##### Table of Contents



United StatesSecurities 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 October 28, 2006
 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)
 (330) 656-2600
 x o
  o x o
 o x




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##### Table of Contents



Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended October 28, 2006
 Page NumbersPart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  October 28, 2006 (Unaudited), January 28, 2006 and October 29, 2005 (Unaudited)
    
    
    1Unaudited Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005
    
    
    2Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26Part II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27Signatures
    
    
    28EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Jo-Ann Stores, Inc.
Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)October 28,
    
    
    January 28,
    
    
    October 29,2006
    
    
    2006
   
    
    2005(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    20.9
    
    
    $
    17.9
    
    
    $
    24.1Inventories
    
    
    535.8
    
    
    
    514.7
    
    
    
    654.1Deferred income taxes
    
    
    38.0
    
    
    
    38.0
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    25.5
    
    
    
    35.2
    
    
    
    24.5Total current assets
    
    
    620.2
    
    
    
    605.8
    
    
    
    724.0Property, equipment and leasehold improvements, net
    
    
    313.7
    
    
    
    331.7
    
    
    
    297.3Goodwill, net
    
    
    
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.8
    
    
    
    9.3
    
    
    
    10.9Total assets
    
    $
    943.7
    
    
    $
    946.8
    
    
    $
    1,059.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    186.2
    
    
    $
    146.6
    
    
    $
    203.1Accrued expenses
    
    
    69.3
    
    
    
    94.1
    
    
    
    56.3Total current liabilities
    
    
    255.5
    
    
    
    240.7
    
    
    
    259.4Long-term debt
    
    
    200.3
    
    
    
    203.7
    
    
    
    290.0Deferred income taxes
    
    
    23.2
    
    
    
    23.2
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    84.8
    
    
    
    79.8
    
    
    
    70.0Shareholders 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 27,270,851; 27,050,507 and 26,719,306 shares, respectively
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.3Additional paid-in capital
    
    
    173.0
    
    
    
    165.4
    
    
    
    160.5Retained earnings
    
    
    248.9
    
    
    
    276.6
    
    
    
    294.6423.3
    
    
    
    443.4
    
    
    
    456.4Treasury stock, at cost, 3,573,673; 3,675,439 and 3,707,402 shares, respectively
    
    
    (43.4
    )
    
    
    (44.0
    )
    
    
    (44.1
    )Total shareholders equity
    
    
    379.9
    
    
    
    399.4
    
    
    
    412.3Total liabilities and shareholders equity
    
    $
    943.7
    
    
    $
    946.8
    
    
    $
    1,059.3
  1




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Jo-Ann Stores, Inc.
 
 Consolidated Statements of Operations
 (Unaudited)
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 28,
    
    October 29,
    
    
    October 28,
    
    October 29,2006
    
    2005
    
    
    2006
    
    2005(Dollars in millions, except share and per share data)Net sales
    
    $
    461.9
    
    
    $
    474.2
    
    
    
    $
    1,249.8
    
    
    $
    1,278.7Cost of sales
    
    
    242.8
    
    
    
    257.9
    
    
    
    
    660.4
    
    
    
    672.8Gross margin
    
    
    219.1
    
    
    
    216.3
    
    
    
    
    589.4
    
    
    
    605.9Selling, general and administrative expenses
    
    
    198.5
    
    
    
    199.0
    
    
    
    
    575.1
    
    
    
    556.0Store pre-opening and closing costs
    
    
    3.0
    
    
    
    8.5
    
    
    
    
    11.1
    
    
    
    17.4Depreciation and amortization
    
    
    12.6
    
    
    
    10.5
    
    
    
    
    36.5
    
    
    
    31.1Operating profit (loss)
    
    
    5.0
    
    
    
    (1.7
    )
    
    
    
    (33.3
    )
    
    
    1.4Interest expense, net
    
    
    4.9
    
    
    
    4.1
    
    
    
    
    12.3
    
    
    
    8.7Income (loss) before income taxes
    
    
    0.1
    
    
    
    (5.8
    )
    
    
    
    (45.6
    )
    
    
    (7.3
    )Income tax provision (benefit)
    
    
    
    
    
    
    (1.7
    )
    
    
    
    (16.9
    )
    
    
    (2.3
    )Income (loss) before cumulative effect of accounting
change
    
    
    0.1
    
    
    
    (4.1
    )
    
    
    
    (28.7
    )
    
    
    (5.0
    )Cumulative effect of change in accounting principle,
net
of tax
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    Net income (loss)
    
    $
    0.1
    
    
    $
    (4.1
    )
    
    
    $
    (27.7
    )
    
    $
    (5.0
    )Income (loss) per common share  basic:Income (loss) before cumulative effect of
accounting
change
    
    $
    
    
    
    $
    (0.18
    )
    
    
    $
    (1.22
    )
    
    $
    (0.22
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    Net income (loss)
    
    $
    
    
    
    $
    (0.18
    )
    
    
    $
    (1.18
    )
    
    $
    (0.22
    )Income (loss) per common share  diluted:Income (loss) before cumulative effect of
accounting
change
    
    $
    
    
    
    $
    (0.18
    )
    
    
    $
    (1.22
    )
    
    $
    (0.22
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    Net income (loss)
    
    $
    
    
    
    $
    (0.18
    )
    
    
    $
    (1.18
    )
    
    $
    (0.22
    )Weighted average shares outstanding (in thousands):Basic
    
    
    23,548
    
    
    
    22,703
    
    
    
    
    23,442
    
    
    
    22,589Diluted
    
    
    23,986
    
    
    
    22,703
    
    
    
    
    23,442
    
    
    
    22,589
  2




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Jo-Ann Stores, Inc.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Thirty-Nine Weeks EndedOctober 28,
    
    October 29,2006
    
    2005(Dollars in millions)Net cash flows provided by (used for) operating activities:Net loss
    
    $
    (27.7
    )
    
    $
    (5.0
    )Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    36.5
    
    
    
    31.1Stock-based compensation expense
    
    
    5.5
    
    
    
    1.2Cumulative effect of change in accounting principle
    
    
    (1.0
    )
    
    
    Tax benefit on stock-based compensation plan awards
    
    
    
    
    
    
    1.0Amortization of deferred financing costs
    
    
    0.7
    
    
    
    0.7Loss on disposal of fixed assets
    
    
    1.0
    
    
    
    1.4Changes in operating assets and liabilities:Increase in inventories
    
    
    (21.1
    )
    
    
    (214.4
    )Decrease (increase) in prepaid expenses and other current assets
    
    
    9.7
    
    
    
    (2.2
    )Increase in accounts payable
    
    
    39.6
    
    
    
    35.9Decrease in accrued expenses
    
    
    (25.4
    )
    
    
    (35.3
    )Increase in lease obligations, net
    
    
    3.6
    
    
    
    24.8(Decrease) increase in other long-term liabilities
    
    
    (0.1
    )
    
    
    1.2Other, net
    
    
    (1.0
    )
    
    
    (0.3
    )Net cash provided by (used for) operating activities
    
    
    20.3
    
    
    
    (159.9
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (42.7
    )
    
    
    (91.8
    )Net proceeds from sale-leaseback transaction
    
    
    24.7
    
    
    
    Net cash used for investing activities
    
    
    (18.0
    )
    
    
    (91.8
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    (3.4
    )
    
    
    190.0Proceeds from stock-based compensation plans
    
    
    3.1
    
    
    
    5.5Other, net
    
    
    1.0
    
    
    
    0.7Net cash provided by financing activities
    
    
    0.7
    
    
    
    196.2Net increase (decrease) in cash and cash equivalents
    
    
    3.0
    
    
    
    (55.5
    )Cash and cash equivalents at beginning of period
    
    
    17.9
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    20.9
    
    
    $
    24.1Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    13.7
    
    
    $
    8.8Income taxes, net of refunds
    
    
    5.3
    
    
    
    26.9
  3




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Notes to Consolidated Financial Statements (Unaudited)
 Jo-Ann Stores, Inc
 Note 1  Basis of Presentation
     Note 2  StockBased Compensation
   4




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Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedOctober 28,
    
    October 29,
    
    October 28,
    
    October 29,Dollars in millions
    
    2006
    
    2005
    
    2006
    
    2005Stock option compensation expense (a)
    
    $
    1.5
    
    
    $
    0.2
    
    
    $
    2.8
    
    
    $
    1.7Restricted stock award amortization
    
    
    0.7
    
    
    
    (2.0
    )
    
    
    2.7
    
    
    
    (0.5
    )$
    2.2
    
    
    $
    (1.8
    )
    
    $
    5.5
    
    
    $
    1.2
 (a)
    
    Included within stock option compensation expense is expense related to the employee stock
purchase plan (the Associate Stock Ownership Plan or ASOP). The associated expense is not
significant.
 Stock Options
   5




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##### Table of Contents



Thirty-Nine Weeks EndedOctober 28,
    
    October 29,2006
    
    2005Weighted average fair value of options granted
    
    $
    5.68
    
    
    $
    11.88Expected volatility of underlying stock
    
    
    .436 to .584
    
    
    
    .532 to .568Risk-free interest rates
    
    4.2% to 5.2%
    
    3.5% to 4.4%Expected life
    
    
    2.2 to 5.2 years
    
    
    4 yearsExpected life  Employee Stock Purchase
Program
    
    6 months
    
    6 months
  Weighted-Average
    
    Weighted-Average
    
    AggregateNumber of
    
    Exercise Price
    
    Remaining
    
    IntrinsicOptions
    
    Per Option
    
    Contractual Term
    
    ValueaOutstanding at January 28, 2006
    
    
    2,051,912
    
    
    $
    15.66Granted
    
    
    276,750
    
    
    
    14.44Exercised
    
    
    (73,600
    )
    
    
    12.18Cancelled
    
    
    (456,302
    )
    
    
    16.36Outstanding at October 28, 2006
    
    
    1,798,760
    
    
    $
    15.43
    
    
    4.2 years
    
    $
    7,544,456Expected to vest
    
    
    1,717,910
    
    
    $
    15.49
    
    
    4.1 years
    
    $
    7,193,752Exercisable at October 28, 2006
    
    
    1,071,566
    
    
    $
    14.61
    
    
    3.2 years
    
    $
    5,163,799
 (a)
    
    The intrinsic value of a stock option is the amount by which the fair value of the
underlying stock exceeds the exercise price of the option.
  Restricted Stock Awards
  Restricted Stock  Time-Based Awards
  6




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##### Table of Contents



Weighted-Number of
    
    Average GrantShares
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    661,910
    
    
    $
    20.83Granted
    
    
    410,920
    
    
    
    13.95Vested
    
    
    (30,656
    )
    
    
    18.46Cancelled
    
    
    (298,463
    )
    
    
    20.36Outstanding at October 28, 2006
    
    
    743,711
    
    
    $
    17.31
   Restricted Stock  Performance-Based Awards
   Weighted-Number of
    
    Average GrantShares
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    801,600
    
    
    $
    29.00Granted
    
    
    134,500
    
    
    
    14.05Cancelled
    
    
    (369,900
    )
    
    
    28.93Outstanding at October 28, 2006
    
    
    566,200
    
    
    $
    25.49Expected to Vest
    
    
    
    
    
    $
    
  7




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##### Table of Contents



Employee Stock Purchase Program
  Note 3  Earnings Per Share
   Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedOctober 28,
    
    October 29,
    
    October 28,
    
    October 29,2006
    
    2005
    
    2006
    
    2005Weighted average shares outstanding:Basic common shares
    
    
    23,548
    
    
    
    22,703
    
    
    
    23,442
    
    
    
    22,589Incremental shares from assumed
exercise of stock options
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    Incremental restricted shares
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    Diluted common shares
    
    
    23,986
    
    
    
    22,703
    
    
    
    23,442
    
    
    
    22,589
   8




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Note 4  Shareholders Equity
  CommonNet
    
    
    
    
    
    
    Stock
    
    AdditionalCommon
    
    Treasury
    
    
    Stated
    
    Paid-In
    
    TreasuryShares
    
    Shares
    
    
    Value
    
    Capital
    
    Stock(Shares in thousands)
    
    
    (Dollars in millions)Balance, January 28, 2006
    
    
    23,375
    
    
    
    3,675
    
    
    
    $
    1.4
    
    
    $
    165.4
    
    
    $
    (44.0
    )Exercise of stock options
    
    
    73
    
    
    
    (12
    )
    
    
    
    
    
    
    
    0.8
    
    
    
    0.1Purchase of common stock
    
    
    (7
    )
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuance of treasury shares
    
    
    96
    
    
    
    (96
    )
    
    
    
    
    
    
    
    0.7
    
    
    
    0.6Associate stock ownership plan
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    Stock-based compensation
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    
    5.5
    
    
    
    Cumulative effect of change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    Year-to-date activity
    
    
    322
    
    
    
    (101
    )
    
    
    
    
    
    
    
    7.6
    
    
    
    0.6Balance, October 28, 2006
    
    
    23,697
    
    
    
    3,574
    
    
    
    $
    1.4
    
    
    $
    173.0
    
    
    $
    (43.4
    )
  Note 5  Sale-Leaseback Transaction
   Note 6  Recent Accounting Pronouncements
 Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
  9




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Statement of Financial Accounting Standards No. 157, Fair Value Measurements
  FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of
FASB Statement No. 109
  10




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Note 7  Consolidating Financial Statements (Unaudited)
   Consolidating Balance Sheets  October 28, 2006
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    18.0
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    20.9Inventories
    
    
    231.2
    
    
    
    304.6
    
    
    
    
    
    
    
    535.8Deferred income taxes
    
    
    27.6
    
    
    
    10.4
    
    
    
    
    
    
    
    38.0Prepaid expenses and other current assets
    
    
    16.2
    
    
    
    9.3
    
    
    
    
    
    
    
    25.5Total current assets
    
    
    293.0
    
    
    
    327.2
    
    
    
    
    
    
    
    620.2Property, equipment and leasehold improvements,
net
    
    
    146.7
    
    
    
    167.0
    
    
    
    
    
    
    
    313.7Other assets
    
    
    8.3
    
    
    
    1.5
    
    
    
    
    
    
    
    9.8Investment in subsidiaries
    
    
    45.6
    
    
    
    
    
    
    
    (45.6
    )
    
    
    Intercompany receivable
    
    
    404.3
    
    
    
    
    
    
    
    (404.3
    )
    
    
    Total assets
    
    $
    897.9
    
    
    $
    495.7
    
    
    $
    (449.9
    )
    
    $
    943.7Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    172.7
    
    
    $
    13.5
    
    
    $
    
    
    
    $
    186.2Accrued expenses
    
    
    83.0
    
    
    
    (13.7
    )
    
    
    
    
    
    
    69.3Total current liabilities
    
    
    255.7
    
    
    
    (0.2
    )
    
    
    
    
    
    
    255.5Long-term debt
    
    
    200.3
    
    
    
    
    
    
    
    
    
    
    
    200.3Deferred income taxes
    
    
    6.5
    
    
    
    16.7
    
    
    
    
    
    
    
    23.2Lease obligations and other long-term liabilities
    
    
    55.5
    
    
    
    29.3
    
    
    
    
    
    
    
    84.8Intercompany payable
    
    
    
    
    
    
    404.3
    
    
    
    (404.3
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    173.0
    
    
    
    
    
    
    
    
    
    
    
    173.0Retained earnings
    
    
    248.9
    
    
    
    45.6
    
    
    
    (45.6
    )
    
    
    248.9423.3
    
    
    
    45.6
    
    
    
    (45.6
    )
    
    
    423.3Treasury stock, at cost
    
    
    (43.4
    )
    
    
    
    
    
    
    
    
    
    
    (43.4
    )Total shareholders equity
    
    
    379.9
    
    
    
    45.6
    
    
    
    (45.6
    )
    
    
    379.9Total liabilities and shareholders equity
    
    $
    897.9
    
    
    $
    495.7
    
    
    $
    (449.9
    )
    
    $
    943.7
 11




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Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Balance Sheets
January 28, 2006
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15.5
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    17.9Inventories
    
    
    194.2
    
    
    
    320.5
    
    
    
    
    
    
    
    514.7Deferred income taxes
    
    
    27.6
    
    
    
    10.4
    
    
    
    
    
    
    
    38.0Prepaid expenses and other current assets
    
    
    21.5
    
    
    
    13.7
    
    
    
    
    
    
    
    35.2Total current assets
    
    
    258.8
    
    
    
    347.0
    
    
    
    
    
    
    
    605.8Property, equipment and leasehold improvements,
net
    
    
    155.2
    
    
    
    176.5
    
    
    
    
    
    
    
    331.7Other assets
    
    
    7.8
    
    
    
    1.5
    
    
    
    
    
    
    
    9.3Investment in subsidiaries
    
    
    62.7
    
    
    
    
    
    
    
    (62.7
    )
    
    
    Intercompany receivable
    
    
    397.8
    
    
    
    
    
    
    
    (397.8
    )
    
    
    Total assets
    
    $
    882.3
    
    
    $
    525.0
    
    
    $
    (460.5
    )
    
    $
    946.8Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    117.6
    
    
    $
    29.0
    
    
    $
    
    
    
    $
    146.6Accrued expenses
    
    
    98.7
    
    
    
    (4.6
    )
    
    
    
    
    
    
    94.1Total current liabilities
    
    
    216.3
    
    
    
    24.4
    
    
    
    
    
    
    
    240.7Long-term debt
    
    
    203.7
    
    
    
    
    
    
    
    
    
    
    
    203.7Deferred income taxes
    
    
    6.5
    
    
    
    16.7
    
    
    
    
    
    
    
    23.2Lease obligations and other long-term liabilities
    
    
    56.4
    
    
    
    23.4
    
    
    
    
    
    
    
    79.8Intercompany payable
    
    
    
    
    
    
    397.8
    
    
    
    (397.8
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    165.4
    
    
    
    
    
    
    
    
    
    
    
    165.4Retained earnings
    
    
    276.6
    
    
    
    62.7
    
    
    
    (62.7
    )
    
    
    276.6443.4
    
    
    
    62.7
    
    
    
    (62.7
    )
    
    
    443.4Treasury stock, at cost
    
    
    (44.0
    )
    
    
    
    
    
    
    
    
    
    
    (44.0
    )Total shareholders equity
    
    
    399.4
    
    
    
    62.7
    
    
    
    (62.7
    )
    
    
    399.4Total liabilities and shareholders equity
    
    $
    882.3
    
    
    $
    525.0
    
    
    $
    (460.5
    )
    
    $
    946.8
 12




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##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Thirteen Weeks Ended October 28, 2006 and October 29, 2005
 October 28, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    256.6
    
    
    $
    361.7
    
    
    $
    (156.4
    )
    
    $
    461.9Cost of sales
    
    
    138.9
    
    
    
    260.3
    
    
    
    (156.4
    )
    
    
    242.8Gross margin
    
    
    117.7
    
    
    
    101.4
    
    
    
    
    
    
    
    219.1Selling, general and administrative expenses
    
    
    101.2
    
    
    
    97.3
    
    
    
    
    
    
    
    198.5Store pre-opening and closing costs
    
    
    1.5
    
    
    
    1.5
    
    
    
    
    
    
    
    3.0Depreciation and amortization
    
    
    6.1
    
    
    
    6.5
    
    
    
    
    
    
    
    12.6Operating profit (loss)
    
    
    8.9
    
    
    
    (3.9
    )
    
    
    
    
    
    
    5.0Interest expense, net
    
    
    1.9
    
    
    
    3.0
    
    
    
    
    
    
    
    4.9Income (loss) before income taxes
    
    
    7.0
    
    
    
    (6.9
    )
    
    
    
    
    
    
    0.1Income tax provision (benefit)
    
    
    2.5
    
    
    
    (2.5
    )
    
    
    
    
    
    
    Income (loss) before equity loss
    
    
    4.5
    
    
    
    (4.4
    )
    
    
    
    
    
    
    0.1Equity loss from subsidiaries
    
    
    (4.4
    )
    
    
    
    
    
    
    4.4
    
    
    
    Net income (loss)
    
    $
    0.1
    
    
    $
    (4.4
    )
    
    $
    4.4
    
    
    $
    0.1
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    260.9
    
    
    $
    418.3
    
    
    $
    (205.0
    )
    
    $
    474.2Cost of sales
    
    
    173.8
    
    
    
    289.1
    
    
    
    (205.0
    )
    
    
    257.9Gross margin
    
    
    87.1
    
    
    
    129.2
    
    
    
    
    
    
    
    216.3Selling, general and administrative expenses
    
    
    92.4
    
    
    
    106.6
    
    
    
    
    
    
    
    199.0Store pre-opening and closing costs
    
    
    5.9
    
    
    
    2.6
    
    
    
    
    
    
    
    8.5Depreciation and amortization
    
    
    5.3
    
    
    
    5.2
    
    
    
    
    
    
    
    10.5Operating (loss) profit
    
    
    (16.5
    )
    
    
    14.8
    
    
    
    
    
    
    
    (1.7
    )Interest expense, net
    
    
    1.3
    
    
    
    2.8
    
    
    
    
    
    
    
    4.1(Loss) income before income taxes
    
    
    (17.8
    )
    
    
    12.0
    
    
    
    
    
    
    
    (5.8
    )Income tax (benefit) provision
    
    
    (3.4
    )
    
    
    1.7
    
    
    
    
    
    
    
    (1.7
    )(Loss) income before equity income
    
    
    (14.4
    )
    
    
    10.3
    
    
    
    
    
    
    
    (4.1
    )Equity income from subsidiaries
    
    
    10.3
    
    
    
    
    
    
    
    (10.3
    )
    
    
    Net (loss) income
    
    $
    (4.1
    )
    
    $
    10.3
    
    
    $
    (10.3
    )
    
    $
    (4.1
    )
 13




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##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005
 October 28, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    692.2
    
    
    $
    943.2
    
    
    $
    (385.6
    )
    
    $
    1,249.8Cost of sales
    
    
    389.6
    
    
    
    656.4
    
    
    
    (385.6
    )
    
    
    660.4Gross margin
    
    
    302.6
    
    
    
    286.8
    
    
    
    
    
    
    
    589.4Selling, general and administrative expenses
    
    
    292.6
    
    
    
    282.5
    
    
    
    
    
    
    
    575.1Store pre-opening and closing costs
    
    
    5.1
    
    
    
    6.0
    
    
    
    
    
    
    
    11.1Depreciation and amortization
    
    
    18.3
    
    
    
    18.2
    
    
    
    
    
    
    
    36.5Operating loss
    
    
    (13.4
    )
    
    
    (19.9
    )
    
    
    
    
    
    
    (33.3
    )Interest expense, net
    
    
    5.1
    
    
    
    7.2
    
    
    
    
    
    
    
    12.3Loss before income taxes
    
    
    (18.5
    )
    
    
    (27.1
    )
    
    
    
    
    
    
    (45.6
    )Income tax benefit
    
    
    (6.9
    )
    
    
    (10.0
    )
    
    
    
    
    
    
    (16.9
    )Loss before equity loss &
cumulative effect
    
    
    (11.6
    )
    
    
    (17.1
    )
    
    
    
    
    
    
    (28.7
    )Equity loss from subsidiaries
    
    
    (17.1
    )
    
    
    
    
    
    
    17.1
    
    
    
    Loss before cumulative effect
    
    
    (28.7
    )
    
    
    (17.1
    )
    
    
    17.1
    
    
    
    (28.7
    )Cumulative effect of accounting change, net
of tax
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Net loss
    
    $
    (27.7
    )
    
    $
    (17.1
    )
    
    $
    17.1
    
    
    $
    (27.7
    )
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    699.9
    
    
    $
    1,084.4
    
    
    $
    (505.6
    )
    
    $
    1,278.7Cost of sales
    
    
    447.1
    
    
    
    731.3
    
    
    
    (505.6
    )
    
    
    672.8Gross margin
    
    
    252.8
    
    
    
    353.1
    
    
    
    
    
    
    
    605.9Selling, general and administrative expenses
    
    
    273.3
    
    
    
    282.7
    
    
    
    
    
    
    
    556.0Store pre-opening and closing costs
    
    
    12.2
    
    
    
    5.2
    
    
    
    
    
    
    
    17.4Depreciation and amortization
    
    
    15.1
    
    
    
    16.0
    
    
    
    
    
    
    
    31.1Operating (loss) profit
    
    
    (47.8
    )
    
    
    49.2
    
    
    
    
    
    
    
    1.4Interest expense, net
    
    
    3.1
    
    
    
    5.6
    
    
    
    
    
    
    
    8.7(Loss) income before income taxes
    
    
    (50.9
    )
    
    
    43.6
    
    
    
    
    
    
    
    (7.3
    )Income tax (benefit) provision
    
    
    (16.0
    )
    
    
    13.7
    
    
    
    
    
    
    
    (2.3
    )(Loss) income before equity income
    
    
    (34.9
    )
    
    
    29.9
    
    
    
    
    
    
    
    (5.0
    )Equity income from subsidiaries
    
    
    29.9
    
    
    
    
    
    
    
    (29.9
    )
    
    
    Net (loss) income
    
    $
    (5.0
    )
    
    $
    29.9
    
    
    $
    (29.9
    )
    
    $
    (5.0
    )
 14




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##### Table of Contents



Note 7  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows
Thirty-Nine Weeks Ended October 28, 2006 and October 29, 2005
 October 28, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    14.8
    
    
    $
    5.5
    
    
    $
    
    
    
    $
    20.3Net cash flows used for investing activities:Capital expenditures
    
    
    (13.0
    )
    
    
    (29.7
    )
    
    
    
    
    
    
    (42.7
    )Net proceeds from sale-leaseback transaction
    
    
    
    
    
    
    24.7
    
    
    
    
    
    
    
    24.7Net cash used for investing activities
    
    
    (13.0
    )
    
    
    (5.0
    )
    
    
    
    
    
    
    (18.0
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Proceeds from stock-based compensation plans
    
    
    3.1
    
    
    
    
    
    
    
    
    
    
    
    3.1Other, net
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Net cash provided by financing activities
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Net increase in cash and cash equivalents
    
    
    2.5
    
    
    
    0.5
    
    
    
    
    
    
    
    3.0Cash and cash equivalents at beginning of period
    
    
    15.5
    
    
    
    2.4
    
    
    
    
    
    
    
    17.9Cash and cash equivalents at end of period
    
    $
    18.0
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    20.9
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (206.2
    )
    
    $
    46.3
    
    
    $
    
    
    
    $
    (159.9
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (45.9
    )
    
    
    (45.9
    )
    
    
    
    
    
    
    (91.8
    )Net cash used for investing activities
    
    
    (45.9
    )
    
    
    (45.9
    )
    
    
    
    
    
    
    (91.8
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    190.0
    
    
    
    
    
    
    
    
    
    
    
    190.0Proceeds from stock-based compensation plans
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    5.5Other, net
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Net cash provided by financing activities
    
    
    196.2
    
    
    
    
    
    
    
    
    
    
    
    196.2Net (decrease) increase in cash and cash equivalents
    
    
    (55.9
    )
    
    
    0.4
    
    
    
    
    
    
    
    (55.5
    )Cash and cash equivalents at beginning of period
    
    
    76.6
    
    
    
    3.0
    
    
    
    
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    20.7
    
    
    $
    3.4
    
    
    $
    
    
    
    $
    24.1
 15




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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 Fabric and Craft Jo-Ann
   Executive Overview
  16




---



##### Table of Contents




    
    Net sales decreased 2.6% to $461.9 million from $474.2 million in the prior
year. Same-store sales decreased 5.4% versus a 0.7% same-store sales increase for the
third quarter last year. The decline in same-store sales was related to a decrease in
customer transactions, as average ticket was consistent with the prior year. The decrease
in customer transactions was driven by lower customer traffic, in part, due to reduced
newspaper ad inserts compared with last year. The conversion rate for the quarter was
consistent with the prior year third quarter, which is an improvement over the negative
trend we experienced in the first half of the year.
 
    
    Our gross margin rate increased by 180 basis points, to 47.4% of net sales
this quarter versus 45.6% for the third quarter last year. The increase is due to a less
promotional pricing strategy, better sell-through on seasonal goods and reduced sales of
clearance inventory.
 
    
    Our SG&A, excluding those expenses separately identified in the statement of
operations, increased 100 basis points to 43.0% of net sales from 42.0% of net sales in the
third quarter last year. While total SG&A expense dollars are below last year spending
levels, the increase as a percentage of net sales is due to the lack of leverage resulting
from lower sales. SG&A expenses also include $2.0 million of severance-related costs
associated with 40 additional head count reductions at our store support center.
  
    
    Store pre-opening and closing costs decreased $5.5 million for the third
quarter of fiscal 2007 to $3.0 million, compared with $8.5 million in the third quarter
last year, due to fewer store openings and closings year-over-year.
 
    
    Third quarter net income was $0.1 million or $0.00 per diluted share, versus a
net loss of $4.1 million or $(0.18) per diluted share in the third quarter last year.
 
    
    During the third quarter, we completed a sale-leaseback transaction of our
distribution center located in Visalia, California. We sold the facility to an independent
third party for approximately $24.7 million, and have leased the facility back from the
purchaser. The initial term of the lease is for 20 years and can be automatically renewed
for eight consecutive five-year renewal terms unless we provide notice of non-renewal. A
gain of $1.5 million on the sale of the facility was deferred and is being amortized as a
reduction of rent expense over the initial term of 20 years.
 Results of Operations
  17




---



##### Table of Contents



Percentage of Net SalesThirteen
    
    Thirty-NineWeeks Ended
    
    Weeks EndedOctober 28,
    
    October 29,
    
    October 28,
    
    October 29,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    47.4
    %
    
    
    45.6
    %
    
    
    47.2
    %
    
    
    47.4
    %Selling, general and
administrative expenses
    
    
    43.0
    %
    
    
    42.0
    %
    
    
    46.0
    %
    
    
    43.5
    %Store pre-opening and closing costs
    
    
    0.6
    %
    
    
    1.8
    %
    
    
    0.9
    %
    
    
    1.4
    %Depreciation and amortization
    
    
    2.7
    %
    
    
    2.2
    %
    
    
    3.0
    %
    
    
    2.4
    %Operating profit (loss)
    
    
    1.1
    %
    
    
    (0.4
    )%
    
    
    (2.7
    )%
    
    
    0.1
    %
 Comparison of the Thirteen Weeks Ended October 28, 2006 to October 29, 2005
 Net Sales .
   Gross Margin.
 18




---



##### Table of Contents



Selling, general and administrative expenses.
 Share-Based
Payment,
 Store pre-opening and closing costs.
  Depreciation and amortization.
 Interest expense.
 Income taxes.
 19




---



##### Table of Contents



Comparison of the Thirty-Nine Weeks Ended October 28, 2006 to October 29, 2005
 Net Sales .
   Gross Margin.
 Selling, general and administrative expenses.
 20
    Table of Contents    Store pre-opening and closing costs.
  Depreciation and amortization.
 Interest expense.
 Income taxes.
 Cumulative effect of change in accounting principle.
 21




---



##### Table of Contents



Liquidity and Capital Resources
     Dollars in millions
    
    2007
    
    2006Net cash provided by (used for) operating activities
    
    $
    20.3
    
    
    $
    (159.9
    )Net cash used for investing activities
    
    
    (18.0
    )
    
    
    (91.8
    )Net cash provided by financing activities
    
    
    0.7
    
    
    
    196.2Net increase (decrease) in cash and cash equivalents
    
    $
    3.0
    
    
    $
    (55.5
    )Ending cash and cash equivalents
    
    $
    20.9
    
    
    $
    24.1
 Net cash provided by (used for) operating activities
   22




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##### Table of Contents



Net cash used for investing activities
  Thirty-Nine Weeks EndedOctober 28,
    
    
    October 29,Dollars in millions
    
    2006
    
    
    2005Cash
    
    $
    30.8
    
    
    $
    76.5Cash  landlord reimbursed
    
    
    11.9
    
    
    
    15.3Total
    
    $
    42.7
    
    
    $
    91.8
   Net cash provided by financing activities
  23




---



##### Table of Contents



Off-Balance Sheet Transactions
   Business Outlook
  
    
    Same-store sales decline in the fourth quarter, improving slightly from
year-to-date results;
    
    Gross margin rate improvement for the full year of 70 to 90 basis points in
fiscal 2007 from fiscal 2006;
    
    Selling, general and administrative expenses for the full year, excluding the
former chief executive officer separation expenses, to increase 95 to 110 basis points as a
percentage of net sales from fiscal 2006;
    
    Capital spending for the full year of $43 to $45 million, net of the landlord
allowances received, primarily related to the opening of the 26 new stores; and
    
    Strengthening of the balance sheet through inventory reduction of $50 to $55
million as of the end of the fiscal year, and a resulting debt reduction by fiscal year end
of $75 to $85 million, which includes $25 million of proceeds received from our
sale-leaseback of our Visalia distribution center completed during the third quarter this
year.
  Seasonality and Inflation
  24




---



##### Table of Contents



Critical Accounting Policies
  Cautionary Statement Concerning Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  25




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##### Table of Contents



Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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 or
    
    Under the Plans orPurchased
    
    per Share
    
    Programs
    
    ProgramsJuly 30  August 26, 2006
    
    
    
    
    
    $
    
    
    
    
    905,544
    
    
    
    1,244,456August 27  Sept. 30, 2006
    
    
    472
    
    
    $
    15.94
    
    
    
    906,016
    
    
    
    1,243,984October 128, 2006
    
    
    
    
    
    $
    
    
    
    
    906,016
    
    
    
    1,243,984Total
    
    
    472
    
    
    $
    15.94
    
    
    
    906,016
    
    
    
    1,243,984
  26




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 No.
    
    Exhibit Description10.1
    
    
    Lease Agreement, dated as of October 19, 2006, between BPVisalia LLC,
as Landlord, and Jo-Ann Stores Supply Chain Management, Inc., as
Tenant (incorporated by reference to Exhibit 10.1 of Form 8-K, filed
with the Securities and Exchange Commission on October 25, 2006)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
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##### Table of Contents



SIGNATURES
  JO-ANN STORES, INC.DATE: December 7, 2006
    /s/ Darrell WebbDarrell Webb,President and Chief Executive Officer/s/ James KerrJames Kerr,Executive Vice President and Chief Financial Officer 28