10-Q 1 l91966ae10-q.txt JO-ANN STORES, INC. 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 2001 COMMISSION FILE NO. 1-6695 ------------------------------ JO-ANN STORES, INC. (Exact name of Registrant as specified in its charter) OHIO 34-0720629 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5555 DARROW ROAD, HUDSON, OHIO 44236 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 656-2600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Class A Common Stock outstanding at December 14, 2001: 9,812,960 Shares of Class B Common Stock outstanding at December 14, 2001: 8,806,211 ================================================================================ JO-ANN STORES, INC. FORM 10-Q INDEX FOR THE QUARTER ENDED NOVEMBER 3, 2001 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION: Page Numbers Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of November 3, 2001 and February 3, 2001 3 Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended November 3, 2001 and October 28, 2000 4 Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 3, 2001 and October 28, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
Page 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JO-ANN STORES, INC. CONSOLIDATED BALANCE SHEETS
(UNAUDITED) NOVEMBER 3, FEBRUARY 3, 2001 2001 ------------------------------------------------------------------------------------------------------------------- (MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current assets: Cash and temporary cash investments $ 29.1 $ 17.5 Inventories 467.1 451.0 Prepaid expenses and other current assets 39.9 37.3 -------------- -------------- Total current assets 536.1 505.8 Property, equipment and leasehold improvements, net 220.9 190.2 Goodwill, net 26.7 27.2 Other assets 19.1 19.0 -------------- -------------- Total assets $802.8 $742.2 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $151.5 $164.0 Accrued expenses 51.4 59.5 -------------- -------------- Total current liabilities 202.9 223.5 Long-term debt 356.0 240.0 Deferred income taxes 23.5 22.5 Other long-term liabilities 8.1 7.4 Shareholders' equity: Common stock: Class A, stated value $0.05 per share; issued and outstanding 9,798,356 and 9,320,725, respectively 0.6 0.6 Class B, stated value $0.05 per share; issued and outstanding 8,806,211 and 8,842,998 respectively 0.5 0.5 Additional paid-in capital 99.8 99.2 Unamortized restricted stock awards (0.8) (1.2) Retained earnings 154.0 187.8 Accumulated other comprehensive income (loss) (4.4) -- -------------- -------------- 249.7 286.9 Treasury stock, at cost (37.4) (38.1) -------------- -------------- Total shareholders' equity 212.3 248.8 -------------- -------------- Total liabilities and shareholders' equity $802.8 $742.2 ============== ==============
See notes to consolidated financial statements Page 3 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED --------------------------------------------------------------- NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------------------------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) Net sales $413.0 $362.5 $1,072.1 $986.9 Cost of sales 230.4 190.1 599.2 526.3 ----------------------------- ----------------------------- Gross margin 182.6 172.4 472.9 460.6 Selling, general and administrative expenses 182.4 148.2 472.3 414.0 Depreciation and amortization 9.9 9.6 29.7 28.4 ----------------------------- ----------------------------- Operating profit (loss) (9.7) 14.6 (29.1) 18.2 Interest expense 8.6 7.9 24.5 21.1 ----------------------------- ----------------------------- Income (loss) before income taxes (18.3) 6.7 (53.6) (2.9) Income tax provision (benefit) (7.0) 2.5 (20.4) (1.1) ----------------------------- ----------------------------- Income(loss) before equity loss (11.3) 4.2 (33.2) (1.8) Equity loss from minority investment -- (1.1) -- (2.1) ----------------------------- ----------------------------- Income (loss) before extraordinary item (11.3) 3.1 (33.2) (3.9) Extraordinary item, loss related to early retirement of debt, net of tax benefit of $0.4 million -- -- (0.6) -- ----------------------------- ----------------------------- Net income (loss) $(11.3) $ 3.1 $ (33.8) $ (3.9) ============================= ============================= Net income (loss) per common share - basic and diluted: Net income (loss) before extraordinary item $(0.61) $0.17 $ (1.81) $(0.21) Extraordinary item, net of tax benefit -- -- $ (0.03) -- ----------------------------- ----------------------------- Net income (loss) $(0.61) $0.17 $ (1.84) $(0.21) ============================= ============================= Weighted average shares outstanding (millions): Basic 18.5 18.1 18.4 18.0 ============================= ============================= Diluted 18.5 18.1 18.4 18.0 ============================= =============================
See notes to consolidated financial statements Page 4 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEKS ENDED ------------------------------------- NOVEMBER 3, OCTOBER 28, 2001 2000 ---------------------------------------------------------------------------------------------------------------------- (MILLIONS OF DOLLARS) Net cash flows from operating activities: Net loss $ (33.8) $ (3.9) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 29.7 28.4 Equity loss from minority investment -- 2.1 Extraordinary item, net of tax 0.6 -- Changes in operating assets and liabilities: Increase in inventories (16.1) (114.6) Decrease in prepaid expenses and other current assets 0.9 0.4 Increase (decrease) in accounts payable (12.5) 78.5 Decrease in accrued expenses (13.1) (5.6) Other, net 3.7 (1.4) ---------------- ---------------- Net cash used for operating activities (40.6) (16.1) ---------------- ---------------- Net cash flows used for investing activities: Capital expenditures (60.4) (26.5) Minority investment -- (6.5) Other, net (1.1) 1.0 ---------------- ---------------- Net cash used for investing activities (61.5) (32.0) ---------------- ---------------- Net cash flow provided by financing activities: Net increase in credit facilities 116.0 51.5 Other, net (2.3) 2.6 ---------------- ---------------- Net cash provided by financing activities 113.7 54.1 ---------------- ---------------- Net increase in cash and temporary investments 11.6 6.0 Cash and temporary cash investments at beginning of period 17.5 21.4 ---------------- ---------------- Cash and temporary cash investments at end of period $ 29.1 $ 27.4 ================ ================ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 25.9 $ 21.6 Income taxes, net of refunds 0.8 5.7
See notes to consolidated financial statements Page 5 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric and craft retailer with 974 retail stores in 49 states at December 6, 2001. The 904 traditional and 70 superstores feature a large variety of competitively priced, high quality apparel, craft and home decorating fabrics, notions, crafts, seasonal and home decor accessories, and floral and framing products. The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures herein are adequate to make the information not misleading. Certain amounts in the fiscal 2001 interim financial statements have been reclassified in order to conform to the current year presentation. The statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001. Typical of most retail companies, the Company's business is highly seasonal with the majority of revenues and operating profits generated in the second half of the fiscal year; therefore, earnings or losses for a particular interim period are not indicative of full year results. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of results for the interim periods presented. NOTE 2 - EARNINGS PER SHARE Basic earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the period. If applicable, diluted earnings per share include the effect of the assumed exercise of dilutive stock options under the treasury stock method. Stock options have not been included in the earnings per common share calculation for the thirteen and thirty-nine weeks ended November 3, 2001 and the thirty-nine weeks ended October 28, 2000, as their inclusion would be anti-dilutive. NOTE 3 - STORE CLOSING CHARGE The Company has communicated since the fourth quarter of fiscal 2001, when its turnaround plan was announced, and a charge for the SKU Reduction Initiative and 42 store closings was taken, that it expected to take a second charge for store closings in the current fiscal year. During the third quarter of fiscal 2002, the Company recorded a $19.7 million store closing charge. This store closing charge includes asset write-downs associated with the closing of 102 traditional stores and either the downsizing or buyout of the remaining lease obligation of four superstores that are under-performing relative to the Company's required performance levels. The charge also includes the estimated cash closing costs and the estimated amount of any remaining rent liability, under non-cancelable lease agreements after the store closing date, for the 77 store closings that are expected to be completed in the next year. Approximately $8.0 million of the $19.7 million charge represents asset write-downs that are non-cash in nature. The majority of the charge, $17.1 million, is recorded in selling, general and Page 6 administrative expenses with the balance, $2.6 million, recorded in cost of sales. The Company expects this to be the final charge related to initiatives undertaken as part of its turnaround plan. NOTE 4 - FINANCING In April 2001, the Company entered into a new $365 million senior secured credit facility (the "Credit Facility") which replaced the Company's prior senior credit and synthetic lease facilities and expires on April 30, 2005. The Credit Facility consists of a $325 million revolving credit facility and a $40 million term loan. Deferred finance charges written-off under the prior senior credit facility totaled $1.0 million, or $0.6 million after tax, and were recorded as an extraordinary item in the first quarter of fiscal 2002. NOTE 5 - FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The Company is subject to risk resulting from interest rate fluctuations, as interest on the Company's Credit Facility is based on variable rates. The Company's objective in managing its interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows. Interest rate swaps are primarily utilized to achieve this objective, effectively converting a portion of its variable-rate exposures to fixed interest rates. Effective February 4, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. In accordance with SFAS No. 133, the Company has reviewed and designated all of its interest rate swap agreements as cash flow hedges and now recognizes the fair value of its interest rate swap agreements on the balance sheet. Changes in the fair value of these agreements are recorded in other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. Other comprehensive income (loss) includes the effects of derivative transactions accounted for under SFAS No. 133, net of related tax. Comprehensive income (loss) consists of the following:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------ --------------------------------- NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 -------------- ------------- --------------- --------------- Net income (loss) $(11.3) $3.1 $(33.8) $(3.9) Cumulative effect of change in accounting principle -- -- (1.7) -- Other comprehensive income (loss) (1.7) -- (2.7) -- -------------- ------------- --------------- --------------- Comprehensive income (loss) $(13.0) $3.1 $(38.2) $(3.9) ============== ============= =============== ===============
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), which supersedes Accounting Principles Board Opinion No. 16, "Business Combinations". The provisions of this statement apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 does not have any effect on the Company's results of operations or financial position. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets" ("SFAS No. 142"). SFAS No. 142 eliminates the current requirement to amortize goodwill and intangible assets with indefinite useful lives and addresses the amortization of intangible assets with finite useful lives. In addition, goodwill will be subject to at least an annual assessment for impairment by applying a fair value Page 7 based test. The Company is required to adopt this standard in fiscal 2003, which begins on February 3, 2002. The Company is currently in the process of evaluating the potential impact of this statement on the Company's financial statements. The elimination of goodwill amortization will have a $0.7 million annual positive impact to the Company's reported results of operations. In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") and in August 2001, issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 143 requires the recognition of a liability for the estimated cost of disposal as part of the initial cost of a long-lived asset. SFAS No. 144 supersedes SFAS No. 121 to supply a single accounting approach for measuring impairment of long-lived assets, including a segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. The Company is required to adopt SFAS No. 143 in fiscal 2004 and SFAS No. 144 in fiscal 2003. The Company does not expect these statements to have a significant impact on the Company's results of operations or financial position. Page 8 NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) The Company's 10-3/8% senior subordinated notes and Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the Company. The senior subordinated notes are subordinated to the Company's Credit Facility. Summarized consolidating financial information of the Company (excluding its subsidiaries) and the guarantor subsidiaries as of November 3, 2001 and February 3, 2001 and for the thirteen and thirty-nine weeks ended November 3, 2001 and October 28, 2000 are as follows: CONSOLIDATING BALANCE SHEETS NOVEMBER 3, 2001
GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------- ---------- ------------ ------------ ----------- (Millions of dollars) ASSETS Current assets: Cash and temporary cash investments $ 24.7 $ 4.4 $ -- $ 29.1 Inventories 206.4 260.7 -- 467.1 Prepaid expenses and other current assets 25.8 14.1 -- 39.9 ---------- ----------- ----------- ----------- Total current assets 256.9 279.2 -- 536.1 Property, equipment and leasehold improvements, net 70.6 150.3 -- 220.9 Goodwill, net -- 26.7 -- 26.7 Other assets 17.4 1.7 -- 19.1 Investment in subsidiaries 14.9 -- (14.9) -- Intercompany receivable 453.7 -- (453.7) -- ---------- ----------- ----------- ----------- Total assets $813.5 $457.9 $(468.6) $802.8 ========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 142.7 $ 8.8 $ -- $151.5 Accrued expenses 83.3 (31.9) -- 51.4 ---------- ----------- ----------- ----------- Total current liabilities 226.0 (23.1) -- 202.9 Long-term debt 356.0 -- -- 356.0 Deferred income taxes 14.7 8.8 -- 23.5 Other long-term liabilities 4.5 3.6 -- 8.1 Intercompany payable -- 453.7 (453.7) -- Shareholders' equity: Common stock 1.1 -- -- 1.1 Additional paid-in capital 99.8 -- -- 99.8 Unamortized restricted stock awards (0.8) -- -- (0.8) Retained earnings 154.0 14.9 (14.9) 154.0 Accumulated other comprehensive income (loss) (4.4) -- -- (4.4) ---------- ----------- ----------- ----------- 249.7 14.9 (14.9) 249.7 Treasury stock, at cost (37.4) -- -- (37.4) ---------- ----------- ----------- ----------- Total shareholders' equity 212.3 14.9 (14.9) 212.3 ---------- ----------- ----------- ----------- Total liabilities and shareholders' equity $813.5 $457.9 $(468.6) $802.8 ========== =========== =========== ===========
Page 9 NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED CONSOLIDATING BALANCE SHEETS FEBRUARY 3, 2001
GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------- ------------ ------------ ------------ (Millions of dollars) ASSETS Current assets: Cash and temporary cash investments $ 13.8 $ 3.7 $ -- $ 17.5 Inventories 181.9 269.1 -- 451.0 Prepaid expenses and other current assets 25.0 12.3 -- 37.3 ---------- ----------- ----------- ----------- Total current assets 220.7 285.1 -- 505.8 Property, equipment and leasehold improvements, net 74.6 115.6 -- 190.2 Goodwill, net -- 27.2 -- 27.2 Other assets 17.9 1.1 -- 19.0 Investment in subsidiaries 19.9 -- (19.9) -- Intercompany receivable 387.1 -- (387.1) -- ---------- ----------- ----------- ----------- Total assets $720.2 $429.0 $(407.0) $742.2 ========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $127.3 $ 36.7 $ -- $164.0 Accrued expenses 85.3 (25.8) -- 59.5 ---------- ----------- ----------- ----------- Total current liabilities 212.6 10.9 -- 223.5 Long-term debt 240.0 -- -- 240.0 Deferred income taxes 14.2 8.3 -- 22.5 Other long-term liabilities 4.6 2.8 -- 7.4 Intercompany payable -- 387.1 (387.1) -- Shareholders' equity: Common stock 1.1 -- -- 1.1 Additional paid-in capital 99.2 -- -- 99.2 Unamortized restricted stock awards (1.2) -- -- (1.2) Retained earnings 187.8 19.9 (19.9) 187.8 Accumulated other comprehensive income (loss) -- -- -- -- ---------- ----------- ----------- ----------- 286.9 19.9 (19.9) 286.9 Treasury stock, at cost (38.1) -- -- (38.1) ---------- ----------- ----------- ----------- Total shareholders' equity 248.8 19.9 (19.9) 248.8 ---------- ----------- ----------- ----------- Total liabilities and shareholders' equity $720.2 $429.0 $(407.0) $742.2 ========== =========== =========== ===========
Page 10 NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED CONSOLIDATING STATEMENT OF OPERATIONS THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001 --------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------- ------------ ------------ ------------ (Millions of dollars) Net sales $227.2 $423.4 $(237.6) $413.0 Cost of sales 139.4 328.6 (237.6) 230.4 ----------- ------------ ----------- ----------- Gross margin 87.8 94.8 -- 182.6 Selling, general and administrative expenses 104.1 78.3 -- 182.4 Depreciation and amortization 3.7 6.2 -- 9.9 ----------- ------------ ----------- ----------- Operating profit (loss) (20.0) 10.3 -- (9.7) Interest expense 4.1 4.5 -- 8.6 ----------- ------------ ----------- ----------- Income (loss) before income taxes (24.1) 5.8 -- (18.3) Income tax benefit (7.0) -- -- (7.0) ----------- ------------ ----------- ----------- Net income (loss) before equity losses (17.1) 5.8 -- (11.3) Equity income from subsidiaries 5.8 -- (5.8) -- ----------- ------------ ----------- ----------- Net income (loss) $(11.3) $ 5.8 $ (5.8) $(11.3) =========== ============ =========== ===========
OCTOBER 28, 2000 --------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------- ------------ ------------ ------------ (Millions of dollars) Net sales $200.6 $425.7 $(263.8) $362.5 Cost of sales 118.3 335.6 (263.8) 190.1 ----------- ------------ ----------- ----------- Gross margin 82.3 90.1 -- 172.4 Selling, general and administrative expenses 74.3 73.9 -- 148.2 Depreciation and amortization 4.1 5.5 -- 9.6 ----------- ------------ ----------- ----------- Operating profit 3.9 10.7 -- 14.6 Interest expense (2.8) 10.7 -- 7.9 ----------- ------------ ----------- ----------- Income before income taxes 6.7 -- -- 6.7 Income tax provision (benefit) 2.6 (0.1) -- 2.5 ----------- ------------ ----------- ----------- Net income before equity losses 4.1 0.1 -- 4.2 Equity loss from minority investment (1.1) -- -- (1.1) Equity income from subsidiaries 0.1 -- (0.1) -- ----------- ------------ ----------- ----------- Net income (loss) $ 3.1 $ 0.1 $ (0.1) $ 3.1 =========== ============ =========== ===========
Page 11 NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED CONSOLIDATING STATEMENT OF OPERATIONS THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001 -------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------------------------------------------------------- ------------ ------------ ------------ (Millions of dollars) Net sales $585.1 $1,110.8 $(623.8) $1,072.1 Cost of sales 360.1 862.9 (623.8) 599.2 ----------- ----------- ----------- ----------- Gross margin 225.0 247.9 -- 472.9 Selling, general and administrative expenses 250.8 221.5 -- 472.3 Depreciation and amortization 11.8 17.9 -- 29.7 ----------- ----------- ----------- ----------- Operating profit (loss) (37.6) 8.5 -- (29.1) Interest expense 10.8 13.7 -- 24.5 ----------- ----------- ----------- ----------- Loss before income taxes (48.4) (5.2) -- (53.6) Income tax benefit (20.2) (0.2) -- (20.4) ----------- ----------- ----------- ----------- Net loss before equity loss and extraordinary item (28.2) (5.0) -- (33.2) Equity loss from subsidiaries (5.0) -- 5.0 -- -------------------------------------------------- Net income (loss) before extraordinary item (33.2) (5.0) 5.0 (33.2) Extraordinary item, net of tax benefit (0.6) -- -- (0.6) ----------- ----------- ----------- ----------- Net income (loss) $(33.8) $ (5.0) $ 5.0 $ (33.8) =========== =========== =========== ===========
OCTOBER 28, 2000 --------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------- ------------ ------------ ------------ (Millions of dollars) Net sales $541.1 $1,016.2 $(570.4) $986.9 Cost of sales 316.9 779.8 (570.4) 526.3 ----------- ------------ ----------- ----------- Gross margin 224.2 236.4 -- 460.6 Selling, general and administrative expenses 212.4 201.6 -- 414.0 Depreciation and amortization 12.8 15.6 -- 28.4 ----------- ------------ ----------- ----------- Operating profit (loss) (1.0) 19.2 -- 18.2 Interest expense (5.1) 26.2 -- 21.1 ----------- ------------ ----------- ----------- Income (loss) before income taxes 4.1 (7.0) -- (2.9) Income tax benefit (1.0) (0.1) -- (1.1) ----------- ------------ ----------- ----------- Net income (loss) before equity losses 5.1 (6.9) -- (1.8) Equity loss from minority investment (2.1) -- -- (2.1) Equity loss from subsidiaries (6.9) -- 6.9 -- ----------- ------------ ----------- ----------- Net income (loss) $ (3.9) $ (6.9) $ 6.9 $ (3.9) =========== ============ =========== ===========
Page 12 NOTE 7 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED CONSOLIDATING STATEMENTS OF CASH FLOWS THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
NOVEMBER 3, 2001 -------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------- ------------ ------------ ----------- (Millions of dollars) Net cash provided by (used for) operating activities $(93.2) $ 52.6 $ -- $(40.6) Net cash flows used for investing activities: Capital expenditures (8.3) (52.1) -- (60.4) Other, net (1.3) 0.2 -- (1.1) ----------- ----------- ------------ ----------- Net cash used for investing activities (9.6) (51.9) -- (61.5) Net cash flows provided by financing activities: Net increase in credit facilities 116.0 -- -- 116.0 Other, net (2.3) -- -- (2.3) ----------- ----------- ------------ ----------- Net cash provided by financing activities 113.7 -- -- 113.7 ----------- ----------- ------------ ----------- Net increase in cash 10.9 0.7 -- 11.6 Cash and temporary cash investments at beginning of period 13.8 3.7 -- 17.5 ----------- ----------- ------------ ----------- Cash and temporary cash investments at end of period $ 24.7 $ 4.4 $ -- $ 29.1 =========== =========== ============ ===========
OCTOBER 28, 2000 -------------------------------------------------- GUARANTOR PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------- ------------ ------------ ----------- (Millions of dollars) Net cash provided by (used for) operating activities $(30.8) $ 14.7 $ -- $(16.1) Net cash flows used for investing activities: Capital expenditures (10.3) (16.2) -- (26.5) Minority investment (6.5) -- -- (6.5) Other, net (0.2) 1.2 -- 1.0 ----------- ----------- ------------ ----------- Net cash used for investing activities (17.0) (15.0) -- (32.0) Net cash flows provided by financing activities: Net increase in credit facilities 51.5 -- -- 51.5 Other, net 2.7 (0.1) -- 2.6 ----------- ----------- ------------ ----------- Net cash provided by financing activities 54.2 (0.1) -- 54.1 ----------- ----------- ------------ ----------- Net increase (decrease) in cash 6.4 (0.4) -- 6.0 Cash and temporary cash investments at beginning of period 16.9 4.5 -- 21.4 ----------- ----------- ------------ ----------- Cash and temporary cash investments at end of period $ 23.3 $ 4.1 $ -- $ 27.4 =========== =========== ============ ===========
Page 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000 Management has communicated since the fourth quarter of fiscal 2001, when our turnaround plan was announced, and a charge for the SKU Reduction Initiative and 42 store closings was taken, that we expected to take a second charge for store closings in the current fiscal year. During the third quarter of fiscal 2002, we recorded a $19.7 million store closing charge ("Store Closing Charge"). This Store Closing Charge includes asset write-downs associated with the closing of 102 traditional stores and either the downsizing or buyout of the remaining lease obligation of four superstores that are under-performing relative to our required performance levels. The charge also includes the estimated cash closing costs and the estimated amount of any remaining rent liability, under non-cancelable lease agreements after the store closing date, for the 77 store closings that are expected to be completed in the next year. Approximately $8.0 million of the $19.7 million charge represents asset write-downs that are non-cash in nature. The majority of the charge, $17.1 million, is recorded in selling, general and administrative expenses with the balance, $2.6 million, recorded in cost of sales. Management expects this to be the final charge related to initiatives undertaken as part of its turnaround plan. Net sales for the third quarter of fiscal 2002 increased 13.9%, or $50.5 million, to $413.0 million from $362.5 million in the prior year. Sales from stores open one year or more ("same-store sales") increased 8.0% for the third quarter of fiscal 2002 compared with a same-store sales decrease of 0.4% for the prior year third quarter. Same-store sales accounted for $28.9 million, or approximately 57% of the overall sales increase for the quarter. The balance of the increase was primarily due to the increased number of superstores in operation. At November 3, 2001, 70 superstores were in operation compared with 55 superstores at October 28, 2000. By store format, our same-store sales performance for traditional stores increased 6.1%. This was driven by a 3.3% increase in customer traffic with the balance of the increase due to a higher average ticket. Same-store sales for superstores increased 9.2% for the quarter, which was driven by a 5.0% increase in customer traffic with the balance of the increase due to a higher average ticket. All major product categories experienced positive same-store sales gains for the quarter. Management attributes the improvement in same-store sales over last year to an improved inventory in-stock position in its stores. Sales performance was particularly strong in our hardlines and home decor categories. Clearance sales associated with the SKU Reduction Initiative contributed approximately $13.0 million in sales during the third quarter, but were recorded at a zero gross margin. At the end of the third quarter, we are approximately 65% sold through on this clearance product. We currently anticipate that the SKU Reduction Initiative will be completed by the end of our first quarter of fiscal 2003. As a percent of net sales, gross margin was 44.2% for the third quarter of fiscal 2002 compared with 47.6% for the same quarter a year earlier, a decrease of 3.4%. Of this decrease, 1.5% is attributable to the zero gross margin sales from the SKU Reduction Initiative and 0.6% is attributable to the Store Closing Charge recorded during the quarter. Excluding these two items, a more normalized margin rate for the quarter was 46.3%, a decrease of 1.3% from a year ago. The primary causes for this decrease were lower income from vendor purchase discounts during the quarter, resulting from successful execution of our plans to lower inventory levels, and higher shrink expense. Page 14 The shrink expense increase resulted from a deterioration in our shrink rates versus the prior year, consistent with the trend identified in the first half of the year and disclosed in our first and second quarter Form 10-Q filings this year. Our store shrink accrual rates are adjusted based upon the performance of annual physical inventories taken throughout the year. Physical inventories are typically concentrated in the nine months between January and September. During the third quarter, we inventoried, reconciled and recorded the inventory results of approximately 25% of our stores bringing our year-to-date results to 100% of our stores inventoried, reconciled and recorded. Shrink expense was $2.5 million worse than our shrink expense in the prior year third quarter. Selling, general and administrative ("SG&A") expenses were 44.2% of net sales for the third quarter of fiscal 2002, versus 40.9% for the third quarter of fiscal 2001, an increase of 3.3%. The Store Closing Charge recorded in SG&A in the third quarter fiscal 2002 increased SG&A expenses as a percentage of sales by 4.2%. Excluding this charge, positive expense leverage was realized in both store and non-store expenses, with good cost controls complementing the favorable impact of improved same-store sales growth. Depreciation and amortization expense increased $0.3 million to $9.9 million from $9.6 million. This increase is attributable to capital expenditures completed in the current and prior year. Operating income for the third quarter of fiscal 2002, excluding the Store Closing Charge of $19.7 million, was $10.0 million, compared to an operating income of $14.6 million for the third quarter of fiscal 2001. Interest expense increased $0.7 million to $8.6 million from $7.9 million in the third quarter of fiscal 2001. The increase is primarily due to the impact of higher average borrowings partially offset by a lower effective interest rate. Average borrowings on the revolver for the third quarter of fiscal 2002 increased $81.2 million, to $226.6 million from $145.4 million in the prior year third quarter. The increase in average borrowings is due primarily to the unwind of our synthetic lease facility and a change in our import letter of credit terms from 120 days to "site", as discussed further under "Liquidity and Capital Resources" below. Our effective income tax rate of 38.0% for the third quarter of fiscal 2002 was consistent with the rate for the third quarter of fiscal 2001. Net loss for the third quarter was $11.3 million, or $0.61 per diluted share, compared to net income of $3.1 million, or $0.17 earnings per diluted share, for the prior year third quarter. Excluding the Store Closing Charge, net income for the current year third quarter was $0.05 earnings per diluted share. COMPARISON OF THE THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000 Net sales for the first three quarters of fiscal 2002 increased 8.6%, or $85.2 million, to $1,072.1 million from $986.9 million in the prior year. Same-store sales increased 5.2% year-to-date compared to a same-store sales increase of 1.8% for the same period of the prior year. Same-store sales accounted for $50.1 million, or approximately 59% of the increase. The balance of the increase was primarily due to the increased number of superstores in operation. By store format, our same-store sales performance for traditional stores increased 4.2%. This was driven by a 3.2% increase in the average ticket with the balance of the increase driven by increased customer traffic. Same-store sales for superstores increased 6.4% year-to-date, driven by a 6.7% increase in customer traffic as the average ticket fell slightly against the prior year. All of our major product lines experienced positive same-store sales growth year-to-date. Page 15 Management attributes the improvement in same-store sales year over year to an improved store inventory in-stock position in its stores. Sales performance was particularly strong in our hardlines and home decor categories. Clearance sales associated with the SKU Reduction Initiative contributed approximately $30.0 million in sales year-to-date, but were recorded at a zero gross margin. At the end of the third quarter, we are approximately 65% sold through on this clearance product. We currently anticipate that the SKU Reduction Initiative will be completed by the end of our first quarter of fiscal 2003. As a percent of net sales, gross margin was 44.1% for year-to-date fiscal 2002 versus 46.7% for the same period a year earlier, a decrease of 2.6%. Of this decrease, 1.3% is attributable to the zero gross margin sales from the SKU Reduction Initiative and 0.2% is attributable to the Store Closing Charge recorded during the third quarter. Excluding these two items, a more normalized margin rate year-to-date was 45.6%, a decrease of 1.1% from the same period a year ago. The primary cause for this decrease was higher shrink expense. The shrink expense increase resulted from a deterioration in our shrink rate versus the prior year, consistent with the trend identified in the first half of the year and disclosed in our first and second quarter Form 10-Q filings this year. Our store shrink accrual rates are adjusted based upon the performance of annual physical inventories taken throughout the year. Physical inventories are concentrated in the nine months between January and September. At the end of the third quarter, we had inventoried, reconciled and recorded the inventory results of all our stores. Shrink expense for the year-to-date period was $15.6 million, or 1.2% as a percentage of sales, worse than our shrink expense for the year-to-date period last year. SG&A expenses were 44.1% of net sales for the first three quarters of fiscal 2002, versus 41.9% for fiscal 2001, an increase of 2.2%. The Store Closing Charge increased SG&A expenses as a percentage of sales by 1.7%. Excluding this charge, SG&A expense leverage was negatively impacted primarily by higher distribution expenses due to the opening of our second owned distribution center in Visalia, California. The opening of this distribution center necessitated operating a three distribution center network for approximately the first eight months of this year until the contract facility was closed in September. Depreciation and amortization expense increased $1.3 million to $29.7 million from $28.4 million. This increase is attributable to capital expenditures completed in the current and prior year and two additional months of depreciating the cost of the SAP retail project, which begun depreciating in April 2000. The operating loss for year-to-date fiscal 2002, excluding the Store Closing Charge of $19.7 million, was $9.4 million, compared to an operating income of $18.2 million for fiscal 2001. Year-to-date interest expense increased $3.4 million to $24.5 million from $21.1 million in fiscal 2001. The increase is primarily due to the impact of higher average borrowings partially offset by a lower effective interest rate. Average borrowings on the revolver for fiscal 2002 increased $64.3 million, to $184.3 million from $120.0 million in the prior year. The increase in average borrowings is due primarily to the unwind of the synthetic lease facility and the change in import letter of credit terms from 120 days to "site", as discussed under "Liquidity and Capital Resources" below. Our effective income tax rate of 38.0% for the first three quarters of fiscal 2002 was consistent with the rate used in the prior year. Page 16 Net loss for the first three quarters was $33.8 million, or $1.84 per diluted share, compared with a net loss of $3.9 million, or $0.21 loss per diluted share, for the prior year. Excluding the extraordinary item discussed below and the Store Closing Charge, net loss year-to-date was $21.0 million, or $1.15 loss per diluted share. In April 2001, we entered into a new four-year $365 million senior secured credit facility (the "Credit Facility"), consisting of a $325 million revolving credit facility and a $40 million term loan facility (the "Term Loan"). The Credit Facility replaced our prior senior credit and synthetic lease facilities. Deferred finance charges written-off under the prior senior credit facility totaled $0.6 million after-tax, or $0.03 per diluted share, and were recorded as an extraordinary item. See the discussion under "Liquidity and Capital Resources - Financing" below. LIQUIDITY AND CAPITAL RESOURCES Cash, including temporary cash investments, increased $11.6 million during the first three quarters of fiscal 2002 to $29.1 million as of November 3, 2001. Net cash used for operating activities was $40.6 million in the first three quarters of fiscal 2002, compared to net cash used for operating activities of $16.1 million in the first three quarters of fiscal 2001. Inventories increased $16.1 million, compared with an increase of $114.6 million in the first three quarters of the prior year. Inventories typically increase during the first three quarters of the fiscal year as the Company builds for the peak selling season. The smaller increase in fiscal 2002 is attributable to the Company successfully executing its plans to reduce overall inventory levels by fiscal year-end through a combination of the SKU Reduction Initiative and better utilization of the forecasting and replenishment capabilities aided by the installation of new enterprise-wide merchandising information systems in the prior year. Management has a stated objective of reducing inventory levels to $420 million by the end of the fiscal year. Accounts payable decreased $12.5 million in the first three quarters of fiscal 2002 despite the increased inventory levels, due to payment changes we initiated under our import letter of credit arrangements. We utilize letters of credit in the procurement of imported product for resale. Imported product represents approximately 20% of our total annual purchases. Beginning in late fiscal 2001, we have been changing our dating on import letters of credit to approximately 10 day, or "site terms", from our historic terms of 120 days, in exchange for more favorable cash discount terms from our vendors. This resulted in an approximately $30 million decrease in accounts payable and a corresponding increase in our debt outstanding. Net cash used for investing activities for the first three quarters of fiscal 2002 totaled $61.5 million compared to $32.0 million in the first three quarters of fiscal 2001. Capital expenditures of $60.4 million for the first half of fiscal 2002 include approximately $40.0 million related to the unwind of a synthetic lease facility which was replaced by our new Credit Facility (discussed further under "Financing" below). Excluding the unwind of the synthetic lease, capital expenditures of $20.4 million during the first three quarters of fiscal 2002 related primarily to the opening of 12 new superstores and other store related projects. During the first three quarters of fiscal 2002, we opened 12 superstores, relocated or expanded nine traditional stores and closed 30 smaller or under-performing traditional stores. For the balance of fiscal 2002, we expect to relocate one traditional store and to close 30 smaller traditional stores. Financing Page 17 We believe that our Credit Facility, coupled with cash on hand and cash from operations, will be sufficient to cover our working capital, capital expenditure and debt service requirement needs for the foreseeable future. In April 2001, we entered into a new senior secured credit facility which expires on April 30, 2005 and replaced our prior senior credit and synthetic lease facilities. The Credit Facility consists of a $365 million credit facility providing for $325 million in revolving loans and a $40 million term loan, both secured by a first priority perfected security interest in our inventory, accounts receivable, property and other assets. The Credit Facility is fully and unconditionally guaranteed by each of our subsidiaries. As of December 14, 2001, excess availability under this facility was $166.2 million. Interest on borrowings under the Credit Facility is calculated at the bank's base rate or London Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%, depending on the level of excess availability (as defined in the Credit Agreement) that is maintained. Proceeds from the Credit Facility were used to repay all outstanding borrowings under our prior senior credit facility and synthetic lease facility. The term loan portion of the Credit Facility replaces a $40 million synthetic lease facility that we used to finance the construction of our West Coast distribution center located in Visalia, California. The synthetic lease facility was accounted for as an operating lease, with interest payments capitalized until the facility began operations. As a result of the unwind of the synthetic lease facility, we recorded the appropriate assets and debt obligation of $40 million on our balance sheet in the first quarter of fiscal 2002. Effective May 15, 2001, the agent for the Credit Facility assumed assignment of our two interest rate swap agreements existing as of February 3, 2001, and on May 16, 2001, terminated those interest rate swap agreements and established a new interest rate swap with a fixed LIBOR rate of 6.72% and notional amount of $90.0 million, reducing to $40.0 million on May 1, 2003, until its expiration on April 30, 2005. BUSINESS OUTLOOK We believe that we will demonstrate further progress in our turnaround plan by returning to profitability in the fourth quarter and continuing into the next fiscal year. Provided we are able to achieve our sales goals for the fourth quarter, which call for a same-store sales increase of 5-6% versus a 0.2% same-store sales increase in the fourth quarter of last year, we should see a modest improvement in operating performance in the fourth quarter. However, our actual results in the fourth quarter are highly dependent on the sales performance we are able to achieve. SEASONALITY AND INFLATION Our business exhibits seasonality, which is typical for most retail companies. Our sales are much stronger in the second half of the year than the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season. We believe that inflation has not had a significant effect on net sales or on net income. There can be no assurance, however, that our operating results will not be affected by inflation in the future. FORWARD-LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "estimates," "expects," "believes," and similar expressions as they relate to us are intended to identify such forward-looking statements. Our actual results, performance or achievements may Page 18 materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, changes in customer demand, changes in trends in the fabric and craft industry, seasonality, our failure to manage our growth, our failure to execute our productivity initiatives, including the SKU Reduction Initiative and the store base productivity initiative, the availability of merchandise, changes in the competitive pricing for products, and the impact of our and our competitors store openings and closings. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We use derivative financial instruments at various times to manage the risk associated with interest rate fluctuations. The Company is subject to risk resulting from interest rate fluctuations, as interest on the Company's Credit Facility is based on variable rates. The Company's objective in managing its interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows. Interest rate swaps are primarily utilized to achieve this objective, effectively converting a portion of its variable-rate exposures to fixed interest rates (See Note 5 - Fair Value of Derivative Financial Instruments). Page 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 16, 2000, Sandy Lortz, a former employee of the Company, filed a purported class action complaint (the "Lortz Complaint") against the Company, on behalf of the Company's former and current California store management employees. The Lortz Complaint was filed in the Superior Court of California and alleges the Company violated certain California laws by erroneously treating its store management employees as "exempt" employees who are not entitled to overtime compensation. The Lortz Complaint seeks compensatory damages, penalties, attorneys' fees and injunctive relief. This case has been consolidated with a similar class action complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the Superior Court of California. The case is in the discovery phase and no trial date has been set. The Company intends to defend this lawsuit vigorously. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs of such litigation would not be material to the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS No exhibits are filed with this report. b) REPORTS ON FORM 8-K Not Applicable. Page 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JO-ANN STORES, INC. DATE: December 18, 2001 /s/ Alan Rosskamm ------------------ By: Alan Rosskamm President and Chief Executive Officer /s/ Brian P. Carney --------------------------- By: Brian P. Carney Executive Vice President and Chief Financial Officer Page 21