##### Table of Contents



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 May 1, 2004 Commission File No. 1-6695   JO-ANN STORES, INC.  Ohio
(State or other jurisdiction of
incorporation or organization)
    
    34-0720629
(I.R.S. Employer Identification No.)5555 Darrow Road, Hudson, Ohio
(Address of principal executive offices)
    
    44236
(Zip Code)
 Registrants telephone number, including area code: (330) 656-2600 Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No
o Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date: Common Shares,
without par value, as of June 4, 2004: 22,521,602.




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Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended May 1, 2004  
 Page NumbersPart I. Financial InformationItem 1.Financial StatementsConsolidated Balance Sheets  May 1, 2004 (Unaudited),
January 31, 2004 and May 3, 2003 (Unaudited)
    
    
    1Unaudited Consolidated Statements of Operations for the Thirteen
Weeks Ended May 1, 2004 and May 3, 2003
    
    
    2Unaudited Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended May 1, 2004 and May 3, 2003
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4.Controls and Procedures
    
    
    18Part II. Other InformationItem 1.Legal Proceedings
    
    
    19Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4.Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.Other Information
    
    
    19Item 6.Exhibits and Reports on Form 8-K
    
    
    20Signatures
    
    
    21EX-31.1  Section 302 Certification of CEOEX-31.2  Section 302 Certification of CFOEX-32.1  Section 906 Certification




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##### Table of Contents



PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements Jo-Ann Stores, Inc. 
 Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    (Unaudited)May 1,
    
    January 31,
    
    May 3,2004
    
    2004
    
    2003(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15.2
    
    
    $
    17.4
    
    
    $
    26.0Inventories
    
    
    420.1
    
    
    
    404.6
    
    
    
    369.1Deferred income taxes
    
    
    24.8
    
    
    
    25.0
    
    
    
    28.1Prepaid expenses and other current assets
    
    
    24.1
    
    
    
    23.5
    
    
    
    17.0Total current assets
    
    
    484.2
    
    
    
    470.5
    
    
    
    440.2Property, equipment and leasehold improvements, net
    
    
    201.5
    
    
    
    203.2
    
    
    
    183.5Goodwill, net
    
    
    26.5
    
    
    
    26.5
    
    
    
    26.5Other assets
    
    
    10.1
    
    
    
    7.5
    
    
    
    15.1Total assets
    
    $
    722.3
    
    
    $
    707.7
    
    
    $
    665.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    142.3
    
    
    $
    122.0
    
    
    $
    136.0Accrued expenses
    
    
    61.2
    
    
    
    76.1
    
    
    
    59.9Total current liabilities
    
    
    203.5
    
    
    
    198.1
    
    
    
    195.9Long-term debt
    
    
    106.6
    
    
    
    113.7
    
    
    
    124.9Deferred income taxes
    
    
    39.3
    
    
    
    39.4
    
    
    
    37.2Other long-term liabilities
    
    
    11.0
    
    
    
    10.3
    
    
    
    9.6Shareholders 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 26,003,933; 25,603,035 and 25,255,516 shares, respectively
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Additional paid-in capital
    
    
    139.0
    
    
    
    129.0
    
    
    
    117.5Retained earnings
    
    
    265.5
    
    
    
    258.8
    
    
    
    221.9Accumulated other comprehensive loss
    
    
    (1.2
    )
    
    
    (1.6
    )
    
    
    (2.5
    )404.6
    
    
    
    387.5
    
    
    
    338.2Treasury
stock, at cost, 3,763,993; 3,774,800 and 3,766,375 shares,
respectively
    
    
    (42.7
    )
    
    
    (41.3
    )
    
    
    (40.5
    )Total shareholders equity
    
    
    361.9
    
    
    
    346.2
    
    
    
    297.7Total liabilities and shareholders equity
    
    $
    722.3
    
    
    $
    707.7
    
    
    $
    665.3
 See notes to unaudited consolidated financial statements 1




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##### Table of Contents



Jo-Ann Stores, Inc. 
 Consolidated Statements of Operations
(Unaudited)
 Thirteen Weeks EndedMay 1,
    
    May 3,2004
    
    2003(Dollars in millions, exceptshare and per share data)Net sales
    
    $
    404.9
    
    
    $
    374.8Cost of sales
    
    
    205.9
    
    
    
    194.3Gross margin
    
    
    199.0
    
    
    
    180.5Selling, general and administrative expenses
    
    
    165.2
    
    
    
    153.1Store pre-opening and closing costs
    
    
    2.9
    
    
    
    2.1Depreciation and amortization
    
    
    9.7
    
    
    
    9.0Stock-based compensation expense
    
    
    2.0
    
    
    
    1.3Debt repurchase expenses
    
    
    4.2
    
    
    
    3.4Operating profit
    
    
    15.0
    
    
    
    11.6Interest expense, net
    
    
    4.1
    
    
    
    5.0Income before income taxes
    
    
    10.9
    
    
    
    6.6Income tax provision
    
    
    4.2
    
    
    
    2.5Net income
    
    $
    6.7
    
    
    $
    4.1Net income
per common share  basic
    
    $
    0.31
    
    
    $
    0.19Net income per common share  diluted
    
    $
    0.30
    
    
    $
    0.19Weighted average shares outstanding (in thousands):Basic
    
    
    21,817
    
    
    
    21,275Diluted
    
    
    22,680
    
    
    
    21,647
 See notes to unaudited consolidated financial statements 2




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##### Table of Contents



Jo-Ann Stores, Inc. 
 Consolidated Statements of Cash Flows
(Unaudited)
 Thirteen Weeks EndedMay 1,
    
    May 3,2004
    
    2003(Dollars in millions)Net cash flows provided by operating activities:Net income
    
    $
    6.7
    
    
    $
    4.1Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    9.7
    
    
    
    9.0Stock-based compensation expense
    
    
    2.0
    
    
    
    1.3Loss on disposal of fixed assets
    
    
    0.2
    
    
    
    0.1Loss associated with purchase of senior subordinated notes
    
    
    4.2
    
    
    
    3.4Changes in operating assets and liabilities:Increase in inventories
    
    
    (15.5
    )
    
    
    (6.0
    )Increase in accounts payable
    
    
    20.3
    
    
    
    6.1Decrease in accrued expenses
    
    
    (14.9
    )
    
    
    (16.0
    )Other, net
    
    
    3.2
    
    
    
    1.3Net cash provided by operating activities
    
    
    15.9
    
    
    
    3.3Net cash flows used for investing activities:Capital expenditures
    
    
    (8.1
    )
    
    
    (2.7
    )Net cash used for investing activities
    
    
    (8.1
    )
    
    
    (2.7
    )Net cash flows used for financing activities:Proceeds
from issuance of 7.5% senior subordinated notes, net
    
    
    97.0
    
    
    
    Purchase of 10 3/8% senior subordinated notes
    
    
    (66.6
    )
    
    
    (48.4
    )Net change in revolving credit facility
    
    
    (42.7
    )
    
    
    7.9Other, net
    
    
    2.3
    
    
    
    2.7Net cash used for financing activities
    
    
    (10.0
    )
    
    
    (37.8
    )Net decrease in cash and cash equivalents
    
    
    (2.2
    )
    
    
    (37.2
    )Cash and cash equivalents at beginning of period
    
    
    17.4
    
    
    
    63.2Cash and cash equivalents at end of period
    
    $
    15.2
    
    
    $
    26.0Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4.0
    
    
    $
    9.6Income taxes, net of refunds
    
    
    11.6
    
    
    
    2.3
 See notes to unaudited consolidated financial statements 3




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Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc. Note 1    Basis of Presentation Jo-Ann Stores, Inc. (the Company), an Ohio corporation, is a fabric and
craft retailer operating 874 retail stores in 47 states at May 1, 2004. The
780 traditional stores and 94 superstores feature a variety of competitively
priced merchandise used in sewing, crafting and home decorating projects,
including fabrics, notions, crafts, frames, scrapbooking material, artificial
and dried flowers, home accents, finished seasonal and home décor merchandise. The consolidated interim financial statements include the accounts of the
Company and its subsidiaries and have been prepared without audit, pursuant to
the rules of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures herein are adequate to make
the information not misleading. Certain amounts in the fiscal 2004 year-end
and interim financial statements have been reclassified in order to conform to
the current year presentation. The statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended January 31,
2004. Typical of most retail companies, the Companys business is highly
seasonal with the majority of revenues and operating profits generated in the
second half of the fiscal year. Accordingly, earnings or losses for a
particular interim period are not indicative of full year results. Due to the
seasonal nature of the Companys business, a comparable balance sheet as of
May 3, 2003 has been provided. 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. 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 2005 refers to the
year ended January 29, 2005). Note 2   Debt Refinancing On February 26, 2004, the Company completed the placement of $100 million
of 7.5% senior subordinated notes due 2012. Net proceeds from the offering
were $97.0 million and used to repurchase $39.2 million of 10 3/8% senior
subordinated notes due 2007 that were tendered as part of the refinancing, as
well as the remaining $25.2 million in 10 3/8% senior subordinated notes that
remained outstanding on May 1, 2004, the date when their call premium was
reduced, and for general corporate purposes. As a result of the repurchase,
the Company incurred a $4.2 million charge primarily for the premium paid to
repurchase the 10 3/8% senior subordinated notes and to write-off the
remaining deferred debt costs. On April 16, 2004, the Company amended and extended the expiration date
of its senior credit facility originally entered into in April 2001 and led by
Fleet Retail Group, Inc. The senior credit facility, as amended, is a $350.0
million revolver that expires April 30, 2009. The prior credit facility
provided for a $325.0 million revolver and a $40.0 million term loan, and
would have expired on April 30, 2005. The amended facility is secured by a
first priority perfected security interest in inventory, accounts receivable,
property and other assets and is fully and unconditionally guaranteed by each
of the Companys wholly-owned subsidiaries. Interest on borrowings under the
amended credit facility is calculated at the banks base rate or London
Interbank Offered Rate (LIBOR) plus 1.25% to 2.00%, depending on the level
of excess 4




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##### Table of Contents



availability (as defined in the credit agreement) that is maintained. At
May 1, 2004, interest on borrowings under the amended credit facility was
LIBOR plus 1.25%. The credit facility, as amended, contains a sub-limit for
letters of credit of $200.0 million. Note 3    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 following table presents information necessary to calculate basic and
diluted earnings per common share for the periods presented (shares in
thousands). Thirteen Weeks EndedMay 1,
    
    May 3,2004
    
    2003Weighted average shares outstanding:Basic common shares
    
    
    21,817
    
    
    
    21,275Incremental shares from assumed exercise of stock options
    
    
    769
    
    
    
    372Incremental restricted shares
    
    
    94
    
    
    
    Diluted common shares
    
    
    22,680
    
    
    
    21,647
 For the first quarter of fiscal 2005 and fiscal 2004, 10,100 and 418,250
stock options, respectively, that could potentially dilute earnings per share
in the future, were not included in the computation of diluted earnings per
share because to do so would have been anti-dilutive. Note 4  Store Closing Charges The Company is pursuing a growth strategy that is driven by the
replacement of its traditional stores with superstores. In addition, the
Company continually reviews the productivity of its store base, actively
manages its real estate to preserve maximum flexibility in lease terms, and
closes locations that do not meet certain financial performance thresholds.
During the first quarter of the fiscal year, the Company opened eight new
superstores and one larger traditional store and it closed 27 traditional
stores. The charges to the statement of operations for the first quarter ending
May 1, 2004 related to store closings and a roll-forward of the store closing
reserve balances from January 31, 2004 is summarized in the following table. Non-cancelablelease
    
    Asset
    
    OtherDollars in millions
    
    obligations
    
    Impairments
    
    Costs
    
    TotalBalance at January 31, 2004
    
    $
    1.8
    
    
    $
    
    
    
    $
    1.0
    
    
    $
    2.8Amounts charged to income
    
    
    0.2
    
    
    
    0.1
    
    
    
    1.0
    
    
    
    1.3Utilization:Cash
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    (1.7
    )Non-Cash
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Balance at May 1, 2004
    
    $
    1.4
    
    
    $
    
    
    
    $
    0.9
    
    
    $
    2.3
 5




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##### Table of Contents



Note 5  Fair Value of Derivative Financial Instruments The Company is subject to risk resulting from interest rate fluctuations,
as interest on the Companys Credit Facility is based on variable rates. The
Companys objective in managing its interest rate exposure is to limit the
impact of interest rate changes on earnings and cash flows. Interest rate
swaps are primarily utilized to achieve this objective, effectively converting
a portion of its variable-rate exposures to fixed interest rates. The Company
does not enter into financial instruments for trading purposes. At May 1, 2004, the Company had a $40.0 million interest rate swap with a
fixed LIBOR rate of 6.72% that expires on April 30, 2005. The interest rate
swap agreement requires the Company to pay a fixed interest rate while
receiving a floating interest rate based on LIBOR. In accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, the
Company has reviewed and designated its interest rate swap agreement as a cash
flow hedge and recognizes the fair value of its interest rate swap agreement
on the balance sheet. Changes in the fair value of this agreement are
recorded in other comprehensive income and reclassified into earnings as the
underlying hedged item affects earnings. Other comprehensive income includes the effects of derivative
transactions accounted for under SFAS No. 133, net of related tax.
Comprehensive income consists of the following: Thirteen Weeks EndedMay 1,
    
    May 3,Dollars in millions
    
    2004
    
    2003Net income
    
    $
    6.7
    
    
    $
    4.1Other comprehensive income, net of tax
    
    
    0.4
    
    
    
    0.1Comprehensive income
    
    $
    7.1
    
    
    $
    4.2
 Note 6   Shareholders Equity The Company has various stock-based compensation plans that it utilizes
as long-term compensation for its board of directors, executive officers,
senior management and other key employees. The Company issues stock under
these various stock-award compensation plans and uses treasury shares to fund
the Companys match under the 401(k) savings plan. During the first quarter
of fiscal 2005, shares outstanding increased by 412,000 as follows: CommonNet
    
    
    
    
    
    Stock
    
    AdditionalCommon
    
    Treasury
    
    Stated
    
    Paid-In
    
    TreasuryShares
    
    Shares
    
    Value
    
    Capital
    
    Stock(Shares in thousands)
    
    (Dollars in millions)Balance, January 31, 2004
    
    
    21,828
    
    
    
    3,775
    
    
    $
    1.3
    
    
    $
    129.0
    
    
    $
    (41.3
    )Exercise of stock options
    
    
    408
    
    
    
    (66
    )
    
    
    
    
    
    
    3.7
    
    
    
    Purchase of common stock
    
    
    (64
    )
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    (1.8
    )Issuance of treasury shares
    
    
    9
    
    
    
    (9
    )
    
    
    
    
    
    
    0.2
    
    
    
    0.4Associate stock ownership plan
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Tax benefit on equity
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    First Quarter Activity
    
    
    412
    
    
    
    (11
    )
    
    
    
    
    
    
    10.0
    
    
    
    (1.4
    )Balance, May 1, 2004
    
    
    22,240
    
    
    
    3,764
    
    
    $
    1.3
    
    
    $
    139.0
    
    
    $
    (42.7
    )
 6




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##### Table of Contents



Note 7    Recent Accounting Pronouncements FASB Interpretation No. 46, Consolidation of Variable Interest Entities In
January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, for certain entities which do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest (variable interest
entities). Variable interest entities will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entitys
expected losses, receives a majority of its expected returns, or both, as a
result of holding variable interests, which are ownership, contractual, or
other pecuniary interests in an entity. The Company completed its analysis
and adopted FIN 46 during its fiscal 2005 first quarter. The adoption of FIN
46 had no impact on the Companys consolidated financial statements. 7




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Note 8   Consolidating Financial Statements (Unaudited) During the first quarter of fiscal 2005, the Company completed the
placement of $100 million of 7.5% senior subordinated notes due in 2012.
Proceeds from the offering were used to repurchase the $64.4 million of 10 3/8
% senior subordinated notes that remained outstanding at the beginning of the
year, and for general corporate purposes. The Companys 7.5% 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 May
1, 2004 and January 31, 2004 and for the thirteen weeks ended May 1, 2004 and
May 3, 2003 are as follows: Consolidating Balance Sheets
May 1, 2004 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    12.5
    
    
    $
    2.7
    
    
    $
    
    
    
    $
    15.2Inventories
    
    
    161.8
    
    
    
    258.3
    
    
    
    
    
    
    
    420.1Deferred income taxes
    
    
    19.2
    
    
    
    5.6
    
    
    
    
    
    
    
    24.8Prepaid expenses and other current assets
    
    
    15.0
    
    
    
    9.1
    
    
    
    
    
    
    
    24.1Total current assets
    
    
    208.5
    
    
    
    275.7
    
    
    
    
    
    
    
    484.2Property, equipment and leasehold improvements, net
    
    
    77.8
    
    
    
    123.7
    
    
    
    
    
    
    
    201.5Goodwill, net
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    26.5Other assets
    
    
    8.7
    
    
    
    1.4
    
    
    
    
    
    
    
    10.1Investment in subsidiaries
    
    
    65.4
    
    
    
    
    
    
    
    (65.4
    )
    
    
    Intercompany receivable
    
    
    323.5
    
    
    
    
    
    
    
    (323.5
    )
    
    
    Total assets
    
    $
    683.9
    
    
    $
    427.3
    
    
    $
    (388.9
    )
    
    $
    722.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    131.2
    
    
    $
    11.1
    
    
    $
    
    
    
    $
    142.3Accrued expenses
    
    
    58.5
    
    
    
    2.7
    
    
    
    
    
    
    
    61.2Total current liabilities
    
    
    189.7
    
    
    
    13.8
    
    
    
    
    
    
    
    203.5Long-term debt
    
    
    106.6
    
    
    
    
    
    
    
    
    
    
    
    106.6Deferred income taxes
    
    
    18.7
    
    
    
    20.6
    
    
    
    
    
    
    
    39.3Other long-term liabilities
    
    
    7.0
    
    
    
    4.0
    
    
    
    
    
    
    
    11.0Intercompany payable
    
    
    
    
    
    
    323.5
    
    
    
    (323.5
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    139.0
    
    
    
    
    
    
    
    
    
    
    
    139.0Retained earnings
    
    
    265.5
    
    
    
    65.4
    
    
    
    (65.4
    )
    
    
    265.5Accumulated other comprehensive loss
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (1.2
    )404.6
    
    
    
    65.4
    
    
    
    (65.4
    )
    
    
    404.6Treasury stock, at cost
    
    
    (42.7
    )
    
    
    
    
    
    
    
    
    
    
    (42.7
    )Total shareholders equity
    
    
    361.9
    
    
    
    65.4
    
    
    
    (65.4
    )
    
    
    361.9Total liabilities and shareholders equity
    
    $
    683.9
    
    
    $
    427.3
    
    
    $
    (388.9
    )
    
    $
    722.3
 8




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##### Table of Contents



Note 8   Consolidating Financial Statements (Unaudited)  CONTINUED Consolidating Balance Sheets
January 31, 2004 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    14.3
    
    
    $
    3.1
    
    
    $
    
    
    
    $
    17.4Inventories
    
    
    154.0
    
    
    
    250.6
    
    
    
    
    
    
    
    404.6Deferred income taxes
    
    
    19.4
    
    
    
    5.6
    
    
    
    
    
    
    
    25.0Prepaid expenses and other current assets
    
    
    15.1
    
    
    
    8.4
    
    
    
    
    
    
    
    23.5Total current assets
    
    
    202.8
    
    
    
    267.7
    
    
    
    
    
    
    
    470.5Property, equipment and leasehold improvements, net
    
    
    80.1
    
    
    
    123.1
    
    
    
    
    
    
    
    203.2Goodwill, net
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    26.5Other assets
    
    
    6.1
    
    
    
    1.4
    
    
    
    
    
    
    
    7.5Investment in subsidiaries
    
    
    55.5
    
    
    
    
    
    
    
    (55.5
    )
    
    
    Intercompany receivable
    
    
    331.7
    
    
    
    
    
    
    
    (331.7
    )
    
    
    Total assets
    
    $
    676.2
    
    
    $
    418.7
    
    
    $
    (387.2
    )
    
    $
    707.7Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    112.0
    
    
    $
    10.0
    
    
    $
    
    
    
    $
    122.0Accrued expenses
    
    
    78.9
    
    
    
    (2.8
    )
    
    
    
    
    
    
    76.1Total current liabilities
    
    
    190.9
    
    
    
    7.2
    
    
    
    
    
    
    
    198.1Long-term debt
    
    
    113.7
    
    
    
    
    
    
    
    
    
    
    
    113.7Deferred income taxes
    
    
    18.8
    
    
    
    20.6
    
    
    
    
    
    
    
    39.4Other long-term liabilities
    
    
    6.6
    
    
    
    3.7
    
    
    
    
    
    
    
    10.3Intercompany payable
    
    
    
    
    
    
    331.7
    
    
    
    (331.7
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    129.0
    
    
    
    
    
    
    
    
    
    
    
    129.0Retained earnings
    
    
    258.8
    
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    258.8Accumulated other comprehensive loss
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    (1.6
    )387.5
    
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    387.5Treasury stock, at cost
    
    
    (41.3
    )
    
    
    
    
    
    
    
    
    
    
    (41.3
    )Total shareholders equity
    
    
    346.2
    
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    346.2Total liabilities and shareholders equity
    
    $
    676.2
    
    
    $
    418.7
    
    
    $
    (387.2
    )
    
    $
    707.7
 9




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##### Table of Contents



Note 8   Consolidating Financial Statements (Unaudited)  CONTINUED Consolidating Statements of Operations
Thirteen Weeks Ended May 1, 2004 and May 3, 2003 May 1, 2004GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    220.4
    
    
    $
    312.3
    
    
    $
    (127.8
    )
    
    $
    404.9Cost of sales
    
    
    128.8
    
    
    
    204.9
    
    
    
    (127.8
    )
    
    
    205.9Gross margin
    
    
    91.6
    
    
    
    107.4
    
    
    
    
    
    
    
    199.0Selling, general and administrative expenses
    
    
    83.5
    
    
    
    81.7
    
    
    
    
    
    
    
    165.2Store pre-opening and closing costs
    
    
    1.1
    
    
    
    1.8
    
    
    
    
    
    
    
    2.9Depreciation and amortization
    
    
    4.0
    
    
    
    5.7
    
    
    
    
    
    
    
    9.7Stock-based compensation expense
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    2.0Debt repurchase expenses
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating profit (loss)
    
    
    (3.2
    )
    
    
    18.2
    
    
    
    
    
    
    
    15.0Interest expense, net
    
    
    2.0
    
    
    
    2.1
    
    
    
    
    
    
    
    4.1Income (loss) before income taxes
    
    
    (5.2
    )
    
    
    16.1
    
    
    
    
    
    
    
    10.9Income tax provision (benefit)
    
    
    (2.0
    )
    
    
    6.2
    
    
    
    
    
    
    
    4.2Income (loss) before equity income
    
    
    (3.2
    )
    
    
    9.9
    
    
    
    
    
    
    
    6.7Equity income from subsidiaries
    
    
    9.9
    
    
    
    
    
    
    
    (9.9
    )
    
    
    Net income
    
    $
    6.7
    
    
    $
    9.9
    
    
    $
    (9.9
    )
    
    $
    6.7
 May 3, 2003GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    205.5
    
    
    $
    286.5
    
    
    $
    (117.2
    )
    
    $
    374.8Cost of sales
    
    
    122.8
    
    
    
    188.7
    
    
    
    (117.2
    )
    
    
    194.3Gross margin
    
    
    82.7
    
    
    
    97.8
    
    
    
    
    
    
    
    180.5Selling, general and administrative expenses
    
    
    77.8
    
    
    
    75.3
    
    
    
    
    
    
    
    153.1Store pre-opening and closing costs
    
    
    0.8
    
    
    
    1.3
    
    
    
    
    
    
    
    2.1Depreciation and amortization
    
    
    3.3
    
    
    
    5.7
    
    
    
    
    
    
    
    9.0Stock-based compensation expense
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Debt repurchase expenses
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    3.4Operating profit (loss)
    
    
    (3.9
    )
    
    
    15.5
    
    
    
    
    
    
    
    11.6Interest expense, net
    
    
    2.2
    
    
    
    2.8
    
    
    
    
    
    
    
    5.0Income (loss) before income taxes
    
    
    (6.1
    )
    
    
    12.7
    
    
    
    
    
    
    
    6.6Income tax provision (benefit)
    
    
    (2.3
    )
    
    
    4.8
    
    
    
    
    
    
    
    2.5Income (loss) before equity income
    
    
    (3.8
    )
    
    
    7.9
    
    
    
    
    
    
    
    4.1Equity income from subsidiaries
    
    
    7.9
    
    
    
    
    
    
    
    (7.9
    )
    
    
    Net income
    
    $
    4.1
    
    
    $
    7.9
    
    
    $
    (7.9
    )
    
    $
    4.1
 10




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##### Table of Contents



Note 8   Consolidating Financial Statements (Unaudited)  CONTINUED Consolidating Statements of Cash Flows
Thirteen Weeks Ended May 1, 2004 and May 3, 2003 May 1, 2004GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    9.9
    
    
    $
    6.0
    
    
    $
    
    
    
    $
    15.9Net cash flows used for investing activities:Capital expenditures
    
    
    (1.7
    )
    
    
    (6.4
    )
    
    
    
    
    
    
    (8.1
    )Net cash used for investing activities
    
    
    (1.7
    )
    
    
    (6.4
    )
    
    
    
    
    
    
    (8.1
    )Net cash flows used for 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
    
    
    (42.7
    )
    
    
    
    
    
    
    
    
    
    
    (42.7
    )Other, net
    
    
    2.3
    
    
    
    
    
    
    
    
    
    
    
    2.3Net cash used for financing activities
    
    
    (10.0
    )
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Net decrease in cash and cash equivalents
    
    
    (1.8
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (2.2
    )Cash and cash equivalents at beginning of period
    
    
    14.3
    
    
    
    3.1
    
    
    
    
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    12.5
    
    
    $
    2.7
    
    
    $
    
    
    
    $
    15.2
 May 3, 2003GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    0.1
    
    
    $
    3.2
    
    
    $
    
    
    
    $
    3.3Net cash flows used for investing activities:Capital expenditures
    
    
    (1.1
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (2.7
    )Net cash used for investing activities
    
    
    (1.1
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (2.7
    )Net cash flows used for financing activities:Purchase of
10 3/8% senior subordinated notes
    
    
    (48.4
    )
    
    
    
    
    
    
    
    
    
    
    (48.4
    )Net change in revolving credit facility
    
    
    7.9
    
    
    
    
    
    
    
    
    
    
    
    7.9Other, net
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    2.7Net cash used for financing activities
    
    
    (37.8
    )
    
    
    
    
    
    
    
    
    
    
    (37.8
    )Net increase (decrease) in cash and cash equivalents
    
    
    (38.8
    )
    
    
    1.6
    
    
    
    
    
    
    
    (37.2
    )Cash and cash equivalents at beginning of period
    
    
    60.2
    
    
    
    3.0
    
    
    
    
    
    
    
    63.2Cash and cash equivalents at end of period
    
    $
    21.4
    
    
    $
    4.6
    
    
    $
    
    
    
    $
    26.0
 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations General Overview Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto and the Companys
Form 10-K Annual Report to Shareholders for the fiscal year ended January 31,
2004. The financial information presented for the first quarter of fiscal 2004
has been reclassified for certain amounts to conform to the fiscal 2005
presentation. We are the nations largest specialty retailer of fabrics and one of the
largest specialty retailers of crafts, 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-Annsuperstores) feature a variety of competitively
priced merchandise used in sewing, crafting and home decorating projects,
including fabrics, notions, crafts, frames, scrapbooking material, artificial
and dried flowers, home accents, finished seasonal and home décor merchandise. Our strategy is to grow by replacing many of our existing traditional
stores with superstores over time. Our research has demonstrated that our
customers have a better perception of the quality and pricing of our products
when they are presented in our superstore format. We believe that our
prototype 35,000 square foot superstore gives us a competitive advantage in the
industry. Our superstores provide a unique shopping experience by offering a
full creative selectionsewing, crafting, framing, seasonal, floral and home
décor accessoriesall under one roof. On average we close 1.3 traditional
stores for every superstore that we open. Our superstores typically average
over three times the revenues of the traditional stores they replaced. In
markets where we have opened multiple superstores, we have been able to grow
our revenues significantly and, we believe, expand the market size and our
share of market. As of May 1, 2004, we operated 874 stores in 47 states (780 traditional
stores and 94 superstores). Our traditional stores offer a complete selection
of fabric and a convenience assortment of crafts, floral, finished seasonal and
home décor merchandise. Our traditional stores average 14,400 square feet and
generated net sales per store of approximately $1.5 million in fiscal 2004.
Our superstores offer an expanded and more comprehensive product assortment
than our traditional stores. Our superstores also offer custom framing and
educational programs that our traditional stores do not. Our
superstores opened prior to fiscal 2003 average 45,000 square feet and
generated net sales per store of approximately $6.0 million in fiscal 2004.
Our current superstore prototype averages 35,000 square feet. We opened eight
of these new prototype superstores in the first quarter of fiscal 2005 and at
the end of the first quarter, we had 22 prototype superstores in operation. Executive Overview As of the end of the first quarter of fiscal 2005, we continue to build
upon our solid fiscal 2004 performance. We have delivered 12 consecutive
quarters of positive comparable store sales increases. We continue to execute
well to our strategic initiatives of opening our new 35,000 square foot
prototype superstores, improving margins, and improving the productivity of our
store base. Our financial performance for the first quarter of fiscal 2005 was strong.
Highlights of the first quarter are as follows: 12




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##### Table of Contents




    
    Net sales increased 8.0% to $404.9 million. Strong same-store
sales led our overall sales growth, with same-store sales increasing
6.6% versus a 2.6% same-store sales increase for the first quarter
last year.
    
    We opened eight of our new 35,000 square foot superstores in the
first quarter, and we had 22 of these prototype superstores in
operation at the end of the first quarter.
    
    We expanded our gross profit margin rate by 90 basis points, to
49.1% of sales this quarter versus 48.2% for the first quarter last
year, continuing a trend we established in the third and fourth
quarters of last year. This improvement was driven by a
comprehensive strategy we have been pursuing for three consecutive
quarters to be less promotional.
    
    Net income was $0.30 per diluted share, versus net income of
$0.19 per diluted share last year, an increase of approximately 58%.
Both fiscal years include costs related to the early redemption of
debt. These costs negatively impacted pre-tax earnings by $4.2
million in the first quarter of fiscal 2005 and $3.4 million in the
first quarter of fiscal 2004. The fiscal 2005 first quarter charge
represents the premium paid to retire our 10 3/8% senior subordinated
notes and write-off the remaining deferred debt costs on that debt.
    
    During the first quarter, we completed our capital financing
initiatives. In February, we issued $100 million of 7.5% senior
subordinated notes, which enabled us to repurchase the remaining
$64.4 million of our 10 3/8% senior subordinated notes. In April, we
amended our $365 million bank credit facility, extending the term
until May 2009 and reducing the commitment to $350 million. Results of Operations The following table sets forth our results of operations through
operating profit, expressed as a percentage of net sales. The following
discussion should be read in conjunction with our consolidated financial
statements and related notes thereto. Percentage of Net SalesThirteen Weeks EndedMay 1, 2004
    
    May 3, 2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    49.1
    %
    
    
    48.2
    %Selling, general and administrative expenses
    
    
    40.8
    %
    
    
    40.8
    %Store pre-opening and closing costs
    
    
    0.7
    %
    
    
    0.6
    %Depreciation and amortization
    
    
    2.4
    %
    
    
    2.4
    %Stock-based compensation expense
    
    
    0.5
    %
    
    
    0.4
    %Debt repurchase expenses
    
    
    1.0
    %
    
    
    0.9
    %Operating profit
    
    
    3.7
    %
    
    
    3.1
    %
 Comparison of the Thirteen Weeks Ended May 1, 2004 and May 3, 2003 Net sales for the first quarter of fiscal 2005 increased 8.0%, or $30.1
million, to $404.9 million from $374.8 million in the prior year. Sales from
stores open one year or more (same-store sales) generated the majority of
the overall net sales increase, increasing 6.6% compared with a same-store
sales increase of 2.6% for the prior year first quarter. We operated fewer
stores in the first quarter versus a year ago. The Companys total store
count at the end of the quarter was down 43 units, or 4.7% from last years
first quarter; however, the number of superstores in operation increased to 94
from 77 in last years first 13




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##### Table of Contents



quarter. Total store square footage decreased 0.5% from last years
first quarter. The 94 superstores in operation accounted for approximately
30% of the total sales for the first quarter. By store format, our same-store sales performance for traditional stores
increased 7.6% versus a same-store sales increase of 2.7% for the prior year
first quarter. Same-store sales for superstores increased 3.9% for the
quarter versus a same-store sales increase of 2.2% for the prior year first
quarter. In both store formats, the increase was entirely due to an increased
average ticket, with customer traffic essentially flat. With the exception of
our finished seasonal business, which represented less than 10% of total sales
in the first quarter, all of our major product categories experienced positive
same-store sales growth in the quarter. As a percent of net sales, gross margin was 49.1% for the first quarter
of fiscal 2005 compared with 48.2% for the same quarter a year earlier, an
improvement of 90 basis points. This was our third consecutive quarter of
year-over-year improvement in gross margin rate, and is attributable to a
strategy we began executing in the third quarter of last year to be less
promotional. Selling, general and administrative (SG&A) expenses, excluding other
expenses separately identified in the statement of operations, were $165.2
million in the first quarter compared with $153.1 million in the prior year
first quarter. As a percentage of net sales, SG&A expenses held constant at
40.8% with leverage in store expenses being offset by increased distribution
costs, due to the increased volume of merchandise purchases in the first
quarter. Store pre-opening and closing costs increased $0.8 million during the
first quarter of fiscal 2005, to $2.9 million reflecting the increased level
of real estate activity year over year. We opened eight superstores and one
traditional store in the first quarter of fiscal 2005, compared with three
superstore openings and one traditional store opening in the prior year first
quarter. As a percentage of sales, store pre-opening and closing costs
increased to 0.7% of sales from 0.6% last year. As we continue to increase
the number of new store openings, we expect our store pre-opening and closing
costs to increase. For the full fiscal year, our store pre-opening and
closing costs are projected at $18 million pre-tax versus $10.9 million last
year. Depreciation and amortization expense increased $0.7 million to $9.7
million from $9.0 million, primarily due to the increased level of capital
expenditures year-over-year. Stock-based compensation expense includes the expensing of stock options
under Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
for Stock-Based Compensation Expense, which we adopted in the first quarter
of fiscal 2004, and the amortization of the value of restricted stock granted
to employees. Previously, we reported the amortization of restricted stock in
depreciation and amortization. Stock-based compensation expense was $2.0
million for the first quarter of fiscal 2005, compared with $1.3 million in
the same period last year. Stock based compensation expense, consisting of
both stock option related expense and restricted stock amortization is
estimated at approximately $8.5 to $9.0 million, pre-tax, for the full 2005
fiscal year. Debt repurchase expenses were $4.2 million for the first quarter of
fiscal 2005 compared with $3.4 million in the first quarter of fiscal 2004.
The fiscal 2005 charge represents the premium paid to repurchase our 10 3/8%
senior subordinated notes and write-off the remaining deferred debt costs. We
have been de-leveraging our balance sheet over the last three years, and as a
consequence, we have been recording charges related to the early repayment of
debt. Our capital financing initiatives were completed in the first quarter
of fiscal 2005. 14




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##### Table of Contents



Interest expense in the first quarter of fiscal 2005 decreased $0.9
million to $4.1 million from $5.0 million in the first quarter of fiscal 2004.
The decrease is attributable to a decrease in our average debt levels between
years and a lower all-in average borrowing rate. Our average debt levels
during the first quarter of fiscal 2005 were $145 million compared with $159
million in the prior year first quarter. Our effective income tax rate for the first quarter of fiscal 2005 was
38.5% versus 38.0% in the first quarter of the prior year. For the full
fiscal year, our effective tax rate is estimated at 38.5%. Liquidity and Capital Resources We believe that our credit facility, coupled with cash on hand and
internally generated cash flows from operations, will be sufficient to cover
our working capital, capital expenditure and debt service requirement needs
for the foreseeable future. During the first quarter, we completed our capital financing initiatives.
In February, we issued $100 million of 7.5% senior subordinated notes, which
enabled us to repurchase the remaining $64.4 million of our 10 3/8% senior
subordinated notes that were outstanding at the beginning of the year. In
April, we amended our $365 million bank credit facility, extending the term
until May 2009 and reducing the commitment to $350 million. Cash and cash equivalents decreased $2.2 million during fiscal 2005 to
$15.2 million as of May 1, 2004. Net cash provided by operating activities was $15.9 million in fiscal
2005 compared with $3.3 million in fiscal 2004. The increase of $12.6 million
was driven by strong operating performance, combined with strong payables
support to finance our growth in inventory. Cash flows from operating
activities, before changes in operating assets and liabilities, were $22.8
million in fiscal 2005 versus $17.9 million generated in fiscal 2004. Inventories, net of payable support, decreased $4.8 million, compared
with a decrease of $0.1 million in fiscal 2004. Substantially all of the
increase in inventories was in core product categories such as scrapbooking and
fabric, which have experienced solid sales performances. Net cash used for investing activities, totaled $8.1 million in fiscal
2005 compared with $2.7 million in fiscal 2004 and consisted entirely of
capital spending for both periods. We continue to anticipate capital expenditures for the full fiscal year
2005 to be approximately $70 to $75 million. The increase in capital spending
over the prior year is attributable to increased store opening activity and
the first phase over the next three years to replace the point-of-sale systems
in our stores. During the first quarter of fiscal 2005, we opened eight
superstores and one larger traditional store and closed 27 traditional stores. For the full fiscal year, we expect to open 30 superstores and five
larger traditional stores. Of the 22 superstores yet to be opened, three are
scheduled to open in the second quarter, with the balance scheduled to open in
the third or early in the fourth quarter. For the full fiscal year, we expect
to close approximately 70 traditional stores, about 40 related to the
superstore openings and 30 that are performance related. Of these expected 70
store closings, 27 stores were closed in the first quarter. Net cash used for financing activities was $10.0 million during fiscal
2005 compared with $37.8 million during fiscal 2004. Debt borrowings were
$106.6 million at the end of the first quarter which was a decrease of $7.1
million from the beginning of the year and a decrease of $18.3 million from
the same 15




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period in the prior year. Cash payments for the deferred debt costs
associated with the 7.5% senior subordinated notes and credit facility
amendment were approximately $3.0 million and $1.5 million, respectively, and
are included within the financing activities section in the statements of cash
flows. These costs were capitalized and are being amortized over the lives of
the respective debt instruments. During the first quarter of fiscal 2004, we redeemed or repurchased in
the open market, approximately $46.0 million of senior subordinated notes at
an aggregate premium of 105.4% to par value. The $3.4 million pre-tax charge
for debt repurchase expenses includes the cash premium to par value and the
write-off of deferred costs and original issue discount. The financing initiatives we completed this quarter are expected to save
approximately $1 million in annual interest expense for fiscal 2005, and more
importantly, position us to successfully execute our growth strategy over the
next three to five years. Our debt-to-capitalization ratio was 22.8% at May 1, 2004, 24.7% at
January 31, 2004 and 29.6% at May 3, 2003. We have a stated goal of
maintaining our year-end debt to total capitalization ratio in future years in
the low 20% range. Off-Balance Sheet Transactions Our liquidity is not currently dependent on the use of off-balance sheet
transactions other than letters of credit and operating leases, which are
typical in a retail environment. Business Outlook In a press release dated May 17, 2004, which was furnished to the
Securities and Exchange Commission on Form 8-K, the Company provided guidance
for the full fiscal year and second quarter. The Company increased its
expectations for fiscal 2005 earnings per diluted share to approximately $2.20
to $2.25 per diluted share from our earlier stated guidance of $2.18 to $2.22
per diluted share. For the second quarter, historically the Companys weakest
quarter of the year, the Company stated that it is estimating a loss of $0.02
to $0.07 per share, compared with a loss of $0.10 per share in the prior year. The change in guidance was predicated on the strength of the Companys
first quarter earnings performance versus its expectations. The following
should be taken into consideration related to our guidance:  
    
    Same-store sales growth of three percent was assumed for the
remainder of the fiscal year.
    
    Diluted shares outstanding are estimated to be approximately
23 million by the end of the fiscal year.
    
    Included in our earnings guidance is approximately $8.5  $9.0
million pre-tax expense related to stock-based compensation.
    
    Not included in the guidance for the full year is a charge of
$4.2 million pre-tax, related to the debt repurchase expenses. Our actual results in the second quarter and full year are highly
dependent on the sales and operating margin performance we are able to
achieve. As a result, our estimates are subject to further refinement, which
we will provide, if necessary, during the fiscal year. 16




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Other Matters On May 10, 2004 the Company announced that Mike Edwards, who has been the
Companys Executive Vice-President of Operations for the last three years,
will be leaving the Company at the end of May to become CEO of a West Coast
retailer. A search firm has been engaged to conduct a nationwide search to
identify qualified candidates to replace Mr. Edwards, and both internal and
external candidates are being considered. 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. Working capital requirements needed to finance our operations
fluctuate during the year and reach their highest levels during the second and
third fiscal quarters as we increase our inventory in preparation for our peak
selling season. We believe that inflation has not had a significant effect on net sales
or on net income. There can be no assurance, however, that our operating
results will not be affected by inflation in the future. Critical Accounting Policies Our condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America. Preparation of these statements requires management to make
judgments and estimates. Some accounting policies have a significant impact
on amounts reported in these financial statements. A summary of significant
accounting policies and a description of accounting policies that are
considered critical may be found in our 2004 Annual Report on Form 10-K, in
the notes to the consolidated financial statements, Note 1 and the Critical
Accounting Policies section. Cautionary Statement Concerning Forward-Looking Statements Certain statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, which reflect
the Companys current views of future events and financial performance,
involve certain risks and uncertainties. When used herein, the terms
anticipates, plans, estimates, expects, believes, and similar
expressions as they relate to us or future or conditional verbs such as
will, should, would, may, and could 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, the impact of our and our competitors store
openings and closings, fuel and energy costs, changes in tariff and freight
rates, consumer debt levels, and other capital market and geo-political
conditions. We caution readers not to place undue reliance on these
forward-looking statements. We assume no obligation to update any of the
forward-looking statements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We use derivative financial instruments at various times to manage the
risk associated with interest rate fluctuations. The Company is subject to
risk resulting from interest rate fluctuations, as interest on the 17




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Companys credit facility is based on variable rates. The Companys objective
in managing its interest rate exposure is to limit the impact of interest rate
changes on earnings and cash flows. Interest rate swaps are primarily
utilized to achieve this objective, effectively converting a portion of our
variable-rate exposures to fixed interest rates (See Note 5  Fair Value of
Derivative Financial Instruments). 
 Item 4. Controls and Procedures As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)).
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Companys internal control over financial reporting during the Companys
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting. 18




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##### Table of Contents



PART II OTHER INFORMATION 
 Item 1. 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. 
 Item 2. Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities Purchases of Equity Securities by the Issuer and Affiliated
Purchasers. Purchases of Equity Securities by Jo-Ann Stores, Inc. MaximumTotal Number of
    
    Number of SharesTotal
    
    Average
    
    Shares Purchased
    
    that May Yet BeNumber of
    
    Price
    
    as Part of Publicly
    
    Purchased UnderShares
    
    Paid per
    
    Announced Plans
    
    the Plans orPurchased
    
    Share
    
    or Programs
    
    ProgramsFebruary 1-28, 2004
    
    
    1,721
    
    
    $
    26.27
    
    
    
    753,465
    
    
    
    1,396,535February 29, 2004  April
3, 2004
    
    
    50,048
    
    
    $
    27.08
    
    
    
    803,513
    
    
    
    1,346,487April 4, 2004  May 1, 2004
    
    
    11,999
    
    
    $
    29.82
    
    
    
    815,512
    
    
    
    1,334,488Total
    
    
    63,768
    
    
    $
    27.57
    
    
    
    815,512
    
    
    
    1,334,488
 In December 1998, the Companys board of directors authorized a
discretionary program that allowed the Company to buy back 2,150,000 common
shares. That program does not have a stated expiration date. The total number
of shares purchased represent shares repurchased directly from the market, as
well as shares repurchased from employees related to the lapse of restricted
shares and employee stock options used to satisfy related tax withholding
requirements. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 19




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Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.1
    
    
    Fourth Amendment to Credit Agreement dated April 16, 2004 by and
among Jo-Ann Stores, Inc., as borrower, Fleet National Bank, as
Issuing Bank, Fleet Retail Group, Inc., as Administrative Agent and
Collateral Agent, Congress Financial Corporation, as Documentation
Agent, GMAC Commercial Finance LLC, National City Commercial Finance,
Inc. and The CIT Group / Business Credit, Inc. as Co-Agents (filed as
an Exhibit 10.15 to the Registrants Form S-4 filed with the
Commission on May 24, 2004 and incorporated herein by reference)31.1
    
    
    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
 b) Reports on Form 8-K The Company furnished a Current Report on Form 8-K dated
February 5, 2004 to report the issuance of a press release
announcing that it has commenced a cash tender offer to
purchase all of its outstanding 10 3/8% Senior Subordinated
Notes due 2007 and consent solicitation to amend the related
Note Indenture. The Company also announced its net sales for
the four weeks, thirteen weeks and fiscal year ended January
31, 2004. The Company furnished a Current Report on Form 8-K dated
March 4, 2004 to report the issuance of a press release
announcing its net sales for its first four weeks of the fiscal
year as of February 28, 2004. The Company furnished a Current Report on Form 8-K dated
March 8, 2004 to report the issuance of a press release
announcing its earnings for the fiscal year ended January 31,
2004. The Company furnished a Current Report on Form 8-K dated
April 8, 2004 to report the issuance of a press release
announcing its net sales for the five and nine weeks of the
fiscal year as of April 3, 2004. The Company furnished a Current Report on Form 8-K dated
May 10, 2004, to announce that its Executive Vice President of
Operations, Mike Edwards, will be leaving the Company at the
end of May to join a West Coast retailer as its President and
CEO. 20




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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 10, 2004
    
    /s/ Alan RosskammAlan Rosskamm,President and Chief Executive Officer/s/ Brian P. CarneyBrian P. Carney,Executive Vice President and Chief Financial Officer
 21