdeaForest"), an online destination site for arts and crafts merchandise, creative ideas, advice and supplies. IdeaForest, which operates as an independent entity, brings online selling capability and enriched content and community features to our joann.com website. IdeaForest is responsible for all content and technology support to the joann.com website. We provide product to the site, with customer fulfillment and service being handled by IdeaForest. Our website is currently the number one visited arts and crafts site based on unique monthly visitors. PURCHASING We have numerous competitive domestic and international sources of supply available for each category of merchandise that we sell. During fiscal 2001, approximately 80% of our purchases were sourced domestically and 20% were sourced internationally. Although we have no long-term purchase commitments with any of our suppliers, we strive to maintain continuity with them. All purchases are centralized through our corporate office, allowing store team leaders and store team members to focus on customer sales and service and enabling us to negotiate volume discounts, control product mix and ensure quality. Currently, none of our suppliers represents more than four percent of our purchasing volume and the top ten suppliers represent less than 20% of our total purchasing volume. We currently utilize more than 1,100 suppliers, with the top 200 representing more than 80% of our purchasing volume. LOGISTICS As of the end of fiscal 2001, we operated one owned distribution center in Hudson, Ohio, which ships products to all of our stores on a weekly basis. During fiscal 2001, approximately 80% of the merchandise sold in a traditional store and 70% of the merchandise sold in a superstore were handled through this distribution center with the remainder shipped directly from our vendors. During the past three years, we have also utilized a contract warehouse in Southern California to distribute seasonal product directly to stores. During January 2001, construction was completed on a new 630,000 square foot West Coast distribution center located on an 80-acre site in Visalia, California. We began shipping product from this facility to approximately 80 stores in April 2001, and we expect to be fully operational and shipping product to more than 300 stores by the end of July 2001. The new facility will ultimately serve all of our stores west of the Mississippi, or more than 30% of our store base. The cost of construction and equipment for this project is approximately $45 million. Later in fiscal 2002, we expect to exit the Southern California contract warehouse after we are fully transitioned to our Visalia distribution center. We transport merchandise from our distribution centers to our stores utilizing contract carriers. Some merchandise is transported to 31 regional "hubs" and repacked for local delivery. We do not own either the regional hubs or the local delivery vehicles. We expect that the number of regional hubs we will utilize in the future will be reduced as a result of the Visalia distribution center. When fully operational, use of the Visalia distribution center, in conjunction with the Hudson distribution center, will allow us to distribute product directly to over 80% of our store base without use of regional hubs. STORE OPERATIONS Site Selection. We believe that our store locations are integral to our success. Sites are selected through a coordinated effort of our real estate and operations management teams. In evaluating the desirability of a potential store site, we consider both market demographics and site-specific criteria. Market demographic criteria that we consider important include total population, number of households, median household income, percentage of home ownership versus rental, and historical and projected population growth over a ten-year period. Site-specific criteria that we consider important include rental terms, our position within the shopping strip location, size of the location, age of the shopping strip location, co-tenants, proximity to highway access, traffic patterns and ease of entry from the major roadways framing the strip location. 5 7 Our expansion strategy is to give priority to adding stores in existing markets in order to create economies of scale associated with advertising, distribution, field supervision, and other regional expenses. We believe that there are attractive opportunities in most of our existing markets and numerous new markets. Costs of Opening Stores. We employ standard operating procedures that allow us to efficiently open new stores and integrate them into our information and distribution systems. We develop a standardized floor plan, inventory layout, and marketing program for each new store we open. We typically open new stores during the period from February through October to maximize sales during our peak Christmas selling season. Store Management. Traditional stores have approximately three full-time team members and 10 to 15 part-time team members, while superstores typically have approximately 15 full-time team members and 35 to 40 part-time team members. Store team leaders are compensated with a base salary plus a bonus which is tied to quarterly store sales and annual store profit. The average tenure of our store team leaders is approximately seven years. Traditional store team leaders are typically promoted from a group of top performing sales team members, some of whom started as our customers. This continuity serves to solidify long-standing relationships between our stores and our customers. When a traditional store is closed due to the opening of a superstore, we generally retain its team members to staff the new superstore. Superstore team leaders have been staffed from within or externally, generally with individuals who have previous experience in managing "big-box" retail concepts. Each store is under the supervision of a district team leader who reports to a regional vice president. Our human resource department and field training department are responsible for recruiting and training new store team leaders. Our prospective store team leaders are assigned to one of our existing stores as management-trainees for several weeks where they receive in-depth on-the-job training. In addition, quarterly training seminars are conducted for existing store team leaders and orientation and training programs are conducted for new store team members. INFORMATION TECHNOLOGY We believe we have employed industry leading information technology in our stores. Our point of sale register transactions are polled nightly and our point of sale system is interfaced into both our financial and merchandising systems. We utilize point of sale registers and scanning devices to record the sale of merchandise at a SKU level at the stores. We also utilize hand-held radio frequency terminals for a variety of store tasks including price look-up, ordering and fabric sales processing. Information obtained from item-level scanning through our point of sale system enables us to identify important trends to assist in managing inventory by facilitating the elimination of less profitable SKUs, increasing the in-stock level of more popular SKUs, analyzing product margins and generating data for advertising cost/benefit evaluations. We also believe that our point of sale system allows us to provide better customer service by increasing the speed and accuracy of register check out, enabling us to more rapidly restock merchandise and efficiently re-price sale items. In March 2000, we went live on the retail portion of our fully integrated enterprise-wide system ("SAP Retail System"). The completion of the retail portion of this project merged all of our financial, merchandise, and retail systems and linked business processes on a single software platform. During fiscal 2001, we experienced operating difficulties stemming from the implementation of the SAP Retail System, resulting in out-of-stock conditions on key basic products while being overstocked on slower selling products. We are currently working on restoring inventory to appropriate levels, as well as realizing the replenishment and forecasting benefits of the SAP Retail System. The total cost of the SAP Retail System, including expenses, was approximately $33 million and is being amortized over five years. 6 8 STATUS OF PRODUCT OR LINE OF BUSINESS During fiscal 2001, there has been no public announcement nor is there a public announcement anticipated, about either a new product line or line of business involving the investment of a material portion of our assets. TRADEMARKS We do business under the federally registered trademarks "Jo-Ann Fabrics and Crafts" and "Jo-Ann etc." We believe that these names are significant to our business. SEASONAL BUSINESS Our business exhibits seasonality which is typical for most retail companies, with much stronger sales 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. CUSTOMER BASE We are engaged in the retail sale of merchandise to the general public and, accordingly, no part of our business is dependent upon a single customer or a few customers. During fiscal 2001, no one store accounted for more than one percent of total sales. BACKLOG OF ORDERS We sell merchandise to the general public on a cash and carry basis and, accordingly, we have no significant backlog of orders. COMPETITIVE CONDITIONS We are the largest national category-dominant retailer serving the retail fabric and craft industry. Our stores compete with other specialty fabric and craft retailers and selected mass merchants that dedicate a portion of their selling space to a limited selection of fabrics and craft supply items. We compete on the basis of product assortment, price, convenience and customer service. We believe the combination of our product assortment, customer service emphasis, systems technology and frequent advertising provides us with a competitive advantage. We have one direct national competitor in the fabric and craft segments of the industry, with the balance of the competitors being regional and local operators. We believe that there are only a few competitors with fabric or crafts sales exceeding $200 million annually. We believe that we have several advantages over most of our smaller competitors, including: - purchasing power; - ability to support an efficient nationwide distribution; and - the financial resources to execute our strategy and capital investment needs going forward. RESEARCH AND DEVELOPMENT During the three fiscal years ended February 3, 2001, we have not incurred any material expense for research activities relating to the development of new products or services or the improvement of existing products or services. 7 9 ENVIRONMENTAL DISCLOSURE We are not engaged in manufacturing. Accordingly, we do not believe that compliance with federal, state and local provisions regulating the discharge of material into the environment or otherwise relating to the protection of the environment will have a material adverse effect upon our capital expenditures, income or competitive position. EMPLOYEES As of February 3, 2001, we had approximately 22,300 full and part-time employees, of which 21,000 worked in our stores, 450 were employed in our Hudson distribution center, 120 were employed in the Visalia distribution center and the balance held corporate and administrative positions. The number of part- time employees is substantially higher during the Christmas selling season. We believe our employee turnover is below average for retailers primarily because our stores are staffed with sewing and crafting enthusiasts. In addition, we provide an attractive work environment, employee discounts, flexible hours and competitive compensation packages within the local labor markets. Our ability to offer flexible scheduling is important in attracting and retaining these employees since approximately 66% of our employees work part-time. The United Steelworkers of America, Upholstery and Allied Industries Division currently represents employees who work in our Hudson distribution center. Our current contract expires in May 2001. Negotiations are currently underway to extend the union contract. We believe that our relations with our employees and the union are good. FOREIGN OPERATIONS AND EXPORT SALES In fiscal 2001, we purchased approximately 20% of our products directly from manufacturers located in foreign countries. We currently use suppliers located in Hong Kong, China and Taiwan. In addition, many of our domestic suppliers purchase a portion of their products from foreign suppliers. Because a large percentage of our products are manufactured or sourced abroad, we are required to order these products further in advance than would be the case if the products were manufactured domestically. If we underestimate consumer demand, we may not be able to fill orders on a timely basis. If we overestimate consumer demand, we may be required to hold goods in inventory for a long period of time or to reduce selling prices in order to clearance excess inventory at the end of a selling season. We do not have long-term contracts with any manufacturers, and none of our suppliers manufacture products for us exclusively. Foreign manufacturing is also subject to a number of other risks, including work stoppages, transportation delays and interruptions, political instability, economic disruptions, the imposition of tariffs and import and export controls, changes in governmental policies and other events. If any of these events occur, it could result in a material adverse effect on our business, financial condition, results of operations and prospects. In addition, reductions in the value of the U.S. dollar could ultimately increase the prices that we pay for our products. ITEM 2. PROPERTIES Our store support center and Hudson distribution center are located in an approximately 1.4 million square foot facility on approximately 105 acres in Hudson, Ohio. We own both the facility and the real estate. The distribution center occupies approximately 1.1 million square feet and the remainder is used as our store support center and a superstore. In addition, we own approximately 77 acres of land adjacent to our Hudson, Ohio facility. During January 2001, we completed construction on a 630,000 square foot West Coast distribution center on an 80-acre site located in Visalia, California. The construction was financed through a synthetic lease facility. This property is owned by us. The remaining properties that we occupy are leased retail store facilities, located primarily in high-traffic shopping centers. All store leases are operating leases, generally with initial terms of five to ten years and renewal options for up to 20 years. Certain retail store leases contain escalation clauses and contingent rents 8 10 based on a percent of sales in excess of defined minimums. During the fiscal year ended February 3, 2001, we incurred $140.2 million of rental expense and common area maintenance for store locations. As of February 3, 2001, the current terms of our store leases, assuming we exercise all lease renewal options, were as follows:
NUMBER OF YEAR LEASE TERMS EXPIRE STORE LEASES ----------------------- ------------ Month-to-month.............................................. 21 2002........................................................ 43 2003........................................................ 37 2004........................................................ 22 2005........................................................ 16 2006........................................................ 18 Thereafter.................................................. 849 ----- Total............................................. 1,006 =====
ITEM 3. 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. In February 1997, we settled enforcement proceedings brought by the U.S. Securities and Exchange Commission ("SEC") involving our financial statements for the fiscal year ended February 1, 1992, the use of those statements in connection with the sale in March 1992 of our 6 1/4% Convertible Subordinated Debentures due 2002 (subsequently redeemed in June 1997), our financial statements for the first three quarters of fiscal 1993, and the adequacy of certain disclosures relating to such periods. The principal allegation was that we materially overstated earnings for such periods because of the manner in which we calculated one of our inventory-related reserves, thereby allegedly violating certain federal securities laws, including provisions regarding anti-fraud, reporting, internal controls and books and records. The accounting and disclosure issues that were raised are not related to any current period, and no current accounting policies or financial statements were in question. At the same time as the settlement, the SEC filed a civil action against us and our former chief financial officer and our former controller in the United States District Court for the District of Columbia. Without admitting or denying the allegations, we consented to the entry of an order enjoining us from violations of the federal securities laws and agreed to pay $3.3 million in settlement of the action against us. In February 1997, our Chief Executive Officer consented to a separate SEC administrative cease and desist order settling certain allegations, without admitting or denying the allegations. The SEC contended that he violated certain federal securities laws as a result of not making adequate inquiry of the financial staff before signing management representation letters given to our auditors in connection with the 1992 debenture offering, and as a result of signing our Form 10-Q for the quarter ended May 2, 1992. In February 2000, the former chief financial officer and the former controller, without admitting or denying the allegations, consented to the entry of an order enjoining them from violations of the federal securities laws and agreed to pay $0.2 million in settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during our fourth quarter. 9 11 EXECUTIVE OFFICERS OF THE REGISTRANT The following information is set forth pursuant to Item 401(b) of Regulation S-K. Our executive officers are as follows:
NAME AGE POSITION ---- --- -------- Alan Rosskamm............................. 51 Chairman of the Board, President and Chief Executive Officer David Bolen............................... 49 Executive Vice President, Merchandising Brian Carney.............................. 40 Executive Vice President, Chief Financial Officer Michael Edwards........................... 40 Executive Vice President, Operations Rosalind Thompson......................... 51 Executive Vice President, Human Resources Debra Walker.............................. 44 Executive Vice President, Marketing and E- Commerce
Alan Rosskamm has been Chairman of the Board, President and Chief Executive Officer of our company for more than five years. He is a member of one of the two founding families of our company and has been employed by us since 1978. Mr. Rosskamm is also a Director of Charming Shoppes Inc., a women's apparel retailer. David Bolen has been Executive Vice President, Merchandising, of our company since March 2001. He was Executive Vice President, Stores and Business Development from December 1998 to March 2001. He was Executive Vice President, Business Development from August 1997 to December 1998 and Senior Vice President, General Manager Jo-Ann etc from March 1997 to August 1997. Prior to joining our company, he was Executive Vice President-Operations of Michaels Stores, Inc. from July 1994 to August 1996. Brian Carney has been Executive Vice President, Chief Financial Officer of our company since October 1997. Prior to joining our company, he was Senior Vice President-Finance from May 1996 to August 1997, and Vice President and Controller from June 1992 to May 1996, of Revco D.S., Inc. (a retail drugstore chain acquired by CVS Corporation in 1997). Michael Edwards was named Executive Vice President, Operations of our company in March 2001 and assumed his responsibilities in April 2001. Prior to joining our company, Mr. Edwards was Executive Vice President, Merchandising and Chief Marketing Officer of West Marine, Inc. from June 1999 to March 2001. He was Vice President, General Merchandise Manager of Goldsmith LP from September 1998 to May 1999. Prior to that, Mr. Edwards was with CompUSA from 1990 to 1998 where he served as Senior Vice President of Merchandising and Senior Vice President of Operations during his tenure. Rosalind Thompson has been Executive Vice President, Human Resources of our company since December 1999. She was previously Senior Vice President, Human Resources from March 1992 to December 1999. Debra Walker has been Executive Vice President, Marketing and E-Commerce of our company since June 2000. She was a member of our Board of Directors from August 1998 to June 2000. Prior to joining our company, she was Executive Vice President and Chief Marketing Officer and co-founder of iCARumba, Inc., an on-line auto services site from August 1999 to May 2000. She was previously Vice President and Chief Information Officer from March 1997 to July 1999 and Vice President-Retail responsible for the operation of all retail stores from February 1995 to March 1997, of The Goodyear Tire and Rubber Company, where she had been employed since 1979. 10 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A and Class B common shares are traded on the New York Stock Exchange under the ticker symbols JAS.a and JAS.b, respectively. The number of Class A and Class B common shareholders of record as of April 13, 2001 were 710 and 663, respectively. The quarterly high and low closing stock prices for fiscal 2001 and 2000 are presented in the table below:
CLASS A CLASS B COMMON SHARES COMMON SHARES ------------------ ------------------ HIGH LOW HIGH LOW ---- --- ---- --- Fiscal 2001: February 3, 2001.................................... $ 7.188 $ 5.500 $ 5.375 $ 3.688 October 28, 2000.................................... 7.500 6.188 7.188 5.125 July 29, 2000....................................... 9.500 6.938 8.688 7.063 April 29, 2000...................................... 10.313 8.063 10.000 6.000 Fiscal 2000: January 29, 2000.................................... $14.250 $ 9.563 $13.000 $ 9.625 October 30, 1999.................................... 14.688 12.438 12.688 11.313 July 31, 1999....................................... 17.250 12.375 13.000 11.750 May 1, 1999......................................... 17.125 13.188 12.875 10.625
11 13 ITEM 6. SELECTED FINANCIAL DATA The following table presents our selected financial data for each of the ten years ending February 3, 2001, as restated for the change from the last-in, first-out inventory method to the first-in, first-out inventory method, as discussed in Note 2 to the financial statements. The selected financial data was derived from the audited financial statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and notes thereto, and other financial data that we have filed with the U.S. Securities and Exchange Commission.
FISCAL YEARS ENDED ---------------------------------------------------------------------------------------------------- FEB 3, JAN 29, JAN 30, JAN 31, FEB 1, JAN 27, JAN 28, JAN 29, JAN 30, FEB 1, 2001(a) 2000 1999 1998 1997(a) 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- ------- ------- ------- ------- ------- (Millions of dollars, except share, per share and store data) OPERATING RESULTS: Net sales.................. $1,483.3 $1,381.5 $1,242.9 $ 975.0 $929.0 $ 834.6 $ 677.3 $ 582.1 $ 574.1 $ 442.0 Total sales percentage increase................. 7.4% 11.2% 27.5% 5.0% 11.3% 23.2% 16.4% 1.4% 29.9% 19.9% Same-store sales percentage increase................. 1.3% 4.5% 3.5% 3.8% 7.5% 3.0% 1.0% 4.4% 7.6% 11.9% Gross margin............... 645.1 633.2 564.0 441.5 412.1 378.5 299.3 251.6 244.2 208.9 Selling, general and administrative expenses................. 589.2 533.8 476.7 363.1 340.9 319.9 257.2 223.4 221.2 171.8 Non-recurring charge....... -- -- 25.1 -- -- -- -- -- -- -- Depreciation and amortization............. 38.3 32.0 27.7 21.7 21.2 18.2 14.0 12.0 10.1 5.5 Operating profit........... 17.6 67.4 34.5 56.7 50.0 40.4 28.1 16.2 12.9 31.6 Interest expense........... 29.0 26.2 12.5 5.9 10.6 12.0 8.4 5.6 5.5 2.9 Income (loss) from continuing operations before income taxes...... (11.4) 41.2 22.0 50.8 39.4 28.4 19.7 10.6 7.4 28.7 Income tax provision (benefit)................ (4.3) 15.6 8.6 19.1 14.8 10.6 7.6 3.9 2.8 10.3 Income (loss) from continuing operations.... (7.1) 25.6 13.4 31.7 24.6 17.8 12.1 6.7 4.6 18.4 Losses from extraordinary items/discontinued operations............... -- -- -- (1.1) -- -- -- (4.8) (1.0) (0.6) Equity and asset impairment losses of minority investment............... (6.5) -- -- -- -- -- -- -- -- -- Net income (loss).......... (13.6) 25.6 13.4 30.6 24.6 17.8 12.1 1.9 3.6 17.8 EBITDA (b) (c)............. $ 55.9 $ 99.4 $ 87.3 $ 78.4 $ 71.2 $ 58.6 $ 42.1 $ 28.2 $ 23.0 $ 37.1 ---------------------------------------------------------------------------------------------------- PER SHARE DATA (d): Net income (loss) from continuing operations -- diluted.................. $ (0.75) $ 1.38 $ 0.67 $ 1.59 $ 1.26 $ 0.91 $ 0.65 $ 0.35 $ 0.24 $ 1.00 Average shares outstanding -- diluted (000's).................. 18,041 18,583 19,904 20,592 21,216 19,293 18,749 18,877 19,263 18,398 Book value................. $ 13.67 $ 14.54 $ 13.10 $ 12.31 $10.59 $ 9.27 $ 8.25 $ 8.16 $ 7.99 $ 7.75 Shares outstanding, net of treasury shares (000's).................. 18,207 17,845 19,012 18,767 17,921 18,486 18,398 18,194 18,555 18,584 ---------------------------------------------------------------------------------------------------- FINANCIAL POSITION: Inventories................ $ 451.0 $ 442.5 $ 404.0 $ 278.9 $280.6 $ 322.6 $ 274.7 $ 223.8 $ 223.2 $ 185.9 Current assets............. 505.8 497.9 480.1 312.3 308.7 351.8 315.8 247.1 242.0 211.2 Property, equipment and leasehold improvements, net...................... 190.2 194.7 164.0 110.0 94.6 102.0 84.1 75.6 77.9 54.6 Current liabilities........ 223.5 208.1 209.2 164.8 141.2 129.2 127.5 80.2 93.6 97.8 Long-term debt............. 240.0 245.2 182.5 24.7 72.1 155.5 127.0 102.5 104.1 40.1 Shareholders' equity....... $ 248.8 $ 259.4 $ 249.0 $ 231.1 $189.8 $ 171.4 $ 151.8 $ 148.4 $ 148.2 $ 144.1 ----------------------------------------------------------------------------------------------------
12 14 ITEM 6. SELECTED FINANCIAL DATA -- CONTINUED
FISCAL YEARS ENDED ---------------------------------------------------------------------------------------------------- FEB 3, JAN 29, JAN 30, JAN 31, FEB 1, JAN 27, JAN 28, JAN 29, JAN 30, FEB 1, 2001(a) 2000 1999 1998 1997(a) 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- ------- ------- ------- ------- ------- (Millions of dollars, except share, per share and store data) STATISTICS AND OTHER FINANCIAL INFORMATION: Operating income percent of sales (c)................ 1.2% 4.9% 4.8% 5.8% 5.4% 4.8% 4.1% 2.8% 2.2% 7.1% EBITDA percent of sales (c)...................... 3.8% 7.2% 7.0% 8.0% 7.7% 7.0% 6.2% 4.8% 4.0% 8.4% Return on average assets (e)...................... (1.0)% 3.6% 5.1% 7.4% 5.5% 4.0% 3.2% 1.9% 1.4% 7.5% Return on average equity (e)...................... (2.8)% 10.1% 12.0% 15.1% 13.6% 11.0% 8.1% 4.5% 3.1% 16.5% Capital expenditures....... $ 35.9 $ 67.4 $ 75.1 $ 36.6 $ 13.2 $ 34.7 $ 11.7 $ 8.5 $ 32.3 $ 18.5 Long-term debt to total capitalization........... 49.1% 48.6% 42.3% 9.7% 27.5% 47.6% 45.6% 40.9% 41.3% 21.8% Ratio of EBITDA to interest expense (times).......... 1.9 3.8 7.0 13.3 6.7 4.9 5.0 5.0 4.2 12.8 Ratio of debt to EBITDA (times).................. 4.3 2.5 2.1 0.3 1.0 2.7 3.0 3.6 4.5 1.1 ---------------------------------------------------------------------------------------------------- STORE INFORMATION: Number of traditional stores................... 949 984 1,034 896 913 935 964 655 693 664 Number of etc superstores.............. 58 42 24 7 1 1 -- -- -- -- ---------------------------------------------------------------------------------------------------- Total store count.......... 1,007 1,026 1,058 903 914 936 964 655 693 664 Traditional stores total square footage (000's)... 13,381 13,685 14,144 11,794 11,566 11,476 11,424 7,481 7,376 5,890 etc superstores total square footage (000's)... 2,687 1,957 1,126 325 46 46 -- -- -- -- ---------------------------------------------------------------------------------------------------- Total stores square footage (000's).................. 16,068 15,642 15,270 12,119 11,612 11,522 11,424 7,481 7,376 5,890
- --------------- (a) 53-week year. (b) Earnings before interest, taxes, depreciation and amortization. (c) Fiscal 1999 excludes a $25.1 million non-recurring charge recorded in connection with the acquisition of House of Fabrics. (d) The number of shares and per share data have been restated to give effect to changes required by Statement of Financial Accounting Standards No. 128, "Earnings Per Share," and the Recapitalization Amendment, effective August 2, 1995, which has been accounted for as a two-for-one stock split. (e) Calculated based on income from continuing operations. Fiscal 1999 excludes the non-recurring charge, net of tax. 13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are the largest national category-dominant retailer, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating, and other creative endeavors. Our retail stores (operating as Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann etc superstores) feature a variety of competitively priced merchandise -- from apparel, crafts and home decorating fabrics and notions to crafts, seasonal and home accessories, and floral and framing products. As of February 3, 2001, we operated 1,007 stores in 49 states (949 traditional stores and 58 superstores). Our traditional stores average approximately 14,100 square feet. Over the past five years, we have strategically relocated certain traditional stores, increasing average square footage per store and sales per square foot by approximately 15%. As a result, net sales per traditional store have increased to approximately $1.2 million over this period. In November 1995, we opened our first large format "category killer" superstore, which offers an expanded and more comprehensive product assortment than our traditional stores. Our superstores average 46,300 square feet and in fiscal 2001, on a per-store basis, generated more than four and one-half times the revenue and over 30% higher sales per square foot than our traditional stores. We believe our superstores, which accounted for almost 20% of fiscal 2001 total net sales, present opportunities for future sales growth. In March 1998, we acquired House of Fabrics, Inc., a retail chain operating predominantly on the West Coast. Operating results of the House of Fabrics stores have been included in our results of operations since the date of the acquisition. The acquisition was accounted for using the purchase method of accounting. Over the past three years, we have invested heavily in our infrastructure, primarily in the areas of systems and logistics, which in turn has resulted in higher debt levels and interest expense. This infrastructure spending was required in order to improve our efficiency and to build the necessary platform for continued future store growth. In fiscal 2000, we improved our operating performance but our net earnings declined due to the increased interest expense. The construction of our West Coast distribution center, located in Visalia, California, and the implementation of our fully integrated enterprise-wide system ("SAP Retail System") were substantially completed during fiscal 2001, with relatively minor capital expenditures required thereafter to complete the investments. In fiscal 2001, we experienced difficulty with the implementation of the SAP Retail System, resulting in out-of-stock conditions on key basic products while being overstocked on slower selling products. As a result, sales were negatively impacted which hurt our operating performance. Due to our recent earnings trends and the weak retail economic environment that currently exists, our strategy has shifted from accelerating the growth of our superstore concept to improving the productivity of our existing asset base and realizing the benefits from our completed infrastructure investments. We plan to implement this strategy by: - slowing new store growth to maximize free cash flow; - getting our stores back in-stock while reducing overall inventory levels; - opening our new West Coast distribution center on time and on budget without disruption to the business; and - challenging all aspects of our existing business to focus on execution and to improve our operating discipline. We expect to limit the growth of our superstore concept to the 12 store openings to which we have committed for fiscal 2002. During the fourth quarter of fiscal 2001, we recognized one-time pretax charges of $29.7 million related to store closings and inventory productivity initiatives. We have made significant and necessary improvements to our infrastructure; we are now poised to begin to realize the benefits from these investments. By focusing our attention on the productivity of our existing store base, improving our inventory management processes, and managing our capital spending tightly, we expect to reduce inventory and debt levels in fiscal 2002 and beyond. However, we currently expect operating results for the first three quarters of fiscal 2002 to be below that of the prior year and do not expect to show improved results until the fourth quarter due to the recent economic downturn, lingering effects of our out-of-stock situation, higher store expenses and higher distribution costs related to the transition to our new Visalia distribution center. 14 16 RESULTS OF OPERATIONS The following table sets forth certain financial information from our audited consolidated statements of operations expressed as a percentage of net sales and should be read in conjunction with our consolidated financial statements and related notes thereto.
PERCENTAGE OF NET SALES -------------------------------------------- FISCAL YEARS ENDED -------------------------------------------- FEB 3, 2001 JAN 29, 2000 JAN 30, 1999 ------------ ------------ ------------ Net sales................................... 100.0% 100.0% 100.0% Cost of sales............................... 56.5(a) 54.2 54.6 ----- ----- ----- Gross margin................................ 43.5 45.8 45.4 Selling, general and administrative expenses.................................. 39.7(b) 38.6 38.4 Depreciation and amortization............... 2.6 2.3 2.2 Non-recurring charge........................ -- -- 2.0 ----- ----- ----- Operating profit............................ 1.2 4.9 2.8 Interest expense............................ 2.0 1.9 1.0 ----- ----- ----- Income (loss) before income taxes........... (0.8) 3.0 1.8 Income tax provision (benefit).............. (0.3) 1.1 0.7 ----- ----- ----- Net income (loss) before equity loss........ (0.5) 1.9 1.1 Equity and asset impairment losses of minority investment....................... (0.4) -- -- ----- ----- ----- Net income (loss)........................... (0.9)% 1.9% 1.1% ===== ===== =====
- --------------- (a) Includes $23.0 million charge, or 1.6% of sales, related to the SKU Reduction Initiative (as defined below). (b) Includes $6.7 million charge, or 0.5% of sales, related to 42 stores identified for closing in fiscal 2002. COMPARISON OF THE 53 WEEKS ENDED FEBRUARY 3, 2001 AND THE 52 WEEKS ENDED JANUARY 29, 2000 Our results for the year were a major disappointment. Sales performance suffered due to the weak economic environment, experienced in the second half of fiscal 2001, and the out-of-stock problems that we encountered as a result of difficulties in implementing our SAP Retail System. We went live on this system in March 2000 after a two-year installation period. As a result of the sales softness, our operating performance deteriorated from the prior year. Coupled with charges for the "SKU Reduction Initiative" (defined below), store closings and equity and asset impairment losses from our joint venture with IdeaForest.com, Inc. ("IdeaForest"), all discussed in further detail below, we recorded a net loss for fiscal 2001 of $13.6 million, or $0.75 per diluted share, versus prior year net income of $25.6 million, or $1.38 per diluted share. Net sales. Net sales for fiscal 2001 were $1,483.3 million compared with $1,381.5 million in fiscal 2000, an increase of $101.8 million, or 7.4%. Fiscal 2001 was a 53-week year. Excluding the 53rd week, sales increased 5.7% over fiscal 2000. Same-store sales increased 1.3% for fiscal 2001 over fiscal 2000, our worst same-store sales performance in six years. Same-store sales increased 4.5% for fiscal 2000 over fiscal 1999. Same-store sales on a comparable week basis accounted for $17.0 million of the overall sales increase, and the 53rd week accounted for $22.6 million of the overall increase. The majority of the sales increase was due to the increase in the number of superstores in operation. We operated 58 superstores at February 3, 2001 compared with 42 superstores at January 29, 2000. Gross margin. Gross margin for fiscal 2001 was $645.1 million compared with $633.2 million in fiscal 2000. As a percentage of net sales, fiscal 2001 gross margin was 43.5% compared with 45.8% in the prior year, a decrease of 230 basis points. Approximately 160 basis points of this decrease was due to a 15 17 $23.0 million charge for the estimated write-down below cost of approximately $60 million of inventory that has been identified for discontinuance as part of an inventory productivity initiative (the "SKU Reduction Initiative"). Excluding this charge, gross margin decreased 70 basis points from fiscal 2000, resulting primarily from lower realized gross margins on the softlines side of our business, due to fourth quarter clearance markdowns in our apparel and craft fabric categories. During the fourth quarter of fiscal 2001, we commenced the SKU Reduction Initiative which entailed a thorough review of inventory investment and gross margin performance by item or stock-keeping unit ("SKU"). This analysis identified approximately 10,000 active items that we decided to discontinue. We will begin clearance programs in the second quarter of fiscal 2002 designed to aggressively clear this product. The analysis performed in connection with the SKU Reduction Initiative was conducted utilizing new measurement capabilities made available to us from our SAP Retail System. While the conversion to the SAP Retail System has been difficult, we are beginning to extract very useful analytical data that is changing the way we manage our business. Our strategy for fiscal 2002 is to fund improved fill rates for our most productive items by eliminating investment in less-productive inventory. The SKU Reduction Initiative is an important step in this inventory productivity initiative. Even though we took a charge in the fourth quarter of fiscal 2001 to reserve for the estimated portion of product that we will sell below cost, liquidating this inventory at reduced selling prices is expected to put pressure on overall realized gross margins in fiscal 2002. We believe the review process we completed in the fourth quarter for the SKU Reduction Initiative was thorough. We are committed to an ongoing disciplined, detailed review of our product mix. Although additional product may be targeted for reduction based on that analysis, we believe that the extent of such reduction decisions will be more comparable to what is normal course business practice in retailing. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $589.2 million in fiscal 2001 compared with $533.8 million in fiscal 2000. As a percentage of sales, SG&A expenses increased 110 basis points, to 39.7%, compared with 38.6% in fiscal 2000. Approximately 45 basis points of this increase is due to the $6.7 million charge for 42 stores identified for closing in fiscal 2002. These expenses consist primarily of the cost of reducing store fixed assets and leasehold improvements to realizable value and accruing for any remaining closed store rent liability under the non-cancelable lease agreements. The remaining expense increase, as a percentage of sales, was due to a loss in store expense leverage, primarily in store payroll as modest same-store sales increases were not sufficient to offset inflationary pressure in the average wage rate we paid to our store team members. We expect this loss in store payroll expense leverage to continue in fiscal 2002 if we are not able to improve the level of our same-store sales performance from fiscal 2001. We review the productivity of our store base on an ongoing basis and are very active in managing our real estate and preserving flexibility in our lease terms. As a result, there are very few stores in operation that are not cash flow positive on a "four-wall" contribution basis. In addition, despite an aggressive store rationalization policy, pursuant to which we have closed over 230 stores in the last three years, we are only paying rent on 16 store locations where we have not yet obtained a sublease tenant or executed a lease termination. Nevertheless, in addition to the 42 identified store closings for fiscal 2002, we are currently analyzing the relative contribution of each of our stores on a stand-alone basis, after considering the assets and incremental overhead costs deployed to operate that location. We expect to complete that analysis in the next three to six months, and based on the results of that analysis, we may initiate additional store closings. Depreciation and amortization. Depreciation and amortization expense for fiscal 2001 was $38.3 million compared with $32.0 million in fiscal 2000, an increase of $6.3 million. We began depreciating the cost of our SAP Retail System in April 2000, adding approximately $4.0 million in incremental depreciation expense for fiscal 2001. The remaining increase in depreciation expense was primarily due to the growth of the superstores, as we bring new, larger stores online and close older, largely depreciated locations. 16 18 Operating profit. Operating profit for fiscal 2001 was $17.6 million, compared with $67.4 million in fiscal 2000, a decrease of $49.8 million. Excluding the $29.7 million in charges associated with the SKU Reduction Initiative and the 42 store closings identified for fiscal 2002, operating profit was $47.3 million for the year. Interest expense. Interest expense for fiscal 2001 was $29.0 million compared with $26.2 million in fiscal 2000, an increase of $2.8 million. The increase was attributable both to a higher average borrowing rate on our revolving credit facility, tied to increases in the LIBOR rate, as well as the completion of our 10 3/8% $150.0 million senior subordinated debt issue. This debt issue was completed at the end of the first quarter of fiscal 2000 and added $1.7 million of incremental interest expense for the full year comparison. Income taxes. An effective income tax rate of 38.0% was recognized for both fiscal 2001 and fiscal 2000. Equity and asset impairment losses of minority investment. During fiscal 2001, we invested $6.5 million in IdeaForest to form a strategic relationship for e-commerce. During fiscal 2001, we recognized equity losses of $3.2 million, representing our 28.5% share of IdeaForest's net operating losses. During the fourth quarter of fiscal 2001, we reduced the carrying value of this investment to zero, as discussed further under the caption "Minority Investment" under "Liquidity and Capital Resources" below. Net income (loss). Net loss during fiscal 2001 was $13.6 million compared with net income of $25.6 million in fiscal 2000. COMPARISON OF THE 52 WEEKS ENDED JANUARY 29, 2000 AND JANUARY 30, 1999 Net sales. Net sales for fiscal 2000 were $1,381.5 million compared with $1,242.9 million in fiscal 1999, an increase of $138.6 million, or 11.2%. Same-store sales accounted for $48.1 million or approximately 35% of this increase. Same-store sales increased 4.5% for fiscal 2000 over fiscal 1999 while same-store sales increased 3.5% for fiscal 1999 over fiscal 1998. The balance of the increase was primarily due to the increase in the number of superstores in operation. At January 29, 2000, 42 superstores were in operation compared with 24 superstores at January 30, 1999. Gross margin. Gross margin for fiscal 2000 was $633.2 million compared with $564.0 million in fiscal 1999, an increase of $69.2 million. As a percentage of net sales, fiscal 2000 gross margin was 45.8%, an increase of 40 basis points from fiscal 1999. The margin rate improvement resulted from improvements in our point of sale margin rate. This improvement was the result of earlier sell-through on seasonal products, a less promotional stance in the second half of fiscal 2000 and an improved margin in the House of Fabrics stores, which were in the process of stock reduction during fiscal 1999. Selling, general and administrative expenses. SG&A expenses, excluding the non-recurring charge recorded in fiscal 1999, were $533.8 million in fiscal 2000 compared with $476.7 million in fiscal 1999, an increase of $57.1 million. SG&A expenses as a percentage of net sales were 38.6% in fiscal 2000 compared with 38.4% in fiscal 1999, an increase of 20 basis points. The increase, as a percentage of sales, was due to higher store expenses, resulting primarily from higher store payroll costs to handle increased product flow. Depreciation and amortization. Depreciation and amortization expense for fiscal 2000 was $32.0 million compared with $27.7 million in fiscal 1999, an increase of $4.3 million. This increase was due to higher capital expenditure levels in recent years. Non-recurring charge. During fiscal 1999, we recorded a pretax non-recurring charge of $25.1 million related to the House of Fabrics acquisition. This charge consisted of write-downs of previously owned assets affected by the acquisition to estimated net realizable value, the cost of operating duplicate corporate facilities during the six-month transition period following the acquisition, and costs associated with the remerchandising of the acquired stores. The total cash costs included in the non-recurring charge were approximately $15.9 million. Operating profit. Operating profit for fiscal 2000 was $67.4 million, compared with $34.5 million in fiscal 1999, an increase of $32.9 million, or 95.4%. Excluding the non-recurring charge incurred in fiscal 17 19 1999, operating profit increased $7.8 million or 13.1%. As a percentage of sales, operating profit increased slightly from 4.8% in fiscal 1999 to 4.9% in fiscal 2000. Interest expense. Interest expense for fiscal 2000 was $26.2 million compared with $12.5 million in fiscal 1999, an increase of $13.7 million. The increase was due to higher debt levels resulting from, among other things, the House of Fabrics acquisition, and related working capital expenditures, capital expenditures, and increased inventory levels. Income taxes. Income taxes during fiscal 2000 were $15.6 million compared with $8.6 million in fiscal 1999, an increase of $7.0 million. The effective income tax rate was 38.0% for fiscal 2000 compared to 39.0% for fiscal 1999. The effective tax rate decreased due to a lower effective state tax rate and federal tax credits related to our participation in various government hiring programs. Net income. Net income during fiscal 2000 was $25.6 million compared with $13.4 million in fiscal 1999, an increase of $12.2 million, or 91.0%. Excluding the after-tax effect of the non-recurring charge recorded in fiscal 1999, net income in fiscal 1999 would have been $28.7 million. LIQUIDITY AND CAPITAL RESOURCES Fiscal 2001 Cash Flows Cash, including temporary cash investments, decreased $3.9 million during fiscal 2001 to $17.5 million as of February 3, 2001. Net cash provided by operating activities was $39.0 million in fiscal 2001, compared with $27.7 million in fiscal 2000. Excluding the charges for the SKU Reduction Initiative and the 42 stores identified for closing in fiscal 2002, cash generated by operations in fiscal 2001, before working capital items, totaled $58.4 million, a decrease of $13.4 million from the $71.8 million generated during fiscal 2000. Excluding the amounts for the SKU Reduction Initiative and the 42 stores identified for closing in fiscal 2002, working capital used $19.4 million of cash in fiscal 2001 versus $44.1 million of cash in fiscal 2000, primarily due to an improved level of payables support in fiscal 2001. Net cash used for investing activities for fiscal 2001 totaled $40.7 million compared with $66.0 million in fiscal 2000. Capital expenditures were $35.9 million during fiscal 2001 versus $67.4 million in fiscal 2000 and are discussed further under the caption "Capital Expenditures." In addition, we invested $6.5 million in IdeaForest.com, which is discussed below under "Minority Investment." Net cash used for financing activities during fiscal 2001 was $2.2 million, primarily related to a decrease in net borrowings under the prior senior credit facility of $5.2 million. Settlement of House of Fabrics Tax Liability During the third quarter of fiscal 2001, we reached a final settlement on a contingent income tax liability of $22.5 million (discussed in Note 4 to the consolidated financial statements) assumed during the acquisition of House of Fabrics. The income tax contingency and accrued interest was recorded at $26.9 million as of the acquisition date. On October 20, 2000, this issue was settled with the Internal Revenue Service ("IRS") for $19.6 million ($14.7 million of tax liability and $4.9 million of accrued interest). Of this total settlement, $16.1 million of the liability was paid in fiscal 2000 in the form of a deposit payment (cash bond) to the IRS. The remaining $3.5 million was paid during the third quarter of fiscal 2001. Due to the settlement of this liability, goodwill recorded at the acquisition date was reduced by $8.2 million. We reduced goodwill amortization on a prospective basis beginning in the fourth quarter of fiscal 2001. Minority Investment On June 6, 2000, we announced the formation of a strategic relationship with IdeaForest, an online destination site for arts and crafts merchandise, creative ideas, advice and supplies. As part of the strategic relationship, IdeaForest, which operates as an independent entity, is responsible for all content and technology support to the joann.com website. We provide product to the site, with customer fulfillment and service being handled by IdeaForest. We invested $6.5 million in IdeaForest, which, combined with our contribution of 18 20 strategic assets, entitled us to a 28.5% ownership interest. In addition, we have the ability to increase our future ownership percentage through the vesting and exercise of warrants. Our investment in IdeaForest is accounted for using the equity method. During fiscal 2001, we recorded equity losses of $3.2 million related to this minority investment. During the fourth quarter of fiscal 2001, we reduced the carrying value of our investment in IdeaForest to zero, which resulted in a $3.3 million charge. IdeaForest's current projections anticipate that it will not achieve profitability until its third year of operations and that an additional cash investment in IdeaForest will be required before then. IdeaForest has sufficient cash to continue to run its operation at its lowered cost structure through the end of fiscal 2002. Although we remain committed to an online presence, the level of any future cash investment by us in IdeaForest is uncertain. As a result, we concluded the carrying value of the initial investment should be reduced to zero. Fiscal 2000 Cash Flows Cash, including temporary cash investments, increased $1.0 million during fiscal 2000 to $21.4 million as of January 29, 2000. Net cash provided by operating activities was $27.7 million in fiscal 2000, compared to net cash used for operating activities of $15.3 million in fiscal 1999. Cash generated by operations in fiscal 2000, before working capital items, totaled $71.8 million, an improvement of $11.0 million from the $60.8 million generated during fiscal 1999. Working capital consumed $44.1 million of cash in fiscal 2000. Inventories, net of payables support, increased $39.3 million primarily due to the opening of 18 additional superstores and an increase in the average store inventory levels for our traditional store base from fiscal 1999. Net cash used for investing activities for fiscal 2000 totaled $66.0 million compared to $94.3 million in fiscal 1999. Capital expenditures were $67.4 million during fiscal 2000 versus $75.1 million in fiscal 1999 and are discussed further under the caption "Capital Expenditures." Net cash provided by financing activities during fiscal 2000 was $39.3 million, consisting of a net increase of $56.1 million in long-term debt, offset by the repurchase of $20.0 million of common shares. Capital Expenditures During fiscal 2001, we reinvested $35.9 million into our business. We invested $26.2 million during the year in new stores and upgrades through the relocation or remodeling of our existing store base. During fiscal 2001, we opened 16 superstores and two traditional stores, relocated six stores and closed 37 smaller or under-performing traditional stores (excluding the 42 traditional stores identified for closing in fiscal 2002). Of the fiscal 2001 closings, 14 directly related to superstore openings. We spent $4.0 million in fiscal 2001 on capitalizable systems technology, of which $3.0 million related to the installation of the SAP Retail System. This software replaced substantially all of our existing financial and merchandising systems. We became operational on the SAP Retail System in March 2000. The total cost of this two-year project, including expenses, was approximately $33 million and is being amortized over five years. We also spent $3.3 million in fiscal 2001 on capital projects for our distribution network, among other improvements, to prepare our Hudson distribution center for seasonal product handling. During fiscal 2001, construction was completed on a new 630,000 square foot West Coast distribution center, located on an 80-acre site in Visalia, California. This facility began shipping inventory to select stores in April 2001. We expect this facility to be fully operational and shipping product to more than 300 stores, or over 30% of our chain, by the end of the second quarter of fiscal 2002. See "Sources of Liquidity" for additional information regarding the financing of this facility. During fiscal 2000, we reinvested $67.4 million into our business, of which $39.9 million represented investment in new stores and upgrades through the relocation or remodeling of our existing store base. During fiscal 2000, we opened 18 superstores and 11 traditional stores, relocated 18 traditional stores and closed 61 19 21 smaller or under-performing traditional stores. Twenty of these closings directly related to superstore openings. We spent $17.1 million in fiscal 2000 on capitalizable systems technology, of which $15.8 million related to the installation of the SAP Retail System. We also spent $4.2 million in fiscal 2000 on capital projects for our distribution network, including among other improvements, the installation of a second fabric selection module in our Hudson distribution center. During fiscal 2002, we intend to open 12 new superstores and to relocate 10 traditional stores. We are limiting our store expansion in fiscal 2002 to the 12 new superstores for which we have already executed leases. We will refrain from any new commitments until the overall economic picture and our specific performance improves. We are limiting our capital spending in order to maximize our cash flows to reduce debt. Our total capital expenditures are expected to approximate $30 million in fiscal 2002 and we envision a lower amount in fiscal 2003. We expect funds for these expenditures to come from borrowings under our senior credit facility and cash generated internally. Our superstore openings for fiscal 2002 will average slightly less than 42,000 square feet compared with the average of 46,300 square feet for the 58 superstores in operation today. Common Share Repurchases During fiscal 2000, we purchased a total of 1.5 million common shares at an aggregate price of $20.0 million. During fiscal 2001, we avoided share repurchase opportunities in order to focus on debt reduction. As of February 3, 2001, we are authorized to purchase up to an additional 1.5 million shares under previous authorizations from our Board of Directors. However, we have no plans to repurchase additional shares at the present time. Sources of Liquidity We have three principal sources of liquidity: - cash from operations; - cash and temporary cash investments; and - the Credit Facility (defined below). We believe that our Credit Facility, coupled with cash on hand and cash from operations, will be sufficient to cover our working capital, capital expenditure and debt service requirement needs for the foreseeable future. In April 2001, we entered into new senior secured credit facilities (the "Credit Facility") which, as explained below, refinanced and replaced our prior senior credit facility and expire on April 30, 2005. The Credit Facility consists of a $365 million credit facility providing for $325 million in revolving loans and a $40 million term loan (the "Term Loan"), both secured by a first priority perfected security interest in our inventory, accounts receivable, property and other assets. The Credit Facility is fully and unconditionally guaranteed by each of our subsidiaries. As of April 7, 2001, excess availability exceeded $120 million. Interest on borrowings under the Credit Facility is calculated at the bank's base rate or London Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%, depending on the level of excess availability (as defined in the Credit Agreement) that is maintained. Proceeds from the Credit Facility were used to repay all outstanding borrowings under our prior senior credit facility and synthetic lease facility. As of February 3, 2001, we had outstanding borrowings of $90.0 million under the prior senior credit facility at a weighted average interest rate of 7.94% and $54.6 million of letters of credit outstanding. Our weighted average interest rate and weighted average borrowings under the prior senior credit facility and other lines of credit were 7.87% and $119.3 million during fiscal 2001 and 6.24% and $161.1 million during fiscal 2000. 20 22 The Term Loan replaces a $40 million synthetic lease facility that we used to finance the construction of our West Coast distribution center located in Visalia, California. The synthetic lease facility was accounted for as an operating lease, with interest payments capitalized until the facility began operations. Accordingly, no asset or debt obligation related to the construction of the Visalia distribution center is reflected on the accompanying consolidated balance sheet at February 3, 2001. As a result of the termination of the synthetic lease facility, we will record the appropriate assets and debt obligation of $40 million in the first quarter of fiscal 2002. The Term Loan, while outstanding, reduces availability under the Credit Facility. On May 5, 1999, we issued $150.0 million of 10 3/8% senior subordinated notes due May 1, 2007. Interest on the senior subordinated notes is payable on May 1 and November 1 of each year. We have the option of redeeming the notes at any time after May 1, 2003, in accordance with certain call provisions. The notes represent unsecured obligations that are subordinated to the Credit Facility and are fully and unconditionally guaranteed by each of our subsidiaries. Our total debt-to-capitalization ratio was 49.1% at February 3, 2001 and 48.6% at January 29, 2000. This increase in the debt-to-capitalization ratio resulted primarily from the reduction in shareholders' equity due to the fiscal 2001 net loss. We have a goal to reduce debt and inventory levels during fiscal 2002. Our new SAP Retail System should help us achieve our inventory reduction goals, and we are limiting our capital spending and forgoing share buyback opportunities to focus on debt reduction. SEASONALITY AND INFLATION Our business exhibits seasonality which is typical for most retail companies. Our sales are much stronger in the second half of the year than the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season. We believe that inflation has not had a significant effect on the growth of net sales or on net income over the past three years. There can be no assurance, however, that our operating results will not be affected by inflation in the future. DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK We are exposed to the impact of: - interest rate changes on our outstanding borrowings under the Credit Facility; and - foreign currency fluctuations on merchandise that is sourced internationally. In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objective, we utilize interest rate swaps to manage net exposure to interest rate changes related to our debt structure. On March 15, 1998, we entered into a five-year interest rate swap agreement to hedge our interest rate exposure. The notional amount of this interest rate swap is $75.0 million, with a fixed LIBOR of 5.98%, reduced to $50.0 million on March 15, 2001 until its expiration on March 15, 2003. In May 2000, we entered into an interest rate swap agreement to hedge interest rate exposure on $40.0 million of variable rate debt. The interest rate swap has a term of five years effective May 1, 2001, with a notional amount of $40.0 million and a fixed LIBOR rate of 6.80%. We believe foreign currency exchange rate fluctuations do not contain significant market risk due to the nature of our relationships with our international vendors. All merchandise contracts are denominated in U.S. dollars and are subject to negotiation prior to our commitment for purchases. As a result, there is not a direct correlation between merchandise prices and fluctuations in the exchange rate. We source approximately 20% of our purchases internationally. 21 23 RECENT ACCOUNTING PRONOUNCEMENTS Derivatives. In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, was issued. This statement will be adopted in the first quarter of fiscal 2002. Under the provisions of this statement, we are required to record all derivatives on the balance sheet at fair value and to recognize changes in the fair value of derivatives in our results of operations, unless specific hedge accounting criteria are met, in which case the charge will be reflected in other comprehensive income as a charge to shareholders' equity. As of February 4, 2001, we expect the adoption of this new accounting standard to result in an after tax charge to be classified as a cumulative effect of change in accounting principle of $1.7 million. FORWARD-LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "estimates," "expects," "believes," and similar expressions as they relate to us are intended to identify such forward-looking statements. Our actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, changes in customer demand, changes in trends in the fabric and craft industry, seasonality, our failure to manage our growth or our transition to our new Visalia distribution center, our failure to execute our productivity initiatives outlined, including the SKU Reduction Initiative and the store base productivity review, loss of key management, the availability of merchandise, changes in the competitive pricing for products, and the impact of competitor store openings and closings. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included in the "Derivative Financial Instruments and Market Risk" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." 22 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA JO-ANN STORES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 24 Report of Independent Public Accountants.................... 25 Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.......................................... 26 Consolidated Statements of Operations for each of the three fiscal years in the period ended February 3, 2001...... 27 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended February 3, 2001...... 28 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended February 3, 2001................................................... 29 Notes to Consolidated Financial Statements.................. 30 Report of Independent Public Accountants on Financial Statement Schedule........................................ 49 Schedule II -- Valuation and Qualifying Accounts............ 50
23 25 REPORT OF MANAGEMENT To the Shareholders of Jo-Ann Stores, Inc. We have prepared the accompanying consolidated financial statements and related information included herein for the years ended February 3, 2001, January 29, 2000 and January 30, 1999. The opinion of Arthur Andersen LLP, the Company's independent public accountants, on those financial statements is included. The primary responsibility for the integrity of the financial information included in this annual report rests with management. This information is prepared in accordance with accounting principles generally accepted in the United States, based on our best estimates and judgments and giving due consideration to materiality. The Company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our systems provide this appropriate balance. The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The committee meets periodically with management, internal auditors and our independent public accountants to discuss the adequacy of financial controls, the quality of financial reporting, and the nature, extent and results of the audit effort. Both the internal auditors and independent public accountants have private and confidential access to the Audit Committee at all times. Alan Rosskamm Brian P. Carney Chairman of the Board, Executive Vice President, President and Chief Executive Officer Chief Financial Officer
24 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Jo-Ann Stores, Inc.: We have audited the accompanying consolidated balance sheets of Jo-Ann Stores, Inc. (an Ohio corporation) and Subsidiaries as of February 3, 2001 and January 29, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 3, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jo-Ann Stores, Inc. and Subsidiaries as of February 3, 2001 and January 29, 2000 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the consolidated financial statements, the Company has given retroactive effect to a change in method of inventory valuation from the last-in, first-out ("LIFO") method to the first-in, first- out ("FIFO") method. Arthur Andersen LLP Cleveland, Ohio, March 7, 2001. 25 27 JO-ANN STORES, INC. CONSOLIDATED BALANCE SHEETS
FEBRUARY 3, JANUARY 29, 2001 2000 ----------- ----------- (Millions of dollars, except share and per share data) ASSETS Current assets: Cash and temporary cash investments....................... $ 17.5 $ 21.4 Inventories............................................... 451.0 442.5 Prepaid expenses and other current assets................. 37.3 34.0 ------ ------ Total current assets........................................ 505.8 497.9 Property, equipment and leasehold improvements, net......... 190.2 194.7 Goodwill, net............................................... 27.2 36.3 Other assets................................................ 19.0 18.0 ------ ------ Total assets................................................ $742.2 $746.9 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $164.0 $149.6 Accrued expenses.......................................... 59.5 58.5 ------ ------ Total current liabilities................................... 223.5 208.1 Long-term debt.............................................. 240.0 245.2 Deferred income taxes....................................... 22.5 22.4 Other long-term liabilities................................. 7.4 11.8 Shareholders' equity: Common stock: Class A, stated value $0.05 per share; issued and outstanding 9,364,896 and 8,987,036, respectively.... 0.6 0.5 Class B, stated value $0.05 per share; issued and outstanding 8,842,123 and 8,857,853, respectively.... 0.5 0.5 Additional paid-in capital................................ 99.2 97.9 Unamortized restricted stock awards....................... (1.2) (2.1) Retained earnings......................................... 187.8 201.4 ------ ------ 286.9 298.2 Treasury stock, at cost................................... (38.1) (38.8) ------ ------ Total shareholders' equity.................................. 248.8 259.4 ------ ------ Total liabilities and shareholders' equity.................. $742.2 $746.9 ====== ======
See notes to consolidated financial statements 26 28 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED -------------------------------------------- FEBRUARY 3, JANUARY 29, JANUARY 30, 2001 2000 1999 ------------ ------------ ------------ (Millions of dollars, except per share data) Net sales................................................ $1,483.3 $1,381.5 $1,242.9 Cost of sales............................................ 838.2 748.3 678.9 -------- -------- -------- Gross margin............................................. 645.1 633.2 564.0 Selling, general and administrative expenses............. 589.2 533.8 476.7 Depreciation and amortization............................ 38.3 32.0 27.7 Non-recurring charge..................................... -- -- 25.1 -------- -------- -------- Operating profit......................................... 17.6 67.4 34.5 Interest expense......................................... 29.0 26.2 12.5 -------- -------- -------- Income (loss) before income taxes........................ (11.4) 41.2 22.0 Income tax provision (benefit)........................... (4.3) 15.6 8.6 -------- -------- -------- Net income (loss) before equity loss..................... (7.1) 25.6 13.4 Equity and asset impairment losses of minority investment............................................. (6.5) -- -- -------- -------- -------- Net income (loss)........................................ $ (13.6) $ 25.6 $ 13.4 ======== ======== ======== Net income (loss) per common share: Basic.................................................. $ (0.75) $ 1.41 $ 0.71 ======== ======== ======== Diluted................................................ $ (0.75) $ 1.38 $ 0.67 ======== ======== ========
See notes to consolidated financial statements 27 29 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED ----------------------------------------- FEBRUARY 3, JANUARY 29, JANUARY 30, 2001 2000 1999 ----------- ----------- ----------- (Millions of dollars) Net cash flows from operating activities: Net income (loss)...................................... $(13.6) $ 25.6 $ 13.4 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization....................... 38.3 32.0 27.7 Deferred income taxes............................... (4.2) 13.0 8.3 Loss on disposal of fixed assets.................... 1.7 1.2 2.2 Equity and asset impairment losses of minority investment........................................ 6.5 -- -- Non-cash portion of non-recurring charge............ -- -- 9.2 Changes in operating assets and liabilities: Increase in inventories............................. (8.5) (38.5) (95.6) Decrease in prepaid expenses and other current assets............................................ 1.0 5.9 19.2 Increase (decrease) in accounts payable............. 14.4 (0.8) 14.6 Increase (decrease) in accrued expenses............. 3.9 6.8 (14.3) Settlement of income tax contingency................ (3.5) (16.1) -- Other, net.......................................... 3.0 (1.4) -- ------ ------- ------ Net cash provided by (used for) operating activities:.... 39.0 27.7 (15.3) Net cash flows used for investing activities: Capital expenditures................................... (35.9) (67.4) (75.1) Minority investment.................................... (6.5) -- -- House of Fabrics acquisition, net of cash acquired..... -- -- (23.5) Other, net............................................. 1.7 1.4 4.3 ------ ------- ------ Net cash used for investing activities................... (40.7) (66.0) (94.3) Net cash flows provided by (used for) financing activities: Proceeds from issuance of senior subordinated notes, net................................................. -- 143.4 -- Proceeds from long-term debt........................... 73.7 158.4 159.8 Repayment of long-term debt............................ (78.9) (245.7) (48.5) Purchase of common stock............................... (0.1) (20.0) (1.5) Proceeds and tax benefit from exercise of stock options............................................. -- 1.9 4.4 Issuance of treasury shares............................ 1.0 1.2 1.0 Other, net............................................. 2.1 0.1 -- ------ ------- ------ Net cash provided by (used for) financing activities..... (2.2) 39.3 115.2 ------ ------- ------ Net increase (decrease) in cash.......................... (3.9) 1.0 5.6 Cash and temporary cash investments at beginning of year................................................... 21.4 20.4 14.8 ------ ------- ------ Cash and temporary cash investments at end of year....... $ 17.5 $ 21.4 $ 20.4 ====== ======= ====== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest............................................ $ 27.7 $ 20.0 $ 12.5 Income taxes, net of refunds........................ $ 3.4 $ (5.9) $ 14.6
See notes to consolidated financial statements 28 30 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A CLASS B ADDITIONAL UNAMORTIZED TOTAL COMMON COMMON PAID-IN RESTRICTED RETAINED TREASURY SHAREHOLDERS' STOCK STOCK CAPITAL STOCK AWARDS EARNINGS STOCK EQUITY ------- ------- ---------- ------------ -------- -------- ------------- (Millions of dollars) Balance, January 31, 1998, as previously stated................... $0.5 $0.5 $88.9 $(3.1) $172.2 $(18.1) $240.9 Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (Note 2)............................ -- -- -- -- (9.8) -- (9.8) ---- ---- ----- ----- ------ ------ ------ Balance, January 31, 1998, as restated............................ 0.5 0.5 88.9 (3.1) 162.4 (18.1) 231.1 Net income.......................... -- -- -- -- 13.4 -- 13.4 Exercise of stock options........... -- -- 2.7 -- -- -- 2.7 Tax benefit on options exercised.... -- -- 1.7 -- -- -- 1.7 Issuance of restricted stock awards............................ -- -- 1.3 (1.3) -- -- -- Cancellation of restricted stock awards............................ -- -- (0.9) 0.4 -- -- (0.5) Amortization of restricted stock awards............................ -- -- -- 1.1 -- -- 1.1 Purchase of common stock............ -- -- -- -- -- (1.5) (1.5) Issuance of treasury shares......... -- -- 0.7 -- -- 0.3 1.0 ---- ---- ----- ----- ------ ------ ------ Balance, January 30, 1999............. 0.5 0.5 94.4 (2.9) 175.8 (19.3) 249.0 Net income.......................... -- -- -- -- 25.6 -- 25.6 Exercise of stock options........... -- -- 1.3 -- -- -- 1.3 Tax benefit on options exercised.... -- -- 0.6 -- -- -- 0.6 Issuance of restricted stock awards............................ -- -- 0.6 (0.6) -- -- -- Cancellation of restricted stock awards............................ -- -- (0.3) 0.1 -- -- (0.2) Amortization of restricted stock awards............................ -- -- -- 1.3 -- -- 1.3 Purchase of common stock............ -- -- -- -- -- (20.0) (20.0) Issuance of treasury shares......... -- -- 0.7 -- -- 0.5 1.2 Issuance of common stock -- Associate Stock Ownership Plan.... -- -- 0.6 -- -- -- 0.6 ---- ---- ----- ----- ------ ------ ------ Balance, January 29, 2000............. 0.5 0.5 97.9 (2.1) 201.4 (38.8) 259.4 Net loss............................ -- -- -- -- (13.6) -- (13.6) Issuance of restricted stock awards............................ -- -- 0.1 (0.1) -- -- -- Cancellation of restricted stock awards............................ -- -- (0.6) 0.2 -- -- (0.4) Amortization of restricted stock awards............................ -- -- -- 0.8 -- -- 0.8 Purchase of common stock............ -- -- -- -- -- (0.1) (0.1) Issuance of treasury shares......... -- -- 0.2 -- -- 0.8 1.0 Issuance of common stock -- Associate Stock Ownership Plan.... 0.1 -- 1.6 -- -- -- 1.7 ---- ---- ----- ----- ------ ------ ------ Balance, February 3, 2001............. $0.6 $0.5 $99.2 $(1.2) $187.8 $(38.1) $248.8 ==== ==== ===== ===== ====== ====== ======
See notes to consolidated financial statements 29 31 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric and craft retailer with 1,007 retail stores in 49 states at February 3, 2001. The 949 traditional and 58 superstores feature a broad line of apparel, craft and home decorating fabrics, notions, crafts, seasonal and home accessories, and floral and framing products. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below: BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the fiscal 2000 and fiscal 1999 financial statements have been reclassified in order to conform with the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January 31. The fiscal year refers to the year in which the period ends (e.g., fiscal 2001 ended February 3, 2001). Fiscal 2001 is a 53-week year. Fiscal years 2000 and 1999 consist of 52 weeks. CASH AND TEMPORARY CASH INVESTMENTS Temporary cash investments are all highly liquid investments with original maturities of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. All inventories were valued using the first-in, first-out ("FIFO") method (See Note 2 -- Inventories). PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is provided over the estimated useful life of the assets principally by the straight-line method. The major classes of assets and ranges of estimated useful lives are: buildings from 10 to 40 years; furniture, fixtures and equipment from 2 to 10 years; and leasehold improvements for 10 years or the remainder of the lease, whichever is shorter. Expense for depreciation of property and equipment and amortization of leasehold improvements amounted to $36.9 million, $30.0 million and $25.4 million in fiscal 2001, 2000 and 1999, respectively. 30 32 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Maintenance and repair expenditures are charged to expense as incurred and improvements and major renewals are capitalized. SOFTWARE DEVELOPMENT The Company capitalized $3.5 million and $16.9 million in fiscal 2001 and fiscal 2000, respectively, for internal use software. The capitalized amounts are included in property, equipment and leasehold improvements and are being amortized on a straight-line basis over periods ranging from three to five years beginning at the time the software becomes operational. GOODWILL Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible assets acquired from House of Fabrics, Inc. Goodwill is amortized on a straight-line basis over 40 years and is a non-deductible expense for tax purposes. The Company periodically reviews the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis. In management's opinion, no material impairment exists on February 3, 2001. Amortization expense was $0.9 million, $1.0 million and $0.9 million for fiscal 2001, 2000 and 1999, respectively. During fiscal 2001, goodwill was reduced by $8.2 million due to the settlement of an income tax contingency (See Note 4 -- Acquisition of House of Fabrics, Inc.) IMPAIRMENT OF LONG-LIVED ASSETS The Company records impairment losses on long-lived assets when indicators of impairment are present and the estimated undiscounted cash flows to be generated by those assets are less than the assets' net book value. There were no long-lived assets that required recognition of an impairment loss at February 3, 2001 or January 29, 2000. FINANCIAL INSTRUMENTS Financial instruments held by the Company include cash and temporary cash investments, accounts payable, debt obligations and interest rate swap agreements. The carrying value of cash and temporary cash investments and accounts payable is representative of fair value because of the short maturity of these instruments. The carrying value of borrowings under the prior senior credit facility approximates the fair value since the interest rate is variable and fluctuates with market conditions. The fair value of the Company's senior subordinated notes is based on market values in the high yield debt market. For fair value disclosures of the Company's senior subordinated notes and interest rate swap agreements, see Note 13 -- Fair Value of Financial Instruments. In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, was issued. The statement will be adopted by the Company in the first quarter of fiscal 2002, and requires that all derivatives be recorded on the balance sheet at fair value and that changes in fair value of derivatives be recognized in the Company's results of operations, unless specific hedge accounting criteria are met, in which case the charge will be reflected in other comprehensive income as a charge to shareholders' equity. INCOME TAXES The Company accounts for income taxes pursuant to the asset and liability method. Under that method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences 31 33 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. REVENUE RECOGNITION The Company recognizes revenue at the time of sale of merchandise to its customers in compliance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." STORE OPENING EXPENSES Store opening expenses are charged to operations as incurred. ADVERTISING COSTS The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense was $39.5 million, $32.6 million and $32.5 million for fiscal 2001, 2000 and 1999, respectively. EARNINGS PER SHARE Basic and diluted earnings per share are calculated in accordance with SFAS No. 128, "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 year. Diluted earnings per share for fiscal 2000 and fiscal 1999 include the effect of the assumed exercise of dilutive stock options under the treasury stock method. Stock options are antidilutive for fiscal 2001 and therefore are excluded from the calculation of diluted earnings per share. Basic and diluted weighted average shares are as follows:
FISCAL YEARS ENDED 2001 2000 1999 ------------------ ---------- ---------- ---------- Weighted average shares: Basic................................ 18,041,192 18,198,325 18,964,082 Incremental shares from assumed exercise of stock options......... -- 384,612 939,517 ---------- ---------- ---------- Diluted.............................. 18,041,192 18,582,937 19,903,599 ========== ========== ==========
NOTE 2 -- INVENTORIES CHANGE IN ACCOUNTING METHOD The Company has changed its method of valuing inventory and cost of sales from the last-in, first-out method ("LIFO") to the FIFO method in fiscal 2001. The change in inventory valuation method was made in order to facilitate more appropriate comparisons within the industry as most of the Company's competitors are on the FIFO inventory method, to simplify and provide more meaningful reporting to lenders under the new senior secured credit facilities the Company recently entered into and to more appropriately cost inventory in light of continuous interim price volatility in the prices of the Company's inventory. The financial statements for fiscal 2000 and prior years have been retroactively restated to apply the new method. 32 34 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- INVENTORIES (CONTINUED) The effect of the accounting change, net of tax, on the Company's net income and earnings per share, as previously reported, is as follows (millions of dollars, except per share data):
FISCAL YEARS ENDED 2000 1999 ------------------ ---------------------- ---------------------- AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- Net income.......................... $25.7 $25.6 $13.6 $13.4 Net income per common share: Basic............................. $1.41 $1.41 $0.72 $0.71 Diluted........................... 1.38 1.38 0.69 0.67
SKU REDUCTION INITIATIVE During the fourth quarter of fiscal 2001, the Company commenced an inventory productivity initiative (the "SKU Reduction Initiative") which entailed a thorough review of inventory investment and gross margin performance by item or stock-keeping unit ("SKU"), resulting in the identification of approximately 10,000 active items, or approximately $60 million of inventory, at cost, that the Company has made the decision to discontinue. During the fourth quarter of fiscal 2001, the Company recorded a non-cash charge of $23.0 million, included in cost of sales, to reserve for management's estimate of the expected loss associated with the clearance sale of these products, below cost, during fiscal 2002. This estimate was based on the Company's historical levels of recovery experience. The Company will begin clearance programs in the second quarter of fiscal 2002 designed to aggressively clear this product. Management believes the review process completed in the fourth quarter for the SKU Reduction Initiative was thorough. Although additional product may be targeted for reduction based on that analysis, the Company believes that the extent of such reduction decisions will be more comparable to what is normal course business practice in retailing. NOTE 3 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (millions of dollars):
FISCAL YEARS 2001 2000 ------------ ------- ------- Land and buildings....................................... $ 25.6 $ 23.2 Furniture, fixtures and equipment........................ 244.3 200.4 Leasehold improvements................................... 69.7 64.5 Construction in progress................................. 5.8 28.4 ------- ------- 345.4 316.5 Less accumulated depreciation............................ (155.2) (121.8) ------- ------- $ 190.2 $ 194.7 ======= =======
NOTE 4 -- ACQUISITION OF HOUSE OF FABRICS, INC. On March 9, 1998, the Company acquired, through a cash tender offer, 77.2% of the outstanding common stock of House of Fabrics, Inc. ("HOF") for $4.25 per share (the "Acquisition"). On April 21, 1998, the merger of HOF with a wholly owned subsidiary of the Company was approved by the shareholders of HOF. As a result, HOF became a wholly owned subsidiary of the Company, and all shares of HOF common stock not already owned by the Company were canceled and converted into the right to receive 33 35 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- ACQUISITION OF HOUSE OF FABRICS, INC. (CONTINUED) $4.25 in cash. The total value of the transaction was approximately $97.1 million, including the assumption of debt and other long-term liabilities aggregating $73.6 million. HOF had annual revenues of approximately $240.0 million and operated 261 fabric and craft stores in 27 states at the time of the Acquisition. Of the 261 stores acquired, management identified 60 HOF stores and 30 Jo-Ann Fabrics and Crafts stores for closing, due to the geographic overlap that existed between the two companies. Operating results of the continuing HOF stores have been included in the Company's results of operations since the date of the Acquisition. The Acquisition was recorded as a purchase business combination using Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the carrying values of HOF net assets, including the establishment of reserves for severance and costs associated with the HOF store closings, have been adjusted to their estimated fair values. The excess of the purchase price paid over the net identifiable assets and liabilities totaled $38.1 million, before considering the settlement of the income tax contingency discussed below, and is reported as goodwill, which is being amortized on a straight-line basis over a 40-year life. In accordance with Emerging Issues Task Force 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)," the Company recorded a non-recurring charge of $25.1 million during fiscal 1999 for direct and other merger-related costs pertaining to the Acquisition. Following is a summary of the significant components of the non-recurring charge (millions of dollars):
CASH NON-CASH TOTAL ----- -------- ----- Write-downs of previously owned assets............ $ -- $ 9.2 $ 9.2 Costs of operating duplicate corporate facilities...................................... 5.4 -- 5.4 Store remerchandising costs....................... 5.1 -- 5.1 Rental costs on closed stores and other costs..... 5.4 -- 5.4 ----- ----- ----- $15.9 $ 9.2 $25.1 ===== ===== =====
The integration events associated with the Acquisition were completed in fiscal 1999. Other long-term liabilities in fiscal 2000 and fiscal 1999 include a $22.5 million income tax contingency assumed in the Acquisition. Prior to the Acquisition, HOF received refunds totaling $22.5 million pursuant to carrybacks of certain net operating losses on claims filed for refund with the Internal Revenue Service ("IRS") on Forms 1139. The claims for refund were examined by the IRS, and a deficiency notice was issued. HOF appealed the deficiency assessment. As of the date of the Acquisition, the Company recorded accrued interest of $4.4 million associated with this contingency. On October 20, 2000, this income tax contingency was settled with the IRS for $19.6 million ($14.7 million of tax liability and $4.9 million of accrued interest). Of this total settlement, $16.1 million of the liability was paid in fiscal 2000 in the form of a deposit payment (cash bond) to the IRS. The remaining $3.5 million was paid during the third quarter of fiscal 2001. Due to the settlement of this liability, goodwill recorded in connection with the Acquisition was reduced by $8.2 million. Goodwill amortization has been reduced on a prospective basis beginning in the fourth quarter of fiscal 2001. NOTE 5 -- MINORITY INVESTMENT On June 6, 2000, the Company announced that it had entered into a strategic relationship with IdeaForest.com, Inc. ("IdeaForest"), an online destination site for arts and crafts merchandise, creative ideas, 34 36 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- MINORITY INVESTMENT (CONTINUED) advice and supplies. As part of the strategic relationship, IdeaForest, which operates as an independent entity, is responsible for all content and technology support to the joann.com website. The Company provides product to the site, with customer fulfillment and service being handled by IdeaForest. The Company invested $6.5 million in IdeaForest, which, combined with the Company's contribution of strategic assets, entitled the Company to a 28.5% ownership interest. In addition, the Company has the ability to increase its future ownership percentage through the vesting and exercise of warrants. The investment in IdeaForest is accounted for using the equity method. During fiscal 2001, the Company recorded equity losses of $3.2 million related to this minority investment. During the fourth quarter of fiscal 2001, the Company reduced the carrying value of its investment in IdeaForest to zero, which resulted in a $3.3 million charge. IdeaForest's current projections anticipate that it will not achieve profitability until its third year of operations and that an additional cash investment in IdeaForest will be required before then. IdeaForest has sufficient cash to continue to run its operation at its lowered cost structure through the end of fiscal 2002. Although the Company remains committed to an online presence, the level of any future cash investment by the Company in IdeaForest is uncertain. As a result, the Company concluded the carrying value of the initial investment should be reduced to zero. NOTE 6 -- INCOME TAXES The significant components of the income tax provision (benefit) are as follows:
FISCAL YEARS ENDED 2001 2000 1999 ------------------ ------ ----- ----- (Millions of dollars) Current: Federal................................................. $ 6.9 $ 1.6 $(1.4) State and local......................................... (0.7) 1.2 1.4 ------ ----- ----- 6.2 2.8 -- Deferred.................................................. (10.5) 12.8 8.6 ------ ----- ----- Income tax provision (benefit)............................ $ (4.3) $15.6 $ 8.6 ====== ===== =====
The reconciliation of income tax at the statutory rate to the income tax provision (benefit) is as follows:
FISCAL YEARS ENDED 2001 2000 1999 ------------------ ----- ----- ---- (Millions of dollars) Federal income tax at the statutory rate.................... $(4.0) $14.4 $7.6 Effect of: State and local taxes..................................... (0.2) 1.7 0.9 Goodwill and other, net................................... (0.1) (0.5) 0.1 ----- ----- ---- Income tax provision (benefit).............................. $(4.3) $15.6 $8.6 ===== ===== ====
35 37 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax assets and liabilities are as follows:
ASSET/(LIABILITY) ---------------------- FISCAL YEARS 2001 2000 ------------ --------- --------- (Millions of dollars) Current Deferred tax assets: Inventory items........................................... $ 14.4 $ 6.9 Employee benefits......................................... 2.3 2.5 Lease obligations......................................... 3.0 1.6 Other..................................................... 1.2 5.6 ------ ------ 20.9 16.6 Deferred tax liabilities: Basis difference in net assets acquired................... (1.4) (1.4) ------ ------ Net current deferred tax asset.............................. $ 19.5 $ 15.2 ====== ====== Non-current Deferred tax assets: NOL carryforward.......................................... $ 9.3 $ -- Other..................................................... 1.7 0.1 ------ ------ 11.0 0.1 Deferred tax liabilities: Depreciation.............................................. (32.8) (21.6) Basis difference in net assets acquired................... (0.6) (0.7) Other..................................................... (0.1) (0.2) ------ ------ (33.5) (22.5) ------ ------ Net non-current deferred tax liability...................... $(22.5) $(22.4) ====== ======
In connection with the purchase of HOF, the Company incurred certain net operating losses, of which approximately $22.5 million is available as of February 3, 2001 to offset future years' tax payments. These losses expire in 2019. The Company has recorded valuation allowances for certain deferred tax assets that may be unrealizable. NOTE 7 -- FINANCING CREDIT FACILITY In April 2001, the Company entered into new senior secured credit facilities (the "Credit Facility") led by Fleet Retail Finance Inc. as Agent, which, as explained below, refinanced and replaced our prior senior credit facility and expire on April 30, 2005. The Credit Facility consists of a $365 million credit facility providing for $325 million in revolving loans and a $40 million term loan (the "Term Loan"), both secured by a first priority perfected security interest in the inventory, accounts receivable, property and other assets of the Company. The Credit Facility is fully and unconditionally guaranteed by each of the Company's subsidiaries. The Credit Facility contains a letter of credit sub-limit of $150 million. Interest on borrowings under the Credit Facility is calculated at the bank's base rate or London Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%, depending on the level of excess availability (as defined in the Credit Agreement) that is maintained. The Credit Facility provides for the applicable LIBOR margin to be set at 2.00% for the first 12 months of the term of the facility. Proceeds from the Credit Facility were used to repay all outstanding 36 38 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- FINANCING (CONTINUED) borrowings under the Company's prior senior credit facility and synthetic lease facility. As of February 3, 2001, the Company had outstanding borrowings of $90.0 million under the prior senior credit facility at a weighted average interest rate of 7.94% and $54.6 million of letters of credit outstanding. Letters of credit are considered outstanding amounts under the Credit Facility. The Company will pay quarterly usage fees of between 1.25% and 2.25% per annum on outstanding letters of credit under the Credit Facility. The Company will also pay quarterly fees of 0.375% per annum on the unused portion of the Credit Facility. The Credit Facility does not contain any financial covenant tests as long as excess availability, as defined, is greater than $35 million. A minimum net worth financial covenant test exists if excess availability is less than $35 million. As of April 7, 2001, excess availability exceeded $120 million. In addition, capital expenditures under the Credit Facility are limited to $50 million per year, with any unused portion carried forward and available for future use. The Credit Facility permits the repurchase of common shares of the Company, the repurchase of senior subordinated notes, and the payment of cash dividends (up to $5.0 million) in any fiscal year, subject to maintaining certain levels of excess availability. The Company's weighted average interest rate and weighted average borrowings under the prior senior credit facility and other lines of credit were 7.87% and $119.3 million during fiscal 2001, 6.24% and $161.1 million during fiscal 2000, and 6.23% and $157.1 million during fiscal 1999. The Term Loan replaces a $40 million synthetic lease facility that the Company used to finance the construction of its West Coast distribution center located in Visalia, California. The synthetic lease facility was accounted for as an operating lease, with interest payments capitalized until the facility began operations. Accordingly, no asset or debt obligation related to the construction of the distribution center is reflected on the accompanying consolidated balance sheet at February 3, 2001. As a result of the termination of the synthetic lease facility, the Company will record the appropriate assets and debt obligation of $40 million in the first quarter of fiscal 2002. Construction period interest, which totaled $0.8 million at February 3, 2001, will be capitalized as part of the asset cost in the first quarter. The Term Loan, while outstanding, reduces availability under the Credit Facility. There is no penalty if the Company elects to prepay the Term Loan principal. SENIOR SUBORDINATED NOTES On May 5, 1999, the Company issued $150.0 million of 10 3/8% senior subordinated notes due May 1, 2007. Interest on the senior subordinated notes is payable on May 1 and November 1 of each year. Deferred charges and the original issue discount (the notes were issued at 98.5% of face value) recorded at issuance in the amounts of $4.3 million and $2.3 million, respectively, are reflected in other long-term assets and are being amortized as interest expense over the term of the notes utilizing the effective interest method. The Company has the option of redeeming the notes at any time after May 1, 2003, in accordance with certain call provisions. The notes represent unsecured obligations that are subordinated to the Credit Facility and are fully and unconditionally guaranteed by each of the Company's subsidiaries. NOTE 8 -- COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation claims and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. During the fourth quarter of fiscal 2001, the Company recorded a $6.7 million charge to selling, general and administrative expenses related to 42 stores identified for closing in fiscal 2002. The expenses accrued consist primarily of the cost of reducing store fixed assets and leasehold improvements to net realizable value and accruing for any remaining closed store rent liability under non-cancelable lease agreements. 37 39 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CAPITAL STOCK The following table details the common stock ($0.05 stated value) activity for fiscal 2001 and fiscal 2000:
COMMON SHARES OUTSTANDING -- NET OF TREASURY ------------------------------------ SHARES CLASS A CLASS B TOTAL IN TREASURY --------- --------- ---------- ----------- Balance at January 30, 1999.................. 9,530,330 9,481,244 19,011,574 2,272,555 Exercise of stock options.................. 100,864 68,748 169,612 -- Issuance of restricted stock awards........ 39,000 3,250 42,250 -- Issuance of common stock -- Associate Stock Ownership Plan.......................... 60,049 -- 60,049 -- Cancellation of restricted stock awards.... (5,000) (9,750) (14,750) -- Purchase of common stock................... (820,907) (689,064) (1,509,971) 1,509,971 Issuance of treasury shares................ 82,700 3,425 86,125 (86,125) --------- --------- ---------- --------- Balance at January 29, 2000.................. 8,987,036 8,857,853 17,844,889 3,696,401 Exercise of stock options.................. 7,838 2,588 10,426 -- Issuance of restricted stock awards........ 15,000 375 15,375 -- Issuance of common stock -- Associate Stock Ownership Plan.......................... 248,476 -- 248,476 -- Cancellation of restricted stock awards.... (25,000) (4,875) (29,875) -- Purchase of common stock................... -- (13,818) (13,818) 13,818 Issuance of treasury shares................ 131,546 -- 131,546 (131,546) --------- --------- ---------- --------- Balance at February 3, 2001.................. 9,364,896 8,842,123 18,207,019 3,578,673 ========= ========= ========== =========
The Company's Class A common shares have voting rights while Class B common shares have no voting rights. At February 3, 2001 and January 29, 2000, there were 75,000,000 Class A common shares and 75,000,000 Class B common shares authorized for issuance. At February 3, 2001 and January 29 2000, there were 5,000,000 shares of serial preferred stock, without par value, authorized for issuance, none of which are outstanding. SHAREHOLDERS' RIGHTS PLAN On October 31, 2000, the Company amended and restated its Shareholders' Rights Plan (the "Rights Plan"). Under the Rights Plan, as amended and restated, one right is issued for each Class A and Class B common share outstanding. The rights are exercisable only if a person or group buys or announces a tender offer for 15% or more of the outstanding Class A common shares as defined in the Rights Plan. When exercisable, each right initially entitles a holder to purchase one Class A common share for $60.00, or under certain circumstances, one Class A common share for $0.50. The rights, which do not have voting privileges, expire in October 2010, but may be redeemed by the Board of Directors prior to that time, under certain circumstances, for $0.005 per right. Until the rights become exercisable, they have no effect on earnings per share. RIGHT TO ACQUIRE SHARES The Company is a party to an agreement with certain members of the two founding families of the Company, whereby the Company has a right of first refusal to acquire, at market prices, common shares disposed of by either of the families. The total number of both Class A and Class B common shares, subject to this agreement, was approximately 4.5 million shares as of February 3, 2001. 38 40 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK-BASED COMPENSATION PLANS 1998 INCENTIVE COMPENSATION PLAN The 1998 Incentive Compensation Plan (the "1998 Plan") includes a stock option program, a restricted stock program and an employee stock purchase program for employees, and a restricted stock and deferred stock program for non-employee directors. Shares subject to awards under the 1998 Plan may be Class A or Class B common shares. The total number of shares subject to awards, other than those granted under the employee stock purchase program, are limited in any fiscal year to (1) four percent of the number of shares outstanding at the beginning of the fiscal year, plus (2) for each of the two prior fiscal years, the excess of four percent of the number of shares outstanding at the beginning of each such fiscal year over the number of shares subject to awards actually granted in each such fiscal year. The following table summarizes award activity and the number of shares available for future awards under the 1998 Plan at February 3, 2001:
STOCK RESTRICTED OPTIONS STOCK TOTAL ---------- ---------- ---------- Available at January 31, 1998............ -- Fiscal year 1999 calculated available........................... 750,666 Granted................................ (431,600) (59,000) (490,600) Cancellations.......................... -- 1,500 1,500 ---------- Available at January 30, 1999............ 261,566 Fiscal year 2000 calculated available........................... 760,463 Granted................................ (484,450) (42,250) (526,700) Cancellations.......................... 50,000 14,750 64,750 ---------- Available at January 29, 2000............ 560,079 Fiscal year 2001 calculated available........................... 713,796 Granted................................ (1,552,250) (15,375) (1,567,625) Cancellations.......................... 344,300 4,875 349,175 ---------- Available at February 3, 2001............ 55,425 ==========
Employee stock option program The employee stock options granted under the 1998 Plan become exercisable to the extent of one-fourth of the optioned shares for each full year of continuous employment following the date of grant and generally expire ten years after the date of the grant. Stock options granted under the 1998 Plan may become exercisable under different terms as approved by the Compensation Committee of the Board of Directors. During fiscal 2001, 1,136,000 shares were granted, net of cancellations, which will become exercisable to the extent of one-half of the optioned shares after the completion of three full years of continuous employment following the date of grant, with the remaining one-half becoming exercisable after the completion of the fourth full year of continuous employment. Restricted stock program The vesting periods for the restricted shares granted under the 1998 Plan are up to five years for employee restricted shares and up to six years for non-employee director restricted shares. All rights to such restricted shares terminate without any payment of consideration by the Company unless the grantee remains in the continuous service of the Company throughout the vesting period. Unearned compensation resulting from the issuance of restricted shares is being amortized over the vesting periods, and the unamortized portion has been reflected as a reduction of shareholders' equity. 39 41 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) The following table summarizes the restricted shares granted and weighted average grant price under the 1998 Plan:
CLASS A COMMON SHARES CLASS B COMMON SHARES ---------------------- ---------------------- WEIGHTED WEIGHTED RESTRICTED AVERAGE RESTRICTED AVERAGE SHARES GRANT SHARES GRANT FISCAL YEAR GRANTED PRICE GRANTED PRICE ----------- ---------- -------- ---------- -------- 2001............................... 15,000 $ 6.74 375 $ 7.92 2000............................... 39,000 13.52 3,250 11.31 1999............................... 11,500 21.92 47,500 22.82
Employee stock purchase program The employee stock purchase program (the Associate Stock Ownership Plan or "ASOP") was established in April 1999, and enables employees to subscribe to purchase shares of common stock on offering dates at six-month intervals, at a purchase price equal to the lesser of 85% of the fair market value of the common stock on the first or last day of the offering period. The ASOP meets the requirements of Section 423 of the Internal Revenue Code of 1986. The total number of shares subject to stock purchase rights granted in any fiscal year for the ASOP may not exceed 1,000,000 shares. During fiscal 2001 and fiscal 2000, stock purchase rights of 248,476 and 60,049, respectively, were granted and exercised under the ASOP. Deferred stock program On March 9, 2000, the Company established a deferred stock program for non-employee directors. This program allows non-employee directors to elect to convert the retainer and meeting fee portion of their cash compensation into deferred stock units. Under this feature, non-employee directors make an irrevocable election prior to the Company's annual shareholders' meeting whereby they can elect to convert a percentage (0% to 100% in 25% increments) of their cash compensation for the following year to deferred stock units. One-half of the cash compensation deferred is converted into Class A stock units and one-half into Class B stock units. The conversion of cash compensation to deferred stock units is based on the closing market price of Class A and Class B common shares on the date the cash compensation would have been payable if it were paid in cash. These deferred stock units are credited to an account of each non-employee director, although no stock is issued until the earlier of an elected distribution date, as selected by the non-employee director, or retirement. During fiscal 2001, 3,552 Class A units and 3,997 Class B units were deferred under the deferred stock program. NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Under the 1996 Stock Option Plan for Non-Employee Directors (the "Directors Stock Option Plan"), the Company automatically grants stock options for 2,500 Class A common shares and 2,500 Class B common shares to each non-employee director upon the completion of each year of service at prices not less than the fair market value of the common stock at the date of the grant. The options become exercisable to the extent of one-fourth of the optioned shares for each full year of continuous service following the date of grant and generally expire ten years after the date of the grant. There are 63,000 Class A common shares and 63,000 Class B common shares authorized for future option grants under the Directors Stock Option Plan at February 3, 2001. 40 42 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) OTHER PLANS In addition to the 1998 Plan, nonqualified stock options are also available for, and have been granted to, certain officers and key employees under the 1990 Employee Stock Option and Stock Appreciation Rights Plan (the "1990 Plan") at prices not less than fair market value of the common stock at the date of grant. The 1990 Plan also permits the granting of stock appreciation rights with respect to all or part of the common stock subject to any option granted under this plan. Vesting and expiration periods are identical to options issued under the 1998 Plan. There are 1,026,759 Class A common shares and 401,953 Class B common shares authorized for future option and stock appreciation right grants under the 1990 Plan at February 3, 2001. In addition to the 1998 Plan, restricted shares of the Company's common stock are available for, and have been awarded to, executive officers, senior management and other key employees under the 1994 Executive Incentive Plan (the "Executive Plan"). At February 3, 2001, 93,500 Class A and 2,000 Class B restricted shares were outstanding under the Executive Plan and 359,500 Class A and 451,000 Class B common shares are available for future awards. In March 2000, the Board of Directors authorized for issuance and subsequently granted 319,000 Class B common shares for stock options. Stock options granted under this authorization became exercisable and expire on the same terms as stock options awarded under the provisions of the 1998 Plan. The following is a summary of the Company's stock option activity for the 1998 Plan, the 1990 Plan and the Directors Stock Option Plan (collectively the "Plans"):
CLASS A OPTIONS CLASS B OPTIONS --------------------- --------------------- WEIGHTED WEIGHTED CLASS A AVERAGE AVERAGE AND NUMBER OF EXERCISE NUMBER OF EXERCISE CLASS B OPTIONS PRICES OPTIONS PRICES OPTIONS --------- -------- --------- -------- --------- Outstanding at January 31, 1998...... 879,020 $10.98 1,745,512 $13.73 2,624,532 Granted............................ 13,650 25.82 459,500 15.94 473,150 Exercised.......................... (131,541) 9.28 (149,864) 9.74 (281,405) Canceled........................... (10,550) 9.52 (65,551) 15.18 (76,101) -------- --------- --------- Outstanding at January 30, 1999...... 750,579 11.57 1,989,597 14.49 2,740,176 Granted............................ 7,500 16.50 491,950 11.18 499,450 Exercised.......................... (100,864) 8.76 (68,748) 6.67 (169,612) Canceled........................... (32,426) 13.28 (196,030) 15.89 (228,456) -------- --------- --------- Outstanding at January 29, 2000...... 624,789 11.99 2,216,769 13.87 2,841,558 Granted............................ 10,000 8.75 1,921,250 7.67 1,931,250 Exercised.......................... (7,838) 7.76 (2,588) 6.47 (10,426) Canceled........................... (150,562) 10.66 (703,337) 11.40 (853,899) -------- --------- --------- Outstanding at February 3, 2001...... 476,389 $12.41 3,432,094 $10.91 3,908,483 ======== ====== ========= ====== =========
41 43 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)
CLASS A OPTIONS CLASS B OPTIONS --------------------- ---------------------- WEIGHTED WEIGHTED CLASS A AVERAGE AVERAGE AND NUMBER OF EXERCISE NUMBER OF EXERCISE CLASS B OPTIONS PRICES OPTIONS PRICES OPTIONS --------- -------- ---------- -------- --------- Exercisable at: February 3, 2001.................. 444,889 $12.05 1,194,538 $14.13 1,639,427 January 29, 2000.................. 572,289 11.18 1,176,669 13.34 1,748,958 January 30, 1999.................. 652,554 10.52 1,010,720 11.90 1,663,274 Weighted average fair value of options granted during fiscal: 2001.............................. $ 5.44 $ 3.76 2000.............................. 6.80 4.59 1999.............................. 10.38 6.20
The following table summarizes the status of stock options outstanding and exercisable at February 3, 2001:
CLASS A CLASS A OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE NUMBER EXERCISE EXERCISE CONTRACTUAL NUMBER EXERCISE OUTSTANDING PRICES PRICES LIFE EXERCISABLE PRICES - ----------- ---------------- -------- ----------- ----------- -------- 144,939 $ 6.16 to $7.66 $ 6.55 2.1 years 144,939 $ 6.55 176,250 $ 7.67 to $18.44 $10.08 4.1 years 161,750 $ 9.98 155,200 $18.45 to $29.06 $20.53 3.3 years 138,200 $20.25 ------- ------- 476,389 $ 6.16 to $29.06 $12.41 3.2 years 444,889 $12.05 ======= =======
CLASS B CLASS B OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE NUMBER EXERCISE EXERCISE CONTRACTUAL NUMBER EXERCISE OUTSTANDING PRICES PRICES LIFE EXERCISABLE PRICES - ----------- ---------------- -------- ----------- ----------- -------- 1,867,755 $ 4.37 to $7.75 $ 7.56 8.5 years 202,755 $ 6.88 925,039 $ 7.76 to $14.31 $11.89 7.4 years 465,098 $11.85 639,300 $14.32 to $26.66 $19.28 5.7 years 526,685 $18.94 --------- --------- 3,432,094 $ 4.37 to $26.66 $10.91 7.7 years 1,194,538 $14.13 ========= =========
The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options granted under the Plans. Accordingly, no compensation cost has been recognized for the Plans. Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards under these Plans consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and net 42 44 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) income (loss) per share would have been restated to the pro forma amounts shown in the table below (millions of dollars, except per share data):
FISCAL YEARS ENDED 2001 2000 1999 ------------------ ------------------ ----------------- ----------------- AS PRO AS PRO AS PRO REPORTED FORMA REPORTED FORMA REPORTED FORMA -------- ------ -------- ----- -------- ----- Net income (loss)................... $(13.6) $(16.1) $25.6 $23.8 $13.4 $11.7 Net income (loss) per common share: Basic............................. $(0.75) $(0.89) $1.41 $1.31 $0.71 $0.62 Diluted........................... (0.75) (0.89) 1.38 1.31 0.67 0.60
The pro forma disclosures presented are not representative of the future effects on net income and net income per share. For purposes of computing the pro forma disclosures above, the fair values of the options granted under the Plans were determined at the date of grant separately for Class A and Class B option grants using the Black-Scholes option pricing model. The significant assumptions used to calculate the fair value of Class A and Class B option grants were: risk-free interest rates ranging from 5.8% to 6.4% for Class A and 4.6% to 6.6% for Class B, expected volatility ranging from 34.5% to 38.0% for Class A and 31.7% to 38.0% for Class B, expected lives ranging from 3.2 to 10.0 years for Class A and 3.8 to 6.6 years for Class B and no expected dividends for either class of shares. NOTE 11 -- SAVINGS PLAN AND POSTRETIREMENT BENEFITS The Company sponsors the Jo-Ann Stores, Inc. Savings Plan 401(k) (the "Savings Plan"), which is a tax deferred savings plan whereby eligible employees may elect quarterly to contribute up to the lesser of 15% of annual compensation or the statutory maximum. The Company makes a 50% matching contribution in the form of the Company's common stock, up to a maximum employee contribution of four percent of the employee's annual compensation. Employer contributions of the Company's common stock have been made through the issuance of shares out of treasury or by purchasing shares on the open market. The amount of the Company's matching contributions during fiscal 2001, 2000 and 1999 were $1.0 million, $1.2 million and $1.0 million, respectively. Plan assets included 617,929 shares of Class A common shares and 240,189 shares of Class B common shares at February 3, 2001. The Company does not provide postretirement health care benefits for its employees. NOTE 12 -- LEASES With the exception of one superstore, all of the Company's retail stores operate out of leased facilities. All store leases are operating leases, generally for periods up to 10 years with renewal options for up to 20 years. Certain leases contain escalation clauses and provide for contingent rents based on a percent of sales in excess of defined minimums. In certain instances, the Company is required to pay its pro rata share of real estate taxes and common area maintenance expenses. 43 45 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- LEASES (CONTINUED) The following is a schedule of future minimum rental payments under non-cancelable operating leases:
MINIMUM FISCAL YEARS ENDED RENTALS ------------------ ------- (Millions of dollars) 2002........................................................ $120.4 2003........................................................ 107.2 2004........................................................ 88.2 2005........................................................ 73.2 2006........................................................ 65.0 Thereafter.................................................. 255.1 ------ $709.1 ======
Rent expense was as follows:
FISCAL YEARS ENDED 2001 2000 1999 ------------------ ------ ------ ------ (Millions of dollars) Minimum rentals.................................. $124.6 $112.4 $103.4 Contingent rentals............................... 2.3 2.4 1.8 Sublease rentals................................. (4.8) (4.1) (2.8) ------ ------ ------ $122.1 $110.7 $102.4 ====== ====== ======
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and temporary cash investments and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The bid price of the 10 3/8% senior subordinated notes at February 3, 2001 in the high yield debt market was $74.0. Accordingly, the fair value of the 10 3/8% senior subordinated notes at February 3, 2001 was $111.0 million versus their carrying value of $150.0 million. The Company uses derivative financial instruments to reduce exposures to market risks resulting from fluctuations in interest rates. The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company's best interest. On March 15, 1998, the Company entered into a five-year interest rate swap agreement to hedge its interest rate exposure on the Company's prior senior credit facility. The notional amount of this interest rate swap agreement is $75.0 million, with a fixed LIBOR rate of 5.98%, reducing to $50.0 million on March 15, 2001 until its expiration on March 15, 2003. The fair market value of this interest rate swap as of February 3, 2001 was a net liability of $0.6 million. In May 2000, the Company entered into an interest rate swap agreement to hedge its interest rate exposure on $40.0 million of variable rate debt. The interest rate swap has a term of five years effective May 1, 2001, with a notional amount of $40.0 million and a fixed LIBOR rate of 6.80%. The fair market value of this interest rate swap agreement as of February 3, 2001 was a net liability of $2.2 million. The interest rate swap agreements require the Company to pay a fixed interest rate while receiving a floating interest rate based on LIBOR. These interest rate swaps are an off-balance sheet liability of the Company as of February 3, 2001. Beginning in the first quarter of fiscal 2002, the Company will adopt the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires the fair value of these derivative financial instruments to be recorded on the balance sheet. As of February 4, 44 46 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 2001, upon adoption of this statement, the Company expects to recognize an after tax charge to be classified as a cumulative effect of change in accounting principle of $1.7 million. NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized below are the unaudited results of operations by quarter for fiscal 2001 and 2000, as restated for the change from the LIFO inventory method to the FIFO inventory method:
FIRST SECOND THIRD FOURTH FISCAL 2001 QUARTER QUARTER QUARTER QUARTER ----------- ------- ------- ------- ------- (Millions of dollars, except per share data) Net sales........................................... $325.4 $299.0 $362.5 $ 496.4 Gross margin........................................ 152.3 135.9 172.4 184.5(a) Net income (loss) before equity loss................ 3.0 (9.0) 4.2 (5.3)(b) Equity and asset impairment losses of minority investment........................................ -- (1.0) (1.1) (4.4) Net income (loss)................................... 3.0 (10.0) 3.1 (9.7)(b) Net income (loss) per common share: Basic............................................. $ 0.17 $(0.55) $ 0.17 $ (0.53)(b) Diluted........................................... 0.17 (0.55) 0.17 (0.53)(b)
FIRST SECOND THIRD FOURTH FISCAL 2000 QUARTER QUARTER QUARTER QUARTER ----------- ------- ------- ------- ------- (Millions of dollars, except per share data) Net sales........................................... $295.7 $282.4 $347.1 $456.3 Gross margin........................................ 138.2 130.8 169.5 194.7 Net income (loss)................................... 2.4 (5.3) 8.3 20.2 Net income (loss) per common share: Basic............................................. $ 0.13 $(0.29) $ 0.46 $ 1.13 Diluted........................................... 0.13 (0.29) 0.45 1.11
- ------------------------------ (a) Includes one-time charge of $23.0 million for the fourth quarter related to the SKU Reduction Initiative. (b) Includes after tax one-time charge of $18.4 million, or $1.02 per share, for the fourth quarter related to stores identified for closing in fiscal 2002 and the SKU Reduction Initiative. 45 47 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS 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 and for the years ended February 3, 2001 is as follows:
FEBRUARY 3, 2001 JANUARY 29, 2000 ------------------------------------ ------------------------------------ GUARANTOR GUARANTOR CONSOLIDATING BALANCE SHEETS PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED ---------------------------- ------ ------------ ------------ ------ ------------ ------------ (Millions of dollars) ASSETS Current assets: Cash and temporary cash investments............... $ 13.8 $ 3.7 $ 17.5 $ 16.9 $ 4.5 $ 21.4 Inventories....................................... 181.9 269.1 451.0 203.8 238.7 442.5 Prepaid expenses and other current assets......... 25.0 12.3 37.3 23.7 10.3 34.0 ------ ------- ------ ------ ------- ------ Total current assets................................ 220.7 285.1 505.8 244.4 253.5 497.9 Property, equipment and leasehold improvements, net............................................... 74.6 115.6 190.2 78.7 116.0 194.7 Goodwill, net....................................... -- 27.2 27.2 -- 36.3 36.3 Other assets........................................ 17.9 1.1 19.0 17.9 0.1 18.0 Intercompany........................................ 387.1 (387.1) -- 390.4 (390.4) -- ------ ------- ------ ------ ------- ------ Total assets........................................ $700.3 $ 41.9 $742.2 $731.4 $ 15.5 $746.9 ====== ======= ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $127.3 $ 36.7 $164.0 $145.9 $ 3.7 $149.6 Accrued expenses.................................. 85.3 (25.8) 59.5 81.8 (23.3) 58.5 ------ ------- ------ ------ ------- ------ Total current liabilities........................... 212.6 10.9 223.5 227.7 (19.6) 208.1 Long-term debt...................................... 240.0 -- 240.0 245.2 -- 245.2 Deferred income taxes............................... 14.2 8.3 22.5 12.5 9.9 22.4 Other long-term liabilities......................... 4.6 2.8 7.4 1.5 10.3 11.8 Shareholders' equity: Common stock...................................... 1.1 -- 1.1 1.0 -- 1.0 Additional paid-in capital........................ 99.2 -- 99.2 97.9 -- 97.9 Unamortized restricted stock awards............... (1.2) -- (1.2) (2.1) -- (2.1) Retained earnings................................. 167.9 19.9 187.8 186.5 14.9 201.4 ------ ------- ------ ------ ------- ------ 267.0 19.9 286.9 283.3 14.9 298.2 Treasury stock, at cost........................... (38.1) -- (38.1) (38.8) -- (38.8) ------ ------- ------ ------ ------- ------ Total shareholders' equity.......................... 228.9 19.9 248.8 244.5 14.9 259.4 ------ ------- ------ ------ ------- ------ Total liabilities and shareholders' equity.......... $700.3 $ 41.9 $742.2 $731.4 $ 15.5 $746.9 ====== ======= ====== ====== ======= ======
46 48 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED -------------------------------------------------------------------------------- FEBRUARY 3, 2001 JANUARY 29, 2000 -------------------------------------- -------------------------------------- GUARANTOR GUARANTOR CONSOLIDATING STATEMENTS OF OPERATIONS PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED -------------------------------------- ------ ------------ ------------ ------ ------------ ------------ (Millions of dollars) Net sales................................... $815.7 $667.6 $1,483.3 $759.1 $622.4 $1,381.5 Cost of sales............................... 486.9 351.3 838.2 412.7 335.6 748.3 ------ ------ -------- ------ ------ -------- Gross margin................................ 328.8 316.3 645.1 346.4 286.8 633.2 Selling, general and administrative expenses.................................. 302.4 286.8 589.2 300.1 233.7 533.8 Depreciation and amortization............... 17.1 21.2 38.3 17.0 15.0 32.0 ------ ------ -------- ------ ------ -------- Operating profit............................ 9.3 8.3 17.6 29.3 38.1 67.4 Interest expense............................ 29.0 -- 29.0 26.2 -- 26.2 ------ ------ -------- ------ ------ -------- Income (loss) before income taxes........... (19.7) 8.3 (11.4) 3.1 38.1 41.2 Income tax provision (benefit).............. (7.6) 3.3 (4.3) 1.9 13.7 15.6 ------ ------ -------- ------ ------ -------- Net income (loss) before equity loss........ (12.1) 5.0 (7.1) 1.2 24.4 25.6 Equity and asset impairment losses of minority investment....................... (6.5) -- (6.5) -- -- -- ------ ------ -------- ------ ------ -------- Net income (loss)........................... $(18.6) $ 5.0 $ (13.6) $ 1.2 $ 24.4 $ 25.6 ====== ====== ======== ====== ====== ========
47 49 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED ---------------------------------------------------------------------------- FEBRUARY 3, 2001 JANUARY 29, 2000 ------------------------------------ ------------------------------------- GUARANTOR GUARANTOR CONSOLIDATING STATEMENTS OF CASH FLOWS PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED -------------------------------------- ------ ------------ ------------ ------- ------------ ------------ (Millions of dollars) Net cash flows from operating activities: Net income (loss)................................ $(18.6) $ 5.0 $(13.6) $ 1.2 $ 24.4 $ 25.6 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization.................. 17.1 21.2 38.3 17.0 15.0 32.0 Deferred income taxes.......................... (1.6) (2.6) (4.2) (6.4) 19.4 13.0 Loss on disposal of fixed assets............... 0.7 1.0 1.7 (0.4) 1.6 1.2 Equity and asset impairment losses of minority investment................................... 6.5 -- 6.5 -- -- -- Changes in operating assets and liabilities: (Increase) decrease in inventories............. 21.9 (30.4) (8.5) 9.1 (47.6) (38.5) (Increase) decrease in prepaid expenses and other current assets......................... 2.0 (1.0) 1.0 (47.4) 53.3 5.9 Increase (decrease) in accounts payable........ (15.3) 29.7 14.4 (41.3) 40.5 (0.8) Increase (decrease) in accrued expenses........ 3.5 0.4 3.9 41.7 (34.9) 6.8 Settlement of income tax contingency........... -- (3.5) (3.5) -- (16.1) (16.1) Other, net..................................... 2.8 0.2 3.0 0.1 (1.5) (1.4) ------ ------ ------ ------- ------ ------- Net cash provided by (used for) operating activities....................................... 19.0 20.0 39.0 (26.4) 54.1 27.7 Net cash flows used for investing activities: Capital expenditures............................. (13.4) (22.5) (35.9) (32.4) (35.0) (67.4) Minority investment.............................. (6.5) -- (6.5) -- -- -- Other, net....................................... -- 1.7 1.7 18.6 (17.2) 1.4 ------ ------ ------ ------- ------ ------- Net cash used for investing activities............. (19.9) (20.8) (40.7) (13.8) (52.2) (66.0) Net cash flows provided by (used for) financing activities: Proceeds from issuance of senior subordinated notes, net..................................... -- -- -- 143.4 -- 143.4 Proceeds from long-term debt..................... 73.7 -- 73.7 158.4 -- 158.4 Repayment of long-term debt...................... (78.9) -- (78.9) (245.7) -- (245.7) Purchase of common stock......................... (0.1) -- (0.1) (20.0) -- (20.0) Proceeds and tax benefit from exercise of stock options........................................ -- -- -- 1.9 -- 1.9 Issuance of treasury shares...................... 1.0 -- 1.0 1.2 -- 1.2 Other, net....................................... 2.1 -- 2.1 0.1 -- 0.1 ------ ------ ------ ------- ------ ------- Net cash provided by (used for) financing activities....................................... (2.2) -- (2.2) 39.3 -- 39.3 ------ ------ ------ ------- ------ ------- Net increase (decrease) in cash.................... (3.1) (0.8) (3.9) (0.9) 1.9 1.0 Cash and temporary cash investments at beginning of year............................................. 16.9 4.5 21.4 17.8 2.6 20.4 ------ ------ ------ ------- ------ ------- Cash and temporary cash investments at end of year............................................. $ 13.8 $ 3.7 $ 17.5 $ 16.9 $ 4.5 $ 21.4 ====== ====== ====== ======= ====== =======
48 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of Jo-Ann Stores, Inc.: We have audited in accordance with auditing standards generally accepted in the United States the consolidated financial statements of Jo-Ann Stores, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated March 7, 2001. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 50 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Cleveland, Ohio, March 7, 2001. 49 51 SCHEDULE II JO-ANN STORES, INC. VALUATION AND QUALIFYING ACCOUNTS (Millions of dollars)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ---------- ---------- ---------- ---------- ---------- February 3, 2001 Closed store reserve................ $4.4 $7.9(a) $ -- $3.0 $9.3 January 29, 2000 Closed store reserve................ 7.5 0.3 -- 3.4 4.4 January 30, 1999 Closed store reserve................ 3.8 3.2(b) 6.0(c) 5.5 7.5
- ------------------------------ (a) Includes $6.7 million accrual for 42 stores identified for closing in fiscal 2002. (b) Includes $2.7 million of non-recurring charges related to the House of Fabrics acquisition. (c) Liability recorded under purchase accounting related to the House of Fabrics acquisition. 50 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 as to the Directors of the Registrant is incorporated herein by reference to the information set forth under the caption "Election of Directors -- Nominees to and Current Members of the Board of Directors" in the Registrant's definitive proxy statement for its 2001 Annual Meeting of Shareholders to be held on June 7, 2001 (the "Proxy Statement"), which is expected to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the Company's fiscal year. Information required by this Item 10 as to the Executive Officers of the Registrant is included under Item 4 of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is incorporated herein by reference to the information set forth in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Securities Exchange Act of 1934. Information required by this Item 10 as to "Involvement in Certain Legal Proceedings" is included under Item 3 "Legal Proceedings" contained in this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference to the information set forth under the captions "Election of Directors -- Compensation of Directors" and "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated herein by reference to the information set forth under the caption "Principal Shareholders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Ira Gumberg, one of our Directors, is President and Chief Executive Officer and a principal shareholder of J.J. Gumberg Co. which manages numerous shopping centers. Thirteen of these shopping centers contain stores of our company. Three of the leases were entered into after Mr. Gumberg became a Director of our company, and we believe such leases are on terms no less favorable to us than could have been obtained from an unrelated party. The aggregate rent and related occupancy charges paid during fiscal 2001, 2000 and 1999 on these stores amounted to $1.5 million, $1.3 million and $1.2 million, respectively. Betty Rosskamm and Alma Zimmerman, two of our directors, and Justin Zimmerman (Alma Zimmerman's spouse) and Jo-Ann Stores have entered into an agreement, dated September 26, 1997, relating to their Jo-Ann Stores Class A and Class B common shares. Under this agreement, Betty Rosskamm and her lineal descendants and permitted holders, and Alma and Justin Zimmerman and their lineal descendants and permitted holders, may each sell up to 200,000 Class A common shares in any calendar year and may not sell more than 100,000 of those shares in any 180-day period. Mrs. Rosskamm, and Mr. and Mrs. Zimmerman collectively, may each sell up to 100,000 of their Class B common shares in any 60-day period. If either Mrs. Rosskamm or Mr. and Mrs. Zimmerman sell a number of their Class A common shares in excess of the number permitted under the agreement, they must first offer to sell those shares to the other family party to the agreement, and then with the other family's permission, to the Company. If either Mrs. Rosskamm or Mr. and Mrs. Zimmerman sell a number of their Class B common shares in excess of the number permitted under the agreement, each family must first offer to sell those shares to the Company. 51 53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Financial Statement Schedules The consolidated financial statements and the related financial statement schedule filed as part of this Form 10-K are located as set forth in the index on page 23 of this report. (3) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1 (a) Amended Articles of Incorporation of Fabri-Centers of America, Inc. (filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on September 11, 1995 and incorporated herein by reference) 3.1 (b) Certificate of Amendment to the Amended Articles of Incorporation (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 16, 1999 and incorporated herein by reference) 3.2 Regulations of Jo-Ann Stores, Inc., as amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference) 4.1 Form of Amended and Restated Rights Agreement, dated October 31, 2000, between the Registrant and National City Bank, as Rights Agent 4.2 Indenture between the Registrant and FCA Financial, Inc., Fabri-Centers of South Dakota, Inc., Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., as guarantors, and Harris Trust and Savings Bank, as trustee relating to the 10 3/8% Senior Subordinated Notes Due 2007 (filed as an Exhibit to the Registrant's Form S-4 filed with the Commission on June 16, 1999 and incorporated herein by reference) 4.3 Form of Certificate of the 10 3/8% Senior Subordinated Notes due 2007 (filed as an Exhibit to the Registrant's Form S-4 filed with the Commission on June 16, 1999 and incorporated herein by reference) 4.4 Registration Rights Agreement among the Registrant, FCA Financial, Inc., Fabri-Centers of South Dakota, Inc., Fabri-Centers of California, Inc. FCA of Ohio, Inc., and House of Fabrics, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., and Banc One Capital Markets, Inc. relating to the 10 3/8% Senior Subordinated Notes due 2007 (filed as an exhibit to the Registrant's Form S-4 filed with the Commission on June 16, 1999 and incorporated herein by reference) 10.1 Form of Split Dollar Life Insurance Agreement between the Registrant and certain of its officers (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)* 10.2 List of Executive Officers who are parties to the Split Dollar Life Insurance Agreement with the Registrant 10.3 Split Dollar Life Insurance Agreement and Assignment between the Registrant and Alma Zimmerman dated September 22, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)* 10.4 Split Dollar Life Insurance Agreements and Assignments between the Registrant and Betty Rosskamm dated October 19, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)*
52 54
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.5 Fabri-Centers of America, Inc. 1979 Supplemental Retirement Benefit Plan as amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and Incorporated herein by reference)* 10.6 List of Executive Officers who participate in the Registrant's 1979 Supplemental Retirement Plan, as amended 10.7 Fabri-Centers of America, Inc. Executive Incentive Plan dated March 19, 1980 as amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)* 10.8 Form of Employment Agreement between the Registrant and certain Executive Officers (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)* 10.9 List of Executive Officers who are parties to an Employment Agreement with the Registrant 10.10 Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock Appreciation Rights Plan, as amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by reference)* 10.11 Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee Directors* 10.12 House of Fabrics, Inc. Non-Standardized 401(k) Plan (filed as an Exhibit to House of Fabrics, Inc.'s (commission file number 1-7927) Form 10-K filed with the Commission on May 1, 1997 and incorporated herein by reference)* 10.13 Fabric-Centers of America, Inc. 1998 Incentive Compensation Plan (filed as an Exhibit to the Registrant's Proxy Statement for its Annual Meeting held on June 4, 1998 filed with the Commission on Schedule 14A on May 8, 1998 and incorporated herein by reference)* 10.14 Amended and Restated Agreement dated September 26, 1997 among Fabri-Centers of America, Inc., Betty Rosskamm and Justin Zimmerman and Alma Zimmerman (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 16, 1999 and incorporated herein by reference) 10.15 Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions named therein, as Lenders, The First National Bank of Chicago, as Documentation Agent, Comerica Bank and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Issuing Bank and as Administrative Agent (filed as an Exhibit to the Registrant's Form S-4 filed with the Commission on June 16, 1999 and incorporated herein by reference) 10.16 Amendment No. 1 dated as of December 14, 1999 to Credit Agreement dated as of May 5, 1999 Among the Registrant, as borrower, the Lending Institutions named therein, as Lenders, The First National Bank of Chicago, as Documentation Agent, Comerica Bank and National City Bank, as Co-Agents and KeyBank National Association, as a Lender, the Swing Line Lender, the Issuing Bank and as Administrative Agent (filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on December 14, 1999 and incorporated herein by reference) 10.17 Amendment No. 2 dated as of March 7, 2000 to Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions named therein, as Lenders, Bank One, NA, as Documentation Agent, Comerica Bank and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Issuing Bank and as Administrative Agent (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 28, 2000 and incorporated herein by reference)
53 55
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.18 Amendment No. 3 dated as of March 22, 2000 to Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions named therein, as Lenders, Bank One, NA, as Documentation Agent, Comerica Bank and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Issuing Bank and as Administrative Agent (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 28, 2000 and incorporated herein by reference) 10.19 Amendment No. 4 dated as of December 11, 2000 to Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions named therein, as Lenders, Bank One, NA, as Documentation Agent, Comerica Bank and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Issuing Bank and as Administrative Agent (filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on December 12, 2000 and incorporated herein by reference) 12 Ratio of Earnings to Fixed Charges 18 Preferability letter of Arthur Andersen LLP regarding change in accounting policy relating to the change in inventory valuation methods, and filed herewith 21 Subsidiaries of Jo-Ann Stores, Inc. 23 Consent of Independent Public Accountants 24 Power of Attorney
- --------------- *Indicates a management contract or compensatory plan or arrangement (b) Reports on Form 8-K Not applicable. 54 56 SIGNATURES Pursuant to the requirements of Section 13 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. By: /s/ ALAN ROSSKAMM May 4, 2001 - ----------------------------------------------- Alan Rosskamm President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE - ------------------------------------------------ --------------------------------------------------- /s/ ALAN ROSSKAMM Chairman of the Board and Director (Chief Executive - ------------------------------------------------ Officer) Alan Rosskamm /s/ BRIAN P. CARNEY* Executive Vice President and Chief Financial - ------------------------------------------------ Officer (Chief Accounting Officer) Brian P. Carney /s/ BETTY ROSSKAMM* Director - ------------------------------------------------ Betty Rosskamm /s/ ALMA ZIMMERMAN* Director - ------------------------------------------------ Alma Zimmerman /s/ SCOTT COWEN* Director - ------------------------------------------------ Scott Cowen /s/ FRANK NEWMAN* Director - ------------------------------------------------ Frank Newman /s/ IRA GUMBERG* Director - ------------------------------------------------ Ira Gumberg* /s/ GREGG SEARLE* Director - ------------------------------------------------ Gregg Searle
The undersigned, by signing his name hereto, does hereby sign this Form 10-K Annual Report on behalf of the above-named officers and directors of Jo-Ann Stores, Inc., pursuant to powers of attorney executed on behalf of each of such officers and directors. *By: /s/ ALAN ROSSKAMM ------------------------------------------- May 4, 2001 Alan Rosskamm, Attorney-in-Fact
55 57 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 4.1 Form of Amended and Restated Rights Agreement, dated October 31, 2000, between the Registrant and National City Bank, as Rights Agent 10.2 List of Executive Officers who are parties to the Split Dollar Life Insurance Agreement with the Registrant 10.6 List of Executive Officers who participate in the Registrant's 1979 Supplemental Retirement Plan, as amended 10.9 List of Executive Officers who are parties to an Employment Agreement with the Registrant 10.11 Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.) 1996 Stock Option Plan for Non-Employee Directors 12 Ratio of Earnings to Fixed Charges 18 Preferability Letter of Arthur Andersen LLP regarding change in accounting policy relating to the change in inventory valuation methods, and filed herewith 21 Subsidiaries of Jo-Ann Stores, Inc. 23 Consent of Independent Public Accountants 24 Power of Attorney 56 EX-4.1 2 l87539aex4-1.txt EXHIBIT 4.1 1 Exhibit 4.1 JO-ANN STORES, INC. AND NATIONAL CITY BANK, NATIONAL ASSOCIATION, AS RIGHTS AGENT AMENDED AND RESTATED RIGHTS AGREEMENT DATED AS OF OCTOBER 31, 2000 57 2 AMENDED AND RESTATED RIGHTS AGREEMENT This AMENDED AND RESTATED RIGHTS AGREEMENT (this "Agreement"), dated as of October 31, 2000, is made and entered into by and between Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), and National City Bank, National Association, as Rights Agent (the "Rights Agent"). One right (a "Right") has been distributed with respect to each Class A Common Share (as hereinafter defined) outstanding on October 31, 2000, and the Board of Directors of the Company has authorized the issuance of one Right in respect of (1) each Class A Common Share issued after October 31, 2000, and the earlier of the Shares Acquisition Date or the Expiration Date (as such terms are hereinafter defined), (2) each Class B Common Share (as hereinafter defined) outstanding on December 29, 2000, and (3) each Class B Common Share issued between December 29, 2000, and the earlier of the Shares Acquisition Date or the Expiration Date, including in each case Common Shares that are treasury shares and subsequently become outstanding. Each Right represents the right to purchase one Class A Common Share. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" means any Person (as such term is hereinafter defined) that, together with all Affiliates and Associates (as such terms are hereinafter defined) of the Person, is the Beneficial Owner (as such term is hereinafter defined) of a number of Class A Common Shares that equals or exceeds 15% of the number of Class A Common Shares then outstanding, but will not include the Company, any subsidiary of the Company, any employee benefit plan or employee stock ownership plan of the Company or of any subsidiary of the Company or any person organized, appointed or established by the Company or any subsidiary of the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person will become an "Acquiring Person" as the result of an acquisition of Class A Common Shares by the Company that, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by the Person to 15% or more of the Class A Common Shares then outstanding; except that, if a Person becomes the Beneficial Owner of 15% or more of the Class A Common Shares then outstanding by reason of share purchases by the Company and, after such share purchases by the Company, becomes the Beneficial Owner of any additional Class A Common Shares, then the Person will be deemed to be an "Acquiring Person". In addition, if the Board of Directors of the Company determines in good faith that a Person that would otherwise be an "Acquiring Person" has become the Beneficial Owner of 15% or more of the Class A Common Shares inadvertently, and the Person divests as promptly as practicable a sufficient number of Class A Common Shares so that the Person would no longer be an "Acquiring Person", then the Person will not be deemed to be an "Acquiring Person" for any purposes of this Agreement. (b) "Affiliate" and "Associate" have the meanings given to them in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof. (c) "Associated Acquiring Person" means (i) any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to any Person who holds an equity interest in such Acquiring Person or with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer that the Board of Directors of the 58 3 Company has determined is part of a plan, arrangement or understanding that has, as a primary purpose or effect, the avoidance of Section 7(e). (d) A Person will be deemed to be the "Beneficial Owner of and will be deemed to "beneficially own" any securities: (i) that the Person, or any of the Person's Affiliates or Associates, beneficially owns, directly or indirectly; (ii) that the Person or any of the Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; except that, a Person will not be deemed to be the "Beneficial Owner" of or to "beneficially own" (1) securities tendered pursuant to a tender offer made by the Person or any of the Person's Affiliates or Associates until such tendered securities are accepted for purchase, or (2) securities issuable upon exercise of these Rights; (iii) that the Person or any of the Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of, pursuant to any agreement, arrangement or understanding (whether or not in writing); except that, a Person will not be deemed to be the Beneficial Owner of or to "beneficially own" any security under this subparagraph (iii) if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act and (B) is not then reportable by the Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iv) that are beneficially owned, directly or indirectly, by any other Person with which the Person or any of the Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in subparagraph (iii) of this paragraph (c)) or disposing of any securities of the Company. Notwithstanding the foregoing, (x) a Person will not be deemed to be the Beneficial Owner of, or to "beneficially own," any security if beneficial ownership arises solely as a result of the Person's status as a "clearing agency," as defined in Section 3(a)(23) of the Exchange Act, (y) a Person engaged in business as an underwriter of securities will not be deemed to be the Beneficial Owner of, or to "beneficially own," any securities acquired through the Person's participation in good faith in an underwriting syndicate pursuant to an agreement to which the Company is a party until expiration of 40 calendar days after the date on which the securities are acquired, and (z) for purposes of determining the amount of Class A Common Shares beneficially owned by any of the Family Members, (A) the Class A Common Shares beneficially owned by any one or more of the Family Members will not be deemed to be beneficially owned by any other Family member, whether individually or as part of a group, and (B) the Class A Common Shares beneficially owned by any one or more of the Family Members that, after the date of this Agreement, are transferred (whether the transfer is voluntarily or by operation of law and whether the transfer is of a direct or indirect interest in the shares) to any other Family Member will not be deemed to be beneficially owned by the other Family Member. (e) "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in the State of Ohio are authorized or obligated by law or executive order to close. (f) "Class A Common Shares" means the Class A Common Shares, without par value, of the Company. (g) "Class B Common Shares" means the Class B Common Shares, without par value, of the Company. 59 4 (h) "Close of business" on any given date means 5:00 P.M., Cleveland time, on such date; except that, if such date is not a Business Day, it will mean 5:00 P.M., Cleveland time, on the next succeeding Business Day. (i) "Common Shares" means the Class A Common Shares and the Class B Common Shares. (j) "Current market price" is defined in Section 11(d). (k) "Exchange Act" is defined in Section 10. (l) "Exercise Price" means the exercise price per share set forth in Section 11. (m) "Expiration Date" is defined in Section 7(a). (n) "Family Members" mean Martin Rosskamm, Betty Rosskamm, Justin Zimmerman, Alma Zimmerman, Steve Reich, Margrit Reich, their descendants, their spouses, and the spouses of their descendants, the executors, administrators, and custodians of any of the foregoing, and any trust for the benefit of any of the foregoing. (o) "Issuance" includes the issuance of authorized but unissued shares and the transfer of treasury shares. In the event the Class A Common Shares or Class B Common Shares are subdivided into a greater number of shares, the excess of the number of shares into which the Class A Common Shares or the Class B Common Shares are subdivided over the number of shares prior to the subdivision will be deemed to be "issued." (p) "NASDAQ" is defined in Section 11(d). (q) "Person" means any individual, firm, corporation or other entity. (r) "Purchase Price" means the purchase price per share set forth in Section 7(b). (s) "Redemption Price" is defined in Section 22(a). (t) "SEC" means the Securities and Exchange Commission. (u) "Securities Act" is defined in Section 9(c). (v) "Shares Acquisition Date" means the first date of public announcement by the Company or an Acquiring Person (by press release, filing made with the SEC or otherwise) that an Acquiring Person has become such. (w) "Subsidiary" means any corporation or other entity of which a majority of the voting power of the voting equity securities or other equity interests is owned, directly or indirectly, by the Company. (x) "Triggering Event" is defined in Section 11(a)(ii). Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. Any actions that may be taken by the Rights Agent pursuant to the terms of this Agreement may be taken by any such Co-Rights Agent. Section 3. ISSUE OF RIGHT CERTIFICATES. (a) Until the Shares Acquisition Date, (i) the Rights will be evidenced (subject to the provisions of Section 3(b)) by the certificates for the Common Shares registered in the names of the holders of the Common 60 5 Shares (which certificates for the Common Shares will also be deemed to be Right Certificates) and not by separate Right Certificates, and (ii) the right to receive Right Certificates will be transferable only in connection with the transfer of the Common Shares. As soon as practicable after receipt of written notice from the Company that the Shares Acquisition Date has occurred, the Rights Agent will send, by first-class, insured, postage prepaid mail, at the expense of the Company, to each record holder of the Common Shares as of the close of business on the Shares Acquisition Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit A hereto, evidencing one Right for each Common Share held of record as of the close of business on the Shares Acquisition Date. As of the close of business on the Shares Acquisition Date, the Rights will be evidenced solely by such Right Certificates. (b) Rights will be issued in respect of all Common Shares issued (including but not limited to Common Shares that are treasury shares and subsequently become outstanding) or surrendered for transfer or exchange after October 31, 2000, in the case of Class A Common Shares, or after December 29, 2000, in the case of Class B Common Shares, but prior to the earlier of the Shares Acquisition Date or the Expiration Date. Certificates representing such Common Shares will have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in an Amended and Restated Rights Agreement between Jo-Ann Stores, Inc., and ____________________, as Rights Agent, dated as of October 31, 2000, as such Amended and Restated Rights Agreement may be amended from time to time thereafter, a copy of which is on file at the principal executive offices of Jo-Ann Stores, Inc. Under certain circumstances, as set forth in the Amended and Restated Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Jo-Ann Stores, Inc., will mail to the holder of this certificate a copy of the Amended and Restated Rights Agreement (as in effect on the date of mailing) without charge promptly after receipt of a written request therefor. Under certain circumstances, Rights that are or were beneficially owned by Acquiring Persons or their Affiliates or Associates (as such terms are defined in the Amended and Restated Rights Agreement) and any subsequent holder of such Rights may become null and void. Until the Shares Acquisition Date, the Rights associated with the Common Shares represented by such certificates will be evidenced by such certificates alone, and the surrender for transfer of any of such certificates will also constitute the surrender for transfer of the Rights associated with the Common Shares represented by such certificate. Section 4. FORM OF RIGHT CERTIFICATES. (a) The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) will be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law, with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed or of any association on which the Rights may from time to time be authorized for quotation, or to conform to usage. Subject to the provisions of Section 21, the Right Certificates, whenever issued, will entitle the holders thereof to purchase such number of Class A Common Shares (or, following a Triggering Event, Class A Common Shares, other securities, cash or other assets, as the case may be) as will be set forth therein at the Purchase Price (or, upon the occurrence of a Triggering Event, at the Exercise Price), but the number of such shares, the Purchase Price and the Exercise Price will be subject to adjustment as provided herein. (b) Notwithstanding any other provision of this Agreement, any Right Certificate issued pursuant to Section 3 or Section 21 that represents Rights beneficially owned by an Acquiring Person or an Associated Acquiring Person, any Right Certificate issued at any time to any nominee of an Acquiring Person or an Associated Acquiring Person, and any Right Certificate issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement or adjustment of any Right Certificate referred to in this sentence, will contain the following legend: 61 6 The Rights represented by this Right Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement between Jo-Ann Stores, Inc., and ____________________, as Rights Agent, dated as of October 31, 2000). Accordingly, this Right Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. COUNTERSIGNATURE AND REGISTRATION. The Right Certificates will be executed on behalf of the Company by its Chairman of the Board, President or any Vice President, either manually or by facsimile signature, and will be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates will be countersigned manually or by facsimile by the Rights Agent and will not be valid for any purpose unless so countersigned. In case any officer of the Company who has signed any of the Right Certificates ceases to hold such office of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates may nevertheless be countersigned by the Rights Agent, issued and delivered with the same force and effect as though the person who signed such Right Certificates had not ceased to hold such office of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, is a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any the Person did not hold such office. Following the Shares Acquisition Date, the Rights Agent will keep or cause to be kept, at one of its offices in Cleveland, Ohio, books for registration and transfer of the Right Certificates. Such books will show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 13, at any time after the close of business on the Shares Acquisition Date, and at or prior to the close of business on the Expiration Date, any Right Certificate or Certificates may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of Class A Common Shares (or, following a Triggering Event, a like number or amount of Class A Common Shares, other securities, cash or other assets, as the case may be) as the Right Certificate or Right Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates will make such request in writing delivered to the Rights Agent, and will surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent in Cleveland, Ohio for such purpose. Neither the Rights Agent nor the Company will be obligated to take any action with respect to the transfer of any such surrendered Right Certificate until the registered holder has completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and has provided such additional evidence of the identity of the Beneficial Owner or former Beneficial Owner, or Affiliates or Associates thereof, as the Company may reasonably request. Thereupon the Rights Agent will, subject to Section 4(b), Section 7(e) and Section 13, countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of the loss, theft or destruction of a Right Certificate, of indemnity or security reasonably satisfactory to them and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and, in case of the mutilation of a Right Certificate, upon surrender to the Rights Agent and cancellation of the mutilated Right Certificate, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. 62 7 Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS; NULL AND VOID RIGHTS.(a) Subject to Section 7(e), the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Shares Acquisition Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at its principal office in Cleveland, Ohio, together with payment of the aggregate Purchase Price with respect to the total number of Class A Common Shares (or the aggregate Exercise Price with respect to the total number of Class A Common Shares or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercised, at or prior to the close of business on October 31, 2010 (the "Expiration Date"). (b) Each Right will, as of the date of this Amended and Restated Rights Agreement, represent the right to purchase one Class A Common Share, subject to adjustment as provided in Section 11. The Purchase Price for each Class A Common Share pursuant to the exercise of a Right will, as of the date of this Amended and Restated Rights Agreement, be $60.00, subject to further adjustment from time to time as provided in Section 11, and will be payable in lawful money of the United States of America in accordance with Section 7(c). (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment of the Purchase Price for the Class A Common Shares (or the Exercise Price for the Class A Common Shares, other securities, cash or assets, as the case may be) to be purchased and an amount equal to any applicable transfer tax in cash, or by certified check or bank draft payable to the order of the Company, the Rights Agent will, subject to Section 19(k), promptly (i) requisition from any transfer agent of the Class A Common Shares certificates for the total number of Class A Common Shares to be purchased, and the Company hereby irrevocably authorizes its transfer agent to comply with all such requisitions, (ii) if the Company has elected to deposit the total number of Class A Common Shares issuable upon exercise of the Rights with a depositary agent, requisition from the depositary agent depositary receipts representing such number of Class A Common Shares as are to be purchased (in which case certificates for the Class A Common Shares represented by such receipts will be deposited by the transfer agent with the depositary agent), and the Company will direct the depositary agent to comply with all such requisitions, (iii) when applicable, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 13, (iv) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, and (v) when applicable, after receipt promptly deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue securities, pay cash or distribute assets pursuant to Section 11(a)(ii) or Section 13, the Company will make all arrangements necessary so that such securities, cash, and assets are available for issuance, payment, or distribution by the Rights Agent, as and when appropriate. (d) In case the registered holder of any Right Certificate exercises less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised will be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 13. (e) Notwithstanding anything in this Agreement to the contrary, any Rights that are or were at any time beneficially owned by an Acquiring Person or an Associated Acquiring Person, will become null and void upon the occurrence of a Triggering Event and no holder of such Rights will have any right with respect to such Rights under any provision of this Agreement from and after the occurrence of the Triggering Event. The Company will use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) are complied with, but will have no liability to any holder of Right Certificates or other Person as a result of its failure properly to make any determinations with respect to an Acquiring Person, an Associated Acquiring Person or their transferees or nominees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company will be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder has (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate 63 8 surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company may reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange will, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form or, if surrendered to the Rights Agent, will be cancelled by it, and no Right Certificates will be issued in lieu thereof except as expressly permitted by the provisions of this Agreement. The Company will deliver to the Rights Agent for cancellation and retirement, and the Rights Agent will cancel and retire, any Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent will deliver all cancelled Right Certificates to the Company or will, at the written request of the Company, destroy such cancelled Right Certificates and, in such case, will deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF CLASS A COMMON SHARES. (a) The Company will cause to be reserved and kept available out of its authorized and unissued Class A Common Shares or any authorized and issued Class A Common Shares held in its treasury, the number of Class A Common Shares that will be sufficient to permit the exercise in full of all outstanding Rights. (b) The Company will, as soon as practicable following a Triggering Event, cause all Class A Common Shares (or other securities, as the case may be) reserved for issuance upon exercise of the Rights to be, upon official notice of issuance, listed on the stock exchange or market on which the Class A Common Shares are then listed for trading. (c) The Company will, as soon as practicable following the first occurrence of a Triggering Event, (i) prepare and file a registration statement under the Securities Act of 1933 (the "Securities Act") with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, (ii) use its reasonable best efforts to cause such registration statement to become effective as soon as practicable after such filing, and (iii) use its reasonable best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the date of the expiration of the Rights. The Company will also take such actions as may be appropriate under the blue sky laws of the various states in connection with the issuance of the Rights and the securities purchasable upon exercise of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days, the exercisability of the Rights in order to prepare and file such registration statement. Upon any such suspension, the Company will issue a public announcement and notice to the Rights Agent stating that the exercisability of the Rights has been temporarily suspended, and the Company will issue a public announcement and notice to the Rights Agent at such time as the suspension is no longer in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights will not be exercisable in any jurisdiction in which any requisite registration or qualification will not have been obtained. (d) The Company will take all such action as may be necessary to ensure that all Class A Common Shares (or other securities, as the case may be) delivered upon exercise of Rights will, at the time of delivery of the certificates therefor (subject to payment of the Purchase Price or the Exercise Price, as the case may be), be duly and validly authorized and issued, fully paid and nonassessable, freely tradeable, free and clear of any liens, encumbrances or other adverse claims and not subject to any call or first refusal right. (e) The Company will pay when due and payable all federal and state transfer taxes and charges that may be payable in respect of the issuance or delivery of the Right Certificates or of any Class A Common Shares (or other securities, as the case may be) upon the exercise of Rights. The Company will not, however, be required to (a) pay any transfer tax that may be payable in respect of any transfer involved in the transfer or delivery of Right Certificates or the issuance or delivery of certificates for the Class A Common Shares (or other securities, as the case may be) in a name other than that of the registered holder of the Right Certificate evidencing the Rights surrendered for exercise or (b) issue or deliver any certificates for a number of Class A Common Shares (or other securities, as the case may be) upon the exercise of any Rights until any such tax has been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. 64 9 Section 10. CLASS A COMMON SHARE CERTIFICATE DATE. Each person in whose name any certificate for Class A Common Shares (or other securities, as the case may be) is issued upon the exercise of Rights will for all purposes be deemed to have become the holder of record of such Class A Common Shares (or other securities, as the case may be) represented thereby on, and such certificate will be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (or the Exercise Price, as the case may be) and any applicable transfer taxes was made; except that, if the date of such surrender and payment is a date upon which the Class A Common Share (or other security, as the case may be) transfer books of the Company are closed, the Person will be deemed to have become the record holder thereof on, and such certificate will be dated, the next succeeding Business Day on which the Class A Common Shares (or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate will not be entitled to any rights of a shareholder of the Company with respect to shares for which the Rights are exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and will not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF PURCHASE PRICE, EXERCISE PRICE, NUMBER AND TYPE OF SHARES OR NUMBER OF RIGHTS. The Purchase Price and the Exercise Price, the number of Class A Common Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company at any time after the date of this Agreement (A) declares a dividend on the Class A Common Shares payable in Class A Common Shares, (B) subdivides the outstanding Class A Common Shares, (C) combines the outstanding Class A Common Shares into a smaller number of shares, or (D) issues any shares of its capital stock in a reclassification of the Class A Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e), the Purchase Price and the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of Class A Common Shares or shares of capital stock, as the case may be, issuable on such date, will be proportionately adjusted so that the holder of any Right exercised after such time will be entitled to receive the aggregate number and kind of Class A Common Shares or shares of capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Class A Common Share transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs that would require an adjustment under both this Section 11(a) and Section 11(a), the adjustment provided for in this Section 11(a) will be in addition to, and will be made prior to any adjustment required pursuant to Section 11(a). (ii) In the event any Person becomes an Acquiring Person (a "Triggering Event"), each holder of a Right (except as provided in Section 7(e)) will thereafter have the right to receive, upon exercise of the Right in accordance with the terms of this Agreement, one Class A Common Share for an Exercise Price of $.50 per share; the number of such Class A Common Shares and the Exercise Price will be subject to adjustment as provided in this Section 11. (iii) In the event that there are not enough Class A Common Shares authorized but unissued or held as treasury shares to permit the exercise in full of the Rights in accordance with paragraph (ii) above, the Company will take all such actions as may be necessary to authorize a sufficient number of additional Class A Common Shares to permit the exercise in full of the Rights and will refrain from paying dividends or making any other distributions on the Class A Common Shares or the Class B Common Shares until such additional Class A Common Shares have been authorized and made available to the holders of the Rights for issuance upon exercise of their Rights. 65 10 (b) In case the Company fixes a record date for the issuance of rights or warrants to all holders of Class A Common Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Class A Common Shares at a price per Class A Common Share (or having a conversion price per share, if a security convertible into Class A Common Shares) less than the current market price (as defined in Section 11(d)) per Class A Common Share on such record date, the Purchase Price and the Exercise Price to be in effect after such record date will be determined by multiplying the Purchase Price and the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator is the number of Class A Common Shares outstanding on such record date plus the number of Class A Common Shares which the aggregate offering price of the total number of Class A Common Shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and of which the denominator is the number of Class A Common Shares outstanding on such record date plus the number of additional Class A Common Shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price is paid in a consideration part or all of which is in a form other than cash, the value of such consideration will be as determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent. Class A Common Shares owned by or held for the account of the Company will not be deemed outstanding for the purpose of any such computation. Such adjustment will be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price and the Exercise Price will be adjusted to be the Purchase Price and the Exercise Price that would then be in effect if such record date had not been fixed. (c) In case the Company fixes a record date for the making of a distribution to all holders of Class A Common Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular periodic cash dividend or a dividend payable in Class A Common Shares, but including any dividend payable in stock other than Class A Common Shares) or subscription rights or warrants (excluding those referred to in Section 11(b)), the Purchase Price and the Exercise Price to be in effect after such record date will be determined by multiplying the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such record date by a fraction, of which the numerator is the current market price (as defined in Section 11(d)) per Class A Common Share on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Class A Common Share and of which the denominator is the current market price of one Class A Common Share. Such adjustments will be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price and the Exercise Price will be adjusted to be the Purchase Price and the Exercise Price that would then be in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "current market price" or "value" per share of the Class A Common Shares on any date of determination will be the average of the daily closing prices per share of such Class A Common Shares for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; except that, in the event that the "current market price" or "value" per share of the Class A Common Shares is determined during the period following the announcement by the issuer of such Class A Common Shares of (A) a dividend or distribution on such Class A Common Shares payable in such Class A Common Shares or securities convertible into such Class A Common Shares or (B) any subdivision, combination or reclassification of such Class A Common Shares and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current market price" or "value" will be appropriately adjusted to take into account ex-dividend trading. The closing price for each day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange (the "NYSE") or, if the Class A Common Shares are not listed or admitted to trading on the NYSE, as reported in the NASDAQ Stock Market ("NASDAQ") or, if the Class A Common Shares are not listed or admitted to trading on the NYSE or NASDAQ, as reported in the principal consolidated transaction reporting system on which the Class A Common Shares are listed or admitted to trading or, if the Class A Common Shares are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction 66 11 reporting system, the average of the high bid and low asked prices in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. or such other organization then reporting transactions in the over-the-counter market or, if on any such date the Class A Common Shares are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system or other organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Class A Common Shares selected by the Board of Directors of the Company. The term "Trading Day" will mean a day on which the principal national securities exchange or market on which Class A Common Shares are listed or admitted to trading is open for the transaction of business or, if the Class A Common Shares are not listed or admitted to trading on any national securities exchange or market, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of Ohio are not authorized or obligated by law or executive order to close. If the Class A Common Shares are not publicly held or not so listed or traded, "current market price" or "value" per share will mean the value per share as determined in good faith by an independent investment banking firm selected by the Board of Directors, whose determination will be described in a statement filed with the Rights Agent and will be conclusive for all purposes. (e) No adjustment in the Purchase Price or the Exercise Price will be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this Section 11(e) are not required to be made will be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 will be made to the nearest cent or to the nearest ten-thousandth of a Class A Common Share, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 will be made no later than the earlier of (i) three years from the date of the transaction that mandates such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a), the holder of any Right exercised after such adjustment becomes entitled to receive upon exercise of such Right any shares of capital stock of the Company other than Class A Common Shares, thereafter the number of, and the Purchase Price and the Exercise Price for, such other shares will be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Class A Common Shares contained in Section 11(a) through (m)) inclusive, and the provisions of Section 7, Section 9, Section 10 and Section 13 with respect to the Class A Common Shares will apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price or the Exercise Price hereunder will evidence the right to purchase, at the adjusted Purchase Price or the adjusted Exercise Price, as the case may be, the number of Class A Common Shares (or other securities, as the case may be) purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company has exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price or the Exercise Price as a result of the calculations made in Section 11(b) and Section 11(c), each Right outstanding immediately prior to the making of such adjustment will thereafter evidence the right to purchase, at the adjusted Purchase Price or the adjusted Exercise Price, as the case may be, that number of Class A Common Shares (calculated to the nearest ten-thousandth) obtained by (i) multiplying (x) the number of Class A Common Shares covered by a Right immediately prior to this adjustment by (y) the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such adjustment and (ii) dividing the product so obtained by the Purchase Price or the Exercise Price, as the case may be, in effect immediately after such adjustment. (i) The Company may elect on or after the date of any adjustment of the Purchase Price or the Exercise Price to adjust the number of Rights, in substitution for any adjustment in the number of Class A Common Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights will be exercisable for the number of Class A Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights will become that number of Rights (calculated to the nearest ten-thousandth), obtained by dividing the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such adjustment by the Purchase Price 67 12 or the Exercise Price, as the case may be, in effect immediately after such adjustment. The Company will make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment to be made. This record date may be the date on which the Purchase Price or the Exercise Price, as the case may be, is adjusted or any day thereafter but, if Right Certificates have been issued, will be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company will, as promptly as practicable, cause to be distributed to holders of Right Certificates on such record date Right Certificates evidencing, subject to Section 13, the additional Rights to which such holders will be entitled as a result of such adjustment or, at the option of the Company, will cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof if required by the Company, new Right Certificates evidencing all the Rights to which such holders will be entitled after such adjustment. Right Certificates so to be distributed will be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price or the adjusted Exercise Price) and will be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Notwithstanding any adjustment or change in the Purchase Price, the Exercise Price or the number of Class A Common Shares issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price, the Exercise Price and the number of Class A Common Shares that were expressed in the initial Right Certificates. (k) Before taking any action that would cause an adjustment reducing the Purchase Price or the Exercise Price below the stated capital, if any, of a Class A Common Share issuable upon exercise of the Rights, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and nonassessable Class A Common Shares at such adjusted Purchase Price and or at such adjusted Exercise Price, as the case may be. (l) In any case in which this Section 11(i) requires that an adjustment in the Purchase Price or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date the number of Class A Common Shares issuable upon such exercise over and above the number of Class A Common Shares issuable upon such exercise on the basis of the Purchase Price or the Exercise Price in effect prior to such adjustment; provided, however, that the Company will deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Class A Common Shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11(i) to the contrary notwithstanding, the Company will be entitled to make such reduction in the Purchase Price or the Exercise Price, in addition to those adjustments expressly required by this Section 11(i), as and to the extent that it in its sole discretion determines to be advisable in order that any consolidation or subdivision of Class A Common Shares, issuance wholly for cash of any Class A Common Shares at less than the current market price, issuance wholly for cash of securities that by their terms are convertible into or exchangeable for Class A Common Shares, stock dividends or issuance of rights, options or warrants referred to in this Section 11(i), hereafter made by the Company to holders of its Class A Common Shares will not be taxable to such holders. 68 13 Section 12. CERTIFICATES OF ADJUSTED PURCHASE PRICE, EXERCISE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Section 11(i), the Company will (a) promptly prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Common Shares a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Shares Acquisition Date, to each holder of a certificate representing Common Shares) in accordance with Section 24. The Rights Agent will be fully protected in relying on any such certificate and on any adjustment therein contained, will not be obligated or responsible for calculating any adjustment and will not be deemed to have knowledge of such adjustment unless and until it has received such certificate. Section 13. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company will not be required to issue fractions of Rights or to distribute Right Certificates that evidence fractional Rights. In lieu of such fractional Rights, the Company will pay to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 13(a), the current market value of a whole Right will be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for each day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange (the "NYSE") or, if the Rights are not listed or admitted to trading on the NYSE, as reported in NASDAQ or, if the Rights are not listed or admitted to trading on the NYSE or NASDAQ, as reported in the principal consolidated transaction reporting system on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system, the average of the high bid and low asked prices in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. or such other organization then reporting transactions in the over-the-counter market or, if on any such date the Rights are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system or other organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. (b) The Company will not be required to issue fractions of Class A Common Shares upon exercise of the Rights or to distribute certificates that evidence fractional shares. In lieu of fractional Class A Common Shares, the Company may pay to the registered holders of Right Certificates at the time such Right Certificates are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Class A Common Share. For purposes of this Section 13(b), the current market value of one Class A Common Share will be the closing price of a Class A Common Share (as determined pursuant to Section 11(d)) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right. 69 14 Section 14. RIGHTS OF ACTION. All rights of action in respect of this Agreement are vested in the respective registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Shares Acquisition Date, of any Common Share), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Shares Acquisition Date, of the Common Shares), may, in the holder's own behalf and for the holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, the holder's right to exercise the Rights evidenced by such Right Certificate. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. Section 15. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right by accepting such Right consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Shares Acquisition Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Shares Acquisition Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent in Cleveland, Ohio, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; and (c) subject to Section 6, Section 7(e) and Section 7(f), the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Shares Acquisition Date, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Share certificate made by anyone other than the Company or the Rights Agent) for all purposes, and neither the Company nor the Rights Agent will be affected by any notice to the contrary. Section 16. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as such, of a Right Certificate will be entitled to vote, receive dividends or be deemed for any purpose to be the holder of the number of Class A Common Shares that may at any time be issuable on the exercise of the Rights represented thereby, nor will anything contained herein or in any Right Certificate give to any holder, as such, of a Right Certificate any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 23), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate have been exercised in accordance with the provisions of this Agreement. Section 17. CONCERNING THE RIGHTS AGENT. (a) The Company will pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time on demand of the Rights Agent, to reimburse it for or pay its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent as a result of anything done or omitted to be done by the Rights Agent in connection with the acceptance and administration of this Agreement, including without limitation the costs and expenses of defending against any claim of liability in connection therewith. The costs and expenses of enforcing this right of indemnification will also be paid by the Company. The indemnification provided for hereunder will survive the expiration of the Rights and the termination of this Agreement. (b) The Rights Agent may conclusively rely upon and will be protected and will incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this 70 15 Agreement in reliance upon any Right Certificate or certificate for Common Shares or other securities, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other document believed by it in good faith to be genuine and to be signed, executed and, where necessary, verified or acknowledged by the proper person or persons. (c) Notwithstanding anything in this Agreement to the contrary, in no event will the Rights Agent be liable for special, indirect or consequential loss or damage of any kind (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action. Section 18. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent will be a party, or any corporation, succeeding to the shareholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any document or any further act on the part of any of the parties hereto, provided that such corporation is for appointment as a successor Rights Agent under the provisions of Section 20. In case at the time such successor Rights Agent succeeds to the agency created by this Agreement any of the Right Certificates has been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor so countersigned; in case at that time any of the Right Certificates have not been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases, such Right Certificates will have the full force provided in the Right Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent is changed and at such time any of the Right Certificates has been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; in case at that time any of the Right Certificates have not been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases, such Right Certificates will have the full force provided in the Right Certificates and in this Agreement. Section 19. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, and no implied duties or obligations will be read into this Agreement against the Rights Agent, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, will be bound: (a) Before the Rights Agent acts or refrains from acting, the Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent deems it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof is specifically prescribed in this Agreement) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent will be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify 71 16 such statements or recitals, but all such statements and recitals are and will be deemed to have been made by the Company only. (e) The Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof and as provided in Section 17); nor will it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor will it be responsible for any adjustment required under the provisions of Section 11 or the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor will it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Class A Common Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Class A Common Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it will not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein will preclude the Rights Agent from acting in any other capacity for the Company or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect or misconduct of any such attorney or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement will require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there will be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) The Rights Agent will not be required to take notice or be deemed to have notice of any fact, event or determination (including, without limitation, any dates or events defined in this Agreement or the designation of any Person as an Acquiring Person, Associated Acquiring Person, Affiliate or Associate) under this Agreement unless and until the Rights Agent is specifically notified in writing by the Company of such fact, event or determination. (l) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 or 2 thereof, the Rights Agent will not take any further action with respect to such requested exercise or transfer without first consulting with the Company. 72 17 Section 20. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days notice in writing mailed by registered or certified mail to the Company and to each transfer agent of the Common Shares; if the resignation occurs after a Triggering Event, notice in writing will, at the expense of the Company, also be sent by first class mail to the holders of the Right Certificates. The Rights Agent or any successor Rights Agent that the Company may appoint may, prior to a Triggering Event, be removed by the Company and be discharged from its duties under this Agreement upon 30 days notice in writing mailed by registered or certified mail to the Rights Agent and to each transfer agent of the Common Shares. If the Rights Agent resigns or is removed by the Company or otherwise becomes incapable of acting, the Company will appoint a successor to the Rights Agent. If the Company fails to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who will, with such notice, submit his Right Certificate for inspection by the Company) or after it has given notice of such removal, then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a successor Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, will be a corporation organized and doing business under the law of the United States or of any other state of the United States, in good standing, that is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority or that has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent will deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company will file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares. Failure to give any notice provided for in this Section 20 or any defect therein, however, will not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 21. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price or the Exercise Price per share and the number, kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. Section 22. REDEMPTION. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of the Shares Acquisition Date or the Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.005 per Right, appropriately further adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (the "Redemption Price"). (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights will be to receive the Redemption Price. Within ten calendar days after the action of the Board of Directors ordering the redemption of the Rights, the Company will give notice of such redemption to the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Shares Acquisition Date, on the registry books of the transfer agent for the Common Shares. Any notice that is mailed in the manner herein provided will be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any of the Rights at any time in any manner other than that specifically set forth in this Section 22 or in connection with the repurchase of Common Shares prior to the Shares Acquisition Date. Section 23. NOTICE OF CERTAIN EVENTS. In case the Company proposes at any time following the Shares Acquisition Date to (a) pay any dividend payable in stock of any class to the holders of Class A Common Shares or make any other distribution to the holders of Class A Common Shares (other than dividends payable in 73 18 Class A Shares and regular cash dividends), (b) offer to the holders of Class A Common Shares rights or warrants to subscribe for or to purchase any additional Class A Common Shares or shares of stock of any class or any other securities, rights or options, (c) effect any reclassification of its Common Shares, (d) effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, or (e) effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company will give to the Rights Agent and to each holder of a Right, in accordance with Section 24, a notice of such proposed action, which will specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of the Class A Common Shares, if any such date is to be fixed, and such notice will be so given, in the case of any action described in clause (a) or (b) above, at least twenty days prior to the record date for determining holders of the Class A Common Shares for purposes of such action and, in the case of any such other action, at least twenty days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Class A Common Shares, whichever will be the earlier. In case of any Triggering Event, then the Company will as soon as practicable thereafter give to the Rights Agent and to each holder of a Right, in accordance with Section 24, a notice of the occurrence of such Triggering Event, which will specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii). Section 24. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company will be sufficiently given or made if personally delivered or sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, Ohio 44236 Attention: President Subject to the provisions of Section 20, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent will be sufficiently given or made if personally delivered or sent by registered or certified mail and will be deemed given upon receipt, addressed (until another address is filed in writing with the Company) as follows: National City Bank 1900 East 9th Street Cleveland, Ohio 44114 Attention: Corporate Trust Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to or on the holder of any Right Certificate will be sufficiently given or made if personally delivered or sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 25. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any provision contain herein which may be defective or inconsistent with any other provision herein, or (iii) prior to the Shares Acquisition Date, change or supplement the provisions hereunder that the Company may deem necessary or desirable and not adverse to the interests of the holders of Common Shares. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 25, the Rights Agent will execute such supplement or amendment unless the Rights Agent determines in good faith that such supplement or amendment would adversely affect its interests under this Agreement. Prior to the Shares Acquisition Date, the interests of the holders of Rights will be deemed coincident with the interests of the holders of Common Shares. Notwithstanding 74 19 anything in this Agreement to the contrary, no supplement or amendment that changes the rights and duties of the Rights Agent under this agreement will be effective against the Rights Agent without the execution of such supplement or amendment by the Rights Agent. Section 26. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent will bind and inure to the benefit of their respective successors and assigns hereunder. Section 27. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this Agreement, any calculation of the number of Class A Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Class A Common Shares of which any Person is the Beneficial Owner, will be made in accordance with the provisions of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company will have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board, or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend or supplement this Agreement). All such actions, calculations, interpretations and determinations (including, for the purpose of clause (ii) below, all omissions with respect to the foregoing) that are done or made by the Board in good faith, will (i) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Right Certificates and all other parties, and (ii) not subject the Board to any liability to any holder of any Right Certificate. Section 28. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement will be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares). Section 29. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired or invalidated Section 30. GOVERNING LAW. This Agreement and each Right Certificate will be deemed to be a contract made under the laws of the State of Ohio and for all purposes will be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 31. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts will for all purposes be deemed to be an original, and all such counterparts will together constitute but one and the same instrument. Section 32. DESCRIPTIVE HEADINGS. Descriptive headings of the Sections of this Agreement are inserted for convenience only and will not control or affect the meaning or construction of any of the provisions hereof. [signature page follows] 75 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. JO-ANN STORES, INC. ATTEST: By: /s/ Brian P. Carney By: /s/ Donald R. Tomoff ----------------------------------- ------------------------------ Name: Brian P. Carney Name: Donald R. Tomoff --------------------------------- ---------------------------- Title: Executive Vice President, CFO Title: Vice President, Finance -------------------------------- --------------------------- [RIGHTS AGENT] ATTEST: By: /s/ Laura S. Kress By: /s/ Marlayna J. Jeanclerc ----------------------------------- ------------------------------ Name: Laura S. Kress Name: Marlayna J. Jeanclerc --------------------------------- ---------------------------- Title: Vice President Title: Vice President -------------------------------- --------------------------- 76 21 INDEX OF DEFINED TERMS Page ---- Acquiring Person.........................................................1 Affiliate................................................................2 Agreement................................................................1 Associate................................................................2 Associated Acquiring Person..............................................2 Beneficial Owner.........................................................2 beneficially own.........................................................2 Business Day.............................................................3 Class A Common Shares....................................................3 Class B Common Shares....................................................3 Close of business........................................................3 Common Shares............................................................3 Company..................................................................1 current market price....................................................12 Exchange Act.............................................................2 Exercise Price...........................................................3 Expiration Date..........................................................7 Family Members...........................................................3 Issuance.................................................................4 NASDAQ..................................................................13 NYSE....................................................................13 Person...................................................................4 Purchase Price...........................................................4 Redemption Price........................................................22 Right....................................................................1 Rights Agent.............................................................1 SEC......................................................................4 Securities Act...........................................................9 Shares Acquisition Date..................................................4 Subsidiary...............................................................4 Trading Day.............................................................13 Triggering Event........................................................11 77 22 EXHIBIT A [FORM OF RIGHT CERTIFICATE] Certificate No. R - ___________ Rights NOT EXERCISABLE AFTER october 31, 2010 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.005 PER RIGHT ON THE TERMS SET FORTH IN THE amended and restated RIGHTS AGREEMENT. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN ASSOCIATED ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN Section 7(e) OF THE RIGHTS AGREEMENT.]* RIGHT CERTIFICATE This certifies that _________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Amended and Restated Rights Agreement, dated as of October 31, 2000 and as amended to date (the "Rights Agreement"), between Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), and ____________________, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Shares Acquisition Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Cleveland time, on October 31, 2010, at the principal office of the Rights Agent, or its successors as Rights Agent, in __________, ___________, one Class A Common Share of the Company (the "Class A Common Share"), at a purchase price of $60.00 per share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate, the number of Class A Common Shares that may be purchased upon exercise thereof and the Purchase Price per share set forth above are the numbers and Purchase Price as of October 31, 2000, based on the Class A Common Shares of the Company as constituted at such date. Upon the occurrence of a Triggering Event (as such term is defined in the Rights Agreement), each Right will entitled the holder to receive, upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed, one Class A Common Share for an Exercise Price of $.50 per share (the "Exercise Price"). If the Rights evidenced by this Right Certificate are or at any time were beneficially owned by an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement), such Rights will become null and void and no holder hereof will have any right with respect to such Rights from and after the occurrence of such Triggering Event. As provided in the Rights Agreement, the Purchase Price, the Exercise Price and number and kind of Class A Common Shares or other securities that may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement; reference is made to the Rights Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal office of the Rights Agent in ________, ________. In - -------- * The portion of the legend in brackets will be inserted only if applicable. 78 23 addition, the Company will mail to the holder of this certificate a copy of the Rights Agreement (as in effect on the date of mailing) without charge promptly after receipt of a written request therefor. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Class A Common Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered entitled such holder to purchase. If this Right Certificate is exercised in part, the holder will be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Right Certificate may be redeemed by the Company at its option at a redemption price of $0.005 per Right. The Company will not issue any fractional Class A Common Shares upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof may make a cash payment, as provided in the Rights Agreement. No holder of this Right Certificate will be entitled to vote or receive dividends or be deemed for any purpose the holder of the Class A Common Shares or of any other securities of the Company that may at any time be issuable on the exercise hereof, nor will anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate have been exercised as provided in the Rights Agreement. This Right Certificate will not be valid or obligatory for any purpose until it has been countersigned by the Rights Agent. WITNESS the signature (which may be by facsimile) of the proper officers of the Company. Dated as of __________________, 20___. JO-ANN STORES, INC. ATTEST: By:_____________________________ By:_____________________________ Name:___________________________ Name:___________________________ Title:____________________________ Title:__________________________ Countersigned: By:_____________________________ Name:___________________________ Title:__________________________ 79 24 [FORM OF REVERSE SIDE OF RIGHT CERTIFICATE] FORM OF ASSIGNMENT (To be executed by the registered holder if the holder desires to transfer the Right Certificate) FOR VALUE RECEIVED _________________________________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________________ as attorney, to transfer the Right Certificate on the books of Jo-Ann Stores, Inc., with full power of substitution. Dated: __________________, 20___ Signature Signature Guaranteed: CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Right Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is, was or subsequently became an Acquiring Person or an Associated Acquiring Person. Dated: __________________, 20___ Signature NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration, enlargement or change. 80 25 FORM OF ELECTION TO PURCHASE CLASS A COMMON SHARES (To be executed if the holder desires to exercise the Right Certificate in accordance with Section 11(a)(ii) of the Rights Agreement) To Jo-Ann Stores, Inc.: The undersigned hereby irrevocably elects to exercise ________________ Rights represented by this Right Certificate to purchase the Class A Common Shares issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of: (Please print name and address) Please insert social security or other identifying number: ______________________________ If such number of Rights are not all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights will be registered in the name of and delivered to: (Please print name and address) Please insert social security or other identifying number: ______________________________ Dated: __________________, 20___ Signature (Signature must conform in all respects to name of the holder as specified on the face of this Right Certificate) Signature Guaranteed: 81 26 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is, was or subsequently became an Acquiring Person or an Associated Acquiring Person. Dated: ______________, 20___ Signature NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the fact of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. 82 27 EXHIBIT B SUMMARY OF RIGHTS TO PURCHASE CLASS A COMMON SHARES The Board of Directors of Jo-Ann Stores, Inc. (the "Company") has authorized the issuance of one Right for each outstanding Class A Common Share, without par value, of the Company (the "Class A Common Shares") and each Class B Common Share, without par value, of the Company (the "Class A Common Shares"; the Class A Common Shares and the Class B Common Shares are referred to together as the "Common Shares"). As of October 31, 2000, Each Right entitles the registered holder to purchase from the Company one Class A Common Share at a price of $60.00 (the "Purchase Price"), subject to adjustment. Following the Shares Acquisition Date (as hereinafter defined) and under the conditions described below, each Right entitles the registered holder (other than an Acquiring Person (as hereinafter defined) or Associated Acquiring Person) to acquire one Class A Common Share for an exercise price of $.50 per share (the "Exercise Price"). The description and terms of the Rights are set forth in an Amended and Restated Rights Agreement (the "Rights Agreement"), dated as of October 31, 2000, by and between the Company and ____________________, as Rights Agent (the "Rights Agent"). Until there is a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Class A Common Shares then outstanding (the "Shares Acquisition Date"), the Rights will be evidenced by the certificate for such Class A Common Share. The Rights Agreement provides that, until the Shares Acquisition Date, the Rights will be transferred with and only with the associated Common Shares. Until the Shares Acquisition Date (or the earlier redemption or expiration of the Rights), the surrender for transfer of any certificate for Common Shares will also constitute the transfer of the Rights associated with the Common Shares represented by the certificates. As soon as practicable following the Shares Acquisition Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Shares Acquisition Date, and thereafter such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Shares Acquisition Date. The Rights will expire at the close of business on October 31, 2010 unless earlier redeemed by the Company as described below. Upon the occurrence of a Triggering Event (as defined in the Rights Agreement), each holder of a Right, other than Rights that were or are beneficially owned by an Acquiring Person or an Associated Acquiring Person (which will thereafter be void), will have the right to receive, upon exercise of the Right and payment of the Exercise Price, one Class A Common Share of the Company. The Purchase Price and the Exercise Price, and the number of Class A Common Shares or other securities issuable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution. With certain exceptions, no adjustment in the Purchase Price or the Exercise Price will be required until cumulative adjustments require an adjustment of at least 1% in the Purchase Price or the Exercise Price. No fractional shares will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Class A Common Shares on the last trading date prior to the date of exercise. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. At any time prior to the Shares Acquisition Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right (the "Redemption Price"). Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company will make 83 28 announcement thereof, and the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The provisions of the Rights Agreement may be amended by the Board of Directors in order to cure any ambiguity, to correct any defect or inconsistency or, prior to the Shares Acquisition Date, to make changes deemed to be not adverse to the interests of the holders of the Rights. A copy of the Rights Agreement has been, and any amendments thereto will be, filed with the Securities and Exchange Commission as an exhibit to the Company's registration of the Rights on Form 8-A. A copy of the Rights Agreement is available from the Company free of charge to any holder of Class A Common Shares of the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as it may be amended from time to time. 84 EX-10.2 3 l87539aex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO ARE PARTIES TO THE SPLIT DOLLAR LIFE INSURANCE AGREEMENT WITH THE REGISTRANT - - Alan Rosskamm - - David Bolen - - Brian Carney - - Rosalind Thompson 85 EX-10.6 4 l87539aex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.6 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO PARTICIPATE IN THE REGISTRANT'S 1979 SUPPLEMENTAL RETIREMENT PLAN, AS AMENDED - - David Bolen - - Brian Carney - - Rosalind Thompson 86 EX-10.9 5 l87539aex10-9.txt EXHIBIT 10.9 1 EXHIBIT 10.9 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO ARE PARTIES TO AN EMPLOYMENT AGREEMENT WITH THE REGISTRANT - - Alan Rosskamm - - David Bolen - - Brian Carney - - Rosalind Thompson - - Debra Walker 87 EX-10.11 6 l87539aex10-11.txt EXHIBIT 10.11 1 EXHIBIT 10.11 JO-ANN STORES, INC. 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS EFFECTIVE: JUNE 12, 1996 1. PURPOSE. This 1996 Stock Option Plan for Non-Employee Directors (the "Plan") is designed to enable Fabri-Centers of America, Inc. (the "Company"), through the grant of options, to continue to attract and retain highly qualified non-employee directors and to provide additional incentive to those directors through increased stock ownership. The Plan, upon becoming effective by reason of its approval by the Company's shareholders, replaces the 1988 Stock Option Plan for Non-Employee Directors (the "Predecessor Plan") except any option previously granted under the Predecessor Plan will remain available for exercise under the terms of the Predecessor Plan. 2. ADMINISTRATION. The Plan shall be administered by a committee consisting of not less than two directors of the Company (the "Committee"), to be appointed by, and to serve during the pleasure of, the Board of Directors of the Company. No non-employee director may be appointed or serve as a member of the Committee. Subject to the terms of the Plan, the Committee shall have full power and authority to interpret the provisions and supervise the administration of the Plan. All decisions by the Committee pursuant to the provisions of the Plan shall be final. 3. PARTICIPATION IN THE PLAN. Each director of the Company who is not an employee of the Company or any of its subsidiaries shall be a participant in the Plan. Each newly elected non-employee director of the Company shall automatically be granted, on the date of his or her election to the Board of Directors, an option to purchase 7,500 Class A shares and 7,500 Class B shares of the Company's Common Stock at the option price set forth in Section 5. 88 2 Each continuing non-employee director of the Company shall automatically be granted, upon approval of this Plan and at the end of each Year (as defined herein) thereafter, an option to purchase the number of Class A shares and Class B shares of the Company as follows: (i) 2,000 Class A shares for each continuous Year of service as a non-employee director completed through and including February 1, 1997 less the number of shares of the Company's Common Stock originally purchasable upon exercise of any options awarded to such director for continuous service under the Predecessor Plan and the Plan; and (ii) 1,500 Class A shares and 1,500 Class B shares for each continuous Year of service as a non-employee director completed after February 1, 1997 less the number of shares of the Company's Common Stock originally purchasable upon exercise of any options awarded to such director for continuous service under the Plan. The option price for any option granted pursuant to the immediately preceding sentence shall be as set forth in Section 5. For purposes of this paragraph a Year shall be the period beginning on the date of each Annual Meeting of Shareholders held on or after June 5, 1989 and ending on the date of the next succeeding Annual Meeting of Shareholders; provided, however, that the last such period shall constitute a Year of Service only if the director is re-elected, if his term expired, at the Annual Meeting of Shareholders held on the last day of such period. The number of shares to be granted to each non-employee director and the timing of the grants set forth in this Section 3, and the option price set forth in Section 5, shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. 4. SHARES SUBJECT TO THE PLAN. The shares subject to the Plan shall be shares of the Company's Common Stock, without par value, and may be authorized but unissued shares or treasury shares. The total number of shares that may be delivered upon the exercise of all options granted under the Plan may not exceed 124,000 Class A shares and 100,000 Class B shares subject, however, to adjustment as provided in Section 11. 5. OPTION PRICE. The option price shall be 100% of the fair market value of the shares on the date the option is granted. In no event may previously unissued shares be issued at a price less than that 89 3 permitted by the Ohio General Corporation Law. For purposes of this Plan, the "fair market value" of shares on any date shall be the mean between the high and low sale prices of the shares as reported for New York Stock Exchange-Composite Transactions on that date or, if no shares are traded on that date, the next preceding date on which trading occurred. In the event that the shares cease to be traded on the New York Stock Exchange, the "fair market value" of the shares shall be determined in the manner prescribed by the Committee. 6. EXERCISE OF OPTIONS. Except as otherwise provided in Section 7, an option may be exercised only while the optionee remains a director of the Company. No option granted under the Plan may be exercised prior to the completion of one year of continuous service as director of the Company after the date of grant, unless an option is accelerated as provided in this section, nor, under any circumstances, later than the expiration date of the option. Options granted under the Plan shall become exercisable in increments of one-fourth of the total shares subject to the option upon completion of each of four successive one-year periods of continuous service after the date of grant. If a one-fourth installment of the number of shares subject to the option would otherwise include a fraction of a share, that installment (unless it is the last installment) shall be rounded up to the next larger number of full shares. Each option shall terminate on the date that is ten years following the date of grant. In the event of a Change in Control (as defined below), any outstanding option or any portion of an outstanding option shall become immediately exercisable. The Board shall give the optionee written notice of such acceleration and the reasons therefor. For purposes of this Agreement, a Change in Control shall have occurred if at any time any of the following events occurs: (a) a report if filed with the Securities and Exchange Commission (the "SEC") on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any "person" (as the term "person" is used in Section 13(d) or Section 14(d)(2) of the Exchange Act) is or has become a beneficial owner, directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; provided, however, that the term "person" shall not include any "affiliate" of the Company (as the term "affiliate" is defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) or any individual who is considered to own stock of the Company owned, directly or indirectly, by an "affiliate" under 90 4 the rules of Section 267(c)(2) of the Internal Revenue Code of 1986, as amended; (b) the Company files a report or proxy statement with the SEC pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder that a Change in Control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; (c) the Company is merged or consolidated with another corporation and, as a result thereof, securities representing less than 50% of the combined voting power of the surviving or resulting corporation's securities (or of the securities of a parent corporation in case of a merger in which the surviving or resulting corporation becomes a wholly-owned subsidiary of the parent corporation) are owned in the aggregate by holders of the Company's securities immediately prior to such merger or consolidation; or (d) during any period of 24 consecutive months, individuals who were Directors of the Company at the beginning of such period cease to constitute at least a majority of the Company's Board of Directors; provided, however, that a person shall not be considered to be a new director if that person is nominated or elected as a Director by a vote of at least two-thirds of the Directors of the Company who were Directors at the beginning of such 24 month period. In the event of the retirement of a director (including, for purposes of this Plan, a determination not to stand for election for another term after the expiration of his or her present term) after more than ten years of continuous service as a director, any outstanding option or options of such director shall, following the announcement of the proposed retirement, become immediately exercisable; provided, however, that no acceleration shall be made of any option granted within the prior twelve-month period. The optionee may exercise his or her option only as specified in Section 7 or this Section 6; provided, however, that the exercise of any option or installment accelerated pursuant to the terms of this paragraph shall be conditioned upon the retirement of the director. 7. EXERCISE OF OPTIONS AFTER TERMINATION OF SERVICE. When an optionee ceases to be a director of the Company for any reason, that optionee shall continue to have the right to exercise an outstanding option during the three-month period immediately following the date of termination of such service. Options shall be treated as outstanding for this purpose to the extent that any exercisable installment has not been exercised or otherwise terminated prior to the date of termination. 91 5 8. NOTICE OF GRANT. When a non-employee director is granted an option under the Plan, the Committee shall promptly cause that director to be notified in writing of the nature of the grant and the terms of the option. The date on which the Director is elected or the date of the Annual Meeting of Shareholders shall be considered to be the date on which the option is granted. 9. NOTICE OF EXERCISE; PAYMENT FOR SHARES; WITHHOLDING TAX ELECTION. An option shall be considered to be exercised when the optionee notifies the Company in writing of his intention to do so and tenders payment of the option price in full. Payment of the option price may be made in cash, by delivery of shares of the Company's Common Stock (taken at their fair market value on the date of exercise, as defined in Section 5), or partly in cash, and partly in shares at the election of the optionee. No optionee shall have the right to vote or to receive dividends on shares purchased upon exercise of an option until he has paid the option price in full. An optionee may satisfy, in whole or in part, any withholding tax obligation that may arise in connection with the exercise of an option by delivering Common Stock to the Company, or by having the Company retain a portion of the Common Stock subject to the option, with a fair market value of up to the amount of the withholding tax obligation. The fair market value of the Common Stock to be delivered or retained shall be determined as of the date immediately preceding the date on which the amount of the withholding tax obligation is determined. 10. ASSIGNABILITY. An option granted under the Plan may not be transferred other than by will or by the laws of descent and distribution and is exercisable during an optionee's lifetime only by him. 11. ADJUSTMENTS UPON CHANGES IN SHARES. In the event of any change in the shares subject to the Plan or to any option granted under the Plan by reason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, exchange of shares, or other change in the corporate structure of the Company, the aggregate number of shares as to which options may thereafter be granted under the Plan, the number of shares subject to each outstanding option, the option price for shares subject to each outstanding option, and the number of shares specified in Section 3 shall be appropriately adjusted by the Committee. 12. PURCHASE FOR INVESTMENT. Each director receiving shares upon exercise of an option may be required by the Company to furnish a representation that he is acquiring the shares as an investment and not with a view to distribution if the Company, in its sole discretion, determines that the representation is required to ensure 92 6 that the resale or other disposition of the shares would not violate the Securities Act of 1933, as amended (the "1933 Act"), or any applicable state securities laws. The Company reserves the right to place any legend or other symbol on certificates for shares delivered pursuant to the Plan, and to issue any stop transfer or similar instructions to the transfer agent, that the Company deems necessary and proper to assure compliance with any such representation. 13. COMPLIANCE WITH SECURITIES LAWS. No certificate for shares shall be delivered upon exercise of an option until the Company has taken any action that is required to comply with the provisions of the 1933 Act, the Exchange Act, and any applicable state securities laws and with the requirements of any exchange on which the Company's Common Stock may, at the time, be listed. 14. EFFECTIVE DATE. The Plan was adopted by the Board of Directors on March 13, 1996, and such action shall be submitted to the Company's shareholders for their approval at the next annual meeting following that date. No option shall be granted prior to approval of the Plan by shareholders. If the shareholders do not approve the Plan on or before March 12, 1997, the Plan shall terminate. 15. DURATION AND TERMINATION OF THE PLAN. The Plan shall remain in effect until March 12, 2006 and shall then terminate, unless terminated at an earlier date by action of the Board of Directors. Except as provided in Section 14, termination of the Plan shall not affect options previously granted. 93 EX-12 7 l87539aex12.txt EXHIBIT 12 1 EXHIBIT 12
JO-ANN STORES, INC. RATIO OF EARNINGS TO FIXED CHARGES FISCAL YEAR ENDED ---------------------------------------------------------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, JANUARY 29, FEBRUARY 3, 1997 1998 1999 2000 2001 --------------- -------------- --------------- -------------- -------------- Earnings: Income (loss) before income taxes $ 39.4 $ 50.8 $ 22.0 $ 41.2 $ (11.4) Interest Expense 10.6 5.9 12.5 26.2 29.0 Portion of occupancy expense deemed representative of interest(1) 22.3 23.5 30.9 34.4 37.0 --------------- -------------- --------------- -------------- -------------- Total Earnings $ 72.3 $ 80.2 $ 65.4 $ 101.8 $ 54.6 =============== ============== =============== ============== ============== Fixed Charges: Interest Expense $ 10.6 $ 5.9 $ 12.5 $ 26.2 $ 29.0 Portion of occupancy expense deemed representative of interest (1) 22.3 23.5 30.9 34.4 37.0 --------------- -------------- --------------- -------------- -------------- Total Fixed Charges $ 32.9 $ 29.4 $ 43.4 $ 60.6 $ 66.0 =============== ============== =============== ============== ============== Ratio of Earnings to Fixed Charges 2.2x 2.7x 1.5x 1.7x 0.8x =============== ============== =============== ============== ==============
(1) Represents 33% of fixed rental charges. 94 EX-18 8 l87539aex18.txt EXHIBIT 18 1 EXHIBIT 18 Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, Ohio 44236 Re: Form 10-K Report for the year ended February 3, 2001. Ladies and Gentlemen: This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent accountants whenever there has been a change in accounting principle or practice. The Company changed from the last-in, first-out ("LIFO") method of accounting for valuing inventories to the first-in, first-out ("FIFO") method. According to the management of the Company, this change was made as FIFO is used by substantially all of the Company's competitors, and, therefore, this change facilitates more appropriate comparisons within its industry. Furthermore, this change was due in an effort to simplify and provide more meaningful reporting to lenders under the secured credit facilities the Company recently entered into. The Company is required to report a borrowing base calculation using FIFO-based inventory amounts. Additionally, this change was made to more appropriately cost inventory in light of continuous interim price volatility in the prices of the Company's inventory, thus providing more useful information to financial statement users. A complete coordinated set of financial and reporting standards for determining the preferability of accounting principles among acceptable alternative principles has not been established by the accounting profession. Thus, we cannot make an objective determination of whether the change in accounting described in the preceding paragraph is to a preferable method. However, we have reviewed the pertinent factors, including those related to financial reporting, in this particular case on a subjective basis, and our opinion stated below is based on our determination made in this manner. We are of the opinion that the Company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with you, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgment and business planning of your management. Very truly yours, Arthur Andersen LLP 95 EX-21 9 l87539aex21.txt EXHIBIT 21 1 EXHIBIT 21 JO-ANN STORES, INC. LIST OF SUBSIDIARIES
STATE OF PERCENT OWNED BY NAME INCORPORATION REGISTRANT Jo-Ann Stores Supply Chain Management, Inc.............................................. Ohio 100% FCA of Ohio, Inc........................................................................ Ohio 100% House of Fabrics, Inc................................................................... Delaware 100% Team Jo-Ann, Inc........................................................................ Ohio 100%
96 EX-23 10 l87539aex23.txt EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements:
FORM REGISTRATION NO. PERTAINING TO JO-ANN STORES, INC. - ---- ---------------- --------------------------------- S-4 333-80763 10 3/8% Senior Subordinated notes Due 2007 S-8 333-10093 1994 Executive Incentive Plan S-8 33-72445 1998 Incentive Compensation Plan S-8 33-32809 Employee Savings and Profit Sharing Plan S-8 33-37355 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 33-49690 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10087 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10091 1996 Stock Option Plan for Non-Employee Directors S-8 333-55278 Nonqualified Stock Option Awards to Certain Employees S-8 333-55280 Jo-Ann Stores, Inc. Savings Plan 401(k)
Arthur Andersen LLP Cleveland, Ohio, May 3, 2001. 97 EX-24 11 l87539aex24.txt EXHIBIT 24 1 EXHIBIT 24 DIRECTORS AND OFFICERS POWER OF ATTORNEY Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Jo-Ann Stores, Inc. Commission File No. 1-6695 1934 Act Filings on Form 10-K For Fiscal Year Ended February 3, 2001 Gentlemen: The above Company is the issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (the "Act"). Each of the persons signing his or her name below confirms, as of the date appearing opposite his or her signature, that Alan Rosskamm, Brian P. Carney, and each of them, are authorized on his or her behalf to sign and to submit to the Securities and Exchange Commission such filings on Form 10-K as are required by the Act. Each person so signing also confirms the authority of Alan Rosskamm, Brian P. Carney, and each of them, to do and perform on his or her behalf, any and all acts and things requisite or necessary to assure compliance by the signing person with the Form 10-K filing requirements. The authority confirmed herein shall remain in effect as to each person signing his or her name below until such time as the Commission shall receive from such person a written communication terminating or modifying the authority.
DATE DATE ---- ---- /s/ ALAN ROSSKAMM May 4, 2001 /s/ FRANK NEWMAN May 4, 2001 - ------------------------------------ ----------------------------------- Alan Rosskamm Frank Newman /s/ BRIAN P. CARNEY May 4, 2001 /s/ IRA GUMBERG May 4, 2001 - ------------------------------------ ----------------------------------- Brian P. Carney Ira Gumberg /s/ BETTY ROSSKAMM May 4, 2001 /s/ GREGG SEARLE May 4, 2001 - ------------------------------------ ----------------------------------- Betty Rosskamm Gregg Searle /s/ ALMA ZIMMERMAN May 4, 2001 /s/ DEBRA WALKER May 4, 2001 - ------------------------------------ ----------------------------------- Alma Zimmerman Debra Walker /s/ SCOTT COWEN May 4, 2001 - ------------------------------------ Scott Cowen
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