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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended May 1, 1999 Commission File No. 1-6695
- ------------------------------------ ------------------------------
JO-ANN STORES, INC.
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(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 (Zip Code)
offices)
(330) 656 - 2600
- -------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Class A Common Stock outstanding at June 10, 1999: 9,123,301
Shares of Class B Common Stock outstanding at June 10, 1999: 9,193,919
<PAGE> 2
JO-ANN STORES, INC.
Form 10-Q Index
For the quarter ended May 1, 1999
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements (Unaudited) Page Numbers
Consolidated Balance Sheets as of May 1, 1999 and January 30, 1999 3
Consolidated Statements of Income for the Thirteen Weeks
Ended May 1, 1999 and May 2, 1998 4
Consolidated Statements of Cash Flows for the Thirteen Weeks
Ended May 1, 1999 and May 2, 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Jo-Ann Stores, Inc.
(Millions of dollars)
(UNAUDITED)
MAY 1, JANUARY 30,
1999 1999
- -------------------------------------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 14.9 $ 20.4
Inventories 446.3 420.2
Deferred income taxes 24.8 24.8
Prepaid expenses and other current assets 19.3 24.7
-------- --------
Total current assets 505.3 490.1
Property and equipment, net 165.3 164.0
Goodwill, net 37.0 37.2
Other assets 10.4 10.1
-------- --------
Total assets $ 718.0 $ 701.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 142.1 $ 150.4
Accrued expenses 43.1 58.4
Accrued income taxes 2.1 0.4
-------- --------
Total current liabilities 187.3 209.2
Long-term debt 240.1 182.5
Deferred income taxes 25.2 25.2
Other long-term liabilities 13.4 25.5
Shareholders' equity:
Common stock
Class A 0.5 0.5
Class B 0.5 0.5
Additional paid-in capital 95.4 94.4
Unamortized restricted stock awards (2.7) (2.9)
Retained earnings 188.1 185.8
-------- --------
281.8 278.3
Treasury stock, at cost (29.8) (19.3)
-------- --------
Total shareholders' equity 252.0 259.0
-------- --------
Total liabilities and shareholders' equity $ 718.0 $ 701.4
======== ========
</TABLE>
See notes to consolidated financial statements
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Jo-Ann Stores, Inc.
(Millions of dollars, except per share data)
MAY 1, MAY 2,
Thirteen Weeks Ended 1999 1998
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<S> <C> <C>
Net sales $ 295.7 $ 252.9
Cost of sales 157.7 136.8
--------- ---------
Gross margin 138.0 116.1
Selling, general and administrative expenses 122.3 103.2
Depreciation and amortization 7.7 6.4
Non-recurring charge -- 12.2
--------- ---------
Operating profit (loss) 8.0 (5.7)
Interest expense, net 4.3 1.5
--------- ---------
Income (loss) before income taxes 3.7 (7.2)
Income tax provision (benefit) 1.4 (2.8)
--------- ---------
Net income (loss) $ 2.3 $ (4.4)
========= =========
Net income (loss) per common share
Basic and diluted $ 0.12 $ (0.23)
========= =========
</TABLE>
See notes to consolidated financial statements
Page 4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Jo-Ann Stores, Inc.
(Millions of dollars)
MAY 1, MAY 2,
Thirteen Weeks Ended 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net income (loss) $ 2.3 $ (4.4)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 7.7 6.4
Non-cash portion of non-recurring charge -- 9.7
Other 0.5 0.1
Changes in operating assets and liabilities:
Increase in inventories (26.1) (23.1)
Decrease in prepaid expenses and other current assets 5.2 3.2
Increase (decrease) in accounts payable (8.3) 7.5
Decrease in accrued expenses (15.3) (15.8)
Increase (decrease) in accrued income taxes 1.7 (10.4)
------- --------
Net cash used for operating activities (32.3) (26.8)
Net cash flows from investing activities:
Capital expenditures (10.1) (6.2)
House of Fabrics acquisition, net of cash acquired -- (23.5)
Other, net 1.0 --
------- --------
Net cash used for investing activities (9.1) (29.7)
Net cash flow from financing activities:
Proceeds from long-term debt 57.6 60.8
Decrease in other long-term liabilities (12.1) (0.4)
Proceeds from exercise of stock options 0.7 0.9
Issuance of treasury shares 0.3 0.2
Purchase of common stock (10.6) (0.2)
------- --------
Net cash provided by financing activities 35.9 61.3
------- --------
Net increase (decrease) in cash (5.5) 4.8
Cash and temporary cash investments at beginning of period 20.4 14.8
------- --------
Cash and temporary cash investments at end of period $ 14.9 $ 19.6
======= =======
Supplemental disclosures of cash flow information: Cash paid (received) during
the period for:
Interest $ 4.2 $ 0.8
Income taxes (5.6) 7.9
</TABLE>
See notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Jo-Ann Stores, Inc.
May 1, 1999, January 30, 1999 and May 2, 1998
Note 1 - Basis of Presentation
Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is the largest
national category-dominant retailer serving the retail fabric and craft
industry, with 1,051 retail stores in 49 states at May 1, 1999. The
1,024 traditional and 27 superstores feature a broad line of apparel,
quilting and craft fabrics and sewing-related products, home decorating
fabrics, floral, craft and seasonal products.
The consolidated financial statements include the accounts of the
Company and its subsidiaries and have been prepared without audit,
pursuant to the rules of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures herein
are adequate to make the information not misleading. The statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999.
The Company's business is highly seasonal with the majority of the
Company's revenues and operating profits generated in the second half of
its fiscal year; therefore, earnings or losses for a particular interim
period are not indicative of full year results. In the opinion of
management, the consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary for
a fair statement of results for the interim periods presented.
Note 2 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by
the weighted average number of shares outstanding during the period.
Diluted earnings per share include the effect of the assumed exercise of
dilutive stock options under the treasury stock method. The impact of
stock options is not included in the earnings per common share
calculation for the thirteen weeks ended May 2, 1998 as it is
anti-dilutive.
The following table presents information necessary to calculate basic
and diluted earnings per common share for the periods presented (shares
in millions).
<TABLE>
<CAPTION>
MAY 1, MAY 2,
Thirteen Weeks Ended 1999 1998
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<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Weighted average shares outstanding 18.7 18.8
=========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Weighted average shares outstanding 18.7 18.8
Incremental shares from assumed exercise of stock options 0.4 --
----------- ----------
19.1 18.8
=========== ==========
</TABLE>
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Note 3 - Acquisition of House of Fabrics, Inc.
On March 9, 1998, the Company acquired, through a cash tender offer,
77.2% of the outstanding common stock of House of Fabrics, Inc. ("HOF")
for $4.25 per share (the "Acquisition"). On April 21, 1998, the merger
of HOF with a wholly owned subsidiary of the Company was approved at a
special meeting of the shareholders of HOF. As a result, HOF became a
wholly owned subsidiary of the Company, and all shares of HOF common
stock not already owned by the Company were canceled and converted into
the right to receive $4.25 in cash.
Operating results of the continuing HOF stores have been included in the
Company's results of operations since the date of the Acquisition (eight
of the thirteen weeks in the first quarter of fiscal 1999).
In accordance with Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring),"
the Company recorded a non-recurring charge of $25.1 million during
fiscal 1999, $12.2 million during the first quarter of fiscal 1999, for
merger-related costs pertaining to the Acquisition.
Note 4 - Subsequent Event - Financing
On May 5, 1999, the Company entered into a $300.0 million five-year
unsecured senior revolving credit agreement (the "Senior Credit
Facility") that expires on April 30, 2004. The Company may borrow up to
a maximum of $330.0 million by utilizing funds available under the
Senior Credit Facility and other lines of credit.
Interest on borrowings under the Senior Credit Facility is calculated at
an applicable margin over the London Interbank Offered Rate ("LIBOR").
The applicable margin, as well as the facility fee on the commitment
amount, is based on the achievement of specified ranges of certain
financial covenants. At May 5, 1999, the Company's interest on
borrowings was calculated at LIBOR plus 110 basis points, and the
facility fee was equal to 40 basis points.
The Senior Credit Facility contains financial covenants which require
the Company to, among other things, maintain a minimum consolidated net
worth, fixed charge coverage and current funded indebtedness ratios, as
well as limit the Company's maximum leverage ratios. The Company is in
compliance with all financial covenants contained in the Senior Credit
Facility.
On May 5, 1999, the Company issued $150.0 million of 10 3/8% senior
subordinated notes due May 1, 2007. Interest is payable on May 1 and
November 1 of each year, beginning November 1, 1999. The Company has the
option of redeeming the notes at any time after May 1, 2003, in
accordance with certain call provisions. The notes are unsecured
obligations and are subordinated to the Senior Credit Facility. The
notes are fully and unconditionally guaranteed by each of the Company's
subsidiaries.
The proceeds from the senior subordinated notes, coupled with borrowings
under the Senior Credit Facility, were used to refinance the Company's
former credit facility.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 1, 1999 VS. MAY 2, 1998
Net sales for the first quarter of fiscal 2000 increased 16.9%, or $42.8
million, compared to the first quarter of fiscal 1999. Of this increase, $31.0
million was attributable to the acquired House of Fabrics units, which were
included in our results for only eight of the thirteen weeks in the first
quarter of fiscal 1999. Excluding the impact of these acquired units, total
sales increased 5.1% for the quarter, or $11.8 million. The majority of this
increase is attributable to a greater number of superstores in operation. During
the first quarter of fiscal 2000, we operated 27 superstores versus 11
superstores in the year ago period. Comparable store sales increased 1.8% for
the first quarter of fiscal 2000 over the same quarter a year earlier in which
comparable store sales increased 1.3%.
Gross margin increased $21.9 million compared to the year earlier
period. As a percent of net sales, fiscal 2000 first quarter gross margin was
46.7%, an increase of 0.8 percentage points from the same quarter a year
earlier. The margin rate improvement resulted primarily from improvements in
shrink as pricing to consumers and product costs were relatively constant
between quarters.
Selling, general and administrative expenses were 41.4% of net sales, an
increase of 0.6 percentage points from the same quarter of fiscal 1999,
excluding non-recurring charges. The increase, as a percent of sales, consisted
primarily of increases in store expenses, due to the inclusion of House of
Fabrics stores for a full quarter which are currently operating at a higher
expense structure than traditional stores, and distribution service center
expenses, due to the higher level of inventory processed.
Depreciation and amortization expense for the first quarter of fiscal
2000 increased $1.3 million to $7.7 million from $6.4 million for the same
period of fiscal 1999 due to higher capital expenditure levels in the current
and prior year.
Interest expense for the first quarter of fiscal 2000 increased $2.8
million to $4.3 million from $1.5 million in the first quarter of fiscal 1999
due to higher average debt levels associated with the House of Fabrics
acquisition and related capital and working capital expenditures. Average
borrowings were $222.2 million for the first quarter of fiscal 2000 versus $74.1
million in the first quarter of fiscal 1999.
Our effective income tax rate was 38.0% for the first quarter of fiscal
2000 compared to 39.0% for the first quarter of fiscal 1999 reflecting a lower
effective state tax rate and federal tax credits related to our participation in
various government hiring programs.
Net income for the first quarter of fiscal 2000 was $2.3 million, or
$0.12 per diluted share compared to net income, excluding the after-tax effect
of the House of Fabrics non-recurring charge, of $3.1 million, or $0.15 per
diluted share for the same quarter a year earlier.
LIQUIDITY AND CAPITAL RESOURCES
We used $32.3 million of cash for operating activities in the first
quarter of fiscal 2000 compared to $26.8 million of cash used by operating
activities in the first quarter of the prior year. Inventories, net of payables
support, increased $34.4 million in the first quarter of fiscal 2000 due to an
increase in the inventory flow to stores and three additional superstores since
the beginning of the fiscal year.
Capital expenditures were $10.1 million for the first quarter of fiscal
2000, of which $5.4 million represented investment in new stores and upgrades
through relocation of our existing store base and $4.1 million represented
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capitalizable systems technology related to the installation of enterprise-wide
systems. Fiscal 2000 capital expenditures are expected to be approximately $70.0
million as compared to $75.1 million in the prior year and include investments
in stores, logistics and enterprise-wide systems. We have no material
commitments in connection with these planned capital expenditures. Funds for
these expenditures are expected to be provided from borrowings under our Senior
Credit Facility and cash generated internally.
During the first quarter of fiscal 2000, we opened seven stores
including three superstores, relocated five traditional stores, and closed 14
smaller or underperforming traditional stores. For the balance of fiscal 2000,
we expect to open 20 to 25 new stores including 15 to 17 superstores, and to
relocate 20 traditional stores.
We purchased 773,910 shares of our common stock at an aggregate price of
$10.6 million during the first quarter of fiscal 2000, under previous
authorization from our board of directors. As of May 1, 1999, we were authorized
to purchase up to an additional 2.3 million shares.
On May 5, 1999, we entered into the Senior Credit Facility that expires
on April 30, 2004. We may borrow up to a maximum of $330.0 million by utilizing
funds available under the Senior Credit Facility and other lines of credit.
On May 5, 1999, we issued $150.0 million of 10 3/8% senior subordinated
notes due May 1, 2007. Interest is payable on May 1 and November 1 of each year,
beginning November 1, 1999. We have the option of redeeming the notes at any
time after May 1, 2003, in accordance with certain call provisions. The notes
are unsecured obligations and are subordinated to our Senior Credit Facility.
The notes are fully and unconditionally guaranteed by each of our subsidiaries.
The proceeds from the senior subordinated notes, coupled with borrowings
under the new Senior Credit Facility, were used to refinance our former credit
facility. As of May 1, 1999, we had $240.1 million of debt outstanding under the
former credit facility, not including $46.1 million of letters of credit.
The Senior Credit Facility contains financial covenants which require us
to, among other things, maintain a minimum consolidated net worth, fixed charge
coverage and current funded indebtedness ratios, as well as limit our maximum
leverage ratios. We are in compliance with all financial covenants contained in
the Senior Credit Facility.
We believe that our Senior Credit Facility, coupled with cash on hand
and from operations and the net proceeds of the senior subordinated notes
offering, will be sufficient to cover our working capital, capital expenditure
and debt service requirement needs for the foreseeable future.
SEASONALITY AND INFLATION
Our business exhibits seasonality which is typical for most retail
companies, with much stronger sales in the second half of the year than the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on the growth
of net sales or on net income for the past two years.
YEAR 2000
The "Year 2000 issue" refers to the inability of computers and related
software to correctly interpret and process Year 2000 dated transactions. The
software problem results from a memory-saving practice of using two digits
instead of four to denote years in a program. Computer systems that are not Year
2000 compliant may not be able to be relied upon to process data accurately for
transactions dated after the year 1999.
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We have developed and are executing plans to address possible exposures
related to the impact on our computer systems of the Year 2000 issue. Our
planned modification of our existing systems was complete as of January 30,
1999, and testing and certification of these completed modifications is in
process and is expected to be completed by August 31, 1999. Expenditures for
modifying existing software to address Year 2000 issues are estimated to total
$2.5 million to $3.0 million, of which $2.6 million has been spent to date, $0.5
million during the current quarter and $2.1 million in previous fiscal years.
All expenditures are being expensed as incurred. We expect that we will be able
to test and certify the affected systems that we have modified in time to avoid
any material disruption to operations; however, unforeseen developments or
delays could cause this expectation to change.
We are also engaged in a significantly larger project of implementing an
enterprise-wide system which began in fiscal 1999 and will continue over the
next several years at a total cost of approximately $30.0 million. The project
is expected to fully integrate financial and operations systems, creating
increased reliability and usefulness of our data. Our financial systems became
operational under this enterprise-wide system implementation in the fourth
quarter of fiscal 1999 and are Year 2000 compliant. The merchandise and human
resource operating systems are expected to become operational in fiscal 2000 and
2001. However, as discussed above, we are not relying on this implementation to
address Year 2000 issues related to our existing operational systems.
We are also in the process of developing contingency plans that focus on
reducing any disruption that might be created by product suppliers with whom we
do business being Year 2000 noncompliant. None of our suppliers in fiscal 1999
provided more than 2% of our products. We have communicated with our key
suppliers to identify the nature and potential impact of the Year 2000 issue on
the business of such suppliers. During the first half of fiscal 2000, we have
begun and expect to complete the evaluation of supplier-related issues and other
external risks and we will develop contingency plans as necessary. We are not
presently aware of any product supplier-related issue presented by the year 2000
that is likely to have a material impact on us.
We anticipate minimal business disruption will occur as a result of Year
2000 issues. However, possible consequences include, but are not limited to,
temporary disruption of our normal business operations, loss of communications
links with store locations, loss of electric power, inability to process
transactions, problems with ordering and receiving merchandise and problems with
banks and other financial institutions. We believe that our worst case scenario
involves the inability of electric utility companies to service our various
stores due to Year 2000 problems. If the electric utility companies cannot
provide power to a significant number of our stores, our business and operations
could be materially disrupted.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," was
issued. Our traditional stores and superstores are considered one business
segment as they generally serve the same customer and have the same type of
merchandise and services offered.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "estimates,"
"expects," "believes," and similar expressions as they relate to us are intended
to identify such forward-looking statements. Our actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, changes in customer demand, changes in trends in the fabric
and craft industry, seasonality, our failure to manage our growth, loss of key
management, the availability of merchandise, changes in the competitive pricing
for products, the impact of competitor store openings and closings, and the
ability to address internal and external Year 2000 issues.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not Applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
No exhibits are filed with this report.
b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the 13-week period
ended May 1, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JO-ANN STORES, INC.
DATE: June 15, 1999 /s/ Alan Rosskamm
----------------------------------------------
By: Alan Rosskamm
Chairman, President and Chief
Executive Officer
/s/ Brian P. Carney
-----------------------------------------
By: Brian P. Carney
Executive Vice President and Chief
Financial Officer
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 14,900
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 446,300
<CURRENT-ASSETS> 505,300
<PP&E> 276,900
<DEPRECIATION> 111,600
<TOTAL-ASSETS> 165,300
<CURRENT-LIABILITIES> 187,300
<BONDS> 240,100
0
0
<COMMON> 1,000
<OTHER-SE> 251,000
<TOTAL-LIABILITY-AND-EQUITY> 718,000
<SALES> 295,700
<TOTAL-REVENUES> 295,700
<CGS> 157,700
<TOTAL-COSTS> 287,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,300
<INCOME-PRETAX> 3,700
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 2,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,300
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
