##### Table of Contents



UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10 - Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 30, 2005
 Commission File No. 1-6695
 
 JO-ANN
STORES, INC.
  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)
 (330) 656-2600
 þ o
 þ o
 o þ




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Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended July 30, 2005
 Page NumbersPart
I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  July 30, 2005 (Unaudited),
January 29, 2005 and July 31, 2004 (Unaudited)
    
    
    1Consolidated Statements of Operations (Unaudited) for the Thirteen and
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
    
    
    2Consolidated Statements of Cash Flows (Unaudited) for the
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part
II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    25Signatures
    
    
    26EX-31.1 Certification 302 - CEOEX-31.2 Certification 302 - CFOEX-32.1 Certifications 906 - CEO and CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Jo-Ann Stores, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)July 30,
    
    
    January 29,
    
    
    July 31,2005
    
    
    2005
    
    
    2004(Restated)(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    16.7
    
    
    $
    79.6
    
    
    $
    17.7Inventories
    
    
    574.0
    
    
    
    439.7
    
    
    
    508.4Deferred income taxes
    
    
    21.3
    
    
    
    21.3
    
    
    
    21.5Prepaid expenses and other current assets
    
    
    19.0
    
    
    
    22.3
    
    
    
    19.9Total current assets
    
    
    631.0
    
    
    
    562.9
    
    
    
    567.5Property, equipment and leasehold improvements, net
    
    
    252.6
    
    
    
    238.0
    
    
    
    223.2Goodwill, net
    
    
    27.1
    
    
    
    27.1
    
    
    
    26.5Other assets
    
    
    11.3
    
    
    
    11.3
    
    
    
    10.5Total assets
    
    $
    922.0
    
    
    $
    839.3
    
    
    $
    827.7Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    199.2
    
    
    $
    167.2
    
    
    $
    176.0Accrued expenses
    
    
    51.2
    
    
    
    91.6
    
    
    
    55.2Total current liabilities
    
    
    250.4
    
    
    
    258.8
    
    
    
    231.2Long-term debt
    
    
    174.8
    
    
    
    100.0
    
    
    
    161.7Deferred income taxes
    
    
    27.6
    
    
    
    27.6
    
    
    
    32.8Lease obligations and other long-term liabilities
    
    
    54.7
    
    
    
    44.0
    
    
    
    40.2Shareholders equity:Preferred stock, no par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    
    
    
    
    Common stock, stated value $0.05 per share; 150,000,000 authorized,
issued 26,485,584; 26,321,934 and 26,136,822 shares, respectively
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Additional paid-in capital
    
    
    158.6
    
    
    
    151.8
    
    
    
    144.1Retained earnings
    
    
    298.7
    
    
    
    299.6
    
    
    
    260.4Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (0.8
    )458.6
    
    
    
    452.7
    
    
    
    405.0Treasury stock, at cost, 3,723,989; 3,737,407 and 3,743,330
shares, respectively
    
    
    (44.1
    )
    
    
    (43.8
    )
    
    
    (43.2
    )Total shareholders equity
    
    
    414.5
    
    
    
    408.9
    
    
    
    361.8Total liabilities and shareholders equity
    
    $
    922.0
    
    
    $
    839.3
    
    
    $
    827.7
  1




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##### Table of Contents



Jo-Ann Stores, Inc.
 
 Consolidated Statements of Operations
 (Unaudited)
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)(Dollars in millions, except share and per share data)Net sales
    
    $
    383.8
    
    
    $
    371.0
    
    
    $
    804.5
    
    
    $
    775.9Cost of sales
    
    
    199.0
    
    
    
    189.1
    
    
    
    414.9
    
    
    
    395.0Gross margin
    
    
    184.8
    
    
    
    181.9
    
    
    
    389.6
    
    
    
    380.9Selling, general and administrative expenses
    
    
    176.1
    
    
    
    160.0
    
    
    
    354.0
    
    
    
    324.8Store pre-opening and closing costs
    
    
    4.0
    
    
    
    5.3
    
    
    
    8.9
    
    
    
    8.5Depreciation and amortization
    
    
    10.1
    
    
    
    10.7
    
    
    
    20.6
    
    
    
    21.0Stock-based compensation expense
    
    
    0.3
    
    
    
    2.0
    
    
    
    3.0
    
    
    
    4.0Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating (loss) profit
    
    
    (5.7
    )
    
    
    3.9
    
    
    
    3.1
    
    
    
    18.4Interest expense, net
    
    
    2.5
    
    
    
    3.4
    
    
    
    4.6
    
    
    
    7.0(Loss) income before income taxes
    
    
    (8.2
    )
    
    
    0.5
    
    
    
    (1.5
    )
    
    
    11.4Income tax (benefit) provision
    
    
    (3.1
    )
    
    
    0.2
    
    
    
    (0.6
    )
    
    
    4.4Net (loss) income
    
    $
    (5.1
    )
    
    $
    0.3
    
    
    $
    (0.9
    )
    
    $
    7.0Net (loss) income per common share  basic
    
    $
    (0.23
    )
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    0.32Net (loss) income per common share  diluted
    
    $
    (0.23
    )
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    0.31Weighted average shares outstanding (in thousands):Basic
    
    
    22,580
    
    
    
    22,149
    
    
    
    22,525
    
    
    
    21,976Diluted
    
    
    22,580
    
    
    
    22,877
    
    
    
    22,525
    
    
    
    22,771
  2




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Jo-Ann Stores, Inc.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,2005
    
    
    2004(Restated)(Dollars in millions)Net cash flows used for operating activities:Net (loss) income
    
    $
    (0.9
    )
    
    $
    7.0Adjustments to reconcile net (loss) income to net cash
used for operating activities:Depreciation and amortization
    
    
    20.6
    
    
    
    21.0Stock-based compensation expense
    
    
    3.0
    
    
    
    4.0Tax benefit on stock-based compensation plan awards
    
    
    0.6
    
    
    
    4.2Amortization of deferred financing costs
    
    
    0.4
    
    
    
    0.9Loss on disposal of fixed assets
    
    
    0.4
    
    
    
    0.8Loss associated with purchase of senior subordinated notes
    
    
    
    
    
    
    4.2Changes in operating assets and liabilities:Increase in inventories
    
    
    (134.3
    )
    
    
    (103.8
    )Increase in accounts payable
    
    
    32.0
    
    
    
    54.0Decrease in accrued expenses
    
    
    (40.4
    )
    
    
    (20.9
    )Other, net
    
    
    13.6
    
    
    
    9.5Net cash used for operating activities
    
    
    (105.0
    )
    
    
    (19.1
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (35.6
    )
    
    
    (26.6
    )Net cash used for investing activities
    
    
    (35.6
    )
    
    
    (26.6
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    
    
    
    
    97.0Purchase of 10 3/8% senior subordinated notes
    
    
    
    
    
    
    (66.6
    )Net change in revolving credit facility
    
    
    74.8
    
    
    
    12.4Proceeds from stock-based compensation plans
    
    
    2.6
    
    
    
    7.1Other, net
    
    
    0.3
    
    
    
    (3.9
    )Net cash provided by financing activities
    
    
    77.7
    
    
    
    46.0Net (decrease) increase in cash and cash equivalents
    
    
    (62.9
    )
    
    
    0.3Cash and cash equivalents at beginning of period
    
    
    79.6
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    16.7
    
    
    $
    17.7Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4.4
    
    
    $
    4.8Income taxes, net of refunds
    
    
    27.1
    
    
    
    19.6
  3




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Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc
 Note 1    Basis of Presentation
   Note 2 Restatement of Prior Financial
Information
  Note 2  Restatement of Prior Financial Information
  4




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(Unaudited)July 31, 2004BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedConsolidated Balance SheetProperty, equipment and leasehold improvements, net
    
    $
    204.5
    
    
    $
    18.7
    
    
    $
    223.2Total assets
    
    
    812.0
    
    
    
    15.7
    
    
    
    827.7Deferred income taxes, net
    
    
    14.8
    
    
    
    (3.5
    )
    
    
    11.3Lease obligations and other long-term liabilities
    
    
    12.3
    
    
    
    27.9
    
    
    
    40.2Retained earnings
    
    
    266.0
    
    
    
    (5.6
    )
    
    
    260.4Total shareholders equity
    
    
    367.4
    
    
    
    (5.6
    )
    
    
    361.8Total liabilities and shareholders equity
    
    
    812.0
    
    
    
    15.7
    
    
    
    827.7
 Thirteen Weeks Ended July 31, 2004Consolidated Statements of OperationsSelling, general and administrative expenses
    
    $
    161.2
    
    
    $
    (1.2
    )
    
    $
    160.0Store pre-opening and closing costs
    
    
    4.6
    
    
    
    0.7
    
    
    
    5.3Depreciation and amortization
    
    
    9.9
    
    
    
    0.8
    
    
    
    10.7Operating profit
    
    
    4.2
    
    
    
    (0.3
    )
    
    
    3.9Net income
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    0.3Basic net income per common share
    
    
    0.02
    
    
    
    (0.01
    )
    
    
    0.01Diluted net income per common share
    
    
    0.02
    
    
    
    (0.01
    )
    
    
    0.01
 Twenty-Six Weeks Ended July 31, 2004Consolidated Statements of OperationsSelling, general and administrative expenses
    
    $
    326.8
    
    
    $
    (2.0
    )
    
    $
    324.8Store pre-opening and closing costs
    
    
    7.5
    
    
    
    1.0
    
    
    
    8.5Depreciation and amortization
    
    
    19.6
    
    
    
    1.4
    
    
    
    21.0Operating profit
    
    
    18.8
    
    
    
    (0.4
    )
    
    
    18.4Net income
    
    
    7.2
    
    
    
    (0.2
    )
    
    
    7.0Basic net income per common share
    
    
    0.33
    
    
    
    (0.01
    )
    
    
    0.32Diluted net income per common share
    
    
    0.32
    
    
    
    (0.01
    )
    
    
    0.31Consolidated Statements of Cash FlowsNet cash (used for) provided by operating activities
    
    
    (24.1
    )
    
    
    5.0
    
    
    
    (19.1
    )Net cash used for investing activities
    
    
    (21.6
    )
    
    
    (5.0
    )
    
    
    (26.6
    )
 Note 3    Earnings Per Share
  5




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Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average shares outstanding:Basic common shares
    
    
    22,580
    
    
    
    22,149
    
    
    
    22,525
    
    
    
    21,976Incremental shares from assumed
exercise of stock options
    
    
    
    
    
    
    627
    
    
    
    
    
    
    
    698Incremental restricted shares
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    97Diluted common shares
    
    
    22,580
    
    
    
    22,877
    
    
    
    22,525
    
    
    
    22,771
   Note 4   Shareholders Equity
  CommonNet
    
    
    
    
    
    
    
    Stock
    
    
    AdditionalCommon
    
    
    Treasury
    
    
    
    Stated
    
    
    Paid-In
    
    
    TreasuryShares
    
    
    Shares
    
    
    
    Value
    
    
    Capital
    
    
    Stock(Shares in thousands)
    
    
    
    (Dollars in millions)Balance, January 29, 2005
    
    
    22,585
    
    
    
    3,737
    
    
    
    $
    1.3
    
    
    $
    151.8
    
    
    $
    (43.8
    )Exercise of stock options
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Purchase of common stock
    
    
    (18
    )
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Issuance of treasury shares
    
    
    31
    
    
    
    (31
    )
    
    
    
    
    
    
    
    0.6
    
    
    
    0.2Associate stock ownership plan
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Tax benefit on equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    Year-to-date activity
    
    
    177
    
    
    
    (13
    )
    
    
    
    
    
    
    
    6.8
    
    
    
    (0.3
    )Balance, July 30, 2005
    
    
    22,762
    
    
    
    3,724
    
    
    
    $
    1.3
    
    
    $
    158.6
    
    
    $
    (44.1
    )
  6




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Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,Dollars in millions
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net (loss) income
    
    $
    (5.1
    )
    
    $
    0.3
    
    
    $
    (0.9
    )
    
    $
    7.0Other comprehensive
income, net of tax
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.8Comprehensive (loss) income
    
    $
    (5.1
    )
    
    $
    0.7
    
    
    $
    (0.9
    )
    
    $
    7.8
 Note 5    Recent Accounting Pronouncements
 Emerging Issues Task Force Issue 05-06: Determining the Amortization Period for Leasehold
Improvements
  Staff Accounting Bulletin No. 107, Share-Based Payment
  Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment
  7




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Note 6   Consolidating Financial Statements (Unaudited)
 1 2
  Consolidating Balance Sheets  July 30, 2005
 GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    13.9
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    16.7Inventories
    
    
    210.0
    
    
    
    364.0
    
    
    
    
    
    
    
    574.0Deferred income taxes
    
    
    16.5
    
    
    
    4.8
    
    
    
    
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    8.8
    
    
    
    10.2
    
    
    
    
    
    
    
    19.0Total current assets
    
    
    249.2
    
    
    
    381.8
    
    
    
    
    
    
    
    631.0Property, equipment and leasehold improvements,
net
    
    
    115.7
    
    
    
    136.9
    
    
    
    
    
    
    
    252.6Goodwill, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.8
    
    
    
    1.5
    
    
    
    
    
    
    
    11.3Investment in subsidiaries
    
    
    110.2
    
    
    
    
    
    
    
    (110.2
    )
    
    
    Intercompany receivable
    
    
    341.0
    
    
    
    
    
    
    
    (341.0
    )
    
    
    Total assets
    
    $
    825.9
    
    
    $
    547.3
    
    
    $
    (451.2
    )
    
    $
    922.0Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    165.4
    
    
    $
    33.8
    
    
    $
    
    
    
    $
    199.2Accrued expenses
    
    
    28.9
    
    
    
    22.3
    
    
    
    
    
    
    
    51.2Total current liabilities
    
    
    194.3
    
    
    
    56.1
    
    
    
    
    
    
    
    250.4Long-term debt
    
    
    174.8
    
    
    
    
    
    
    
    
    
    
    
    174.8Deferred income taxes
    
    
    7.8
    
    
    
    19.8
    
    
    
    
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    34.5
    
    
    
    20.2
    
    
    
    
    
    
    
    54.7Intercompany payable
    
    
    
    
    
    
    341.0
    
    
    
    (341.0
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    158.6
    
    
    
    
    
    
    
    
    
    
    
    158.6Retained earnings
    
    
    298.7
    
    
    
    110.2
    
    
    
    (110.2
    )
    
    
    298.7458.6
    
    
    
    110.2
    
    
    
    (110.2
    )
    
    
    458.6Treasury stock, at cost
    
    
    (44.1
    )
    
    
    
    
    
    
    
    
    
    
    (44.1
    )Total shareholders equity
    
    
    414.5
    
    
    
    110.2
    
    
    
    (110.2
    )
    
    
    414.5Total liabilities and shareholders equity
    
    $
    825.9
    
    
    $
    547.3
    
    
    $
    (451.2
    )
    
    $
    922.0
 8




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Balance Sheets
January 29, 2005
 GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    76.6
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    79.6Inventories
    
    
    159.6
    
    
    
    280.1
    
    
    
    
    
    
    
    439.7Deferred income taxes
    
    
    16.5
    
    
    
    4.8
    
    
    
    
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    14.3
    
    
    
    8.0
    
    
    
    
    
    
    
    22.3Total current assets
    
    
    267.0
    
    
    
    295.9
    
    
    
    
    
    
    
    562.9Property, equipment and leasehold improvements,
net
    
    
    106.9
    
    
    
    131.1
    
    
    
    
    
    
    
    238.0Goodwill, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.8
    
    
    
    1.5
    
    
    
    
    
    
    
    11.3Investment in subsidiaries
    
    
    90.6
    
    
    
    
    
    
    
    (90.6
    )
    
    
    Intercompany receivable
    
    
    295.4
    
    
    
    
    
    
    
    (295.4
    )
    
    
    Total assets
    
    $
    769.7
    
    
    $
    455.6
    
    
    $
    (386.0
    )
    
    $
    839.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    155.8
    
    
    $
    11.4
    
    
    $
    
    
    
    $
    167.2Accrued expenses
    
    
    71.8
    
    
    
    19.8
    
    
    
    
    
    
    
    91.6Total current liabilities
    
    
    227.6
    
    
    
    31.2
    
    
    
    
    
    
    
    258.8Long-term debt
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    100.0Deferred income taxes
    
    
    7.8
    
    
    
    19.8
    
    
    
    
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    25.4
    
    
    
    18.6
    
    
    
    
    
    
    
    44.0Intercompany payable
    
    
    
    
    
    
    295.4
    
    
    
    (295.4
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    151.8
    
    
    
    
    
    
    
    
    
    
    
    151.8Retained earnings
    
    
    299.6
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    299.6452.7
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    452.7Treasury stock, at cost
    
    
    (43.8
    )
    
    
    
    
    
    
    
    
    
    
    (43.8
    )Total shareholders equity
    
    
    408.9
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    408.9Total liabilities and shareholders equity
    
    $
    769.7
    
    
    $
    455.6
    
    
    $
    (386.0
    )
    
    $
    839.3
 9




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Thirteen Weeks Ended July 30, 2005 and July 31, 2004
 July 30, 2005GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    208.4
    
    
    $
    319.2
    
    
    $
    (143.8
    )
    
    $
    383.8Cost of sales
    
    
    131.7
    
    
    
    211.1
    
    
    
    (143.8
    )
    
    
    199.0Gross margin
    
    
    76.7
    
    
    
    108.1
    
    
    
    
    
    
    
    184.8Selling, general and administrative expenses
    
    
    88.9
    
    
    
    87.2
    
    
    
    
    
    
    
    176.1Store pre-opening and closing costs
    
    
    2.9
    
    
    
    1.1
    
    
    
    
    
    
    
    4.0Depreciation and amortization
    
    
    5.0
    
    
    
    5.1
    
    
    
    
    
    
    
    10.1Stock-based compensation expense
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating profit (loss)
    
    
    (20.4
    )
    
    
    14.7
    
    
    
    
    
    
    
    (5.7
    )Interest expense, net
    
    
    0.9
    
    
    
    1.6
    
    
    
    
    
    
    
    2.5Income (loss) before income taxes
    
    
    (21.3
    )
    
    
    13.1
    
    
    
    
    
    
    
    (8.2
    )Income tax provision (benefit)
    
    
    (8.1
    )
    
    
    5.0
    
    
    
    
    
    
    
    (3.1
    )Income (loss) before equity income
    
    
    (13.2
    )
    
    
    8.1
    
    
    
    
    
    
    
    (5.1
    )Equity income (loss) from subsidiaries
    
    
    8.1
    
    
    
    
    
    
    
    (8.1
    )
    
    
    Net income (loss)
    
    $
    (5.1
    )
    
    $
    8.1
    
    
    $
    (8.1
    )
    
    $
    (5.1
    )
 July 31, 2004 (Restated)GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    197.9
    
    
    $
    296.7
    
    
    $
    (123.6
    )
    
    $
    371.0Cost of sales
    
    
    117.1
    
    
    
    195.6
    
    
    
    (123.6
    )
    
    
    189.1Gross margin
    
    
    80.8
    
    
    
    101.1
    
    
    
    
    
    
    
    181.9Selling, general and administrative expenses
    
    
    79.0
    
    
    
    81.0
    
    
    
    
    
    
    
    160.0Store pre-opening and closing costs
    
    
    2.5
    
    
    
    2.8
    
    
    
    
    
    
    
    5.3Depreciation and amortization
    
    
    4.4
    
    
    
    6.3
    
    
    
    
    
    
    
    10.7Stock-based compensation expense
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    2.0Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating profit (loss)
    
    
    (7.1
    )
    
    
    11.0
    
    
    
    
    
    
    
    3.9Interest expense, net
    
    
    1.2
    
    
    
    2.2
    
    
    
    
    
    
    
    3.4Income (loss) before income taxes
    
    
    (8.3
    )
    
    
    8.8
    
    
    
    
    
    
    
    0.5Income tax provision (benefit)
    
    
    (3.3
    )
    
    
    3.5
    
    
    
    
    
    
    
    0.2Income (loss) before equity income
    
    
    (5.0
    )
    
    
    5.3
    
    
    
    
    
    
    
    0.3Equity income from subsidiaries
    
    
    5.3
    
    
    
    
    
    
    
    (5.3
    )
    
    
    Net income
    
    $
    0.3
    
    
    $
    5.3
    
    
    $
    (5.3
    )
    
    $
    0.3
 10




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
 July 30, 2005GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    439.0
    
    
    $
    666.1
    
    
    $
    (300.6
    )
    
    $
    804.5Cost of sales
    
    
    273.3
    
    
    
    442.2
    
    
    
    (300.6
    )
    
    
    414.9Gross margin
    
    
    165.7
    
    
    
    223.9
    
    
    
    
    
    
    
    389.6Selling, general and administrative expenses
    
    
    177.9
    
    
    
    176.1
    
    
    
    
    
    
    
    354.0Store pre-opening and closing costs
    
    
    6.3
    
    
    
    2.6
    
    
    
    
    
    
    
    8.9Depreciation and amortization
    
    
    9.8
    
    
    
    10.8
    
    
    
    
    
    
    
    20.6Stock-based compensation expense
    
    
    3.0
    
    
    
    
    
    
    
    
    
    
    
    3.0Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating profit (loss)
    
    
    (31.3
    )
    
    
    34.4
    
    
    
    
    
    
    
    3.1Interest expense, net
    
    
    1.8
    
    
    
    2.8
    
    
    
    
    
    
    
    4.6Income (loss) before income taxes
    
    
    (33.1
    )
    
    
    31.6
    
    
    
    
    
    
    
    (1.5
    )Income tax provision (benefit)
    
    
    (12.6
    )
    
    
    12.0
    
    
    
    
    
    
    
    (0.6
    )Income (loss) before equity income
    
    
    (20.5
    )
    
    
    19.6
    
    
    
    
    
    
    
    (0.9
    )Equity income (loss) from subsidiaries
    
    
    19.6
    
    
    
    
    
    
    
    (19.6
    )
    
    
    Net income (loss)
    
    $
    (0.9
    )
    
    $
    19.6
    
    
    $
    (19.6
    )
    
    $
    (0.9
    )
 July 31, 2004 (Restated)GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    418.3
    
    
    $
    609.0
    
    
    $
    (251.4
    )
    
    $
    775.9Cost of sales
    
    
    245.9
    
    
    
    400.5
    
    
    
    (251.4
    )
    
    
    395.0Gross margin
    
    
    172.4
    
    
    
    208.5
    
    
    
    
    
    
    
    380.9Selling, general and administrative expenses
    
    
    162.3
    
    
    
    162.5
    
    
    
    
    
    
    
    324.8Store pre-opening and closing costs
    
    
    3.6
    
    
    
    4.9
    
    
    
    
    
    
    
    8.5Depreciation and amortization
    
    
    8.8
    
    
    
    12.2
    
    
    
    
    
    
    
    21.0Stock-based compensation expense
    
    
    4.0
    
    
    
    
    
    
    
    
    
    
    
    4.0Debt repurchase expenses
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating profit (loss)
    
    
    (10.5
    )
    
    
    28.9
    
    
    
    
    
    
    
    18.4Interest expense, net
    
    
    2.8
    
    
    
    4.2
    
    
    
    
    
    
    
    7.0Income (loss) before income taxes
    
    
    (13.3
    )
    
    
    24.7
    
    
    
    
    
    
    
    11.4Income tax provision (benefit)
    
    
    (5.2
    )
    
    
    9.6
    
    
    
    
    
    
    
    4.4Income (loss) before equity income
    
    
    (8.1
    )
    
    
    15.1
    
    
    
    
    
    
    
    7.0Equity income from subsidiaries
    
    
    15.1
    
    
    
    
    
    
    
    (15.1
    )
    
    
    Net income
    
    $
    7.0
    
    
    $
    15.1
    
    
    $
    (15.1
    )
    
    $
    7.0
 11




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
 July 30, 2005GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (121.6
    )
    
    $
    16.6
    
    
    $
    
    
    
    $
    (105.0
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (18.8
    )
    
    
    (16.8
    )
    
    
    
    
    
    
    (35.6
    )Net cash used for investing activities
    
    
    (18.8
    )
    
    
    (16.8
    )
    
    
    
    
    
    
    (35.6
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of 10 3/8% senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net change in revolving credit facility
    
    
    74.8
    
    
    
    
    
    
    
    
    
    
    
    74.8Proceeds from stock-based compensation plans
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    2.6Other, net
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Net cash provided by financing activities
    
    
    77.7
    
    
    
    
    
    
    
    
    
    
    
    77.7Net decrease in cash and cash equivalents
    
    
    (62.7
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (62.9
    )Cash and cash equivalents at beginning of period
    
    
    76.6
    
    
    
    3.0
    
    
    
    
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    13.9
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    16.7
 July 31, 2004 (Restated)GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (34.9
    )
    
    $
    15.8
    
    
    $
    
    
    
    $
    (19.1
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (10.6
    )
    
    
    (16.0
    )
    
    
    
    
    
    
    (26.6
    )Net cash used for investing activities
    
    
    (10.6
    )
    
    
    (16.0
    )
    
    
    
    
    
    
    (26.6
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    97.0
    
    
    
    
    
    
    
    
    
    
    
    97.0Purchase of 10 3/8% senior subordinated notes
    
    
    (66.6
    )
    
    
    
    
    
    
    
    
    
    
    (66.6
    )Net change in revolving credit facility
    
    
    12.4
    
    
    
    
    
    
    
    
    
    
    
    12.4Proceeds from stock-based compensation plans
    
    
    7.1
    
    
    
    
    
    
    
    
    
    
    
    7.1Other, net
    
    
    (3.9
    )
    
    
    
    
    
    
    
    
    
    
    (3.9
    )Net cash provided by financing activities
    
    
    46.0
    
    
    
    
    
    
    
    
    
    
    
    46.0Net increase (decrease) in cash and cash equivalents
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    
    
    
    
    0.3Cash and cash equivalents at beginning of period
    
    
    14.3
    
    
    
    3.1
    
    
    
    
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    14.8
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    17.7
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General Overview
 Jo-Ann Fabrics and Crafts Jo-Ann
   Executive Overview
  13




---



##### Table of Contents




    
    Net sales increased 3.5% to $383.8 million due to the impact of new superstore
openings. Net sales from stores open one year or more (same-store sales) decreased 0.5%
versus a 3.1% same-store sales increase for the second quarter last year. Our average
ticket in same-store sales increased 2%, but was more than offset by a decline in customer
traffic.
    
    Our gross margin rate declined by 80 basis points, to 48.2% of net sales this
quarter versus 49.0% for the second quarter last year due to a more price-focused
environment, as we experienced an increased level of coupon assisted sales and greater
margin rate pressure in our finished seasonal, floral and home
décor related merchandise, which have continued
to experience sales softness as well.
    
    Our selling, general and administrative expenses (SG&A), excluding those
expenses separately identified in the statement of operations, increased 280 basis points
from 43.1% of net sales in the second quarter last year to 45.9% this year. The increase
stemmed from a loss of expense leverage, due to an essentially flat same-store sales
performance, coupled with higher advertising spending, logistics costs, and normal
inflationary increases in operating expenses.
    
    Store pre-opening and closing costs decreased $1.3 million for the second
quarter to $4.0 million, due to the timing of real estate activity year-over-year. On a
year-to-date basis, these costs have increased year-over-year due to the increased level of
real estate activity.
    
    Stock-based compensation expense was $0.3 million for the second quarter,
compared with $2.0 million in the same period last year. As discussed in further detail
below, the reduced expense is primarily attributable to an adjustment in our performance
expectation used to compute expense for the performance-based shares portion of our
restricted stock grants.
 Results of Operations
  Percentage of Net SalesThirteen
    
    Twenty-Six WeeksWeeks Ended
    
    EndedJuly 30,
    
    July 31,
    
    July 30,
    
    July 31,2005
    
    2004
    
    2005
    
    2004(Restated)
    
    
    
    
    
    (Restated)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    48.2
    %
    
    
    49.0
    %
    
    
    48.4
    %
    
    
    49.1
    %Selling, general and administrative
expenses
    
    
    45.9
    %
    
    
    43.1
    %
    
    
    44.0
    %
    
    
    41.9
    %Store pre-opening and closing costs
    
    
    1.0
    %
    
    
    1.4
    %
    
    
    1.1
    %
    
    
    1.1
    %Depreciation and amortization
    
    
    2.7
    %
    
    
    2.9
    %
    
    
    2.5
    %
    
    
    2.7
    %Stock-based compensation expense
    
    
    0.1
    %
    
    
    0.5
    %
    
    
    0.4
    %
    
    
    0.5
    %Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    %Operating (loss) profit
    
    
    (1.5
    )%
    
    
    1.1
    %
    
    
    0.4
    %
    
    
    2.4
    %
 14




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##### Table of Contents



Comparison of the Thirteen Weeks Ended July 30, 2005 to July 31, 2004
 Net Sales.
     Gross Margin.
 Selling, general and administrative expenses.
 Store pre-opening and closing costs.
 15




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##### Table of Contents



Depreciation and amortization.
 Stock-based compensation expense.
  Interest expense.
 Income taxes.
 Comparison of the Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
 Net Sales.
 16




---



##### Table of Contents



Gross Margin.
 Selling, general and administrative expenses.
 Store pre-opening and closing costs.
  17




---



##### Table of Contents



Depreciation and amortization.
 Stock-based compensation expense.
   Debt repurchase expenses.
 Interest expense.
 Income taxes.
 18




---



##### Table of Contents



Liquidity and Capital Resources
   2006
    
    
    2005(Restated)Net cash used for operating activities
    
    $
    (105.0
    )
    
    $
    (19.1
    )Net cash used for investing activities
    
    
    (35.6
    )
    
    
    (26.6
    )Net cash provided by financing activities
    
    
    77.7
    
    
    
    46.0Net (decrease) increase in cash and cash equivalents
    
    $
    (62.9
    )
    
    $
    0.3Ending cash and cash equivalents
    
    $
    16.7
    
    
    $
    17.7
 Net cash used for operating activities
   Net cash used for investing activities
  19




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##### Table of Contents



Twenty-Six Weeks EndedJuly 30,
    
    
    July 31,Dollars in millions
    
    2005
    
    
    2004(Restated)Cash
    
    $
    29.8
    
    
    $
    21.6Cash  landlord reimbursed
    
    
    5.8
    
    
    
    5.0Total
    
    $
    35.6
    
    
    $
    26.6
    Net cash provided by financing activities
 1 2
    Off-Balance Sheet Transactions
  20




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##### Table of Contents



Business Outlook
       Seasonality and Inflation
   21




---



##### Table of Contents



Critical Accounting Policies
  Cautionary Statement Concerning Forward-Looking Statements
  22




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by Jo-Ann Stores, Inc.
 Total Number of
    
    Maximum NumberShares Purchased
    
    of Shares that MayTotal Number
    
    Average
    
    as Part of Publicly
    
    Yet Be Purchasedof Shares
    
    Price Paid
    
    Announced Plans
    
    Under the Plans orPurchased
    
    per Share
    

or Programs
    
    ProgramsMay 1 28, 2005
    
    
    212
    
    
    $
    27.06
    
    
    
    885,156
    
    
    
    1,264,844May 29  July 2, 2005
    
    
    2,622
    
    
    $
    28.14
    
    
    
    887,778
    
    
    
    1,262,222July 3-30, 2005
    
    
    897
    
    
    $
    27.63
    
    
    
    888,675
    
    
    
    1,261,325Total
    
    
    3,731
    
    
    $
    27.95
    
    
    
    888,675
    
    
    
    1,261,325
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 a)
    
    An Annual Meeting of Shareholders of the Company was held on June 9,
2005.b)
    
    Frank Newman, Beryl Raff and Tracey Thomas-Travis were elected to the
Board of Directors in the class whose term of office expires in 2008.c)
    
    The nominees for Directors as listed in the proxy statement were
elected with the following vote:
 Nominee
    
    Votes For
    
    
    Votes WithheldFrank Newman
    
    
    17,096,369
    
    
    
    4,042,349Beryl Raff
    
    
    20,656,933
    
    
    
    481,785Tracey Thomas-Travis
    
    
    20,808,158
    
    
    
    330,560
 
 Item 5. Other Information
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##### Table of Contents



Item 6. Exhibits
 a) Exhibits31.1
    
    Section 302 Certification By Chief Executive Officer31.2
    
    Section 302 Certification By Chief Financial Officer32.1
    
    Section 906 Certification of Principal Executive Officer and
Principal Financial Officer
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##### Table of Contents



SIGNATURES
  JO-ANN STORES, INC.DATE: September 7, 2005
    
    /s/ Alan RosskammAlan Rosskamm,President and Chief Executive Officer/s/ Brian P. CarneyBrian P. Carney,Executive Vice President and Chief Financial Officer
 26