-----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, MSjN1Hl6vS8Vgs5943thlHFgvubpHarPZBYrJrlhtuxcCDNMrQvi1BpgYvoEj/yF 9rYwTxD22Tpi2NP/H4ZiJg== 0000950152-02-003738.txt : 20020502 0000950152-02-003738.hdr.sgml : 20020501 ACCESSION NUMBER: 0000950152-02-003738 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020202 FILED AS OF DATE: 20020502 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06695 FILM NUMBER: 02631703 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: CLEVELAND FABRIC SHOPS INC DATE OF NAME CHANGE: 19681216 FORMER COMPANY: FORMER CONFORMED NAME: FABRI CENTERS OF AMERICA INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CLEVELAND FABRIC SHOPS INC NUMBER THREE DATE OF NAME CHANGE: 19681216 10-K 1 l94145ae10-k.txt JO-ANN STORES, INC. FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 2, 2002 COMMISSION FILE NO. 1-6695 ------------------------ JO-ANN STORES, INC. (Exact name of Registrant as specified in its charter) OHIO 34-0720629 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5555 DARROW ROAD, HUDSON, OHIO 44236 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 656-2600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- --------------------- Class A Common Stock, Without Par Value New York Stock Exchange Class B Common Stock, 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 12, 2002, there were 10,001,176 shares of Class A Common Stock and 8,813,511 shares of Class B Common Stock outstanding and the aggregate market value of these Common Shares (based upon the closing price on April 11, 2002 of these shares on the New York Stock Exchange) of the Registrant held by persons other than affiliates of the Registrant was approximately $278.7 million. Documents incorporated by reference: Portions of the following documents are incorporated by reference: Proxy Statement for 2002 Annual Meeting of Shareholders -- Items 10, 11 and 12 of Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I Except as otherwise stated, the information contained in this report is given as of February 2, 2002, the end of our latest fiscal year. The words "Jo-Ann Stores, Inc.," "Jo-Ann Stores," "Jo-Ann Fabrics and Crafts," "Jo-Ann etc," "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 2002 ended February 2, 2002). ITEM 1. BUSINESS We are the largest national category-dominant retailer serving the retail fabric and craft industry. We were founded as a single retail store in 1943 and as of February 2, 2002 we operated 889 Jo-Ann Fabrics and Crafts traditional stores in 49 states and 70 Jo-Ann etc superstores in 16 states. We serve the approximately 76 percent of U.S. households that have engaged in crafts and hobbies 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 approximately 14,300 square feet. Over the past five years we have strategically relocated certain traditional stores, increasing average square footage per store approximately 13 percent and sales per square foot by approximately 20 percent. As a result, net sales per traditional store have increased to $1.3 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 approximately 46,000 square feet and in fiscal 2002 generated more than four times the revenue and over 30 percent higher sales per square foot than our traditional stores. We believe our superstores, which accounted for over 23 percent of fiscal 2002 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 fiscal 2001, we experienced significant difficulties with the implementation of our enterprise-wide system ("SAP Retail"). These difficulties impacted our ability to stay in stock on key basic products while, at the same time, resulted in our being overstocked on slower selling products. As a result, sales were negatively affected and our operating performance suffered. These issues, coupled with a weak retail environment, resulted in a same-store sales performance of 1.3 percent for fiscal 2001, our lowest same-store sales performance in six years. As a result of our recent decline in earnings trends, significant debt and inventory levels, and SAP Retail implementation issues, our strategy 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. Last year, we announced the implementation of our turnaround plan. See "Turnaround Charges" discussed under Management's Discussion and Analysis of Financial Condition and Results of Operations. BUSINESS STRATEGY We intend to improve our operating performance by growing same-store sales, improving product margins, improving leverage of store and administrative operating expenses and reducing interest expense through debt reduction. Key elements of this business strategy are: Grow Same-Store Sales. Both our traditional stores and superstores present opportunities to improve same-store sales. Our focus in this effort is maintaining improved inventory in-stocks, improved retail advertising, merchandise driven initiatives and store optimization. SAP Retail together with our improved distribution network structure, is providing excellent tools to accomplish these goals. The past year demonstrated that as in-stocks improved, we were able to supply the desired merchandise on a consistent basis and our customers responded favorably. We feel we have significant opportunity to continue to leverage improvements as we refine our operations moving forward. The superstore, in particular, has become a much 1 more significant component of our business, generating over 23 percent of total sales in fiscal 2002. We feel there is substantial same-store sales growth to be achieved as we advertise and merchandise this store concept more effectively. Improve Merchandise Margins. We believe we can improve margins by improving supply chain management and merchandising in our stores. We continually examine our product sourcing opportunities to improve our partnerships with our vendors or source through different channels. Further, SAP Retail has provided substantial flexibility in assessing product performance and we measure all of our product utilizing gross margin return on investment ("GMROI"). This process enables us to improve our product selection in our store inventory mix and allows us to reduce non-performing product. SAP Retail also provides the flexibility to target specific SKU item performance and placement in the locations where maximum results can be obtained. Improve Expense Leverage. We believe we can improve expense leverage by improving the operation of our superstores and maintaining a diligent focus on overall expense control. We completed a cost-reduction initiative in fiscal 2002, eliminating approximately 8 percent of our store support center payroll. Store level expenses are tightly controlled, and as we improve our superstore model, we expect to obtain additional leverage from these stores. Through the use of improved technology, including the roll-out of broadband communication to all of our stores in fiscal 2003, we expect to improve store productivity and communication, thereby containing our expense leverage. Completion of our new network distribution structure, with the opening of our Visalia, California distribution center in April 2001, provides the ability to leverage distribution expenses through improved direct delivery to our stores with less regional "pool" points. We continue to examine opportunities to eliminate costs from our operating structure. Reduce Interest Expense Through Debt Reduction. Our debt-to-capitalization ratio at February 2, 2002 was 49.0 percent. We are focused on operational performance improvements and the generation of cash flow for debt reduction. No new store growth is planned for fiscal 2003 and we will only proceed with growth in fiscal 2004 if our operational performance has been restored to a level where growth is warranted. We have set a debt-to-capitalization ratio goal of 30 percent to 35 percent within the next two years and we believe that level can be maintained while growing our store base. Improved inventory productivity enabled debt reduction during fiscal 2002 and we believe additional opportunity exists to improve inventory turns and grow our sales base without necessarily increasing our inventory investment. 2 STORES The following table shows our stores by type and state at February 2, 2002:
TRADITIONAL SUPERSTORE TOTAL TRADITIONAL SUPERSTORE TOTAL ----------- ---------- ----- ----------- ---------- ----- Alabama.............. 3 -- 3 Nebraska........... 6 -- 6 Alaska............... 5 -- 5 Nevada............. 4 3 7 Arizona.............. 15 4 19 New Hampshire...... 10 -- 10 Arkansas............. 3 -- 3 New Jersey......... 16 -- 16 California........... 104 5 109 New Mexico......... 6 -- 6 Colorado............. 14 -- 14 New York........... 41 7 48 Connecticut.......... 15 2 17 North Carolina..... 9 -- 9 Delaware............. 3 -- 3 North Dakota....... 4 -- 4 Florida.............. 51 6 57 Ohio............... 61 9 70 Georgia.............. 10 6 16 Oklahoma........... 5 -- 5 Idaho................ 9 -- 9 Oregon............. 26 -- 26 Illinois............. 44 -- 44 Pennsylvania....... 58 -- 58 Indiana.............. 28 2 30 Rhode Island....... 2 -- 2 Iowa................. 11 -- 11 South Carolina..... 2 -- 2 Kansas............... 9 1 10 South Dakota....... 2 -- 2 Kentucky............. 5 -- 5 Tennessee.......... 3 3 6 Louisiana............ 7 -- 7 Texas.............. 59 -- 59 Maine................ 5 -- 5 Utah............... 13 -- 13 Maryland............. 20 3 23 Vermont............ 4 -- 4 Massachusetts........ 25 -- 25 Virginia........... 22 -- 22 Michigan............. 47 10 57 Washington......... 34 3 37 Minnesota............ 18 5 23 West Virginia...... 6 -- 6 Mississippi.......... 2 -- 2 Wisconsin.......... 22 -- 22 Missouri............. 12 1 13 Wyoming............ 2 -- 2 --- -- --- Montana.............. 7 -- 7 Total.............. 889 70 959 === == ===
The following table reflects the number of stores opened, expanded or relocated, closed and acquired during each of the past five fiscal years (square footage in thousands):
STORES IN FISCAL STORES EXPANDED OR STORES STORES OPERATION AT SQUARE YEAR OPENED RELOCATED CLOSED ACQUIRED YEAR-END FOOTAGE ------ ------ ----------- ------ -------- ------------ ------- 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 2002 12 10 (60) -- 959 15,897
- --------------- (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. Our new store opening costs depend on the building type, store size and general cost levels in the area. During fiscal 2002, we opened 12 superstores, with an average square footage per store of approximately 41,300 square feet. Our average net opening cost of these superstores was $1.2 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 superstore in fiscal 2002 was $0.8 million. During fiscal 2003, we do not expect to open any new stores. We expect to relocate 6 traditional stores, and have committed to leases for 2 of these 6 planned projects. 3 PRODUCT SELECTION Each of our stores feature 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 2, FEBRUARY 3, JANUARY 29, 2002 2001 2000 ----------- ----------- ----------- Principal product line: Softlines................................. 64% 63% 64% Hardlines................................. 36 37 36 --- --- --- Total.................................. 100% 100% 100% === === ===
Historically, our traditional stores have 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 2002, 48 percent of superstore net sales were derived from softlines and 52 percent from hardlines. Softlines We believe that we provide the most extensive offering of apparel, quilting and 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 wider 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; - brand name fine art materials, including items such as pastels, water colors, oil paints, acrylics, easels, brushes, paper and canvas; 4 - 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, greater than $50 million at cost, that were under performing and we decided to discontinue. At the end of fiscal 2002, this initiative was substantially completed. 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 the normal course of business practices in retailing. MARKETING 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. During June 2000, we announced the formation of a strategic relationship with IdeaForest, an on-line 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. PURCHASING We have numerous competitive domestic and international sources of supply available for each category of product that we sell. During fiscal 2002, approximately 80 percent of our purchases were sourced 5 domestically and 20 percent 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 store support center, 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 represent more than three percent of our purchasing volume and the top ten suppliers represent less than 20 percent of our total purchasing volume. We currently utilize approximately 1,000 suppliers, with the top 200 representing more than 80 percent of our purchasing volume. LOGISTICS At the end of fiscal 2002, we operated two owned distribution centers which ship products to all of our stores on a weekly basis. Based on purchase dollars, approximately 80 percent of the products in our stores are shipped through our distribution center network, with the remaining 20 percent of our purchases shipped directly from our suppliers to our stores. Our primary distribution center facility is located in Hudson, Ohio and supplies product to approximately 640 stores, or 67 percent of our store base. Our Visalia, California distribution center was opened in April 2001, and services more than 300 stores. During the past three years we utilized a contract warehouse in southern California to distribute peak seasonal product directly to our stores. The contract warehouse was closed in September 2001. We transport product from our distribution centers to our stores utilizing contract carriers. Merchandise is shipped directly from our distribution centers to our stores for approximately 86 percent of our store base. For the remaining 14 percent of our chain, we transport product to 4 regional "hubs" where it is repacked for local delivery. We do not own either the regional hubs or the local delivery vehicles. The opening of the Visalia distribution center enabled us to reduce the percentage of our stores that were serviced through regional hubs from 42 percent last year to 14 percent at the end of the current year. 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. 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. 6 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 the Company 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 and field training departments 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 sales team members. INFORMATION TECHNOLOGY We believe we employ industry leading information technology in our stores. Our point of sale register transactions are polled nightly and our point of sale system interfaces with both our financial and merchandising systems. We utilize point of sale registers and scanning devices to record the sale of product at a SKU level at the stores. We also utilize handheld radio frequency terminals for a variety of store tasks including price look-up, perpetual inventory exception counting, merchandise receiving, vendor returns 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 SAP Retail. 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. The total cost of SAP Retail was approximately $33.0 million and is being amortized over five years. During fiscal 2001, we experienced operating difficulties stemming from the implementation of SAP Retail, as discussed further under "Turnaround Charges" in Management's Discussion and Analysis of Financial Condition and Results of Operations. During fiscal year 2002, we stabilized operations under SAP Retail and the system is now being used to fine-tune our inventory management capabilities. SAP Retail's auto replenishment features are helping improve our in-stock positions in stores and distribution centers, while simultaneously reducing safety stocks. STATUS OF PRODUCT OR LINE OF BUSINESS During fiscal 2002, there was 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 in the first half of the year. Net earnings are highest during the months of 7 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 2002, 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 national competitor in both the fabric segment and craft segment 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 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 2, 2002, we have not incurred any material expense on research activities relating to the development of new products or services or the improvement of existing products or services. 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 2, 2002, we had approximately 22,100 full and part-time employees, of which 20,700 worked in our stores, 532 were employed in our Hudson distribution center, 163 were employed in our Visalia distribution center and the balance were located at our store support center. 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 over 60 percent of our employees work part-time. 8 The United Steelworkers of America, Upholstery and Allied Industries Division currently represents employees who work in our Hudson, Ohio distribution center. Our current contract expires in May 2003. We believe that our relations with our employees and the union are good. FOREIGN OPERATIONS AND EXPORT SALES In fiscal 2002, we purchased approximately 20 percent of our products directly from manufacturers located in foreign countries. These foreign suppliers are located primarily in Hong Kong 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 fully satisfy our customers on a timely basis. If we overestimate consumer demand, we may be required to hold goods in inventory for a longer period of time or to reduce selling prices in order to clear 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 a 1.4 million square foot facility on 105 acres in Hudson, Ohio. We own both the facility and the real estate. The distribution center occupies 1.1 million square feet and the remainder is used as our store support center and a superstore. In addition, we own 77 acres of land adjacent to our Hudson, Ohio facility. During January 2001, we completed construction of a 630,000 square foot distribution center located on an 80-acre site in Visalia, California. We own both the facility and the real estate. 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 based on a percent of sales in excess of defined minimums. During the fiscal year ended February 2, 2002, we incurred $149.0 million of rental expense and common area maintenance for store locations. As of February 2, 2002, 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.............................................. 22 2003........................................................ 37 2004........................................................ 23 2005........................................................ 30 2006........................................................ 25 2007........................................................ 30 Thereafter.................................................. 791 --- Total............................................. 958 ===
9 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. 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 alleged the Company violated certain California laws by erroneously treating its store management employees as "exempt" employees who are not entitled to overtime compensation. This case was consolidated with a similar class action complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the Superior Court of California. A tentative settlement in this case was reached in January 2002 and a pre-tax charge of $6.5 million ($4.0 million after-tax, or $0.21 per diluted share) was recorded in the fourth quarter of fiscal 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during our fourth quarter. 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............................. 52 Chairman of the Board, President and Chief Executive Officer Dave Bolen................................ 50 Executive Vice President, Merchandising and Marketing Brian Carney.............................. 41 Executive Vice President, Chief Financial Officer Michael Edwards........................... 41 Executive Vice President, Operations Rosalind Thompson......................... 52 Executive Vice President, Human Resources
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. Dave Bolen has been Executive Vice President, Merchandising and Marketing, of our Company since March 2001. He was Executive Vice President, Stores and Business Development from August 1997 to March 2001 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 has been Executive Vice President, Operations of our Company since April 2001. Prior to joining our Company, he 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 Golfsmith 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 Vice President of Operations during his tenure. 10 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. 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 12, 2002 were 701 and 627, respectively. The quarterly high and low closing stock prices for fiscal 2002 and 2001 are presented in the table below:
CLASS A CLASS B COMMON STOCK COMMON STOCK ----------------- ----------------- HIGH LOW HIGH LOW ---- --- ---- --- Fiscal 2002: February 2, 2002.................................... $11.100 $3.900 $ 9.300 $2.250 November 3, 2001.................................... 5.810 4.250 3.800 2.500 August 4, 2001...................................... 4.950 3.950 3.250 2.250 May 5, 2001......................................... 5.600 3.900 4.750 2.830 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
11 ITEM 6. SELECTED FINANCIAL DATA The following table presents our selected financial data for each of the ten years ending February 2, 2002. 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 Securities and Exchange Commission.
FISCAL YEAR ENDED ----------------------------------------------------------------------------------------------------- FEB 2, FEB 3, JAN 29, JAN 30, JAN 31, FEB 1, JAN 27, JAN 28, JAN 29, JAN 30, 2002 2001(A) 2000 1999 1998 1997(A) 1996 1995 1994 1993 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- (Dollars in millions, except earnings per share data) OPERATING RESULTS: Net sales................ $1,570.3 $1,483.3 $1,381.5 $1,242.9 $ 975.0 $ 929.0 $ 834.6 $ 677.3 $ 582.1 $ 574.1 Total sales percentage increase............... 5.9% 7.4% 11.2% 27.5% 5.0% 11.3% 23.2% 16.4% 1.4% 29.9% Same-store sales percentage change...... 5.9% 1.3% 4.5% 3.5% 3.8% 7.5% 3.0% 1.0% (4.4)% 7.6% Gross margin............. 693.1 645.1 633.2 564.0 441.5 412.1 378.5 299.3 251.6 244.2 Selling, general and administrative expenses............... 644.2 589.2 533.8 476.7 363.1 340.9 319.9 257.2 223.4 221.2 Depreciation and amortization........... 39.3 38.3 32.0 27.7 21.7 21.2 18.2 14.0 12.0 10.1 Operating profit......... 9.6 17.6 67.4 34.5 56.7 50.0 40.4 28.1 16.2 12.9 Interest expense......... 32.7 29.0 26.2 12.5 5.9 10.6 12.0 8.4 5.6 5.5 Income (loss) from continuing operations before income taxes.... (23.1) (11.4) 41.2 22.0 50.8 39.4 28.4 19.7 10.6 7.4 Income tax provision (benefit).............. (8.8) (4.3) 15.6 8.6 19.1 14.8 10.6 7.6 3.9 2.8 Income (loss) from continuing operations............. (14.3) (7.1) 25.6 13.4 31.7 24.6 17.8 12.1 6.7 4.6 Losses from extraordinary items/discontinued operations............. (0.6) -- -- -- (1.1) -- -- -- (4.8) (1.0) Equity and asset impairment losses of minority investment.... -- (6.5) -- -- -- -- -- -- -- -- Net income (loss)........ (14.9) (13.6) 25.6 13.4 30.6 24.6 17.8 12.1 1.9 3.6 EBITDA (b)............... 48.9 55.9 99.4 62.2 78.4 71.2 58.6 42.1 28.2 23.0 EBITDA before unusual charges (b) (c)........ $ 75.1 $ 85.6 $ 99.4 $ 87.3 $ 78.4 $ 71.2 $ 58.6 $ 42.1 $ 28.2 $ 23.0 ----------------------------------------------------------------------------------------------------- PER SHARE DATA (d): Net income (loss) from continuing operations -- diluted............. $ (0.81) $ (0.75) $ 1.38 $ 0.67 $ 1.59 $ 1.26 $ 0.91 $ 0.65 $ 0.35 $ 0.24 Average shares outstanding -- diluted (000's)................ 18,444 18,041 18,583 19,904 20,592 21,216 19,293 18,749 18,877 19,263 Book value............... $ 12.49 $ 13.67 $ 14.54 $ 13.10 $ 12.31 $ 10.59 $ 9.27 $ 58.25 $ 8.16 $ 7.99 Shares outstanding, net of treasury shares (000's)................ 18,632 18,207 17,845 19,012 18,767 17,921 18,486 18,398 18,194 18,555 ----------------------------------------------------------------------------------------------------- FINANCIAL POSITION: Inventories.............. $ 369.0 $ 451.0 $ 442.5 $ 404.0 $ 278.9 $ 280.6 $ 322.6 $ 274.7 $ 223.8 $ 223.2 Current assets........... 438.2 505.8 497.9 480.1 312.3 308.7 351.8 315.8 247.1 242.0 Property, equipment and leasehold improvements, net.................... 210.1 190.2 194.7 164.0 110.0 94.6 102.0 84.1 75.6 77.9 Current liabilities...... 205.4 223.5 208.1 209.2 164.8 141.2 129.2 127.5 80.2 93.6 Long-term debt........... 223.7 240.0 245.2 182.5 24.7 72.1 155.5 127.0 102.5 104.1 Shareholders' equity..... $ 232.8 $ 248.8 $ 259.4 $ 249.0 $ 231.1 $ 189.8 $ 171.4 $ 151.8 $ 148.4 $ 148.2 -----------------------------------------------------------------------------------------------------
12 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
FISCAL YEAR ENDED ----------------------------------------------------------------------------------------------------- FEB 2, FEB 3, JAN 29, JAN 30, JAN 31, FEB 1, JAN 27, JAN 28, JAN 29, JAN 30, 2002 2001(a) 2000 1999 1998 1997(a) 1996 1995 1994 1993 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- (Dollars in millions, except earnings per share data) STATISTICS AND OTHER FINANCIAL INFORMATION: Operating profit percent of sales............... 0.6% 1.2% 4.9% 2.8% 5.8% 5.4% 4.8% 4.1% 2.8% 2.2% EBITDA percent of sales.................. 3.1% 3.8% 7.2% 5.0% 8.0% 7.7% 7.0% 6.2% 4.8% 4.0% Return on average assets (e).................... (2.0)% (1.0)% 3.6% 2.4% 7.4% 5.5% 4.0% 3.2% 1.9% 1.4% Return on average equity (e).................... (5.9)% (2.8)% 10.1% 5.6% 15.1% 13.6% 11.0% 8.1% 4.5% 3.1% Capital expenditures..... $ 66.5 $ 35.9 $ 67.4 $ 75.1 $ 36.6 $ 13.2 $ 34.7 $ 11.7 $ 8.5 $ 32.3 Long-term debt to total capitalization......... 49.0% 49.1% 48.6% 42.3% 9.7% 27.5% 47.6% 45.6% 40.9% 41.3% Ratio of EBITDA to interest expense (times)................ 1.5 1.9 3.8 5.0 13.3 6.7 4.9 5.0 5.0 4.2 Ratio of debt to EBITDA (times)................ 4.6 4.3 2.5 2.9 0.3 1.0 2.7 3.0 3.6 4.5 ----------------------------------------------------------------------------------------------------- STORE COUNT: Traditional stores....... 889 949 984 1,034 896 913 935 964 655 693 superstores.............. 70 58 42 24 7 1 1 -- -- -- ----------------------------------------------------------------------------------------------------- Total.................... 959 1,007 1,026 1,058 903 914 936 964 655 693 STORE SQUARE FOOTAGE (000'S): Traditional stores....... 12,684 13,381 13,685 14,144 11,794 11,566 11,476 11,424 7,481 7,376 superstores.............. 3,213 2,687 1,957 1,126 325 46 46 -- -- -- ----------------------------------------------------------------------------------------------------- Total.................... 15,897 16,068 15,642 15,270 12,119 11,612 11,522 11,424 7,481 7,376
- --------------- (a) 53-week year. (b) Earnings before interest, taxes, depreciation and amortization. (c) Excludes unusual charges as follows: Fiscal 2002 -- $26.2 million; $6.5 million, for the settlement of California wage litigation, and $19.7 million for 106 store closings as part of the Company's Turnaround Plan. Fiscal 2001 -- $29.7 million; $6.7 million, for 42 store closings and $23.0 million for a SKU reduction initiative, both as part of the Company's Turnaround Plan. Fiscal 1999 -- $25.1 million in non-recurring charges related to the Company's acquisition of House of Fabrics, Inc. (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 if it were a two-for-one stock split. (e) Calculated based on income from continuing operations. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements presented in this Form 10-K. We are the nation's largest fabric and craft 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 fabrics and notions used in crafting, quilting, apparel sewing, and home decorating projects, to craft components, silk and dried flowers, and finished seasonal merchandise. As of February 2, 2002, we operated 959 stores in 49 states (889 traditional stores and 70 superstores). Our traditional stores average approximately 14,300 square feet. Over the past five years, we have strategically relocated certain traditional stores, increasing average square footage per store approximately 13% and sales per square foot by approximately 20%. As a result, net sales per traditional store have increased to approximately $1.3 million over this period. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores average approximately 46,000 square feet and in fiscal 2002, on a per-store basis, generated more than four times the revenue and over 30% higher sales per square foot than our traditional stores. We believe our superstores, which accounted for over 23% of fiscal 2002 net sales, present opportunities for future sales growth. Over the past four years, we have invested heavily in our infrastructure, primarily in the areas of superstore growth and systems and logistics. Although this infrastructure spending resulted in higher debt levels and interest expense, it was required in order to improve our operating efficiency and to build the necessary platform for continued store growth. Recent major capital expenditures include: - implementation of our fully integrated enterprise-wide system ("SAP Retail") - completed in fiscal 2001; - construction and opening of our Visalia, California distribution center, our second owned distribution center, completed in fiscal 2002; and - the opening of 69 superstores over the last five years, 12 of which were opened during fiscal 2002. TURNAROUND CHARGES In fiscal 2001, we experienced significant difficulty with the implementation of SAP Retail, impacting our ability to stay in stock on key basic products while, at the same time, being overstocked on slower selling products. As a result, sales were negatively affected and our operating performance suffered. These issues, coupled with a weak retail environment, resulted in a same-store sales performance of 1.3% for fiscal 2001, our lowest same-store sales performance in six years. As a result of our recent decline in earnings trends, significant debt and inventory levels, and SAP Retail implementation issues, our strategy 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. Last year, we announced the implementation of our turnaround plan (the "Turnaround Plan"), which encompassed the following key objectives for fiscal 2002: - slowing new store growth to maximize free cash flow and reduce debt; - 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 14 - challenging all aspects of our existing business to focus on execution and improve our operating discipline. In accordance with current accounting literature (Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges,") we recorded a $6.7 million pre-tax ($4.1 million after-tax) charge to operating expenses during the fourth quarter of fiscal 2001 and $17.1 million pre-tax ($10.6 million after-tax) charge to operating expenses during the third quarter of fiscal 2002 for restructuring and asset impairment costs resulting from 148 identified store closings associated with the Turnaround Plan. In accordance with EITF 96-9 "Classification of Inventory Markdowns and Other Costs Associated with a Restructuring," we also recorded a $2.6 million pre-tax charge ($1.6 million after-tax) to cost of goods sold during the third quarter of fiscal 2002 to reflect the markdown of certain inventory contained in the stores identified for closing to its net realizable value. Further, we recorded a $23.0 million pre-tax charge ($14.3 million after-tax) to cost of goods sold during the fourth quarter of fiscal 2001 to reflect the markdown of certain inventory to its net realizable value, identified as part of the SKU Reduction Initiative. In total, the turnaround charges (the "Turnaround Charges") were $19.7 million pre-tax ($12.2 million after-tax), or $0.67 per diluted share in fiscal 2002 and $29.7 million pre-tax ($18.4 million after-tax), or $1.02 per diluted share in fiscal 2001. These charges are described more fully below. Please read Note 2 to the consolidated financial statements for other important information about the Turnaround Charges. STORE CLOSING CHARGES -- Beginning in the fourth quarter of fiscal 2001, we undertook a comprehensive review of our existing store base. We evaluated all of our stores based on return on investment parameters and decided to close those stores that were under-performing relative to our required performance levels. During the fourth quarter of fiscal 2001, we identified 42 traditional stores for closing during fiscal 2002. In the third quarter of fiscal 2002, we announced a charge for 102 traditional store closings and either the downsizing or buyout of four superstores. We accrued closing costs of $6.7 million pre-tax in the fourth quarter of fiscal 2001 and $19.7 million pre-tax in the third quarter of fiscal 2002. The store closing charges taken in these quarters include asset write-downs associated with the identified stores and the estimated closing costs for stores that are expected to be closed in the next twelve months. 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 240 stores in the last five years, we are only paying rent on 16 store locations where we have not yet obtained a sublease tenant or executed a lease termination. SKU REDUCTION INITIATIVE -- During the fourth quarter of fiscal 2001, we commenced the SKU Reduction Initiative which entailed a thorough review of our inventory investment and gross margin performance by item or SKU, utilizing analytical capabilities afforded us under SAP Retail. This analysis identified approximately 10,000 active items, greater than $50 million at cost, that were under-performing and that we decided to discontinue. We began clearance programs in the second quarter of fiscal 2002 designed to eliminate this product. As explained above, we recorded a $23.0 million pre-tax charge to reserve for the portion of this product that we estimated would be sold below cost in the fourth quarter of fiscal 2001. However, liquidating this inventory at reduced selling prices put pressure on overall realized gross margins in fiscal 2002, since the sales were recorded at a zero gross margin. Our ongoing strategy is to fund improved fill rates for our most productive items by eliminating investment in less-productive inventory. The SKU Reduction Initiative was an important first step in this inventory productivity initiative. 15 We believe the review process we completed in the fourth quarter of fiscal 2001 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 the normal course of business practices in retailing. During fiscal 2002, we focused our attention on the productivity of our existing store base, improved our inventory management processes, and managed our capital spending tightly in order to maximize our free cash flow to reduce debt levels. We believe we have been successful in this endeavor. OTHER NON-RECURRING CHARGES In addition to the Turnaround Charges discussed above, we recorded two additional charges during fiscal 2002 and 2001 which were non-recurring in nature. CALIFORNIA LITIGATION SETTLEMENT -- 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 alleged the Company violated certain California laws by erroneously treating its store management employees as "exempt" employees who are not entitled to overtime compensation. This case was consolidated with a similar class action complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the Superior Court of California. A tentative settlement in this case was reached in January 2002 and a pre-tax charge of $6.5 million ($4.0 million after-tax), or $0.21 per diluted share was recorded in the fourth quarter of fiscal 2002. MINORITY INVESTMENT IN IDEAFOREST.COM -- On June 6, 2000, we announced the formation of a strategic relationship with IdeaForest, an on-line 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 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. Our decision to reduce the carrying value of our investment to zero was predicated on operating projections prepared by IdeaForest that resulted in the their cash balance being reduced to near zero before cash flow positive operating status was achieved. We remain committed to an online presence and IdeaForest is currently operating its business in line with its planned projections. 16 RESULTS OF OPERATIONS As discussed above, our reported results were impacted by the Turnaround Charges and other non-recurring charges recorded by the Company during fiscal 2002 and fiscal 2001. The following table shows the pro forma effect of non-comparable items on fiscal years 2002 and 2001.
FISCAL 2002 FISCAL 2001 ------------------------------------------ ------------------------------------------ EXCLUDING EXCLUDING AS NON-COMPARABLE NON-COMPARABLE AS NON-COMPARABLE NON-COMPARABLE REPORTED ITEMS ITEMS REPORTED ITEMS ITEMS -------- -------------- -------------- -------- -------------- -------------- (Dollars in millions) Net sales................. $1,570.3 $ -- $1,570.3 $1,483.3 $ -- $1,483.3 Gross margin............ 693.1 2.6(a) 695.7 645.1 23.0(c) 668.1 Selling, general and administrative expenses................ 644.2 (23.6)(a)(b) 620.6 589.2 (6.7)(c) 582.5 Depreciation and amortization............ 39.3 -- 39.3 38.3 -- 38.3 -------- ------ -------- -------- ------ -------- Operating profit........ 9.6 26.2 35.8 17.6 29.7 47.3 Interest expense.......... 32.7 -- 32.7 29.0 -- 29.0 -------- ------ -------- -------- ------ -------- Income (loss) before income taxes.......... (23.1) 26.2 3.1 (11.4) 29.7 18.3 Income tax provision (benefit)............... (8.8) 10.0 1.2 (4.3) 11.3 7.0 -------- ------ -------- -------- ------ -------- Income (loss) before equity loss and extraordinary item.... (14.3) 16.2 1.9 (7.1) 18.4 11.3 Equity and asset impairment losses of minority investment..... -- -- -- (6.5) 6.5(d) -- -------- ------ -------- -------- ------ -------- Income (loss) before extraordinary item.... (14.3) 16.2 1.9 (13.6) 24.9 11.3 Extraordinary item, net of tax..................... (0.6) 0.6 -- -- -- -- -------- ------ -------- -------- ------ -------- Net income (loss)......... $ (14.9) $ 16.8 $ 1.9 $ (13.6) $ 24.9 $ 11.3 ======== ====== ======== ======== ====== ========
- --------------- (a) $19.7 million related to Turnaround Charges, $2.6 million in cost of sales and $17.1 million in selling, general and administrative expenses, see "Turnaround Charges" previously discussed for further explanation. (b) $6.5 million related to California litigation settlement, see "Other Non-Recurring Charges" previously discussed for further explanation. (c) $29.7 million related to Turnaround Charges, see "Turnaround Charges" previously discussed for further explanation. (d) $6.5 million related to a $3.2 million IdeaForest equity loss and write-off of the carrying value of the investment in IdeaForest, see "Other Non-Recurring Charges" previously discussed for further explanation. 17 The following table sets forth the financial information presented above, excluding non-comparable items through operating profit, 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 YEAR ENDED ------------------------------------------ FEB 2, 2002 FEB 3, 2001 JAN 29, 2000 ----------- ----------- ------------ Net sales....................................... 100.0% 100.0% 100.0% Gross margin.................................. 44.3% 45.0% 45.8% Selling, general and administrative expenses.... 39.5% 39.2% 38.6% Depreciation and amortization................... 2.5% 2.6% 2.3% ----- ----- ----- Operating profit.............................. 2.3% 3.2% 4.9% ===== ===== =====
To provide a more meaningful comparison of operating performance between fiscal years, the following discussion excludes the impact of the non-comparable items. COMPARISON OF THE 52 WEEKS ENDED FEBRUARY 2, 2002 AND THE 53 WEEKS ENDED FEBRUARY 3, 2001 Our results for fiscal 2002 demonstrated strong progress on our Turnaround Plan initiatives. Net sales. Net sales for fiscal 2002 were $1,570.3 million compared with $1,483.3 million in fiscal 2001, an increase of $87.0 million, or 5.9%. Fiscal 2001 was a 53-week year. Excluding the 53rd week, sales increased 7.5% over fiscal 2001. Same-store sales increased $82.8 million or 5.9% for fiscal 2002 over fiscal 2001. Same-store sales increased 1.3% for fiscal 2001 over fiscal 2000. The remainder of the sales increase was due to the increase in the number of superstores in operation. We operated 70 superstores at February 2, 2002 compared to 58 superstores at February 3, 2001. By store format, our same-store sales performance for traditional stores increased 5.1%. This was driven by a 3.5% increase in the average ticket with the balance of the increase driven by increased customer traffic. Same-store sales for superstores increased 9.4%, driven by a 6.2% increase in customer traffic with the balance of the increase driven by an increase in the average ticket. Each of our major product categories experienced positive same-store sales growth for the year. Management attributes the improvement in same-store sales year over year to an improved inventory in-stock position in our stores. Sales performance was particularly strong in our hardlines and home decor categories. Clearance sales associated with the SKU Reduction Initiative contributed approximately $34.0 million in sales for the year, but were recorded at a zero gross margin. At the end of fiscal 2002, we had substantially completed our SKU Reduction Initiative. Gross margin. Gross margin for fiscal 2002 was $695.7 million compared with $668.1 million in fiscal 2001. As a percentage of net sales, fiscal 2002 gross margin was 44.3% compared with 45.0% in the prior year, a decrease of 70 basis points. Of this decrease, approximately 100 basis points is attributable to the $34.0 million in zero gross margin sales from the SKU Reduction Initiative. Excluding these sales, a more normalized margin rate for the year was 45.3%, a slight improvement from a year ago. Higher shrink expense incurred during the year was more than offset by higher realized store margin rates. 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 quarterly Form 10-Q filings throughout fiscal 2002. 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 fourth quarter, we had inventoried, reconciled and recorded the inventory results of all our stores. Shrink expense for the fiscal year was $18.3 million, or 100 basis points as a percentage of sales, worse than our shrink expense for last year. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $620.6 million in fiscal 2002 compared with $582.5 million in fiscal 2001. As a percentage of sales, SG&A 18 expenses increased 20 basis points, to 39.5%, compared with 39.3% in fiscal 2001. SG&A expense leverage was negatively impacted primarily by higher distribution expenses due to the opening of our second 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 fiscal 2002 until our contract facility in Rancho Cucamonga, California was closed in September. The start-up costs of our Visalia distribution center, coupled with the duplicative cost of running a three distribution center network for eight months, added approximately $3.0 million in distribution expenses in fiscal 2002. Depreciation and amortization. Depreciation and amortization expense for fiscal 2002 was $39.3 million compared with $38.3 million in fiscal 2001, an increase of $1.0 million. The increase in depreciation expense was primarily due to two additional months of depreciation related to SAP Retail, which we began depreciating in April 2000. Operating profit. Operating profit for fiscal 2002 was $35.8 million, compared with $47.3 million in fiscal 2001, a decrease of $11.5 million. Interest expense. Interest expense for fiscal 2002 was $32.7 million compared with $29.0 million in fiscal 2001, an increase of $3.7 million. 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 $5.5 million, to $122.9 million from $117.4 million in the prior year. The increase in average borrowings is due primarily to the unwind of a synthetic lease facility used to finance our Visalia distribution center and a change in import letters of credit terms from 120 days to "sight", as discussed under "Liquidity and Capital Resources" below. Income taxes. Our effective income tax rate was 38.0% for both fiscal 2002 and fiscal 2001. Extraordinary Item. In April 2001, we entered into a four-year $365.0 million senior secured credit facility (the "Credit Facility"), consisting of a $325.0 million revolving credit facility and a $40.0 million term loan facility. 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 -- Sources of Liquidity" below. COMPARISON OF THE 53 WEEKS ENDED FEBRUARY 3, 2001 AND THE 52 WEEKS ENDED JANUARY 29, 2000 Our operating results for fiscal 2001 were disappointing. Sales performance suffered due to a weak economic environment experienced in the second half of fiscal 2001, that was exacerbated by out-of-stock problems that we encountered as a result of difficulties in successfully transitioning our business to SAP Retail. We went live with SAP Retail in the first quarter of fiscal 2001 after a two-year installation period. As a result of the sales softness, our operating performance deteriorated from the prior year. 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 to 42 superstores at January 29, 2000. Gross margin. Gross margin for fiscal 2001 was $668.1 million compared with $633.2 million in fiscal 2000. As a percentage of net sales, fiscal 2001 gross margin was 45.0% compared with 45.8% in the prior year, a decrease of 80 basis points. This was caused primarily by lower realized gross margins on the softlines side of our business, due to fourth quarter clearance markdowns in our apparel and craft fabric categories. Selling, general and administrative expenses. SG&A expenses were $582.5 million in fiscal 2001 compared with $533.8 million in fiscal 2000. As a percentage of sales, SG&A expenses increased 70 basis points, to 19 39.3%, compared with 38.6% in fiscal 2000. The 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. 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 SAP Retail 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. Operating profit. Operating profit for fiscal 2001 was $47.3 million, compared with $67.4 million in fiscal 2000, a decrease of $20.1 million. 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. Our effective income tax rate was 38.0% for both fiscal 2001 and fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES The following table provides cash flow related information for the three fiscal years ended February 2, 2002.
2002 2001 2000 ------ ------ ------ Net cash provided by operating activities................... $ 88.2 $ 39.0 $ 27.7 Net cash used for investing activities...................... (66.5) (40.7) (66.0) Net cash (used for) provided by financing activities........ (18.1) (2.2) 39.3 ------ ------ ------ Net increase (decrease) in cash and temporary cash investments............................................... 3.6 (3.9) 1.0 ====== ====== ====== Ending cash and temporary cash investments.................. $ 21.1 $ 17.5 $ 21.4 ====== ====== ======
NET CASH PROVIDED BY OPERATING ACTIVITIES Net cash provided by operating activities was $88.2 million in fiscal 2002, compared with $39.0 million in fiscal 2001, an increase of $49.2 million driven by improvements in working capital. Most notably, inventories, net of payables support, decreased $41.1 million. Inventories decreased $82.0 million, compared with an increase of $8.5 million in the prior year. The large decrease 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, store closings, and better utilization of the forecasting and replenishment capabilities aided by the installation of SAP Retail in the prior year. Accounts payable decreased $40.9 million in fiscal 2002, due to the significant drop in inventory levels and as a result of payment changes we initiated under our import letter of credit arrangements. We utilize letters of credit in the procurement of imported product for resale, which represents approximately 20% of our total annual purchases. Beginning in late fiscal 2001, we changed our dating on import letters of credit to approximately 10 days, or "sight" terms, from our historic terms of 120 days, in exchange for more favorable discount terms from our vendors. This resulted in an approximately $30.0 million decrease in accounts payable and a corresponding increase in the Company's debt outstanding. Net cash provided by operating activities was $39.0 million in fiscal 2001, compared with $27.7 million in fiscal 2000, an increase of $11.3 million. Cash generated by operations in fiscal 2001, before working capital items and excluding non-comparable items, totaled $47.1 million, a decrease of $24.7 million from the 20 $71.8 million generated during fiscal 2000. Cash provided by working capital changes more than offset this decrease, primarily due to an improved level of payables support in fiscal 2001 and a lack of build in inventories. Settlement of House of Fabrics Tax Liability During fiscal 2001, we reached a final settlement on a contingent income tax liability (discussed in Note 4 to the consolidated financial statements) assumed during the acquisition of House of Fabrics. 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 fiscal 2001 at the time of the settlement. Net Cash Used For Investing Activities Net cash used for investing activities for fiscal 2002 totaled $66.5 million compared with $40.7 million in fiscal 2001. Capital expenditures were $66.5 million during fiscal 2002 versus $35.9 million in fiscal 2001 and are discussed further below under the caption "Capital Expenditures." 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. In addition, we invested $6.5 million in IdeaForest.com, as we discussed previously under "Minority Investment in IdeaForest.com." Capital Expenditures Capital expenditures of $66.5 million in 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). The synthetic lease facility was originally used to finance the construction and equipment cost of our distribution center in Visalia, California. During fiscal 2001, construction was completed on this new 630,000 square foot West Coast distribution center. This facility was 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. Excluding the unwind of the synthetic lease, capital expenditures of $26.5 million during fiscal 2002 related primarily to the opening of new superstores and other store related projects. During the year, we opened 12 superstores, relocated or expanded 10 and closed 60 smaller or under-performing traditional stores. During fiscal 2001, we reinvested $35.9 million into our business, of which $26.2 million represented new stores and upgrades through the relocation or remodeling of our existing store base. We opened 16 superstores and two traditional stores, relocated six and closed 37 smaller or under-performing traditional stores. We spent $4.0 million in fiscal 2001 on capitalizable systems technology, of which $3.0 million related to the installation of SAP Retail. This software replaced substantially all of our existing financial and merchandising systems. We became operational on SAP Retail in March 2000. The total cost of this two-year project, including expenses, was approximately $33.0 million and is being depreciated over five years. We also spent $3.3 million in fiscal 2001 on capital projects for our distribution network, including, the preparation of our Hudson distribution center for seasonal product handling. We anticipate capital expenditures in fiscal 2003 of $15 to $20 million. The bulk of this spending pertains to store operations and store information technology improvements. During fiscal 2003, capital spending will be kept to a minimum and no new stores are planned, as we continue to focus on operational enhancements and cash flow for debt reduction. 21 NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES Net cash used for financing activities during fiscal 2002 was $18.1 million, primarily related to a $16.3 million net decrease in debt borrowings resulting from the inventory management and Turnaround Plan progress. This debt reduction was achieved despite the unwinding of a $40.0 million synthetic lease, which added $40.0 million to our balance sheet debt levels, and changes to our letter of credit payment terms, which we estimate added $30.0 million to our debt levels. Net cash used for financing activities during fiscal 2001 was $2.2 million, primarily related to a decrease in debt borrowings of $5.2 million. 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 and 2002, we avoided share repurchase opportunities in order to focus on debt reduction. As of February 2, 2002, 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. Our liquidity is not currently dependent on the use of off-balance sheet transactions other than normal operating leases. 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 the Credit Facility which replaced our prior senior credit and synthetic lease facilities. The Credit Facility expires on April 30, 2005. The Credit Facility consists of a $365.0 million credit facility providing for $325.0 million in revolving loans and a $40.0 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. 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 contains a sub-limit for letters of credit of $150.0 million. 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 $40.0 million synthetic lease facility that we used to finance the construction of our West Coast distribution center. 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 $40.0 million on our balance sheet in the first quarter of fiscal 2002. As of February 2, 2002, we had outstanding borrowings of $73.7 million under the Credit Facility at a weighted average interest rate of 8.7% and $31.2 million of letters of credit outstanding. The Company's weighted average interest rate and weighted average borrowings under the Credit Facility, prior senior credit facility and other lines of credit were 7.2% and $169.0 million during fiscal 2002 and 7.9% and $119.3 million during fiscal 2001. 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. 22 Our total debt-to-capitalization ratio was 49.0% at February 2, 2002 and 49.1% at February 3, 2001. We have a goal to further reduce debt levels during fiscal 2003 utilizing cash provided by operating activities and holding capital spending levels at $15 to $20 million. CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following tables summarize our future cash outflows resulting from financial contracts and commitments as of February 2, 2002:
PAYMENTS DUE BY PERIOD ------------------------------------------------ LESS THAN 1 1-3 4-5 AFTER 5 TOTAL YEAR YEARS YEARS YEARS ------ ----------- ------ ------ ------- Subordinated notes.............................. $150.0 $ -- $ -- $ -- $150.0 Credit Facility -- revolving facility........... 33.7 -- -- 33.7 -- Credit Facility -- term loan.................... 40.0 -- -- 40.0 -- Operating Leases (1)............................ 676.8 116.2 193.4 145.1 222.1 ------ ------ ------ ------ ------ Total Contractual Cash Obligations.............. $900.5 $116.2 $193.4 $218.8 $372.1 ====== ====== ====== ====== ======
- --------------- (1) The remaining cash payments associated with our Turnaround Charges include $9.6 million of lease obligations for stores closed or to be closed. 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 foreign currency fluctuations on merchandise that is sourced internationally and the impact of interest rate changes on our outstanding borrowings under the Credit Facility. 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. 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. Interest rate swaps are primarily utilized to achieve this objective. We utilize interest rate swaps to manage net exposure to interest rate changes related to our debt structure. A one-percent increase or decrease in interest rates would cause an increase or decrease to interest expense of $0.8 million. This includes the impact resulting from the interest rate swap agreement the Company has in place. 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 was $50.0 million, with a fixed LIBOR of 5.98%. On September 5, 2000, we entered into a separate interest rate swap agreement to further hedge our interest rate exposure. The interest rate swap had a term of five years effective May 1, 2001, with a notional amount 23 of $40.0 million and a fixed LIBOR rate of 6.80%. Effective May 15, 2001, the agent for the Credit Facility assumed assignment of our two interest rate swap agreements 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. Effective February 4, 2001, the Company adopted 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 loss and reclassified into earnings as the underlying hedged item affects earnings. During fiscal 2002, unrealized after tax net losses of $3.0 million were recorded in other comprehensive loss, including a $1.7 million cumulative transition adjustment, as of the date of adoption of SFAS No. 133. The hedge ineffectiveness for fiscal 2002 was $1.0 ($0.6 after-tax) million and is reflected in interest expense. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes. The use of estimates is pervasive throughout our financial statements, but the accounting policies and estimates we consider most critical are as follows: Inventory Valuation Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. Inventory valuation methods require certain management estimates and judgments. These include estimates of net realizable value on product designated for clearance and shrink, which affect the ending inventory valuation at cost as well as the gross margins reported for the year. We estimate our reserve for clearance product based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends. Historically, we have not experienced significant differences in our estimates of recovery compared with actual results. Our accrual for shrink is based on the actual historical shrink results of our most recent store physical inventories. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Substantially all of our store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at February 2, 2002 is based on the shrink results of these physical inventories. All of our store locations that have been open one year or more are physically inventoried at least once a year. We experienced an increase in historical shrink rates in fiscal 2002 compared with the prior year, and we adjusted our shrink accrual to the higher realized shrink rates incurred. We will continue to adjust our shrink rate estimates based on the results of future store physical inventories and shrink trends. Valuation of Long-Lived Assets Long-lived assets and certain identifiable intangibles historically have been reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by us to be generated by those assets. If such assets are 24 considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. There are no events or changes in circumstances of which we are aware indicating that the carrying value of our long-lived assets may trigger an impairment consideration, other than as discussed below under "Accrued Store Closing Costs." As described below under "Recent Accounting Pronouncements," the accounting treatment for goodwill and other intangible assets will change significantly effective the beginning of fiscal 2003. Accrued Store Closing Costs We accrue costs related to stores closed or identified for closing, which include future rental obligations, carrying costs, and other closing costs. These expenses are accrued when we have committed to closing or relocating a store and are calculated at the lesser of future rental obligations remaining under the lease (less estimated sublease rental income) or the estimated lease termination cost. The determination of the accrual is dependent on our ability to make estimates of costs to be incurred post-closing and of sublease rental income to be received from subleases. Differences in our estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. The carrying values of long-lived assets for stores identified for closure are reduced to estimated fair value. Accrued Expenses We estimate certain material expenses in an effort to record those expenses in the period incurred. Our most material estimates relate to insurance-related expenses, including self insurance. Our workers' compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These estimates are based on historical loss development factors. Our employee medical insurance accruals are recorded based on our medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in our estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. 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 Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 establishes accounting standards for intangible assets and goodwill. The Company is required to adopt this standard in fiscal 2003, which begins on February 3, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather tested for impairment at least annually, by applying a fair value-based test. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Application of the non-amortization provisions of SFAS No. 142 will result in a reduction in amortization expense of approximately $0.7 million per year. We performed the first of the required impairment tests of goodwill as of February 2, 2002, to evaluate existing goodwill for impairment upon adoption of SFAS No. 142. Based on the transition impairment tests performed on recorded goodwill, no impairment to goodwill exists and we will not record a charge in fiscal 2003 in connection with the adoption of this standard. In June 2001, the FASB issued SFAS 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 25 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. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "estimates," "expects," "believes," and similar expressions as they relate to us are intended to identify such forward-looking statements. Our actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, changes in customer demand, changes in trends in the fabric and craft industry, seasonality, the availability of merchandise, changes in the competitive pricing for products, and the impact of our and our competitors 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. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA JO-ANN STORES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 28 Report of Independent Public Accountants.................... 29 Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001.......................................... 30 Consolidated Statements of Operations for each of the three fiscal years in the period ended February 2, 2002...... 31 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended February 2, 2002...... 32 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended February 2, 2002................................................... 33 Notes to Consolidated Financial Statements.................. 34 Report of Independent Public Accountants on Financial Statement Schedule........................................ 56 Schedule II -- Valuation and Qualifying Accounts............ 57
27 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 2, 2002, February 3, 2001 and January 29, 2000. 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
28 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 2, 2002 and February 3, 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. 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 2, 2002 and February 3, 2001 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002 in conformity with accounting principles generally accepted in the United States. As explained in Note 11 to the consolidated financial statements, effective February 4, 2001, the Company changed its method of accounting for derivative instruments. Arthur Andersen LLP Cleveland, Ohio, March 7, 2002. 29 JO-ANN STORES, INC. CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, FEBRUARY 3, 2002 2001 ----------- ----------- (Dollars in millions, except per share data) ASSETS Current assets: Cash and temporary cash investments....................... $ 21.1 $ 17.5 Inventories............................................... 369.0 451.0 Prepaid expenses and other current assets................. 48.1 37.3 ------ ------ Total current assets........................................ 438.2 505.8 Property, equipment and leasehold improvements, net......... 210.1 190.2 Goodwill, net............................................... 26.5 27.2 Other assets................................................ 18.9 19.0 ------ ------ Total assets................................................ $693.7 $742.2 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $123.1 $164.0 Accrued expenses.......................................... 82.3 59.5 ------ ------ Total current liabilities................................... 205.4 223.5 Long-term debt.............................................. 223.7 240.0 Deferred income taxes....................................... 23.6 22.5 Other long-term liabilities................................. 8.2 7.4 Commitments and contingencies Shareholders' equity: Common stock: Class A, stated value $0.05 per share; issued and outstanding 9,825,802 and 9,364,896, respectively..... 0.6 0.6 Class B, stated value $0.05 per share; issued and outstanding 8,806,211 and 8,842,123, respectively..... 0.5 0.5 Additional paid-in capital................................ 99.7 99.2 Unamortized restricted stock awards....................... (0.6) (1.2) Retained earnings......................................... 172.9 187.8 Accumulated other comprehensive loss...................... (3.0) -- ------ ------ 270.1 286.9 Treasury stock, at cost................................... (37.3) (38.1) ------ ------ Total shareholders' equity.................................. 232.8 248.8 ------ ------ Total liabilities and shareholders' equity.................. $693.7 $742.2 ====== ======
See notes to consolidated financial statements 30 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED --------------------------------------- FEBRUARY 2, FEBRUARY 3, JANUARY 29, 2002 2001 2000 ----------- ----------- ----------- (Dollars in millions, except earnings per share data) Net sales................................................... $1,570.3 $1,483.3 $1,381.5 Cost of sales............................................... 877.2 838.2 748.3 -------- -------- -------- Gross margin.............................................. 693.1 645.1 633.2 Selling, general and administrative expenses................ 644.2 589.2 533.8 Depreciation and amortization............................... 39.3 38.3 32.0 -------- -------- -------- Operating profit.......................................... 9.6 17.6 67.4 Interest expense............................................ 32.7 29.0 26.2 -------- -------- -------- Income (loss) before income taxes......................... (23.1) (11.4) 41.2 Income tax provision (benefit).............................. (8.8) (4.3) 15.6 -------- -------- -------- Income (loss) before equity loss and extraordinary item... (14.3) (7.1) 25.6 Equity and asset impairment losses of minority investment... -- (6.5) -- -------- -------- -------- Income (loss) before extraordinary item................... (14.3) (13.6) 25.6 Extraordinary item, loss related to early retirement of debt, net of tax benefit of $0.4 million.................. (0.6) -- -- -------- -------- -------- Net income (loss)........................................... $ (14.9) $ (13.6) $ 25.6 ======== ======== ======== Basic net income (loss) per common share: Before extraordinary item................................. $ (0.78) $ (0.75) $ 1.41 ======== ======== ======== As reported............................................... $ (0.81) $ (0.75) $ 1.41 ======== ======== ======== Diluted net income (loss) per common share: Before extraordinary item................................. $ (0.78) $ (0.75) $ 1.38 ======== ======== ======== As reported............................................... $ (0.81) $ (0.75) $ 1.38 ======== ======== ========
See notes to consolidated financial statements 31 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED --------------------------------------- FEBRUARY 2, FEBRUARY 3, JANUARY 29, 2002 2001 2000 ----------- ----------- ----------- (Dollars in millions) Net cash flows from operating activities: Net income (loss)......................................... $ (14.9) $(13.6) $ 25.6 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 39.3 38.3 32.0 Deferred income taxes.................................. (8.3) (4.2) 12.8 Loss on disposal of fixed assets....................... 1.2 1.7 1.2 Equity and asset impairment losses of minority investment........................................... -- 6.5 -- Extraordinary item, net of tax......................... 0.6 -- -- Changes in operating assets and liabilities: Decrease (increase) in inventories..................... 82.0 (8.5) (38.5) Increase (decrease) in accounts payable................ (40.9) 14.4 (0.8) Increase in accrued expenses........................... 21.2 3.9 6.8 Settlement of income tax contingency................... -- (3.5) (16.1) Other, net............................................. 8.0 4.0 4.7 ------- ------ ------ Net cash provided by operating activities................... 88.2 39.0 27.7 Net cash flows used for investing activities: Capital expenditures...................................... (66.5) (35.9) (67.4) Minority investment....................................... -- (6.5) -- Other, net................................................ -- 1.7 1.4 ------- ------ ------ Net cash used for investing activities...................... (66.5) (40.7) (66.0) Net cash flows (used for) provided by financing activities: Proceeds from senior secured credit facility, net......... 171.6 -- -- Repayment of prior senior credit facility................. (123.8) -- -- Net change in revolving credit facility................... (69.1) (5.2) (87.3) Proceeds from issuance of senior subordinated notes, net.................................................... -- -- 143.4 Purchase of common stock.................................. (0.4) (0.1) (20.0) Other, net................................................ 3.6 3.1 3.2 ------- ------ ------ Net cash (used for) provided by financing activities........ (18.1) (2.2) 39.3 ------- ------ ------ Net increase (decrease) in cash............................. 3.6 (3.9) 1.0 Cash and temporary cash investments at beginning of year.... 17.5 21.4 20.4 ------- ------ ------ Cash and temporary cash investments at end of year.......... $ 21.1 $ 17.5 $ 21.4 ======= ====== ====== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest............................................... $ 30.6 $ 27.7 $ 20.0 Income taxes, net of refunds........................... 0.5 3.4 (5.9)
See notes to consolidated financial statements 32 JO-ANN STORES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAMORTIZED ACCUMULATED CLASS A CLASS B ADDITIONAL RESTRICTED OTHER COMMON COMMON PAID-IN STOCK TREASURY RETAINED COMPREHENSIVE COMPREHENSIVE STOCK STOCK CAPITAL AWARDS STOCK EARNINGS LOSS INCOME/(LOSS) ------- ------- ---------- ----------- -------- -------- ------------- ------------- (Dollars in millions) Balance, January 30, 1999... $0.5 $0.5 $94.4 $(2.9) $(19.3) $175.8 $ -- Net income................ -- -- -- -- -- 25.6 -- $ 25.6 Exercise of stock options................. -- -- 1.3 -- -- -- -- -- Tax benefit on options exercised............... -- -- 0.6 -- -- -- -- -- Issuance of restricted stock awards............ -- -- 0.6 (0.6) -- -- -- -- Cancellation of restricted stock awards............ -- -- (0.3) 0.1 -- -- -- -- Amortization of restricted stock awards............ -- -- -- 1.3 -- -- -- -- Purchase of common stock................... -- -- -- -- (20.0) -- -- -- Issuance of treasury shares.................. -- -- 0.7 -- 0.5 -- -- -- Issuance of common stock -- Associate Stock Ownership Plan.......... -- -- 0.6 -- -- -- -- -- ---- ---- ----- ----- ------ ------ ------ ------ Comprehensive income.............. $ 25.6 ====== Balance, January 29, 2000...................... 0.5 0.5 97.9 (2.1) (38.8) 201.4 -- Net loss.................. -- -- -- -- -- (13.6) -- $(13.6) Issuance of restricted stock awards............ -- -- 0.1 (0.1) -- -- -- -- Cancellation of restricted stock awards............ -- -- (0.6) 0.2 -- -- -- -- Amortization of restricted stock awards............ -- -- -- 0.8 -- -- -- -- Purchase of common stock................... -- -- -- -- (0.1) -- -- -- Issuance of treasury shares.................. -- -- 0.2 -- 0.8 -- -- -- Issuance of common stock -- Associate Stock Ownership Plan.......... 0.1 -- 1.6 -- -- -- -- -- ---- ---- ----- ----- ------ ------ ------ ------ Comprehensive loss.... $(13.6) ====== Balance, February 3, 2001... 0.6 0.5 99.2 (1.2) (38.1) 187.8 -- Net loss.................. -- -- -- -- -- (14.9) -- $(14.9) Cumulative effect of change in accounting for derivatives............. -- -- -- -- -- -- (1.7) (1.7) Change in fair value of derivatives............. -- -- -- -- -- -- (1.3) (1.3) Issuance of restricted stock awards............ -- -- 0.1 (0.1) -- -- -- -- Cancellation of restricted stock awards............ -- -- (0.3) 0.1 -- -- -- -- Amortization of restricted stock awards............ -- -- -- 0.6 -- -- -- -- Purchase of common stock................... -- -- -- -- (0.4) -- -- -- Issuance of treasury shares.................. -- -- (0.3) -- 1.2 -- -- -- Issuance of common stock -- Associate Stock Ownership Plan.......... -- -- 1.0 -- -- -- -- -- ---- ---- ----- ----- ------ ------ ------ ------ Comprehensive loss.... $(17.9) ====== Balance, February 2, 2002...................... $0.6 $0.5 $99.7 $(0.6) $(37.3) $172.9 $ (3.0) ==== ==== ===== ===== ====== ====== ======
See notes to consolidated financial statements 33 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 959 retail stores in 49 states at February 2, 2002. The 889 traditional and 70 superstores feature a broad line of apparel, craft and home decorating fabrics, notions, crafts, seasonal and home accessories and floral and framing products. The 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 2001 and 2000 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. Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers to the year in which the period ends (e.g., fiscal 2002 ended February 2, 2002). Fiscal 2001 was a 53-week year. 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 with cost determined on a first-in, first-out basis. Inventory valuation methods require certain management estimates and judgments, which affect the ending inventory valuation at cost as well as the gross margins reported for the year. These valuation methods include estimates of net realizable value on product designated for clearance and estimates of shrink between periods when the Company conducts store physical inventories to substantiate inventory balances. Reserves for clearance product are estimated based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of the Company's estimates can be affected by many factors, some of which are outside of the Company's control, including changes in economic conditions and consumer buying trends. Historically, the Company has not experienced significant differences in estimates of recovery compared with actual results. The Company's accrual for inventory shrink is based on the actual historical shrink results of its most recent store physical inventories. These estimates are compared to actual results as physical inventory counts 34 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are taken and reconciled to the general ledger. Substantially all store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at February 2, 2002 is based on the shrink results of these physical inventories. All store locations that have been open one year or more are physically inventoried at least once a year. The Company experienced an increase in historical shrink rates in fiscal 2002 compared with the prior year, and adjusted its shrink accrual to the higher realized shrink rates incurred. The Company will continue to adjust shrink rate estimates based on the results of future store physical inventories and shrink trends. 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. Maintenance and repair expenditures are charged to expense as incurred and improvements and major renewals are capitalized. SOFTWARE DEVELOPMENT The Company capitalized $0.6 million and $3.5 million in fiscal 2002 and fiscal 2001, 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 AND IMPAIRMENT OF LONG-LIVED ASSETS Goodwill represents the excess of purchase price and related costs over the fair value assigned to the net tangible assets acquired from House of Fabrics, Inc. ("HOF"). Goodwill is amortized on a straight-line basis over 40 years and is a non-deductible expense for tax purposes. Amortization expense was $0.7 million, $0.9 million and $1.0 million for fiscal 2002, 2001 and 2000, respectively. During fiscal 2001, goodwill was reduced by $8.2 million due to the settlement of an income tax contingency (as discussed in Note 4). In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 establishes accounting standards for intangible assets and goodwill. The Company is required to adopt this standard in fiscal 2003, which begins on February 3, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather tested for impairment at least annually, by applying a fair value-based test. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Application of the non-amortization provisions of SFAS No. 142 will result in a reduction in amortization expense of approximately $0.7 million per year. The Company performed the first of the required impairment tests of goodwill as of February 2, 2002, to evaluate existing goodwill for impairment upon adoption of SFAS No. 142. Based on the transition impairment tests performed on recorded goodwill, no impairment to goodwill exists and the Company will not record a charge in fiscal 2003 in connection with the adoption of this standard. Long-lived assets and certain identifiable intangibles historically have been reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount 35 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of the assets to future net cash flows estimated by the Company to be generated by said assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Other than as discussed below under Accrued Store Closing Costs, there were no long-lived assets that required recognition of an impairment loss at February 2, 2002 or February 3, 2001. ACCRUED STORE CLOSING COSTS The Company accrues costs related to stores closed or identified for closing, which include future rental obligations, carrying costs, and other closing costs. These expenses are accrued when the Company commits to closing or relocating a store. The determination of the accrual is dependent on the Company's ability to make estimates of costs to be incurred post-closing. Future rental obligations are calculated at the lesser of contractual obligations remaining under the lease (less estimated sublease rental income) or the estimated lease termination cost. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. The carrying values of long-lived assets for stores identified for closure are reduced to estimated fair value. ACCRUED EXPENSES Certain material expenses are estimated in an effort to record those expenses in the period incurred. The most material estimates relate to insurance-related expenses, portions of which the Company is self-insured for. Workers' compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These estimates are based on historical loss development factors. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in the Company's estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. 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 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. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 was issued. The statement was adopted by the Company in 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 change is reflected in other comprehensive income. For fair value disclosures of the Company's senior subordinated notes and interest rate swap agreements, see Note 11 -- Fair Value of Financial Instruments. 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 between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 36 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $37.9 million, $39.5 million and $32.6 million for fiscal 2002, 2001 and 2000, 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 include the effect of the assumed exercise of dilutive stock options under the treasury stock method. Stock options are antidilutive for fiscal 2002 and fiscal 2001 and therefore are excluded from the calculation of diluted earnings per share. Basic and diluted weighted average shares are as follows:
FISCAL YEAR ENDED 2002 2001 2000 - ----------------- ---------- ---------- ---------- Weighted average shares: Basic................................. 18,444,141 18,041,192 18,198,325 Incremental shares from assumed exercise of stock options.......... -- -- 384,612 ---------- ---------- ---------- Diluted............................... 18,444,141 18,041,192 18,582,937 ========== ========== ==========
NOTE 2 -- TURNAROUND PLAN CHARGES During the fourth quarter of fiscal 2001, management developed a turnaround plan (the "Turnaround Plan"), which resulted from a thorough analysis of the Company's business prompted by recent operating trends. As a result of the Company's decline in earnings, significant increases in debt and inventory levels, and issues surrounding the implementation of SAP Retail, the Company's strategy shifted from accelerating the growth of its superstore concept to improving the productivity of its existing asset base and realizing the benefits from the completed infrastructure investments. In accordance with current accounting literature (Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges,") the Company recorded a 37 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- TURNAROUND PLAN CHARGES (CONTINUED) $6.7 million pre-tax ($4.1 million after-tax) charge to operating expenses during the fourth quarter of fiscal 2001 and $17.1 million pre-tax ($10.6 million after-tax) charge to operating expenses during the third quarter of fiscal 2002 for restructuring and asset impairment costs resulting from 148 identified store closings associated with the Turnaround Plan. In accordance with EITF 96-9 "Classification of Inventory Markdowns and Other Costs Associated with a Restructuring," the Company also recorded a $2.6 million pre-tax charge ($1.6 million after-tax) to cost of goods sold during the third quarter of fiscal 2002 to reflect the markdown of certain inventory contained in the stores identified for closing to its net realizable value. Further, the Company recorded a $23.0 million pre-tax charge ($14.3 million after-tax) to cost of goods sold during the fourth quarter of fiscal 2001 to reduce the carrying amount of certain inventory to its net realizable value, identified as part of the "SKU Reduction Initiative" (as defined below) undertaken as part of the Turnaround Plan. In total, the turnaround charges were $19.7 million pre-tax ($12.2 million after-tax), or $0.67 per diluted share in fiscal 2002 (the "Turnaround Charges") and $29.7 million pre-tax ($18.4 million after-tax), or $1.02 per diluted share in fiscal 2001. The Turnaround Charges included $26.4 million for store closing charges (the "Store Closing Charges") and $23.0 million for the SKU Reduction Initiative. These charges are described more fully below. STORE CLOSING CHARGE As part of the Turnaround Plan, the Company undertook a comprehensive review of its existing store base. The financial and operating performance of each store within the entire store base was evaluated based on return on investment parameters, and the decision was made to close those stores that were under-performing relative to management's required performance levels. During the fourth quarter of fiscal 2001, 42 traditional stores were identified for closing during fiscal 2002. In the third quarter of fiscal 2002, the Company recorded a second charge to close an additional 102 traditional stores and to either downsize or buyout the remaining lease obligations of four superstores. The store closing charges taken in these quarters include asset write-downs associated with the identified stores, and the estimated closing costs for stores whose closings are expected to be closed in the next twelve months. Following is a summary of the significant components of the Store Closing Charges (dollars in millions):
Noncancelable lease obligations............................. $12.6 Asset write-offs............................................ 11.1 Other....................................................... 2.7 ----- Total....................................................... $26.4 =====
Noncancelable lease obligations include the lesser of the estimated buyout or remaining lease obligations of the stores to be closed. Estimated continuing lease obligations were reduced by any sublease rental income. Asset write-offs include $8.5 million for fixed asset write-offs and $2.6 million for the reduction of certain inventory to its net realizable value upon clearance. The Store Closing Charges will require total cash payments of $15.3 million, which primarily consists of noncancelable lease obligations extending through 2011. As of February 2, 2002, the remaining future cash payments total $10.8 million. Summarized below is a reconciliation of the beginning and ending Store Closing Charges liability balances as of February 2, 2002 (dollars in millions). The Company believes that the liability remaining at February 2, 2002 is adequate to cover the remaining obligations associated with the Store Closing Charges. 38 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- TURNAROUND PLAN CHARGES (CONTINUED)
NONCANCELABLE LEASE ASSET OBLIGATIONS WRITE-OFFS OTHER TOTAL ------------- ---------- ----- ------ Store Closing Charges................. $12.6 $ 11.1 $ 2.7 $ 26.4 Utilized -- cash...................... (3.0) -- (1.5) (4.5) Utilized -- non-cash.................. -- (11.1) -- (11.1) ----- ------ ----- ------ Balance -- February 2, 2002........... $ 9.6 $ -- $ 1.2 $ 10.8 ===== ====== ===== ======
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"). This initiative resulted in the identification of approximately 10,000 SKU's, or greater than $50 million of inventory, at cost, that were under-performing and the Company made the decision to discontinue. The Company began clearance programs in the second quarter of fiscal 2002 to reduce this inventory to zero. These clearance programs were substantially completed by the end of fiscal 2002. The Company believes the review process completed in the fourth quarter of fiscal 2001 for the SKU Reduction Initiative was thorough. Although additional product may be targeted for reduction based on ongoing analysis, the Company believes that the extent of such reduction decisions will be more comparable to what is the normal course of business practices in retailing. The Company has established appropriate reserves for product currently designated for clearance. Such reserves are established based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of the Company's estimates can be affected by many factors, some of which are outside of the Company's control, including changes in economic conditions and consumer buying trends. Historically, the Company has not experienced significant differences in its estimates of recovery compared with actual results. NOTE 3 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consists of the following (dollars in millions):
FISCAL YEAR 2002 2001 - ----------- ------- ------- Land and buildings........................................ $ 51.9 $ 25.6 Furniture, fixtures and equipment......................... 267.7 244.3 Leasehold improvements.................................... 69.3 69.7 Construction in progress.................................. 3.7 5.8 ------- ------- 392.6 345.4 Less accumulated depreciation............................. (182.5) (155.2) ------- ------- $ 210.1 $ 190.2 ======= =======
39 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INCOME TAXES The significant components of the income tax provision (benefit) are as follows (dollars in millions):
FISCAL YEAR ENDED 2002 2001 2000 - ----------------- ----- ------ ----- Current: Federal............................................ $(0.4) $ 6.9 $ 1.6 State and local.................................... (0.1) (0.7) 1.2 ----- ------ ----- (0.5) 6.2 2.8 Deferred............................................. (8.3) (10.5) 12.8 ----- ------ ----- Income tax provision (benefit)....................... $(8.8) $ (4.3) $15.6 ===== ====== =====
The reconciliation of income tax at the statutory rate to the income tax provision (benefit) is as follows:
FISCAL YEAR ENDED 2002 2001 2000 - ----------------- ----- ----- ----- Federal income tax at the statutory rate.............. $(8.1) $(4.0) $14.4 Effect of: State and local taxes............................... (0.4) (0.2) 1.7 Other, net.......................................... (0.3) (0.1) (0.5) ----- ----- ----- Income tax provision (benefit)........................ $(8.8) $(4.3) $15.6 ===== ===== =====
40 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax assets and liabilities are as follows:
ASSET/(LIABILITY) ----------------- FISCAL YEAR 2002 2001 - ----------- ------- ------- Current Deferred tax assets: Inventory items........................................... $ 17.3 $ 14.4 Employee benefits......................................... 2.9 2.3 Lease obligations......................................... 6.0 3.0 Other..................................................... 5.8 1.2 ------ ------ 32.0 20.9 Deferred tax liabilities: Basis difference in net assets acquired................... (1.4) (1.4) ------ ------ Net current deferred tax asset.............................. $ 30.6 $ 19.5 ====== ====== Non-current Deferred tax assets: NOL carryforward.......................................... $ 8.4 $ 9.3 Other..................................................... 2.0 1.7 ------ ------ 10.4 11.0 Deferred tax liabilities: Depreciation.............................................. (33.5) (32.8) Basis difference in net assets acquired................... (0.6) (0.6) Other..................................................... 0.1 (0.1) ------ ------ (34.0) (33.5) ------ ------ Net non-current deferred tax liability...................... $(23.6) $(22.5) ====== ======
As of February 2, 2002, the Company had a net operating loss carry-forward totaling $22.3 million available to offset future years' taxable income. These losses expire in 2019. The Company has recorded valuation allowances for certain deferred tax assets that may be unrealizable. As part of the HOF acquisition, the Company assumed an income tax contingency that was subsequently settled with the Internal Revenue Service ("IRS") in October 2000 for $19.6 million. Of the settlement, $16.1 million of the liability was paid during 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. NOTE 5 -- FINANCING SECURED CREDIT FACILITIES In April 2001, the Company entered into a $365.0 million senior secured credit facility (the "Credit Facility") which expires on April 30, 2005. The Credit Facility consists of a $325.0 million revolving credit facility and a $40.0 million 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 $150.0 million. Interest on borrowings under the Credit Facility is calculated at the bank's 41 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FINANCING (CONTINUED) base rate or London Interbank Offered Rate ("LIBOR") plus 1.75 percent to 2.25 percent, depending on the level of excess availability (as defined in the Credit Agreement) that is maintained. The Credit Facility provided for the applicable LIBOR margin to be set at 2.00 percent for the first 12 months of the term of the facility. Proceeds from the Credit Facility were used to repay all outstanding borrowings under the Company's prior $300.0 million senior credit facility and a $40.0 million synthetic lease facility. As of February 2, 2002, the Company had outstanding borrowings of $73.7 million under the Credit Facility at a weighted average interest rate of 8.7 percent and $31.2 million letters of credit outstanding. The Company pays quarterly usage fees of between 1.25 percent and 2.25 percent per annum on outstanding letters of credit under the Credit Facility. The Company also pays quarterly fees of 0.375 percent 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 $35.0 million. A minimum net worth financial covenant test exists if excess availability is less than $35.0 million. Excess availability was $163.1 million on February 2, 2002. In addition, capital expenditures under the Credit Facility are limited to $50.0 million per year, with any unused portion carried forward and available for 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 Credit Facility, prior senior credit facility and other lines of credit were 7.2 percent and $169.0 million during fiscal 2002, 7.9 percent and $119.3 million during fiscal 2001, and 6.5 percent and $161.1 million during fiscal 2000. The term loan portion of the Credit Facility replaced a $40.0 million synthetic lease facility that the Company had originally used to finance the construction of a distribution center 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 recorded the appropriate assets and debt obligation of $40.0 million in the first quarter of fiscal 2002. There is no penalty if the Company elects to prepay the term loan principal, which is due on April 30, 2005. SENIOR SUBORDINATED NOTES On May 5, 1999, the Company issued $150.0 million of 10 3/8 percent 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 percent 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 6 -- COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation matters in the ordinary course of its business. The Company is not currently involved in any litigation, which it expects, either individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations. 42 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 alleged the Company violated certain California laws by erroneously treating its store management employees as "exempt" employees who are not entitled to overtime compensation. This case was consolidated with a similar class action complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the Superior Court of California. A tentative settlement in this case was reached in January 2002 and a pre-tax charge of $6.5 million ($4.0 million after-tax or $0.21 per diluted share) was recorded in the fourth quarter of fiscal 2002. NOTE 7 -- CAPITAL STOCK The following table details the common stock ($0.05 stated value) activity for fiscal 2002 and fiscal 2001:
COMMON SHARES OUTSTANDING -- NET OF TREASURY ---------------------------------- SHARES CLASS A CLASS B TOTAL IN TREASURY --------- --------- ---------- ----------- 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 Issuance of restricted stock awards........... 20,000 500 20,500 -- Issuance of common stock -- Associate Stock Ownership Plan.............. 296,483 -- 296,483 -- Deferred stock.............................. 406 467 873 -- Cancellation of restricted stock awards....... (17,000) -- (17,000) -- Purchase of common stock...................... (37,881) (36,879) (74,760) 74,760 Issuance of treasury shares................... 198,898 -- 198,898 (198,898) --------- --------- ---------- --------- Balance at February 2, 2002................... 9,825,802 8,806,211 18,632,013 3,454,535 ========= ========= ========== =========
The Company's Class A common shares have voting rights while Class B common shares have no voting rights. At February 2, 2002 and February 3, 2001, there were 75,000,000 Class A common shares and 75,000,000 Class B common shares authorized for issuance. At February 2, 2002 and February 3, 2001, there were 5,000,000 shares of serial preferred stock, without par value, authorized for issuance, none of which were 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 43 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- CAPITAL STOCK (CONTINUED) common share outstanding. The rights are exercisable only if a person or group buys or announces a tender offer for 15 percent or more of the outstanding Class A common shares as defined in the Rights Plan. When exercisable, each right initially entitles a holder of Class A and Class B common shares 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 2, 2002. NOTE 8 -- 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 2, 2002:
STOCK RESTRICTED OPTIONS STOCK TOTAL ---------- ---------- ---------- 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 Fiscal year 2002 calculated available.... 672,856 Granted.................................. (426,700) (18,000) (444,700) Cancellations............................ 264,381 16,000 280,381 ---------- Available at February 2, 2002.............. 563,962 ==========
44 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) Employee Stock Option Program The employee stock options granted under the 1998 Plan generally 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 Plan may become exercisable under different terms as approved by the Compensation Committee of the Board of Directors. During fiscal year 2002, 180,000 stock option awards were made to executive officers of the Company, other than the chief executive officer, that were shorter in duration, with a seven year expiration. These stock option awards vest in four years but are subject to accelerated vesting when the Company achieves certain levels of financial performance. By establishing option awards with shorter periods of duration and accelerated vesting provisions, the Compensation Committee believes that the value of such awards are more closely aligned to the near-term financial performance and success of the Company, which is appropriate given the turnaround initiatives established for the Company. 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. 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 - ----------- ---------- -------- ---------- -------- 2002............................ 18,000 $ 4.49 -- $ -- 2001............................ 15,000 6.74 375 7.92 2000............................ 39,000 13.52 3,250 11.31
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 percent 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 2002, 2001 and 2000, stock purchase rights of 296,483, 248,476 and 60,049, respectively, were granted and exercised under the ASOP. Non-Employee Directors 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 45 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) election prior to the Company's annual shareholder's meeting whereby they can elect to convert a percentage (0 percent to 100 percent in 25 percent 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 2002 and 2001, 3,410 and 3,552 Class A units, respectively, and 5,036 and 3,997 Class B units, respectively, 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 had granted stock options 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. The Directors Stock Option Plan is no longer used to grant stock options to non-employee directors of the Company. OTHER PLANS In addition to the 1998 Plan, nonqualified stock options 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. Vesting and expiration periods are identical to options issued under the 1998 Plan. The 1990 Plan terminated on March 14, 2000. The termination of the plan does not affect stock options outstanding granted prior to the termination. 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 2, 2002, 91,500 Class A restricted shares were outstanding under the Executive Plan and 358,500 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 in accordance with the provisions of the 1998 Plan. 46 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) 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 -------------------- -------------------- TOTAL WEIGHTED WEIGHTED CLASS A AVERAGE AVERAGE AND NUMBER OF EXERCISE NUMBER OF EXERCISE CLASS B OPTIONS PRICE OPTIONS PRICE OPTIONS --------- -------- --------- -------- --------- 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 Granted................................ 18,283 4.84 408,417 3.16 426,700 Exercised.............................. -- -- -- -- -- Canceled............................... (116,892) 15.24 (457,201) 11.08 (574,093) -------- --------- --------- Outstanding at February 2, 2002.......... 377,780 $11.17 3,383,310 $ 9.92 3,761,090 ======== ====== ========= ====== =========
CLASS A OPTIONS CLASS B OPTIONS -------------------- -------------------- TOTAL WEIGHTED WEIGHTED CLASS A AVERAGE AVERAGE AND NUMBER OF EXERCISE NUMBER OF EXERCISE CLASS B OPTIONS PRICE OPTIONS PRICE OPTIONS --------- -------- --------- -------- --------- Exercisable at: February 2, 2002....................... 353,814 $11.33 1,282,589 $14.01 1,636,403 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 Weighted average fair value of options granted during fiscal: 2002................................... $ 2.91 $ 1.37 2001................................... 5.44 3.76 2000................................... 6.80 4.59
47 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) The following table summarizes the status of stock options outstanding and exercisable at February 2, 2002:
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 PRICE LIFE EXERCISABLE PRICE - ----------- ---------------- -------- ----------- ----------- -------- 105,405 $ 4.40 to $6.16 $ 5.96 1.5 years 93,439 $ 6.16 153,675 6.17 to 14.63 8.11 2.8 years 146,175 8.08 118,700 14.64 to 29.06 19.75 4.5 years 114,200 19.72 ------- ------- 377,780 $ 4.40 to $29.06 $11.17 3.0 years 353,814 $11.33 ======= ====== ======= ======
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 PRICE LIFE EXERCISABLE PRICE - ----------- ---------------- -------- ----------- ----------- -------- 600,796 $ 2.40 to $7.66 $ 4.14 7.5 years 150,888 $ 6.44 1,507,800 7.67 to 10.81 7.80 7.7 years 116,987 8.27 1,274,714 10.82 to 26.66 15.14 6.2 years 1,014,714 15.80 --------- --------- 3,383,310 $ 2.40 to $26.66 $ 9.92 7.1 years 1,282,589 $14.01 ========= ====== ========= ======
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 income (loss) per share would have been reduced to the pro forma amounts shown in the table below (dollars in millions, except per share data):
2002 2001 2000 ----------------- ----------------- ---------------- AS PRO AS PRO AS PRO FISCAL YEAR ENDED REPORTED FORMA REPORTED FORMA REPORTED FORMA - ----------------- -------- ------ -------- ------ -------- ----- Net income (loss)........................ $(14.9) $(17.0) $(13.6) $(16.1) $25.6 $23.8 Net income (loss) per common share: Basic.................................. (0.81) (0.92) (0.75) (0.89) 1.41 1.31 Diluted................................ (0.81) (0.92) (0.75) (0.89) 1.38 1.31
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 5.2 percent to 6.4 percent for Class A 48 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED) and 4.8 percent to 6.6 percent for Class B, expected volatility ranging from 36.9 percent to 46.0 percent for Class A and 32.3 percent to 46.0 percent for Class B, expected lives ranging from 3.5 to 10.0 years for Class A and 4.1 to 6.6 years for Class B and no expected dividends for either class of shares. NOTE 9 -- 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 percent of annual compensation or the statutory maximum. The Company makes a 50 percent 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 2002, 2001 and 2000 were $1.0 million, $1.0 million and $1.2 million, respectively. Plan assets included 844,968 shares of Class A common shares and 270,695 shares of Class B common shares at February 2, 2002. The Company does not provide post-retirement health care benefits for its employees. NOTE 10 -- 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. The Company also leases certain computer and store equipment, generally under five-year or less lease terms. The following is a schedule of future minimum rental payments under non-cancelable operating leases:
MINIMUM FISCAL YEAR ENDED RENTALS - ----------------- ------- (Dollars in millions) 2003........................................................ $116.2 2004........................................................ 100.7 2005........................................................ 92.7 2006........................................................ 78.6 2007........................................................ 66.5 Thereafter.................................................. 222.1 ------ $676.8 ======
Rent expense was as follows:
FISCAL YEAR ENDED 2002 2001 2000 - ----------------- ------ ------ ------ (Dollars in millions) Minimum rentals.................................... $122.6 $124.6 $112.4 Contingent rentals................................. 2.7 2.3 2.4 Sublease rentals................................... (6.0) (4.8) (4.1) ------ ------ ------ $119.3 $122.1 $110.7 ====== ====== ======
49 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- 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 percent senior subordinated notes at February 2, 2002 in the high yield debt market was $84.0. Accordingly, the fair value of the 10 3/8 percent senior subordinated notes was $126.0 million versus their carrying value of $150.0 million. In the normal course of business, the Company employs established policies and procedures to manage exposure to changes in interest rates. The Company's 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. Interest rate swaps are primarily utilized to achieve this objective. Interest rate swaps are utilized to manage net exposure to interest rate changes related to the Company's debt structure. The interest rate swap agreements require the Company to pay a fixed interest rate while receiving a floating interest rate based on LIBOR. The Company does not enter into financial instruments for trading purposes. On March 15, 1998, the Company entered into a five-year interest rate swap agreement to hedge its interest rate exposure. The notional amount of this interest rate swap was $50.0 million, with a fixed LIBOR of 5.98 percent. On September 5, 2000, the Company entered into a separate interest rate swap agreement to further hedge its interest rate exposure. The interest rate swap had 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 percent. Effective May 15, 2001, the agent for the Credit Facility assumed assignment of the Company's two outstanding interest rate swap agreements 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 percent and a notional amount of $90.0 million, reducing to $40.0 million on May 1, 2003, until its expiration on April 30, 2005. Effective February 4, 2001, the Company adopted 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. During fiscal 2002, unrealized after tax net losses of $3.0 million were recorded in other comprehensive income (loss), including a $1.7 million cumulative transition adjustment, as of the date of adoption of SFAS No. 133. The hedge ineffectiveness for fiscal 2002 was $1.0 million ($0.6 million after-tax) and is reflected in interest expense. NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized below are the unaudited results of operations by quarter for fiscal 2002 and 2001:
FIRST THIRD FOURTH SECOND FISCAL 2002 QUARTER QUARTER QUARTER QUARTER - ----------- ------- ------- ------- ------- (Dollars in millions, except per share data) Net sales........................................... $328.9 $330.2 $413.0 $498.2 Gross margin........................................ 151.1 139.2 182.6 220.2 Net income (loss)................................... (6.4) (16.1) (11.3)(a) 18.9(b) Net income (loss) per common share: Basic............................................. $(0.35) $(0.88) $(0.61)(a) $ 1.02(b) Diluted........................................... (0.35) (0.88) (0.61)(a) 1.01(b)
50 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
FIRST THIRD FOURTH SECOND FISCAL 2001 QUARTER QUARTER QUARTER QUARTER - ----------- ------- ------- ------- ------- (Dollars in millions, except per share data) Net sales........................................... $325.4 $299.0 $362.5 $496.4 Gross margin........................................ 152.3 135.9 172.4 184.5(c) Net income (loss) before equity loss................ 3.0 (9.0) 4.2 (5.3)(d) 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)(d) Net income (loss) per common share: Basic............................................. $ 0.17 $(0.55) $ 0.17 $(0.53)(d) Diluted........................................... 0.17 (0.55) 0.17 (0.53)(d)
- --------------- (a)Includes after tax charge of $12.2 million, or $0.67 per share for the third quarter related to store closings. (b)Includes after tax charge of $4.0 million, or $0.21 per share for the fourth quarter related to a wage litigation settlement. (c)Includes pretax charge of $23.0 million for the fourth quarter related to the SKU Reduction Initiative. (d)Includes after tax 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. NOTE 13 -- MINORITY INVESTMENT On June 6, 2000, the Company announced that it had entered into a strategic relationship with IdeaForest.com, Inc. ("IdeaForest"), an on-line 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. 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 percent 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 the its investment in IdeaForest to zero, which resulted in a $3.3 million charge. The decision to reduce the carrying value of the investment to zero was predicated on operating projections prepared by IdeaForest that resulted in its cash balance being reduced to near zero before cash flow positive operating status was achieved. The Company remains committed to an online presence and IdeaForest is currently operating its business in line with its planned operating projections. 51 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS The Company's 10 3/8 percent 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 2, 2002 is as follows:
FEBRUARY 2, 2002 --------------------------------------------------- GUARANTOR CONSOLIDATING BALANCE SHEETS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - ---------------------------- ------ ------------ ------------ ------------ (Dollars in millions) ASSETS Current assets: Cash and temporary cash investments................... $ 17.5 $ 3.6 $ -- $ 21.1 Inventories..................... 152.8 216.2 -- 369.0 Prepaid expenses and other current assets................ 35.8 12.3 -- 48.1 ------ ------ ------- ------- Total current assets.............. 206.1 232.1 -- 438.2 Property, equipment and leasehold improvements, net............... 64.7 145.4 -- 210.1 Goodwill, net..................... -- 26.5 -- 26.5 Other assets...................... 17.3 1.6 -- 18.9 Investment in subsidiaries........ 3.6 -- (3.6) -- Intercompany receivable........... 418.0 -- (418.0) -- ------ ------ ------- ------- Total assets...................... $709.7 $405.6 $(421.6) $ 693.7 ====== ====== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................ $122.7 $ 0.4 $ -- $ 123.1 Accrued expenses................ 111.2 (28.9) -- 82.3 ------ ------ ------- ------- Total current liabilities......... 233.9 (28.5) -- 205.4 Long-term debt.................... 223.7 -- -- 223.7 Deferred income taxes............. 14.6 9.0 -- 23.6 Other long-term liabilities....... 4.7 3.5 -- 8.2 Intercompany payable.............. -- 418.0 (418.0) Shareholders' equity: Common stock.................... 1.1 -- -- 1.1 Additional paid-in capital...... 99.7 -- -- 99.7 Unamortized restricted stock awards........................ (0.6) -- -- (0.6) Retained earnings............... 172.9 3.6 (3.6) 172.9 Accumulated other comprehensive loss.......................... (3.0) -- -- (3.0) ------ ------ ------- ------- 270.1 3.6 (3.6) 270.1 Treasury stock, at cost......... (37.3) -- -- (37.3) ------ ------ ------- ------- Total shareholders' equity........ 232.8 3.6 (3.6) 232.8 ------ ------ ------- ------- Total liabilities and shareholders' equity............ $709.7 $405.6 $(421.6) $ 693.7 ====== ====== ======= ======= FEBRUARY 3, 2001 --------------------------------------------------- GUARANTOR CONSOLIDATING BALANCE SHEETS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - ---------------------------- ------ ------------ ------------ ------------ (Dollars in millions) 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 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 ====== ====== ======= ======
52 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR ENDED --------------------------------------------------- FEBRUARY 2, 2002 --------------------------------------------------- CONSOLIDATING STATEMENTS OF GUARANTOR OPERATIONS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - --------------------------- ------ ------------ ------------ ------------ (Dollars in millions) Net sales......................... $862.6 $1,614.7 $(907.0) $1,570.3 Cost of sales..................... 528.2 1,256.0 (907.0) 877.2 ------ -------- ------- -------- Gross margin.................... 334.4 358.7 -- 693.1 Selling, general and administrative expenses......... 326.1 318.1 -- 644.2 Depreciation and amortization..... 15.3 24.0 -- 39.3 ------ -------- ------- -------- Operating profit (loss)......... (7.0) 16.6 -- 9.6 Interest expense.................. 14.5 18.2 -- 32.7 ------ -------- ------- -------- Income (loss) before income taxes......................... (21.5) (1.6) -- (23.1) Income tax provision (benefit).... (8.5) (0.3) -- (8.8) ------ -------- ------- -------- Income (loss) before equity loss and extraordinary item........ (13.0) (1.3) -- (14.3) Equity and asset impairment losses of minority investment.......... -- -- -- -- Equity income (loss) from subsidiaries.................... (1.3) -- 1.3 -- ------ -------- ------- -------- Income (loss) before extraordinary item............ (14.3) (1.3) 1.3 (14.3) Extraordinary item, net of tax benefit......................... (0.6) -- -- (0.6) ------ -------- ------- -------- Net income (loss)................. $(14.9) $ (1.3) $ 1.3 $ (14.9) ====== ======== ======= ======== FISCAL YEAR ENDED --------------------------------------------------- FEBRUARY 3, 2001 --------------------------------------------------- CONSOLIDATING STATEMENTS OF GUARANTOR OPERATIONS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - --------------------------- ------ ------------ ------------ ------------ (Dollars in millions) Net sales......................... $815.7 $1,436.9 $(769.3) $1,483.3 Cost of sales..................... 511.1 1,096.4 (769.3) 838.2 ------ -------- ------- -------- Gross margin.................... 304.6 340.5 -- 645.1 Selling, general and administrative expenses......... 293.7 295.5 -- 589.2 Depreciation and amortization..... 17.1 21.2 -- 38.3 ------ -------- ------- -------- Operating profit (loss)......... (6.2) 23.8 -- 17.6 Interest expense.................. 13.5 15.5 -- 29.0 ------ -------- ------- -------- Income (loss) before income taxes......................... (19.7) 8.3 -- (11.4) Income tax provision (benefit).... (7.6) 3.3 -- (4.3) ------ -------- ------- -------- Income (loss) before equity loss and extraordinary item........ (12.1) 5.0 -- (7.1) Equity and asset impairment losses of minority investment.......... (6.5) -- -- (6.5) Equity income (loss) from subsidiaries.................... 5.0 -- (5.0) -- ------ -------- ------- -------- Income (loss) before extraordinary item............ (13.6) 5.0 (5.0) (13.6) Extraordinary item, net of tax benefit......................... -- -- -- -- ------ -------- ------- -------- Net income (loss)................. $(13.6) $ 5.0 $ (5.0) $ (13.6) ====== ======== ======= ========
FISCAL YEAR ENDED --------------------------------------------------- JANUARY 29, 2000 --------------------------------------------------- GUARANTOR CONSOLIDATING STATEMENTS OF OPERATIONS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------------- ------ ------------ ------------ ------------ (Dollars in millions) Net sales................................................... $759.1 $1,358.5 $(736.1) $1,381.5 Cost of sales............................................... 442.8 1,041.6 (736.1) 748.3 ------ -------- ------- -------- Gross margin.............................................. 316.3 316.9 -- 633.2 Selling, general and administrative expenses................ 284.9 248.9 -- 533.8 Depreciation and amortization............................... 17.0 15.0 -- 32.0 ------ -------- ------- -------- Operating profit (loss)................................... 14.4 53.0 -- 67.4 Interest expense............................................ 11.3 14.9 -- 26.2 ------ -------- ------- -------- Income (loss) before income taxes......................... 3.1 38.1 -- 41.2 Income tax provision (benefit).............................. 1.9 13.7 -- 15.6 ------ -------- ------- -------- Income (loss) before equity loss and extraordinary item... 1.2 24.4 -- 25.6 Equity and asset impairment losses of minority investment... -- -- -- -- Equity income (loss) from subsidiaries 24.4 -- (24.4) -- ------ -------- ------- -------- Income (loss) before extraordinary item................... 25.6 24.4 (24.4) 25.6 Extraordinary item, net of tax benefit...................... -- -- -- -- ------ -------- ------- -------- Net income (loss)........................................... $ 25.6 $ 24.4 $ (24.4) $ 25.6 ====== ======== ======= ========
53 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR ENDED ---------------------------------------------------- FEBRUARY 2, 2002 ---------------------------------------------------- CONSOLIDATING STATEMENTS OF CASH GUARANTOR FLOWS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------- ------- ------------ ------------ ------------ (Dollars in millions) Net cash flows from operating activities: Net income (loss).............. $ (14.9) $ (1.3) $ 1.3 $ (14.9) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization............... 15.3 24.0 -- 39.3 Deferred income taxes........ (5.0) (3.3) -- (8.3) Loss on disposal of fixed assets..................... 0.6 0.6 -- 1.2 Equity and asset impairment losses of minority investment................. -- -- -- -- Extraordinary item, net of tax........................ 0.6 -- -- 0.6 Changes in operating assets and liabilities: Decrease (increase) in inventories................ 29.1 52.9 -- 82.0 Increase (decrease) in accounts payables.......... (4.6) (36.3) -- (40.9) Increase (decrease) in accrued expenses........... 24.3 (3.1) -- 21.2 Settlement of income tax contingency................ -- -- -- -- Other, net................... (14.0) 23.3 (1.3) 8.0 ------- ------ ------- ------- Net cash provided by (used for) operating activities........... 31.4 56.8 -- 88.2 Net cash flows used for investing activities: Capital expenditures........... (9.6) (56.9) -- (66.5) Minority investment............ -- -- -- -- Other, net..................... -- -- -- -- ------- ------ ------- ------- Net cash used for investing activities..................... (9.6) (56.9) -- (66.5) Net cash flows (used for) provided by financing activities: Proceeds from senior secured credit facility, net......... 171.6 -- -- 171.6 Repayment of prior senior credit facility.............. (123.8) -- -- (123.8) Net change in revolving credit facility..................... (69.1) -- -- (69.1) Purchase of common stock....... (0.4) -- -- (0.4) Other, net..................... 3.6 -- -- 3.6 ------- ------ ------- ------- Net cash (used for) provided by financing activities........... (18.1) -- -- (18.1) ------- ------ ------- ------- Net increase (decrease) in cash........................... 3.7 (0.1) -- 3.6 Cash and temporary cash investments at beginning of year........................... 13.8 3.7 -- 17.5 ------- ------ ------- ------- Cash and temporary cash investments at end of year..... $ 17.5 $ 3.6 $ -- $ 21.1 ======= ====== ======= ======= FISCAL YEAR ENDED --------------------------------------------------- FEBRUARY 3, 2001 --------------------------------------------------- CONSOLIDATING STATEMENTS OF CASH GUARANTOR FLOWS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------- ------ ------------ ------------ ------------ (Dollars in millions) Net cash flows from operating activities: Net income (loss).............. $(13.6) $ 5.0 $ (5.0) $(13.6) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization............... 17.1 21.2 -- 38.3 Deferred income taxes........ (1.6) (2.6) -- (4.2) Loss on disposal of fixed assets..................... 0.7 1.0 -- 1.7 Equity and asset impairment losses of minority investment................. 6.5 -- -- 6.5 Extraordinary item, net of tax........................ -- -- -- -- Changes in operating assets and liabilities: Decrease (increase) in inventories................ 21.9 (30.4) -- (8.5) Increase (decrease) in accounts payables.......... (15.3) 29.7 -- 14.4 Increase (decrease) in accrued expenses........... 3.5 0.4 -- 3.9 Settlement of income tax contingency................ -- (3.5) -- (3.5) Other, net................... (0.2) (0.8) 5.0 4.0 ------ ------ ------- ------ Net cash provided by (used for) operating activities........... 19.0 20.0 -- 39.0 Net cash flows used for investing activities: Capital expenditures........... (13.4) (22.5) -- (35.9) Minority investment............ (6.5) -- -- (6.5) Other, net..................... -- 1.7 -- 1.7 ------ ------ ------- ------ Net cash used for investing activities..................... (19.9) (20.8) -- (40.7) Net cash flows (used for) provided by financing activities: Proceeds from senior secured credit facility, net......... -- -- -- -- Repayment of prior senior credit facility.............. -- -- -- -- Net change in revolving credit facility..................... (5.2) -- -- (5.2) Purchase of common stock....... (0.1) -- -- (0.1) Other, net..................... 3.1 -- -- 3.1 ------ ------ ------- ------ Net cash (used for) provided by financing activities........... (2.2) -- (2.2) ------ ------ ------- ------ Net increase (decrease) in cash........................... (3.1) (0.8) -- (3.9) Cash and temporary cash investments at beginning of year........................... 16.9 4.5 -- 21.4 ------ ------ ------- ------ Cash and temporary cash investments at end of year..... $ 13.8 $ 3.7 $ -- $ 17.5 ====== ====== ======= ======
54 JO-ANN STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR ENDED --------------------------------------------------- JANUARY 29, 2000 --------------------------------------------------- GUARANTOR CONSOLIDATING STATEMENTS OF CASH FLOWS PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------------- ------ ------------ ------------ ------------ (Dollars in millions) Net cash flows from operating activities: Net income (loss)......................................... $ 25.6 $ 24.4 $ (24.4) $ 25.6 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization........................... 17.0 15.0 -- 32.0 Deferred income taxes................................... (6.6) 19.4 -- 12.8 Loss on disposal of fixed assets........................ (0.4) 1.6 -- 1.2 Equity and asset impairment losses of minority investment............................................ -- -- -- -- Extraordinary item, net of tax.......................... -- -- -- -- Changes in operating assets and liabilities: Decrease (increase) in inventories...................... 9.1 (47.6) -- (38.5) Increase (decrease) in accounts payables................ (41.3) 40.5 -- (0.8) Increase (decrease) in accrued expenses................. 41.7 (34.9) -- 6.8 Settlement of income tax contingency.................... -- (16.1) -- (16.1) Other, net.............................................. (71.5) 51.8 24.4 4.7 ------ -------- ------- -------- Net cash provided by (used for) operating activities........ (26.4) 54.1 -- 27.7 Net cash flows used for investing activities: Capital expenditures...................................... (32.4) (35.0) -- (67.4) Minority investment....................................... -- -- -- -- Other, net................................................ 18.6 (17.2) -- 1.4 ------ -------- ------- -------- Net cash used for investing activities...................... (13.8) (52.2) -- (66.0) Net cash flows (used for) provided by financing activities: Proceeds from senior secured credit facility, net......... 143.4 -- -- 143.4 Repayment of prior senior credit facility................. -- -- -- -- Net change in revolving credit facility................... (87.3) -- -- (87.3) Purchase of common stock.................................. (20.0) -- -- (20.0) Other, net................................................ 3.2 -- -- 3.2 ------ -------- ------- -------- Net cash (used for) provided by financing activities........ 39.3 -- -- 39.3 ------ -------- ------- -------- Net increase (decrease) in cash............................. (0.9) 1.9 -- 1.0 Cash and temporary cash investments at beginning of year.... 17.8 2.6 -- 20.4 ------ -------- ------- -------- Cash and temporary cash investments at end of year.......... $ 16.9 $ 4.5 $ -- $ 21.4 ====== ======== ======= ========
55 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, 2002. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 57 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, 2002. 56 SCHEDULE II JO-ANN STORES, INC. VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS ENDED 2002, 2001 AND 2000 (Dollars in millions)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ---------- ---------- ---------- ---------- ---------- February 2, 2002 Closed store reserve................ $9.3 $17.6(a) $-- $14.5 $12.4 February 3, 2001 Closed store reserve................ 4.4 7.9(b) -- 3.0 9.3 January 29, 2000 Closed store reserve................ 7.5 0.3 -- 3.4 4.4
- --------------- (a)Includes $17.1 million accrual for 106 stores identified for closing, 27 of which were closed in fiscal 2002 and 50 which are expected to close in fiscal 2003. (b)Includes $6.7 million accrual for 42 stores identified for closing in fiscal 2002. 57 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 "Nominees to the Board of Directors" in the Registrant's definitive proxy statement for its 2002 Annual Meeting of Shareholders to be held on June 6, 2002 (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 document. 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. Twelve of these shopping centers contain stores of our company. Two 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 2002, 2001 and 2000 on these stores amounted to $1.3 million, $1.4 million and $1.3 million, respectively. Betty Rosskamm, Alma and Justin Zimmerman and the Company 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 plan to 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 plan to 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. 58 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 schedules filed as part of this Form 10-K are located as set forth in the index on page 26 of this report. (3) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1 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) 3.1.1 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 (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on May 4, 2001 and incorporated herein by reference) 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)*
59
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 Employment Agreement dated July 30, 2001 between the Registrant and Alan Rosskamm* 10.7.1 Form of Employment Agreement between the Registrant and certain Executive Officers* 10.7.2 List of Executive Officers who are parties to an Employment Agreement with the Registrant 10.8 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)* 10.9 Fabri-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)* 10.10 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) 10.11 Credit Agreement dated as of April 24, 2001 among the Registrant, as borrower, Fleet National Bank, as Issuing Bank, Fleet Retail Finance Inc., as Administrative Agent and Collateral Agent, Congress Financial Corporation, as Documentation Agent, GMAC Commercial Credit, LLC, National City Commercial Finance, Inc. and The CIT Group / Business Credit, Inc. as Co-Agents and Fleet Securities Inc. as Arranger and Syndication Agent (filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on June 19, 2001 and incorporated herein by reference) 10.12 Amendment No. 1 to Credit Agreement dated as of April 24, 2001 (filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on June 19, 2001 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 (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on May 4, 2001 and incorporated herein by reference) 21 Subsidiaries of Jo-Ann Stores, Inc. (filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on May 4, 2001 and incorporated herein by reference) 23 Consent of Independent Public Accountants 24 Power of Attorney 99.1 Letter to the Securities and Exchange Commission regarding Arthur Andersen LLP
- --------------- * Indicates a management contract or compensatory plan or arrangement (b) Reports on Form 8-K None 60 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 2, 2002 ------------------------------------------- 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 Brian P. Carney (Chief Accounting Officer) /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 /s/ BERYL RAFF* Director - ------------------------------------------------ Beryl Raff
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 2, 2002 ------------------------------------------- Alan Rosskamm, Attorney-in-Fact
61 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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 10.7 Employment Agreement dated July 30, 2001 between the Registrant and Alan Rosskamm 10.7.1 Form of Employment Agreement between the Registrant and certain Executive Officers 10.7.2 List of Executive Officers who are parties to an Employment Agreement with the Registrant 12 Ratio of Earnings to Fixed Charges 23 Consent of Independent Public Accountants 24 Power of Attorney 99.1 Letter to the Securities and Exchange Commission regarding Arthur Andersen LLP
62 EX-10.2 3 l94145aex10-2.txt EX-10.2 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 - - Mike Edwards EX-10.6 4 l94145aex10-6.txt EX-10.6 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 - - Mike Edwards EX-10.7 5 l94145aex10-7.txt EX-10.7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made as of the 30th day of July, 2001, between JO-ANN STORES, INC., an Ohio corporation (the "Company"), and ALAN ROSSKAMM ("Executive"). The Company is entering into this Agreement in recognition of the importance of Executive's services to the continuity of management of the Company and based upon its determination that it will be in the best interests of the Company to encourage Executive's continued attention and dedication to Executive's duties as a general matter and in the potentially disruptive circumstances of a possible Change of Control of the Company. (As used in this Agreement, the term "Change of Control" and certain other capitalized terms have the meanings ascribed to them in Section 17 at the end of this Agreement.) The Company and Executive agree, effective as of the date first set forth above (the "Effective Date"), as follows: 1. SEVERANCE BENEFITS UPON CERTAIN TERMINATIONS OCCURRING BEFORE A CHANGE OF CONTROL. If, before the occurrence of a Change of Control, Executive's employment with the Company is terminated (a) by the Company without Cause, or (b) by Executive for Good Reason, Executive shall be entitled to the following as Severance Benefits: (a) The Company shall pay Executive an amount equal to one and one half times Executive's Base Salary payable in consecutive bi-weekly installments over the 18 months following the Termination Date at the same times and in the same amounts as if Executive had remained in the employ of the Company and had continued to earn Executive's Base Salary over that 18 month period. (b) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance through the end of the 18th full calendar month following the Termination Date, except that (i) the Company may stop providing medical insurance and dental insurance coverage earlier if and when Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer, and (ii) the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, 1 as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued. (c) Except as provided in the last sentence of this Section 1(c), the Company shall continue to provide Executive, at least through Executive's attainment of age 70 (or his earlier death), with life insurance coverage that will pay to one or more beneficiaries designated by Executive an aggregate life insurance death benefit of $769,000 payable upon Executive's death. Unless otherwise agreed by Executive, the Company shall provide this insurance coverage to Executive pursuant to the Split Dollar Insurance Agreement entered into between Executive and the Company on September 6, 1988, with such amendments as are necessary to carry out the purpose and intent of this Section 1(c) and are approved by Executive. Executive will not be required to pay any premiums but will recognize any imputed income arising out of the provision of this insurance coverage. In addition to providing this coverage through Executive's attainment of age 70, the Company shall continue this coverage beyond attainment of age 70, assuming Executive survives to and beyond attainment of age 70, for so long as the policy underlying the September 6, 1988 Split Dollar Insurance Agreement can be maintained by the Company from year to year under circumstances such that the sum of (i) the annual premium payable with respect to the policy for any particular year plus (ii) the amount of any interest payable on loans outstanding under the policy for that year, does not exceed (x) the amount of any loan that is available to the Company under the policy during that year plus (y) the pro forma amount of tax savings resulting from payment of the interest referred to in (ii) during that year. For these purposes, the "pro forma" tax savings will be determined using the assumption that the Company is profitable to such an extent that it pays income taxes at the highest marginal rates applicable to corporations each year whether or not the Company in fact pays income taxes at those rates. At any time, Executive may elect to have the Company stop providing insurance coverage to him pursuant to this Section 1(c) by written notice to the Company given 30 days in advance of the date on which the coverage is to cease. 2. CHANGE OF CONTROL SEVERANCE BENEFITS UPON CERTAIN TERMINATIONS OCCURRING AFTER A CHANGE OF CONTROL. If, after the occurrence of a Change of Control, Executive's employment with the Company is terminated (a) by the Company without Cause, or (b) by Executive for Good Reason, Executive shall be entitled to the following as Change of Control Severance Benefits: (a) The Company shall make a lump sum cash payment to Executive, not later than ten business days after the Termination Date, in an amount equal to two times the sum of (i) Executive's Base Salary plus (ii) the greater of (A) Executive's average annual bonus earned over the three full fiscal years of the Company ended before the Termination Date, or (B) Executive's target annual bonus established for the bonus plan year in which the Termination Date occurs. If Executive has been employed by the Company for fewer than three but at least one full fiscal year of the Company ended before the Termination Date, the average of the bonuses earned in the two full fiscal years of the Company ended before the Termination Date, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Termination Date, as the case may be, shall be substituted for the average referred to in (A) above. 2 (b) If the Termination Date occurs after the end of a bonus year under any Company sponsored bonus plan and before the bonus with respect to that bonus year has been paid, the Company shall pay to Executive, not later than ten business days after the Termination Date, an amount equal to the bonus for that bonus year to which Executive would have been entitled had the bonus plan for that bonus year remained in effect without any change and had Executive remained in the employ of the Company through the date on which bonuses for that bonus year were paid. (c) The Company shall make a lump sum cash payment to Executive, not later than ten business days after the Termination Date, in an amount equal to the greater of (i) Executive's unpaid targeted annual bonus, established for the bonus year in which the Termination Date occurs, multiplied by a fraction, the numerator of which is the number of days Executive was employed by the Company in the bonus year through the Termination Date, and the denominator of which is 365, or (b) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive. (d) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, group term life insurance, and split-dollar life insurance through the second anniversary of the Termination Date, except that (i) the Company may stop providing medical insurance and dental insurance coverage earlier if Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer, and (ii) the Company may stop providing group term life insurance earlier if Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as in effect as of the Termination Date. (e) Except as provided in the last sentence of this Section 2(e), the Company shall continue to provide Executive, at least through Executive's attainment of age 70 (or his earlier death), with life insurance coverage that will pay to one or more beneficiaries designated by Executive an aggregate life insurance death benefit of $769,000 payable upon Executive's death. Unless otherwise agreed by Executive, the Company shall provide this insurance coverage to Executive pursuant to the Split Dollar Insurance Agreement entered into between Executive and the Company on September 6, 1988, with such amendments as are necessary to carry out the purpose and intent of this Section 2(e)and are approved by Executive. Executive will not be required to pay any premiums but will recognize any imputed income arising out of the provision of this insurance coverage. In addition to providing this coverage through Executive's attainment of age 70, the Company shall continue this coverage 3 beyond attainment of age 70, assuming Executive survives to and beyond attainment of age 70, for so long as the policy underlying the September 6, 1988 Split Dollar Insurance Agreement can be maintained by the Company from year to year under circumstances such that the sum of (i) the annual premium payable with respect to the policy for any particular year plus (ii) the amount of any interest payable on loans outstanding under the policy for that year, does not exceed (x) the amount of any loan that is available to the Company under the policy during that year plus (y) the pro forma amount of tax savings resulting from payment of the interest referred to in (ii) during that year. For these purposes, the "pro forma" tax savings will be determined using the assumption that the Company is profitable to such an extent that it pays income taxes at the highest marginal rates applicable to corporations each year whether or not the Company in fact pays income taxes at those rates. At any time, Executive may elect to have the Company stop providing insurance coverage to him pursuant to this Section 2(e) by written notice to the Company given 30 days in advance of the date on which the coverage is to cease. 3. EARNED BUT UNPAID BASE SALARY AND ACCRUED PAID TIME OFF PAY PAYABLE UPON ANY TERMINATION OF EMPLOYMENT; TREATMENT OF LONG-TERM INCENTIVE AWARDS. Upon any termination of Executive's employment for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive's Beneficiary), not later than ten days after the Termination Date, (a) all earned but unpaid Base Salary through the Termination Date, and (b) an amount equal to the aggregate dollar value of all paid time off earned but not taken by Executive ("Accrued Paid Time Off Pay") before the Termination Date. In addition, upon any termination of Executive's employment, all outstanding long-term incentive awards shall be subject to the treatment provided under the applicable long-term incentive plan of the Company. 4. TERMINATION DUE TO RETIREMENT, DISABILITY, OR DEATH. If Executive's employment is terminated due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of Control), neither Executive nor Executive's Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive's Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 2(e) and to such benefits as may be provided under the terms of the Company's disability, retirement, survivor's benefits, insurance, and other applicable plans and programs of the Company then in effect. 5. TERMINATION FOR CAUSE OR BY EXECUTIVE OTHER THAN FOR GOOD REASON. If Executive's employment is terminated either by the Company for Cause or by Executive other than for Good Reason while this Agreement remains in effect (whether before or after the occurrence of a Change of Control) and Section 6 does not apply, neither Executive nor Executive's Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive's Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 2(e) and the Company shall pay to Executive such other amounts to which Executive is entitled under any compensation plans of the Company, at the time such payments are due. Except as provided in this Section 5, the Company shall have no further obligations to Executive under this Agreement. 4 6. SPECIAL PROVISION APPLICABLE ONLY IF EXECUTIVE IS TERMINATED BOTH IN ADVANCE OF AND IN CONTEMPLATION OF A CHANGE OF CONTROL. If Executive is terminated by the Company (a) in contemplation of and not more than six full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the termination had occurred immediately after that Change of Control Executive would have been entitled to Change of Control Severance Benefits under Section 2 above, then the Company shall pay and provide to Executive all of the amounts and benefits specified in Section 2, reduced by such amounts and such benefits, if any, that the Company has otherwise paid and provided to Executive pursuant to Section 1 above. The Company shall make any cash payment required pursuant to this Section 6 within ten days of the occurrence of the Change of Control. 7. CHANGE OF CONTROL IGNORED IF EMPLOYMENT CONTINUES FOR MORE THAN TWO YEARS THEREAFTER. If Executive's employment continues for more than two years following the occurrence of any Change of Control, that particular Change of Control will deemed never to have occurred for purposes of this Agreement. 8. TERM OF AGREEMENT, RIGHT TO SEVERANCE BENEFITS UPON DETERMINATION BY COMPANY NOT TO RENEW. 8.1. TERM. This Agreement shall be effective as of the Effective Date and shall thereafter apply to any termination of Executive's employment occurring on or before July 31, 2004. Unless this Agreement is earlier terminated pursuant to its terms, on July 31, 2004 and on July 31 of each succeeding year thereafter (a "Renewal Date"), the term of this Agreement shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any termination of Executive's employment occurring after that Renewal Date. 8.2. RIGHT TO SEVERANCE BENEFITS. If the Company gives Executive notice that this Agreement shall not apply to any termination of Executive's employment occurring after a particular Renewal Date, Executive shall have the right to terminate Executive's employment at any time during the first three months of the final year during which this Agreement is thereafter scheduled to be effective (e.g., if the Company gives notice that the Agreement is not to apply to any termination after July 31, 2005, at any time during the months of August, September, and October 2004) and Executive shall thereupon be entitled to receive Severance Benefits to the same extent as if all of the conditions to Executive's right to receive Severance Benefits under Section 2 had been satisfied. 9. EXCISE TAX. 9.1. EXCISE TAX. Notwithstanding any other provision of this Agreement (but subject to the following sentence), if any portion of the severance benefits or any other payment under this Agreement, or under any other agreement with or plan of the Company (in the aggregate "Total Payments") would constitute an "excess parachute payment," then the payments to be made to Executive under this Agreement shall be reduced, but not below zero, to such amount that the value of the aggregate Total Payments that Executive is entitled to receive shall be One Dollar ($1.00) less than the maximum amount which Executive may receive without becoming subject to the tax 5 imposed by Code Section 4999 and without the Company suffering a loss of deduction under Code Section 280G(a). However, the payments shall be reduced as described above only if the reduction results in Executive receiving greater total severance benefits (on an after-tax basis, including excise taxes) than if such severance benefits were not reduced. For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code, and such "parachute payments" shall be valued as provided therein. 9.2. PROCEDURE FOR ESTABLISHING LIMITATION ON TERMINATION PAYMENT. (a) Within 60 days following delivery of notice by the Company to Executive of its belief that there is a payment or benefit due to Executive which will result in an "excess parachute payment", Executive and the Company, at the Company's expense, shall obtain the opinion of such legal counsel, which need not be unqualified, as Executive may choose, which sets forth: (i) the amount of Executive's "annualized includible compensation for the base period" (as defined in Code Section 280G(d)(1)); (ii) the present value of the Total Payments; and (iii) the amount and present value of any "excess parachute payment." The opinion of such legal counsel shall be supported by the opinion of a certified public accounting firm and shall be binding upon the Company and Executive. (b) If the opinion of legal counsel indicates that there would be an "excess parachute payment," the severance benefits hereunder shall be reduced or eliminated as specified by Executive in writing delivered to the Company within 30 days of Executive's his receipt of such opinion, or, if Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the basis of calculations set forth in such opinion, there will be no "excess parachute payment." (c) The calculations, notices, and opinion provided for herein shall be based upon the conclusive presumption that: (i) the compensation and benefits provided for herein; and (ii) any other compensation earned prior to the effective date of termination by Executive pursuant to the Company's compensation programs (if such payments would have been made in the future in any event, even though the timing of such payment is triggered by the Change of Control), are reasonable. 9.3. SUBSEQUENT IMPOSITION OF EXCISE TAX. If, notwithstanding compliance with the provisions herein, it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the Total Payments is considered to be a "parachute payment," subject to excise tax under Section 4999 of the Code, which was not contemplated to be a "parachute payment" at the time of payment (so as to accurately determine whether a limitation should have been applied to the Total Payments to maximize the net benefit to Executive), Executive shall be entitled to receive a lump sum cash payment sufficient to place Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that Executive would have been in had such payment not been subject to such excise tax, and had Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to Executive in the year in which the payment contemplated under this Agreement is made. 6 10. OUTPLACEMENT ASSISTANCE. Following a termination of employment in which Severance Benefits or Change of Control Severance Benefits are payable hereunder the Company shall provide Executive with outplacement services obtained by the Company at its cost and commensurate with the outplacement services typically provided by the Company to Executives who left the employ of the Company before the Effective Date of this Agreement until Executive obtains subsequent employment or self employment. 11. THE COMPANY'S PAYMENT OBLIGATION. 11.1. PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to make the payments and provide the benefits provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from Executive or from whomsoever may be entitled thereto, for any reasons whatsoever. 11.2. NO MITIGATION. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or benefits to be provided under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments or provide any benefits as required under this Agreement, except to the limited extent provided above in cases where a subsequent employer provides medical insurance and/or group term life insurance coverage. 11.3. SOURCE OF PAYMENTS AND BENEFITS. All payments under this Agreement shall be made solely from the general assets of the Company (or from a grantor trust, if any, established by the Company for purposes of making payments under this Agreement and other similar agreements), and Executive shall have the rights of an unsecured general creditor of the Company with respect thereto. 12. LEGAL REMEDIES 12.1. PAYMENT OF LEGAL FEES. Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred in good faith by Executive as a result of the Company's refusal to provide the Severance Benefits or Change of Control Severance Benefits to which Executive deems Executive to be entitled under this Agreement, as a result of the Company's contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict between the parties pertaining to this Agreement, provided, however, that the Company shall be reimbursed by Executive for all such fees and expenses if, but only if, it is ultimately determined by a court of competent jurisdiction or by the arbitrators, as the case may be, that Executive had no reasonable grounds for the position propounded by Executive in the arbitration and/or litigation (which determination need not be made simply because Executive fails to succeed in the arbitration and/or litigation). 7 12.2. ARBITRATION. Subject to the following sentences, any dispute or controversy arising under or in connection with this Agreement shall be settled by mandatory arbitration (in lieu of litigation), conducted before a panel of three arbitrators sitting in a location selected by Executive within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to Executive's alleged violation of the prohibition on competition or any other restriction contained in Section 14 of this Agreement shall be settled by judicial proceedings (in any court of competent jurisdiction with respect to such dispute or claim). Except as provided above for claims or disputes under Section 14, judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. 13. WITHHOLDING. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States federal taxes, and any other state, city, or local taxes). 14. NONCOMPETITION. 14.1. PROHIBITION ON COMPETITION. Without the prior written consent of the Company, during the term of this Agreement, and, if Severance Benefits are paid hereunder, thereafter during the 18 month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second anniversary of the Termination Date, Executive shall not, as an employee, an officer, or as a director, engage directly or indirectly in any business or enterprise that engages to any significant extent within the United Sates of America in the sale at retail or direct marketing to consumers of fabric and craft components. Notwithstanding the foregoing, Executive may purchase and hold for investment less than two percent of the shares of any corporation whose shares are regularly traded on a national securities exchange or in the over-the-counter market. 14.2. DISCLOSURE OF INFORMATION. Executive acknowledges that Executive has and has had access to and knowledge of certain confidential and proprietary information of the Company, which is essential to the performance of Executive' s duties as an employee of the Company. Executive will not, during or after the term of Executive's employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such information for their own purposes. 14.3. COVENANTS REGARDING OTHER EMPLOYEES. During the term of this Agreement and thereafter during any period during which Executive is subject to the restriction set forth in Section 14.1, Executive shall not to attempt to induce any employee of the Company to terminate his or her employment with the Company or accept employment with any competitor of the Company and Executive shall not interfere in any similar manner with the business of the Company. 8 15. SUCCESSORS AND ASSIGNMENT. 15.1. SUCCESSORS TO THE COMPANY. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle Executive to notify the Company that, unless the failure is remedied within 30 days after delivery of the notice from Executive, Executive's employment will terminate as of the 31st day after the delivery of the notice. If any such notice is given and the failure is not so remedied, Executive will be entitled to receive the same payments and benefits from the Company, and on the same schedule, as if the Company had undergone a Change of Control on the date of the succession and Executive had thereupon terminated his employment for Good Reason. 15.2. ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of and be enforceable by Executive and each of Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees, and legatees. If Executive dies while any amount would still be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to Executive's Beneficiary. If Executive has not named a Beneficiary, then such amounts shall be paid to Executive's devisee, legatee, or other designee, or if there is no such designee, to Executive's estate. 16. MISCELLANEOUS. 16.1. EMPLOYMENT STATUS. Except as may be provided under any other agreement between Executive and the Company, the employment of Executive by the Company is "at will," and, prior to the effective date of a Change of Control, may be terminated by either Executive or the Company at any time, subject to applicable law. 16.2. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties with respect to severance benefits to be provided upon any termination of Executive's employment and supersedes any and all prior employment, retention, and/or change of control agreements between Executive and the Company. 16.3. BENEFICIARIES. Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits or Change of Control Severance Benefits owing to Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. Executive may make or change such designation at any time.. 16.4. SEVERABILITY. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. 9 16.5. MODIFICATION. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by Executive and by an authorized representative of the Company, or by the respective parties' legal representatives and successors. 16.6. APPLICABLE LAW. To the extent not preempted by the laws of the United States, the laws of the state of Ohio, applicable to contracts made and to be performed wholly within that state, shall be the controlling law in all matters relating to this Agreement. 17. DEFINITIONS. Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below: 17.1. "BASE SALARY" means an amount equal to Executive's base annual salary at the highest rate payable at any time before the date of a termination. For this purpose, Base Salary shall not include bonuses, long-term incentive compensation, or any remuneration other than base annual salary. 17.2. "BENEFICIAL OWNER" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 17.3. "BENEFICIARY" means the persons or entities designated or deemed designated by Executive pursuant to Section 15.2 herein. 17.4. "BOARD" means the Board of Directors of the Company. 17.5. "CAUSE" shall mean the occurrence of any one or more of the following: (a) The willful and continued failure by Executive to substantially perform his or her normal duties (other than any such failure resulting from Executive's Disability), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which the Committee believes that Executive has not substantially performed his or her duties, and Executive has failed to remedy the situation within 30 business days of receiving such notice; (b) Executive's conviction for committing an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or (c) The willful engaging by Executive in gross negligence materially and demonstrably injurious to the Company. However, no act, or failure to act on Executive's part, shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his or her action or omission was in or not opposed to the best interest of the Company. 17.6. CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect: (a) Any person (other than the Company, any of its Subsidiaries, any member of either of the Founding Families, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established 10 by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 15% or more (but less than 50%) of the Common Shares then outstanding; (b) Any person (other than the Company, any of its Subsidiaries, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 50% or more of the Common Shares then outstanding; (c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of 15% or more of the Common Shares then outstanding; (d) At any time during any period of 24 consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of the Company, unless the election, or the nomination for election by the Company's shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination and (ii) were directors at the beginning of the period; (e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of the Company with another corporation in which those persons who are shareholders of the Company immediately before the merger or consolidation are to receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the dissolution of the Company; (f) (i) the Company is merged or consolidated with another corporation and those persons who were shareholders of the Company immediately before the merger or consolidation receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the Company is dissolved; or (g) Any person who proposes to make a "control share acquisition" of the Company, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to the Company. Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an irrevocable Change of Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in clause (c) occurs, and the Board either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board does 11 not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event. 17.7. "CHANGE OF CONTROL SEVERANCE BENEFITS" means those payments and benefits that may become payable pursuant to Section 2 below. 17.8. "CODE" means the United States Internal Revenue Code of 1986, as amended. 17.9. "COMMITTEE" means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee. 17.10. "COMPANY" means Jo-Ann Stores, Inc., an Ohio corporation, and its successors. 17.11. "DISABILITY" means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice, provided, however, that Executive must be entitled to disability benefits under the Company sponsored disability plans or programs. 17.12. "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. 17.13. "FOUNDING FAMILIES" means the families consisting of Betty and Martin Rosskamm and Alan and Justine Zimmerman and their respective issue. 17.14. "GOOD REASON" (AFTER A CHANGE OF CONTROL) means, without Executive's express written consent, the occurrence, after the occurrence of a Change of Control, of any one or more of the following: (a) Any reduction in Executive's Base Salary below the amount in effect immediately before the Change of Control or, if higher, the amount in effect before any reduction in Executive's Base Salary made in contemplation of the Change of Control. (b) Any significant reduction in Executive's duties, responsibilities, or position with respect to the Company from the duties, responsibilities, or position as in effect immediately before the Change of Control or as in effect immediately before any reduction in any such item made in contemplation of the Change of Control. 12 (c) Any significant reduction in Executive's benefits package from the benefit package in effect immediately before the Change of Control or as in effect immediately before any reduction of the benefit package made in contemplation of the Change of Control. (d) Any reduction in Executive's long-term incentive opportunity with the Company. (e) Any shift of Executive's principal place of employment with the Company to a location that is more than 50 miles (by straight line measurement) from the site of the Company's headquarters in Hudson, Ohio at the Effective Time. (f) Any dissolution or liquidation of the Company. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Section 17.14 unless the Company has given Executive written notice of the change and Executive has voluntarily agreed in a writing that specifically refers to this section of this Agreement to accept the change and to waive any possible reliance on that change as constituting Good Reason. 17.15. "GOOD REASON"(BEFORE A CHANGE OF CONTROL) means, without Executive's express written consent, any reduction in Executive's Base Salary other than a reduction that is in the same proportion as the reduction of the base salaries of every other executive officer of the Company in connection with an across-the-board reduction of executive base salaries. 17.16. "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). 17.17. "RETIREMENT" means a voluntary termination of Executive's employment other than for Good Reason after Executive has either (a) attained age 55 and has completed at least ten full years of continuous service with the Company, or (b) has attained age 65 (without regard to length of service). 17.18. "SEVERANCE BENEFITS" means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 below 17.19. "TERMINATION DATE" means the date on which any termination of Executive's employment becomes effective. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. JO-ANN STORES, INC. 13 By______________________ "EXECUTIVE" ------------------------- ALAN ROSSKAMM 14 EX-10.7.1 6 l94145aex10-7_1.txt EX-10.7.1 EXHIBIT 10.7.1 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made as of the _____ day of ________, 200_, between JO-ANN STORES, INC., an Ohio corporation (the "Company"), and [NAME OF EXECUTIVE] ("Executive"). The Company is entering into this Agreement in recognition of the importance of Executive's services to the continuity of management of the Company and based upon its determination that it will be in the best interests of the Company to encourage Executive's continued attention and dedication to Executive's duties as a general matter and in the potentially disruptive circumstances of a possible Change of Control of the Company. (As used in this Agreement, the term "Change of Control" and certain other capitalized terms have the meanings ascribed to them in Section 17 at the end of this Agreement.) The Company and Executive agree, effective as of the date first set forth above (the "Effective Date"), as follows: 1. SEVERANCE BENEFITS UPON CERTAIN TERMINATIONS OCCURRING BEFORE A CHANGE OF CONTROL. If, before the occurrence of a Change of Control, Executive's employment with the Company is terminated (a) by the Company without Cause, or (b) by Executive for Good Reason, Executive shall be entitled to the following as Severance Benefits: (a) The Company shall pay Executive an amount equal to one and one half times Executive's Base Salary payable in consecutive bi-weekly installments over the 18 months following the Termination Date at the same times and in the same amounts as if Executive had remained in the employ of the Company and had continued to earn Executive's Base Salary over that 18 month period. (b) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance through the end of the 18th full calendar month following the Termination Date, except that (i) the Company may stop providing medical insurance and dental insurance coverage earlier if and when Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer, and (ii) the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, 1 as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued. 2. CHANGE OF CONTROL SEVERANCE BENEFITS UPON CERTAIN TERMINATIONS OCCURRING AFTER A CHANGE OF CONTROL. If, after the occurrence of a Change of Control, Executive's employment with the Company is terminated (a) by the Company without Cause, or (b) by Executive for Good Reason, Executive shall be entitled to the following as Change of Control Severance Benefits: (a) The Company shall make a lump sum cash payment to Executive, not later than ten business days after the Termination Date, in an amount equal to two times the sum of (i) Executive's Base Salary plus (ii) the greater of (A) Executive's average annual bonus earned over the three full fiscal years of the Company ended before the Termination Date, or (B) Executive's target annual bonus established for the bonus plan year in which the Termination Date occurs. If Executive has been employed by the Company for fewer than three but at least one full fiscal year of the Company ended before the Termination Date, the average of the bonuses earned in the two full fiscal years of the Company ended before the Termination Date, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Termination Date, as the case may be, shall be substituted for the average referred to in (A) above. (b) If the Termination Date occurs after the end of a bonus year under any Company sponsored bonus plan and before the bonus with respect to that bonus year has been paid, the Company shall pay to Executive, not later than ten business days after the Termination Date, an amount equal to the bonus for that bonus year to which Executive would have been entitled had the bonus plan for that bonus year remained in effect without any change and had Executive remained in the employ of the Company through the date on which bonuses for that bonus year were paid. (c) The Company shall make a lump sum cash payment to Executive, not later than ten business days after the Termination Date, in an amount equal to the greater of (i) Executive's unpaid targeted annual bonus, established for the bonus year in which the Termination Date occurs, multiplied by a fraction, the numerator of which is the number of days Executive was employed by the Company in the bonus year through the Termination Date, and the denominator of which is 365, or (b) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive. (d) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, group term life insurance, and split-dollar life insurance through the second anniversary of the Termination Date, except that (i) the Company may stop providing medical insurance and dental insurance coverage earlier if Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer, and 2 (ii) the Company may stop providing group term life insurance earlier if Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as in effect as of the Termination Date. (e) In lieu of any retirement benefits provided under Articles II or III of the Fabri-Centers of America, Inc. Supplemental Retirement Benefit Agreement (the "SERP"), the Company shall pay to Executive, not later than ten business days after the Termination Date, a lump sum benefit equal to (A) times (B), where (A) is equal to the Maximum Supplemental Retirement Benefit defined in Section 1.8 of the SERP, and (B) is a fraction (not to exceed 1.0), the numerator of which is the number of completed months of service Executive had with the Company as of the Termination Date and the denominator of which is the number of months of service Executive would have had with the Company had Executive continued to work for the Company through Executive's 65th birthday. 3. EARNED BUT UNPAID BASE SALARY AND ACCRUED PAID TIME OFF PAY PAYABLE UPON ANY TERMINATION OF EMPLOYMENT; TREATMENT OF LONG-TERM INCENTIVE AWARDS. Upon any termination of Executive's employment for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive's Beneficiary), not later than ten days after the Termination Date, (a) all earned but unpaid Base Salary through the Termination Date, and (b) an amount equal to the aggregate dollar value of all paid time off earned but not taken by Executive ("Accrued Paid Time Off Pay") before the Termination Date. In addition, upon any termination of Executive's employment, all outstanding long-term incentive awards shall be subject to the treatment provided under the applicable long-term incentive plan of the Company. 4. TERMINATION DUE TO RETIREMENT, DISABILITY, OR DEATH. If Executive's employment is terminated due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of Control), neither Executive nor Executive's Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive's Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and to such benefits as may be provided under the terms of the Company's disability, retirement, survivor's benefits, insurance, and other applicable plans and programs of the Company then in effect. 5. TERMINATION FOR CAUSE OR BY EXECUTIVE OTHER THAN FOR GOOD REASON. If Executive's employment is terminated either by the Company for Cause or by Executive other than for Good Reason while this Agreement remains in effect (whether before or after the occurrence of a Change of Control) and Section 6 does not apply, neither Executive nor Executive's Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive's Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and the Company shall pay to Executive such other amounts to which 3 Executive is entitled under any compensation plans of the Company, at the time such payments are due. Except as provided in this Section 5, the Company shall have no further obligations to Executive under this Agreement. 6. SPECIAL PROVISION APPLICABLE ONLY IF EXECUTIVE IS TERMINATED BOTH IN ADVANCE OF AND IN CONTEMPLATION OF A CHANGE OF CONTROL. If Executive is terminated by the Company (a) in contemplation of and not more than six full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the termination had occurred immediately after that Change of Control Executive would have been entitled to Change of Control Severance Benefits under Section 2 above, then the Company shall pay and provide to Executive all of the amounts and benefits specified in Section 2, reduced by such amounts and such benefits, if any, that the Company has otherwise paid and provided to Executive pursuant to Section 1 above. The Company shall make any cash payment required pursuant to this Section 6 within ten days of the occurrence of the Change of Control. 7. CHANGE OF CONTROL IGNORED IF EMPLOYMENT CONTINUES FOR MORE THAN TWO YEARS THEREAFTER. If Executive's employment continues for more than two years following the occurrence of any Change of Control, that particular Change of Control will deemed never to have occurred for purposes of this Agreement. 8. TERM OF AGREEMENT, RIGHT TO SEVERANCE BENEFITS UPON DETERMINATION BY COMPANY NOT TO RENEW. 8.1. TERM. This Agreement shall be effective as of the Effective Date and shall thereafter apply to any termination of Executive's employment occurring on or before July 31, 2004. Unless this Agreement is earlier terminated pursuant to its terms, on July 31, 2004 and on July 31 of each succeeding year thereafter (a "Renewal Date"), the term of this Agreement shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any termination of Executive's employment occurring after that Renewal Date. 8.2. RIGHT TO SEVERANCE BENEFITS. If the Company gives Executive notice that this Agreement shall not apply to any termination of Executive's employment occurring after a particular Renewal Date, Executive shall have the right to terminate Executive's employment at any time during the first three months of the final year during which this Agreement is thereafter scheduled to be effective (e.g., if the Company gives notice that the Agreement is not to apply to any termination after July 31, 2005, at any time during the months of August, September, and October 2004) and Executive shall thereupon be entitled to receive Severance Benefits to the same extent as if all of the conditions to Executive's right to receive Severance Benefits under Section 2 had been satisfied. 9. EXCISE TAX. 9.1. EXCISE TAX. Notwithstanding any other provision of this Agreement (but subject to the following sentence), if any portion of the severance benefits or any other payment under this Agreement, or under any other agreement with or plan of the Company (in the aggregate "Total Payments") would constitute an "excess parachute 4 payment," then the payments to be made to Executive under this Agreement shall be reduced, but not below zero, to such amount that the value of the aggregate Total Payments that Executive is entitled to receive shall be One Dollar ($1.00) less than the maximum amount which Executive may receive without becoming subject to the tax imposed by Code Section 4999 and without the Company suffering a loss of deduction under Code Section 280G(a). However, the payments shall be reduced as described above only if the reduction results in Executive receiving greater total severance benefits (on an after-tax basis, including excise taxes) than if such severance benefits were not reduced. For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code, and such "parachute payments" shall be valued as provided therein. 9.2. PROCEDURE FOR ESTABLISHING LIMITATION ON TERMINATION PAYMENT. (a) Within 60 days following delivery of notice by the Company to Executive of its belief that there is a payment or benefit due to Executive which will result in an "excess parachute payment", Executive and the Company, at the Company's expense, shall obtain the opinion of such legal counsel, which need not be unqualified, as Executive may choose, which sets forth: (i) the amount of Executive's "annualized includible compensation for the base period" (as defined in Code Section 280G(d)(1)); (ii) the present value of the Total Payments; and (iii) the amount and present value of any "excess parachute payment." The opinion of such legal counsel shall be supported by the opinion of a certified public accounting firm and shall be binding upon the Company and Executive. (b) If the opinion of legal counsel indicates that there would be an "excess parachute payment," the severance benefits hereunder shall be reduced or eliminated as specified by Executive in writing delivered to the Company within 30 days of Executive's his receipt of such opinion, or, if Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the basis of calculations set forth in such opinion, there will be no "excess parachute payment." (c) The calculations, notices, and opinion provided for herein shall be based upon the conclusive presumption that: (i) the compensation and benefits provided for herein; and (ii) any other compensation earned prior to the effective date of termination by Executive pursuant to the Company's compensation programs (if such payments would have been made in the future in any event, even though the timing of such payment is triggered by the Change of Control), are reasonable. 9.3. SUBSEQUENT IMPOSITION OF EXCISE TAX. If, notwithstanding compliance with the provisions herein, it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the Total Payments is considered to be a "parachute payment," subject to excise tax under Section 4999 of the Code, which was not contemplated to be a "parachute payment" at the time of payment (so as to accurately determine whether a limitation should have been applied to the Total Payments to maximize the net benefit to Executive), Executive shall be entitled to receive a lump sum cash payment sufficient to place Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that Executive would have been in had such payment not been subject to such excise tax, and had 5 Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to Executive in the year in which the payment contemplated under this Agreement is made. 10. OUTPLACEMENT ASSISTANCE. Following a termination of employment in which Severance Benefits or Change of Control Severance Benefits are payable hereunder the Company shall provide Executive with outplacement services obtained by the Company at its cost and commensurate with the outplacement services typically provided by the Company to Executives who left the employ of the Company before the Effective Date of this Agreement until Executive obtains subsequent employment or self employment. 11. THE COMPANY'S PAYMENT OBLIGATION. 11.1. PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to make the payments and provide the benefits provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from Executive or from whomsoever may be entitled thereto, for any reasons whatsoever. 11.2. NO MITIGATION. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or benefits to be provided under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments or provide any benefits as required under this Agreement, except to the limited extent provided above in cases where a subsequent employer provides medical insurance and/or group term life insurance coverage. 11.3. SOURCE OF PAYMENTS AND BENEFITS. All payments under this Agreement shall be made solely from the general assets of the Company (or from a grantor trust, if any, established by the Company for purposes of making payments under this Agreement and other similar agreements), and Executive shall have the rights of an unsecured general creditor of the Company with respect thereto. 12. LEGAL REMEDIES 12.1. PAYMENT OF LEGAL FEES. Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred in good faith by Executive as a result of the Company's refusal to provide the Severance Benefits or Change of Control Severance Benefits to which Executive deems Executive to be entitled under this Agreement, as a result of the Company's contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict between the parties pertaining to this Agreement, provided, however, that the Company shall be reimbursed by Executive for all such fees and expenses if, but only if, it is ultimately determined by a court of competent jurisdiction or 6 by the arbitrators, as the case may be, that Executive had no reasonable grounds for the position propounded by Executive in the arbitration and/or litigation (which determination need not be made simply because Executive fails to succeed in the arbitration and/or litigation). 12.2. ARBITRATION. Subject to the following sentences, any dispute or controversy arising under or in connection with this Agreement shall be settled by mandatory arbitration (in lieu of litigation), conducted before a panel of three arbitrators sitting in a location selected by Executive within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to Executive's alleged violation of the prohibition on competition or any other restriction contained in Section 14 of this Agreement shall be settled by judicial proceedings (in any court of competent jurisdiction with respect to such dispute or claim). Except as provided above for claims or disputes under Section 14, judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. 13. WITHHOLDING. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States federal taxes, and any other state, city, or local taxes). 14. NONCOMPETITION. 14.1. PROHIBITION ON COMPETITION. Without the prior written consent of the Company, during the term of this Agreement, and, if Severance Benefits are paid hereunder, thereafter during the 18 month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second anniversary of the Termination Date, Executive shall not, as an employee, an officer, or as a director, engage directly or indirectly in any business or enterprise that engages to any significant extent within the United Sates of America in the sale at retail or direct marketing to consumers of fabric and craft components. Notwithstanding the foregoing, Executive may purchase and hold for investment less than two percent of the shares of any corporation whose shares are regularly traded on a national securities exchange or in the over-the-counter market. 14.2. DISCLOSURE OF INFORMATION. Executive acknowledges that Executive has and has had access to and knowledge of certain confidential and proprietary information of the Company, which is essential to the performance of Executive' s duties as an employee of the Company. Executive will not, during or after the term of Executive's employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such information for their own purposes. 14.3. COVENANTS REGARDING OTHER EMPLOYEES. During the term of this Agreement and thereafter during any period during which Executive is subject to the restriction set forth in Section 14.1, Executive shall not to attempt to induce any employee of the Company to terminate his or her employment with the Company or 7 accept employment with any competitor of the Company and Executive shall not interfere in any similar manner with the business of the Company. 15. SUCCESSORS AND ASSIGNMENT. 15.1. SUCCESSORS TO THE COMPANY. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle Executive to notify the Company that, unless the failure is remedied within 30 days after delivery of the notice from Executive, Executive's employment will terminate as of the 31st day after the delivery of the notice. If any such notice is given and the failure is not so remedied, Executive will be entitled to receive the same payments and benefits from the Company, and on the same schedule, as if the Company had undergone a Change of Control on the date of the succession and Executive had thereupon terminated his employment for Good Reason. 15.2. ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of and be enforceable by Executive and each of Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees, and legatees. If Executive dies while any amount would still be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to Executive's Beneficiary. If Executive has not named a Beneficiary, then such amounts shall be paid to Executive's devisee, legatee, or other designee, or if there is no such designee, to Executive's estate. 16. MISCELLANEOUS. 16.1. EMPLOYMENT STATUS. Except as may be provided under any other agreement between Executive and the Company, the employment of Executive by the Company is "at will," and, prior to the effective date of a Change of Control, may be terminated by either Executive or the Company at any time, subject to applicable law. 16.2. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties with respect to severance benefits to be provided upon any termination of Executive's employment and supersedes any and all prior employment, retention, and/or change of control agreements between Executive and the Company. 16.3. BENEFICIARIES. Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits or Change of Control Severance Benefits owing to Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. Executive may make or change such designation at any time.. 8 16.4. SEVERABILITY. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. 16.5. MODIFICATION. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by Executive and by an authorized representative of the Company, or by the respective parties' legal representatives and successors. 16.6. APPLICABLE LAW. To the extent not preempted by the laws of the United States, the laws of the state of Ohio, applicable to contracts made and to be performed wholly within that state, shall be the controlling law in all matters relating to this Agreement. 17. DEFINITIONS. Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below: 17.1. "BASE SALARY" means an amount equal to Executive's base annual salary at the highest rate payable at any time before the date of a termination. For this purpose, Base Salary shall not include bonuses, long-term incentive compensation, or any remuneration other than base annual salary. 17.2. "BENEFICIAL OWNER" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 17.3. "BENEFICIARY" means the persons or entities designated or deemed designated by Executive pursuant to Section 15.2 herein. 17.4. "BOARD" means the Board of Directors of the Company. 17.5. "CAUSE" shall mean the occurrence of any one or more of the following: (a) The willful and continued failure by Executive to substantially perform his or her normal duties (other than any such failure resulting from Executive's Disability), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which the Committee believes that Executive has not substantially performed his or her duties, and Executive has failed to remedy the situation within 30 business days of receiving such notice; (b) Executive's conviction for committing an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or (c) The willful engaging by Executive in gross negligence materially and demonstrably injurious to the Company. However, no act, or failure to act on Executive's part, shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his or her action or omission was in or not opposed to the best interest of the Company. 9 17.6. CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect: (a) Any person (other than the Company, any of its Subsidiaries, any member of either of the Founding Families, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 15% or more (but less than 50%) of the Common Shares then outstanding; (b) Any person (other than the Company, any of its Subsidiaries, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 50% or more of the Common Shares then outstanding; (c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of 15% or more of the Common Shares then outstanding; (d) At any time during any period of 24 consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of the Company, unless the election, or the nomination for election by the Company's shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination and (ii) were directors at the beginning of the period; (e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of the Company with another corporation in which those persons who are shareholders of the Company immediately before the merger or consolidation are to receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the dissolution of the Company; (f) (i) the Company is merged or consolidated with another corporation and those persons who were shareholders of the Company immediately before the merger or consolidation receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the Company is dissolved; or (g) Any person who proposes to make a "control share acquisition" of the Company, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to the Company. Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an 10 irrevocable Change of Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in clause (c) occurs, and the Board either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board does not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event. 17.7. "CHANGE OF CONTROL SEVERANCE BENEFITS" means those payments and benefits that may become payable pursuant to Section 2 below. 17.8. "CODE" means the United States Internal Revenue Code of 1986, as amended. 17.9. "COMMITTEE" means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee. 17.10. "COMPANY" means Jo-Ann Stores, Inc., an Ohio corporation, and its successors. 17.11. "DISABILITY" means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice, provided, however, that Executive must be entitled to disability benefits under the Company sponsored disability plans or programs. 17.12. "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. 17.13. "FOUNDING FAMILIES" means the families consisting of Betty and Martin Rosskamm and Alan and Justine Zimmerman and their respective issue. 17.14. "GOOD REASON" (AFTER A CHANGE OF CONTROL) means, without Executive's express written consent, the occurrence, after the occurrence of a Change of Control, of any one or more of the following: (a) Any reduction in Executive's Base Salary below the amount in effect immediately before the Change of Control or, if higher, the amount in effect before any reduction in Executive's Base Salary made in contemplation of the Change of Control. 11 (b) Any significant reduction in Executive's duties, responsibilities, or position with respect to the Company from the duties, responsibilities, or position as in effect immediately before the Change of Control or as in effect immediately before any reduction in any such item made in contemplation of the Change of Control. (c) Any significant reduction in Executive's benefits package from the benefit package in effect immediately before the Change of Control or as in effect immediately before any reduction of the benefit package made in contemplation of the Change of Control. (d) Any reduction in Executive's long-term incentive opportunity with the Company. (e) Any shift of Executive's principal place of employment with the Company to a location that is more than 50 miles (by straight line measurement) from the site of the Company's headquarters in Hudson, Ohio at the Effective Time. (f) Any dissolution or liquidation of the Company. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Section 17.14 unless the Company has given Executive written notice of the change and Executive has voluntarily agreed in a writing that specifically refers to this section of this Agreement to accept the change and to waive any possible reliance on that change as constituting Good Reason. 17.15. "GOOD REASON"(BEFORE A CHANGE OF CONTROL) means, without Executive's express written consent, any reduction in Executive's Base Salary other than a reduction that is in the same proportion as the reduction of the base salaries of every other executive officer of the Company in connection with an across-the-board reduction of executive base salaries. 17.16. "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). 17.17. "RETIREMENT" means a voluntary termination of Executive's employment other than for Good Reason after Executive has either (a) attained age 55 and has completed at least ten full years of continuous service with the Company, or (b) has attained age 65 (without regard to length of service). 17.18. "SEVERANCE BENEFITS" means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 below 17.19. "TERMINATION DATE" means the date on which any termination of Executive's employment becomes effective. 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. JO-ANN STORES, INC. By "EXECUTIVE" [NAME OF EXECUTIVE] 13 EX-10.7.2 7 l94145aex10-7_2.txt EX-10.7.2 - -------------------------------------------------------------------------------- EXHIBIT 10.7.2 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO ARE PARTIES TO AN EMPLOYMENT AGREEMENT WITH THE REGISTRANT The terms of the employment agreements for the following executive officers are the same in all material respects except for the compensation amounts. - - David Bolen - - Brian Carney - - Rosalind Thompson - - Mike Edwards EX-12 8 l94145aex12.txt EX-12 EXHIBIT 12 JO-ANN STORES, INC. RATIO OF EARNINGS TO FIXED CHARGES
FISCAL YEAR ENDED --------------------------------------------------------------- JANUARY 31, JANUARY 30, JANUARY 29, FEBRUARY 3, FEBRUARY 2, 1998 1999 2000 2001 2002 ----------------------- ----------- ----------- ----------- Earnings: Income (loss) before income taxes $ 50.8 $ 22.0 $ 41.2 $(11.4) $(23.1) Interest Expense 5.9 12.5 26.2 29.0 32.7 Portion of occupancy expense deemed representative of interest(1) 23.5 30.9 34.4 37.0 38.6 ------ ------ ------ ------ ------ Total Earnings $ 80.2 $ 65.4 $101.8 $ 54.6 $ 48.2 ====== ====== ====== ====== ====== Fixed Charges: Interest Expense $ 5.9 $ 12.5 $ 26.2 $ 29.0 $ 32.7 Portion of occupancy expense deemed representative of interest (1) 23.5 30.9 34.4 37.0 38.6 ------ ------ ------ ------ ------ Total Fixed Charges $ 29.4 $ 43.4 $ 60.6 $ 66.0 $ 71.3 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 2.7x 1.5x 1.7x 0.8x 0.7x ====== ====== ====== ====== ======
(1) Represents 33% of fixed rental charges EX-23 9 l94145aex23.txt EX-23 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 2, 2002. EX-24 10 l94145aex24.txt EX-24 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 2, 2002 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 2, 2002 /s/ SCOTT COWEN May 2, 2002 - --------------------------- ------------------------- Alan Rosskamm Scott Cowen /s/ BRIAN P. CARNEY May 2, 2002 /s/ FRANK NEWMAN May 2, 2002 - --------------------------- ------------------------- Brian P. Carney Frank Newman /s/ BETTY ROSSKAMM May 2, 2002 /s/ IRA GUMBERG May 2, 2002 - --------------------------- ------------------------- Betty Rosskamm Ira Gumberg /s/ ALMA ZIMMERMAN May 2, 2002 /s/ GREGG SEARLE May 2, 2002 - --------------------------- ------------------------- Alma Zimmerman Gregg Searle /s/ BERYL RAFF May 2, 2002 ------------------------- Beryl Raff
EX-99.1 11 l94145aex99-1.txt EX-99.1 EXHIBIT 99.1 Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, Ohio 44236 May 2, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: The purpose of this letter is to address the requirements of the Securities and Exchange Commission ("SEC") with respect to issuers that include accountants' reports from Arthur Andersen LLP issued after March 14, 2002 in filings with the SEC. We have received, on the date hereof, representation from Arthur Andersen LLP that their audit of the financial statements contained in Jo-Ann Stores, Inc.'s Annual Report on Form 10-K for the year ended February 2, 2002, of which this Exhibit 99.1 is a part, was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, and that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation to conduct the relevant portions of the audit. Sincerely, /s/ Brian P. Carney Executive Vice President and Chief Financial Officer Jo-Ann Stores, Inc. -----END PRIVACY-ENHANCED MESSAGE-----