##### Table of Contents



United States
Securities and Exchange Commission WASHINGTON, D.C. 20549
   Form
10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 30, 2005 Commission File No. 1-6695   Jo-Ann Stores, Inc.  Ohio
    
    34-0720629(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)5555 Darrow Road, Hudson, Ohio
    
    44236(Address of principal executive offices)
    
    (Zip Code)
 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 1,
2005: 23,093,643




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Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended April 30, 2005EX-31.1 Section 302 Certification by CEOEX-31.2 Section 302 Certification by CFOEX-32.1 Section 906 Certification of PEO and PFO
  Page NumbersPart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  April 30, 2005 (Unaudited), January 29, 2005 and May 1, 2004 (Unaudited)
    
    
    1Unaudited Consolidated Statements of Operations for the Thirteen Weeks Ended April 30, 2005 and May 1, 2004
    
    
    2Unaudited Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 30, 2005 and May 1, 2004
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II. Other InformationItem 1. Legal Proceedings
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    21




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Jo-Ann Stores, Inc. 
 Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)April 30,
    
    
    January 29,
    
    
    May 1,2005
    
    
    2005
    
    
    2004(Restated)(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    43.2
    
    
    $
    79.6
    
    
    $
    15.2Inventories
    
    
    446.4
    
    
    
    439.7
    
    
    
    420.1Deferred income taxes
    
    
    21.3
    
    
    
    21.3
    
    
    
    21.7Prepaid expenses and other current assets
    
    
    20.7
    
    
    
    22.3
    
    
    
    24.1Total current assets
    
    
    531.6
    
    
    
    562.9
    
    
    
    481.1Property, equipment and leasehold improvements, net
    
    
    238.8
    
    
    
    238.0
    
    
    
    221.0Goodwill, net
    
    
    27.1
    
    
    
    27.1
    
    
    
    26.5Other assets
    
    
    11.4
    
    
    
    11.3
    
    
    
    10.1Total assets
    
    $
    808.9
    
    
    $
    839.3
    
    
    $
    738.7Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    153.2
    
    
    $
    167.2
    
    
    $
    142.3Accrued expenses
    
    
    59.9
    
    
    
    91.6
    
    
    
    61.2Total current liabilities
    
    
    213.1
    
    
    
    258.8
    
    
    
    203.5Long-term debt
    
    
    100.0
    
    
    
    100.0
    
    
    
    106.6Deferred income taxes
    
    
    27.6
    
    
    
    27.6
    
    
    
    32.9Lease obligations and other long-term liabilities
    
    
    49.8
    
    
    
    44.0
    
    
    
    39.2Shareholders equity:Preferred stock, no par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    
    
    
    
    Common stock, stated value $0.05 per share; 150,000,000 authorized,
issued 26,458,708; 26,321,934 and 26,003,933 shares, respectively
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Additional paid-in capital
    
    
    157.4
    
    
    
    151.8
    
    
    
    139.0Retained earnings
    
    
    303.8
    
    
    
    299.6
    
    
    
    260.1Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (1.2
    )462.5
    
    
    
    452.7
    
    
    
    399.2Treasury stock, at cost, 3,734,217; 3,737,407 and 3,763,993
shares, respectively
    
    
    (44.1
    )
    
    
    (43.8
    )
    
    
    (42.7
    )Total shareholders equity
    
    
    418.4
    
    
    
    408.9
    
    
    
    356.5Total liabilities and shareholders equity
    
    $
    808.9
    
    
    $
    839.3
    
    
    $
    738.7
 See notes to unaudited consolidated financial statements 1




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Jo-Ann Stores, Inc. 
 Consolidated Statements of Operations
 (Unaudited)
 Thirteen Weeks EndedApril 30,
    
    
    May 1,2005
    
    
    2004(Restated)(Dollars in millions, exceptshare and per share data)Net sales
    
    $
    420.7
    
    
    $
    404.9Cost of sales
    
    
    215.9
    
    
    
    205.9Gross margin
    
    
    204.8
    
    
    
    199.0Selling, general and administrative expenses
    
    
    177.9
    
    
    
    164.8Store pre-opening and closing costs
    
    
    4.9
    
    
    
    3.2Depreciation and amortization
    
    
    10.5
    
    
    
    10.3Stock-based compensation expense
    
    
    2.7
    
    
    
    2.0Debt repurchase expenses
    
    
    
    
    
    
    4.2Operating profit
    
    
    8.8
    
    
    
    14.5Interest expense, net
    
    
    2.1
    
    
    
    3.6Income before income taxes
    
    
    6.7
    
    
    
    10.9Income tax provision
    
    
    2.5
    
    
    
    4.2Net income
    
    $
    4.2
    
    
    $
    6.7Net income per common share  basic
    
    $
    0.19
    
    
    $
    0.31Net income per common share  diluted
    
    $
    0.18
    
    
    $
    0.30Weighted average shares outstanding (in thousands):Basic
    
    
    22,479
    
    
    
    21,817Diluted
    
    
    23,208
    
    
    
    22,680
 See notes to unaudited consolidated financial statements 2




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Jo-Ann Stores, Inc. 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Thirteen Weeks EndedApril 30,
    
    
    May 1,2005
    
    
    2004(Restated)(Dollars in millions)Net cash flows (used for) provided by operating activities:Net income
    
    $
    4.2
    
    
    $
    6.7Adjustments to reconcile net income to net cash
(used for) provided by operating activities:Depreciation and amortization
    
    
    10.5
    
    
    
    10.3Stock-based compensation expense
    
    
    2.7
    
    
    
    2.0Tax benefit on stock-based compensation plan awards
    
    
    0.4
    
    
    
    2.8Amortization of deferred financing costs
    
    
    0.2
    
    
    
    0.4Loss on disposal of fixed assets
    
    
    0.3
    
    
    
    0.2Loss associated with purchase of senior subordinated notes
    
    
    
    
    
    
    4.2Changes in operating assets and liabilities:Increase in inventories
    
    
    (6.7
    )
    
    
    (15.5
    )(Decrease) increase in accounts payable
    
    
    (14.0
    )
    
    
    20.3Decrease in accrued expenses
    
    
    (31.7
    )
    
    
    (14.9
    )Other, net
    
    
    7.1
    
    
    
    4.4Net cash (used for) provided by operating activities
    
    
    (27.0
    )
    
    
    20.9Net cash flows used for investing activities:Capital expenditures
    
    
    (11.6
    )
    
    
    (13.1
    )Net cash used for investing activities
    
    
    (11.6
    )
    
    
    (13.1
    )Net cash flows provided by (used for) financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    
    
    
    
    97.0Purchase of 10 3/8% senior subordinated notes
    
    
    
    
    
    
    (66.6
    )Net change in revolving credit facility
    
    
    
    
    
    
    (42.7
    )Proceeds from stock-based compensation plans
    
    
    2.2
    
    
    
    5.4Other, net
    
    
    
    
    
    
    (3.1
    )Net cash provided by (used for) financing activities
    
    
    2.2
    
    
    
    (10.0
    )Net decrease in cash and cash equivalents
    
    
    (36.4
    )
    
    
    (2.2
    )Cash and cash equivalents at beginning of period
    
    
    79.6
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    43.2
    
    
    $
    15.2Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4.2
    
    
    $
    4.0Income taxes, net of refunds
    
    
    19.7
    
    
    
    11.6
 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 the leading national fabric and
craft retailer operating 849 retail stores in 47 states at April 30, 2005. The 724 traditional
stores and 125 superstores feature a variety of competitively priced merchandise used in sewing,
crafting and home decorating projects, including fabrics, notions, yarn, crafts, scrapbooking
material, frames, artificial and dried flowers, home accents, finished seasonal and home décor
merchandise. 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 2006 refers to the year-ended January 28, 2006). 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 2005 year-end and interim financial statements have been
reclassified in order to conform to the current year presentation. See Note 2 Restatement of
Prior Financial Informationpertaining to the restatements for certain lease accounting
practices. The financial 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 29, 2005. 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 1, 2004 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 presentation of
the financial position and results of operations for the interim periods presented. 4




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Note 2  Restatement of Prior Financial Information As a result of a letter issued on February 7, 2005, by the Office of the Chief Accountant of
the Securities and Exchange Commission (SEC) to the Center for Public Company Audit Firms of
the American Institute of Certified Public Accountants, which clarified existing generally
accepted accounting principles applicable to leases and leasehold improvements, the Company
conducted an internal review of its lease accounting practices. After conducting this review, the
Company determined that its historical accounting for leases was not consistent with the
accounting principles described in the SECs letter. The Company has restated its financial
statements for prior periods to correct these errors. See Note 2  Restatement of Prior
Financial Information in the Companys Annual Report on
Form 10-K for the fiscal year-ended
January 29, 2005 for a complete discussion of this restatement. The following is a summary of the impact of the restatement on the Companys consolidated
balance sheet at May 1, 2004 and the consolidated statements of operations and cash flows for the
thirteen weeks ended May 1, 2004 (in millions, except per share data): (Unaudited)May 1, 2004BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedConsolidated Balance SheetProperty, equipment and leasehold improvements, net
    
    $
    201.5
    
    
    $
    19.5
    
    
    $
    221.0Total Assets
    
    
    722.3
    
    
    
    16.4
    
    
    
    738.7Deferred income taxes, net
    
    
    14.5
    
    
    
    (3.3
    )
    
    
    11.2Lease obligations and other long-term liabilities
    
    
    11.0
    
    
    
    28.2
    
    
    
    39.2Retained earnings
    
    
    265.5
    
    
    
    (5.4
    )
    
    
    260.1Total shareholders equity
    
    
    361.9
    
    
    
    (5.4
    )
    
    
    356.5Total liabilities and shareholders equity
    
    
    722.3
    
    
    
    16.4
    
    
    
    738.7
 Thirteen Weeks Ended May 1, 2004Consolidated Statements of OperationsSelling, general and administrative expenses
    
    $
    165.7
    
    
    
    ($0.9
    )
    
    $
    164.8Store pre-opening and closing costs
    
    
    2.9
    
    
    
    0.3
    
    
    
    3.2Depreciation and amortization
    
    
    9.7
    
    
    
    0.6
    
    
    
    10.3Operating profit
    
    
    14.5
    
    
    
    
    
    
    
    14.5Net income
    
    
    6.7
    
    
    
    
    
    
    
    6.7Basic net income per common share
    
    
    0.31
    
    
    
    
    
    
    
    0.31Diluted net income per common share
    
    $
    0.30
    
    
    
    
    
    
    $
    0.30Consolidated Statements of Cash FlowsNet cash provided by operating activities
    
    
    15.9
    
    
    
    5.0
    
    
    
    20.9Net cash used for investing activities
    
    
    (8.1
    )
    
    
    (5.0
    )
    
    
    (13.1
    )
 5




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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 impact of
dilutive stock-based awards assuming their exercise under the treasury stock method. The following table presents information necessary to calculate basic and diluted earnings
per common share (shares in thousands): Thirteen Weeks EndedApril 30,
    
    
    May 1,2005
    
    
    2004Weighted average shares outstanding:Basic common shares
    
    
    22,479
    
    
    
    21,817Incremental shares from assumed exercise of stock options
    
    
    579
    
    
    
    769Incremental restricted shares
    
    
    150
    
    
    
    94Diluted common shares
    
    
    23,208
    
    
    
    22,680
 Not included in the computation of diluted earnings per share were certain stock options
that would have been anti-dilutive to the earnings per share calculation. For the first quarter
of fiscal 2006 and fiscal 2005, 64,850 and 10,100 stock option awards, respectively, were
excluded. Note 4   Shareholders Equity During the first quarter of fiscal 2006, shares outstanding increased by 139,000 as follows: CommonNet
    
    
    
    
    
    
    
    Stock
    
    
    AdditionalCommon
    
    
    Treasury
    
    
    
    Stated
    
    
    Paid-In
    
    
    TreasuryShares
    
    
    Shares
    
    
    
    Value
    
    
    Capital
    
    
    Stock(Shares in thousands)
    
    
    
    (Dollars in millions)Balance, January 29, 2005
    
    
    22,585
    
    
    
    3,737
    
    
    
    $
    1.3
    
    
    $
    151.8
    
    
    $
    (43.8
    )Exercise of stock options
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    Purchase of common stock
    
    
    (14
    )
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Issuance of treasury shares
    
    
    17
    
    
    
    (17
    )
    
    
    
    
    
    
    
    0.3
    
    
    
    0.1Associate stock ownership plan
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Tax benefit on equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    Year-to-date activity
    
    
    139
    
    
    
    (3
    )
    
    
    
    
    
    
    
    5.6
    
    
    
    (0.3
    )Balance, April 30, 2005
    
    
    22,724
    
    
    
    3,734
    
    
    
    $
    1.3
    
    
    $
    157.4
    
    
    $
    (44.1
    )
 As of April 30, 2005, the Company had 2,212,527 stock options outstanding and 524,030
restricted stock awards issued and not yet vested, none of which are included in shares
outstanding. In accordance with Statement of Financial Accounting Standard (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, the Company designated the
interest rate swap agreement as a cash flow hedge and recognized the fair value of the interest
rate swap agreement on the balance sheet prior to April 30, 2005. Changes in the fair value of
this agreement were recorded in other comprehensive income and reclassified into earnings as the
underlying hedged item affected earnings. Other comprehensive income included the effects of derivative transactions accounted for
under SFAS No. 133, net of related tax, as of May 1, 2004. Comprehensive income consists of the
following: 6




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Thirteen Weeks EndedApril 30,
    
    
    May 1,Dollars in millions
    
    2005
    
    
    2004Net income
    
    $
    4.2
    
    
    $
    6.7Other comprehensive income, net of tax
    
    
    
    
    
    
    0.4Comprehensive income
    
    $
    4.2
    
    
    $
    7.1
 Note 5    Recent Accounting Pronouncements Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), Share-Based Payment In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised
2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123R was originally effective for public companies at the beginning of the
first interim or annual period beginning after June 15, 2005. However, in April 2005, the

Securities and Exchange Commission announced the adoption of a new rule that amends the compliance
dates for SFAS No. 123R. Accordingly, we will adopt SFAS No. 123R as of the beginning of our 2007
fiscal year which is January 29, 2006. We voluntarily adopted SFAS No. 123 at the beginning of
fiscal 2004 and began expensing the costs of stock options in our income statement. Currently, we
use the Black-Scholes option pricing model to estimate the value of stock options granted and are
evaluating option valuation models, including the Black-Scholes model, to determine which model we
will utilize upon adoption of SFAS No. 123R. We plan to adopt SFAS No. 123R using the
modified-prospective method. Any impact from the adoption of SFAS No. 123R will be recorded as a
cumulative effect of a change in accounting principle. The Company does not expect the adoption of
SFAS No. 123R to have a material impact on the Companys financial statements. 7




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Note 6   Consolidating Financial Statements (Unaudited) The Companys 7 1/2 percent senior subordinated notes and credit facility are fully and
unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the
Company. The senior subordinated notes are subordinated to the Companys credit facility. The
Company has restated its consolidated financial statements for changes in operating expenses and
depreciation expense for all previous years presented, due to revision of certain lease accounting
practices. Summarized consolidating financial information of the Company (excluding its subsidiaries) and
the guarantor subsidiaries as of April 30, 2005 and January 29, 2005 and for the thirteen weeks
ended April 30, 2005 and May 1, 2004 are as follows: Consolidating Balance SheetsApril 30, 2005 GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    40.6
    
    
    $
    2.6
    
    
    
    
    
    
    $
    43.2Inventories
    
    
    187.6
    
    
    
    258.8
    
    
    
    
    
    
    
    446.4Deferred income taxes
    
    
    16.5
    
    
    
    4.8
    
    
    
    
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    10.0
    
    
    
    10.7
    
    
    
    
    
    
    
    20.7Total current assets
    
    
    254.7
    
    
    
    276.9
    
    
    
    
    
    
    
    531.6Property, equipment and leasehold improvements,
net
    
    
    107.7
    
    
    
    131.1
    
    
    
    
    
    
    
    238.8Goodwill, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.9
    
    
    
    1.5
    
    
    
    
    
    
    
    11.4Investment in subsidiaries
    
    
    102.1
    
    
    
    
    
    
    
    (102.1
    )
    
    
    Intercompany receivable
    
    
    274.1
    
    
    
    
    
    
    
    (274.1
    )
    
    
    Total assets
    
    $
    748.5
    
    
    $
    436.6
    
    
    
    ($376.2
    )
    
    $
    808.9Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    149.7
    
    
    $
    3.5
    
    
    
    
    
    
    $
    153.2Accrued expenses
    
    
    42.1
    
    
    
    17.8
    
    
    
    
    
    
    
    59.9Total current liabilities
    
    
    191.8
    
    
    
    21.3
    
    
    
    
    
    
    
    213.1Long-term debt
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    100.0Deferred income taxes
    
    
    7.8
    
    
    
    19.8
    
    
    
    
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    30.5
    
    
    
    19.3
    
    
    
    
    
    
    
    49.8Intercompany payable
    
    
    
    
    
    
    274.1
    
    
    
    (274.1
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    157.4
    
    
    
    
    
    
    
    
    
    
    
    157.4Retained earnings
    
    
    303.8
    
    
    
    102.1
    
    
    
    (102.1
    )
    
    
    303.8Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462.5
    
    
    
    102.1
    
    
    
    (102.1
    )
    
    
    462.5Treasury stock, at cost
    
    
    (44.1
    )
    
    
    
    
    
    
    
    
    
    
    (44.1
    )Total shareholders equity
    
    
    418.4
    
    
    
    102.1
    
    
    
    (102.1
    )
    
    
    418.4Total liabilities and shareholders equity
    
    $
    748.5
    
    
    $
    436.6
    
    
    
    ($376.2
    )
    
    $
    808.9
 8




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##### Table of Contents



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




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED Consolidating Statements of OperationsThirteen Weeks Ended April 30, 2005 and May 1, 2004 April 30, 2005GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    230.6
    
    
    $
    346.9
    
    
    $
    (156.8
    )
    
    $
    420.7Cost of sales
    
    
    141.6
    
    
    
    231.1
    
    
    
    (156.8
    )
    
    
    215.9Gross margin
    
    
    89.0
    
    
    
    115.8
    
    
    
    
    
    
    
    204.8Selling, general and administrative expenses
    
    
    89.0
    
    
    
    88.9
    
    
    
    
    
    
    
    177.9Store pre-opening and closing costs
    
    
    3.4
    
    
    
    1.5
    
    
    
    
    
    
    
    4.9Depreciation and amortization
    
    
    4.8
    
    
    
    5.7
    
    
    
    
    
    
    
    10.5Stock-based compensation expense
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    2.7Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating profit (loss)
    
    
    (10.9
    )
    
    
    19.7
    
    
    
    
    
    
    
    8.8Interest expense, net
    
    
    0.9
    
    
    
    1.2
    
    
    
    
    
    
    
    2.1Income (loss) before income taxes
    
    
    (11.8
    )
    
    
    18.5
    
    
    
    
    
    
    
    6.7Income tax provision (benefit)
    
    
    (4.5
    )
    
    
    7.0
    
    
    
    
    
    
    
    2.5Income (loss) before equity income
    
    
    (7.3
    )
    
    
    11.5
    
    
    
    
    
    
    
    4.2Equity income from subsidiaries
    
    
    11.5
    
    
    
    
    
    
    
    (11.5
    )
    
    
    Net income
    
    $
    4.2
    
    
    $
    11.5
    
    
    $
    (11.5
    )
    
    $
    4.2
 May 1, 2004 (Restated)GuarantorParent
    
    
    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
    
    
    83.3
    
    
    
    81.5
    
    
    
    
    
    
    
    164.8Store pre-opening and closing costs
    
    
    1.1
    
    
    
    2.1
    
    
    
    
    
    
    
    3.2Depreciation and amortization
    
    
    4.4
    
    
    
    5.9
    
    
    
    
    
    
    
    10.3Stock-based compensation expense
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    2.0Debt repurchase expenses
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating profit (loss)
    
    
    (3.4
    )
    
    
    17.9
    
    
    
    
    
    
    
    14.5Interest expense, net
    
    
    1.6
    
    
    
    2.0
    
    
    
    
    
    
    
    3.6Income (loss) before income taxes
    
    
    (5.0
    )
    
    
    15.9
    
    
    
    
    
    
    
    10.9Income tax provision (benefit)
    
    
    (1.9
    )
    
    
    6.1
    
    
    
    
    
    
    
    4.2Income (loss) before equity income
    
    
    (3.1
    )
    
    
    9.8
    
    
    
    
    
    
    
    6.7Equity income from subsidiaries
    
    
    9.8
    
    
    
    
    
    
    
    (9.8
    )
    
    
    Net income
    
    $
    6.7
    
    
    $
    9.8
    
    
    $
    (9.8
    )
    
    $
    6.7
 10




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##### Table of Contents



Note 6   Consolidating Financial Statements (Unaudited)  CONTINUED Consolidating Statements of Cash FlowsThirteen Weeks Ended April 30, 2005 and May 1, 2004 April 30, 2005GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (32.4
    )
    
    $
    5.4
    
    
    $
    
    
    
    $
    (27.0
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (5.8
    )
    
    
    (5.8
    )
    
    
    
    
    
    
    (11.6
    )Net cash used for investing activities
    
    
    (5.8
    )
    
    
    (5.8
    )
    
    
    
    
    
    
    (11.6
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of 10 3/8% senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net change in revolving credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from stock-based compensation plans
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    2.2Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    2.2Net decrease in cash and cash equivalents
    
    
    (36.0
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (36.4
    )Cash and cash equivalents at beginning of period
    
    
    76.6
    
    
    
    3.0
    
    
    
    
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    40.6
    
    
    $
    2.6
    
    
    $
    
    
    
    $
    43.2
 May 1, 2004 (Restated)GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    11.2
    
    
    $
    9.7
    
    
    $
    
    
    
    $
    20.9Net cash flows used for investing activities:Capital expenditures
    
    
    (3.0
    )
    
    
    (10.1
    )
    
    
    
    
    
    
    (13.1
    )Net cash used for investing activities
    
    
    (3.0
    )
    
    
    (10.1
    )
    
    
    
    
    
    
    (13.1
    )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
    )Proceeds from stock-based compensation plans
    
    
    5.4
    
    
    
    
    
    
    
    
    
    
    
    5.4Other, net
    
    
    (3.1
    )
    
    
    
    
    
    
    
    
    
    
    (3.1
    )Net 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
 11




---



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This discussion provides the reader with information that will assist in an overall
understanding of our financial statements, changes in certain key indicators in those financial
statements from year to year, the factors that account for those changes and how certain accounting
principles have impacted our financial statements. This discussion should be read in conjunction
with the audited consolidated financial statements and notes to the consolidated financial
statements presented in our Annual Report on Form 10-K. The financial information presented for
fiscal 2005 has been restated to reflect the correction of an error in the accounting for leases,
as discussed in Restatement of Prior Financial Information in Note 2 to the notes to the
consolidated financial statements. In addition, the financial information presented for fiscal
2005 has been reclassified for certain amounts to conform to the fiscal 2006 presentation. General Overview 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, yarn, crafts,
scrapbooking material, frames, 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.
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 1.1 traditional stores for every superstore that we open. Our
superstores typically average over three times the revenues of the traditional stores they replace.
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 market share. As of April 30, 2005, we operated 849 stores in 47 states (724 traditional stores and 125
superstores). Our traditional stores offer a complete selection of fabric and a convenience
assortment of crafts, floral, finished seasonal and home décor merchandise. Our smaller
traditional stores average approximately 14,500 square feet and generated net sales per store of
approximately $1.6 million in fiscal 2005. Our superstores offer an expanded and more
comprehensive product assortment than our traditional stores. Our superstores also offer custom
framing, floral arrangement and educational programs that our traditional stores do not. Our
superstores that opened prior to fiscal 2003 average approximately 45,000 square feet and generated
net sales per store of approximately $6.3 million in fiscal 2005. Our current superstore prototype
is 35,000 square feet and targets sales of approximately $5 million for the first year of
operation. We opened 11 of these new prototype superstores in the first quarter of fiscal 2006 and
at the end of the first quarter, we operated 54 of these prototype superstores. Executive Overview Although our first quarter sales performance did not meet our expectations, we continued to
execute well on our strategic initiatives, opening 11 of our new 35,000 square foot prototype
superstores during the first quarter. There were several factors that contributed to our unsatisfactory sales results during the
first quarter. First, we had a shorter Easter selling season due to the shift of the Easter
holiday from April to March, and overall market conditions were soft, particularly in the home
decorating portions of our business, such as seasonal and home décor merchandise, as well as home
decorating textiles. In addition, we believe that 12




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##### Table of Contents



adverse weather conditions further hampered our top-line performance in February and March,
particularly in the Midwest and Northeast portions of the country. The disappointing sales
performance that we experienced in the first nine weeks of the quarter had a negative impact on our
bottom-line in the full quarter, as we were unable to leverage expenses. During the first quarter, we tested two additional newspaper inserts in our superstore
markets. These incremental events aided top-line performance in those markets, but the higher ad
spending and promotion efforts negatively impacted both gross margin performance and our expense
leverage. Overall, the experimental marketing programs conducted during the quarter did not yield
the desired results. Highlights of the first quarter are as follows:  
    Net sales increased 3.9% to $420.7 million. Same-store sales increased 0.6%
versus a 6.6% same-store sales increase for the first quarter last year.
    Our gross margin rate declined by 40 basis points, to 48.7% of net sales this
quarter versus 49.1% for the first quarter last year primarily as a result of an increased
promotional environment.
    Our selling, general and administrative expenses (SG&A), excluding those
expenses separately identified in the statement of operations, increased 160 basis points
from 40.7% of sales in the first quarter last year to 42.3% this year. The increase
stemmed from an essentially flat same-store sales performance, which made it difficult to
leverage expenses, coupled with an increase in advertising spending.
    Store pre-opening and closing costs increased $1.7 million for the first
quarter to $4.9 million, reflecting the increased level of real estate activity year-over-year.
As a percentage of sales, store pre-opening and closing costs increased to 1.2% of
sales from 0.8% in the prior year first quarter.
    First quarter net income was $0.18 per diluted share, versus $0.30 per diluted
share last year. Last years results were negatively impacted by approximately $0.11 per
diluted share due to the financing initiatives we completed in the first quarter last year.
    We began construction on our third distribution center, which will be located
in Opelika, Alabama and will begin serving our southeastern stores beginning in April 2006. 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 EndedApril 30,
    
    
    May 1,2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    48.7
    %
    
    
    49.1
    %Selling, general and administrative expenses
    
    
    42.3
    %
    
    
    40.7
    %Store pre-opening and closing costs
    
    
    1.2
    %
    
    
    0.8
    %Depreciation and amortization
    
    
    2.5
    %
    
    
    2.5
    %Stock-based compensation expense
    
    
    0.6
    %
    
    
    0.5
    %Debt repurchase expenses
    
    
    
    
    
    
    1.0
    %Operating profit
    
    
    2.1
    %
    
    
    3.6
    %
 13




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##### Table of Contents



Comparison of the Thirteen Weeks Ended April 30, 2005 to May 1, 2004 Net Sales.Net sales for the first quarter of fiscal 2006 increased 3.9% to $420.7 million
from $404.9 million in the prior year. Net sales from stores open one year or more (same-store
sales) increased 0.6% during the quarter versus a same-store sales increase of 6.6% in the first
quarter last year. Average ticket in same-stores during the first quarter increased approximately
2%, but was partially offset by lower traffic. The Companys total store count at the end of the
quarter was down 25 units, or 2.9% from last years first quarter; however, the number of
superstores in operation increased to 125 from 94 in last years first quarter. Total store
square footage increased approximately 2% from last years first quarter. The 125 superstores in
operation accounted for 38% of total net sales for the first quarter compared to 94 superstores,
which accounted for approximately 30% of total net sales, for the prior year first quarter. By store format, our same-store sales performance for traditional stores decreased 0.4% versus
a same-store sales increase of 7.6% for the prior year first quarter. Same-store sales for
superstores increased 2.8% for the quarter versus a same-store sales increase of 3.9% for the prior
year first quarter. In both store formats, average ticket dollars increased, while traffic in
same-stores increased approximately 0.5% in superstores, but were down a little over 2% in
traditional stores. The superstores benefited from the increase in ad spending during the quarter,
which resulted in the better sales performance relative to the traditional stores. By product category, our hardlines businesses continued to perform well. Hardlines, which we
define as all of our non-sewing businesses, represented 43% of our first quarter sales volume and
increased 8.9% for the first quarter. On a same-store sales basis, our hardlines business
increased 2%. Key categories continuing to drive growth in hardlines are paper crafting and yarn. Tempering some of the growth in hardlines in the first quarter was the performance of our
finished seasonal business. Our finished seasonal business, representing 8.7% of our first quarter
sales, was down approximately 9% on a same-store sales basis. Our softlines, or sewing-related businesses, represented 57% of our first quarter sales volume
and increased 0.6% for the first quarter. On a same-store sales basis, our softlines businesses
decreased 0.7% for the quarter due primarily to slow performance in home decorating textiles. Gross Margin.Gross margins may not be comparable to those of our competitors and other
retailers. Some retailers include all of the costs related to their distribution network in cost
of sales, while we exclude a portion of them from gross margin, including those costs instead
within selling, general and administrative expenses. As a percent of net sales, gross margin
decreased to 48.7% for the first quarter of fiscal 2006 compared with 49.1% for the same quarter a
year earlier primarily as a result of an increased promotional environment. Selling, general and administrative expenses.Selling, general and administrative (SG&A)
expenses include store and administrative payroll, employee benefits, distribution costs, store
occupancy costs, advertising expenses and administrative expenses. SG&A expenses, excluding other
expenses separately identified in the statement of operations, were $177.9 million in the first
quarter compared with $164.8 million in the prior year first quarter. As a percentage of net
sales, SG&A expenses increased to 42.3% of net sales from 40.7% of net sales in the first quarter
of last year. The increase as a percentage of sales stemmed from a flat same-store sales
performance, which made it difficult for us to leverage expenses, coupled with increases in
advertising spending. Store pre-opening and closing costs.Pre-opening costs are expensed as incurred and relate to
the costs incurred prior to a new store opening, which includes lease costs recognized prior to the
store opening, hiring and training costs for new employees and processing of initial merchandise.
Store closing costs consist 14




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##### Table of Contents



of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and
equipment, severance for employees, third-party inventory liquidation costs and other costs
incidental to store closings. Store pre-opening and closing costs increased $1.7 million during
the first quarter of fiscal 2006 to $4.9 million resulting from a higher level of real estate
activity than in the prior year. Store pre-opening costs increased $1.2 million during the
quarter, to $3.1 million compared to $1.9 million in last years first quarter. Store closing
costs increased $0.5 million during the quarter, to $1.8 million compared to $1.3 million in last
years first quarter. As a percentage of net sales, store pre-opening and closing costs increased
to 1.2% of net sales from 0.8% last year. As we continue to increase the number of new store
openings, we expect continued pressure on this line item for the balance of fiscal 2006. On
average we close approximately 1.1 nearby traditional stores for every superstore that we open. Depreciation and amortization.Depreciation and amortization expense increased $0.2 million
to $10.5 million from $10.3 million, year-over-year. Stock-based compensation expense.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, and the amortization of the value of restricted stock granted

to employees. Stock-based compensation expense was $2.7 million for the first quarter of fiscal
2006, compared with $2.0 million in the same period last year. Debt repurchase expenses.Debt repurchase expenses were $4.2 million for the first quarter
of fiscal 2005 and represent the premium paid to repurchase $64.4 million of our previously
outstanding 10 3/8 percent senior subordinated notes at an aggregate premium of 103.4 percent to
par value and to write-off the related deferred financing costs. Interest expense.Interest expense in the first quarter of fiscal 2006 decreased $1.5
million to $2.1 million from $3.6 million in the first quarter of fiscal 2005 due to a decrease in
our average debt levels. Our average debt levels during the first quarter of fiscal 2006 were
$102 million, compared with $145 million during the prior year first quarter. Income taxes.Our effective income tax rate for the first quarter of fiscal 2006 was
approximately 38%. Our effective tax rate in the first quarter last year was 38.5%, but we
adjusted that rate in the fourth quarter last year, and our effective rate for the full year last
year was 37.7%. Our effective tax rate is subject to change based on the mix of income from
different state jurisdictions which tax at different rates, as well as the change in status or
outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and
update our estimate of the full-year effective rate as necessary. Liquidity and Capital Resources Our capital requirements are primarily for capital expenditures in connection with
infrastructure investments, new store openings, the construction of our third distribution center,
and working capital requirements for seasonal inventory builds and new store inventory purchases.
Working capital requirements needed to finance our operations fluctuate during the year and reach
their highest levels during the third fiscal quarter as we increase our inventory in preparation
for our peak selling season during the months of September through December. These requirements
will be funded through a combination of internally generated cash flows from operations, credit
extended by suppliers and borrowings under our bank credit facility. 15




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##### Table of Contents



The following table provides cash flow related information for the first quarter of fiscal
2006 and 2005: 2006
    
    
    2005(Restated)Net cash (used for) provided by operating activities
    
    $
    (27.0
    )
    
    $
    20.9Net cash used for investing activities
    
    
    (11.6
    )
    
    
    (13.1
    )Net cash provided by (used for ) financing activities
    
    
    2.2
    
    
    
    (10.0
    )Net decrease in cash and cash equivalents
    
    $
    (36.4
    )
    
    $
    (2.2
    )Ending cash and cash equivalents
    
    $
    43.2
    
    
    $
    15.2
 Net cash (used for) provided by operating activities Net cash used by operating activities was $27.0 million in the first quarter of fiscal 2006
compared with net cash provided by operations of $20.9 million in fiscal 2005. The decrease of
$47.9 million was primarily driven by decreases in accounts payable and accrued expenses. Cash
flows from operating activities, before changes in operating assets and liabilities, were $18.3
million in fiscal 2006 versus $26.6 million generated in fiscal 2005. Inventories, net of payable support, increased $20.7 million in the first quarter of fiscal
2006, compared with a decrease of $4.8 million in fiscal 2005 due primarily to the change in
payables support. Inventories increased $6.7 million in support of our store growth plans, with
inventory levels in same-stores down slightly year-over-year. Net cash used for investing activities Net cash used for investing activities totaled $11.6 million in the first quarter of fiscal
2006 compared with $13.1 million in fiscal 2005 and consisted entirely of capital spending for
both periods. Capital expenditures consist of cash expenditures and cash expenditures reimbursed
by the landlord. Landlord reimbursed capital expenditures represent the cost of assets acquired
with landlord lease incentives. Capital expenditures are summarized as follows: Thirteen Weeks EndedApril 30,
    
    
    May 1,Dollars in millions
    
    2005
    
    
    2004Cash
    
    $
    8.6
    
    
    $
    8.1Cash  landlord reimbursed
    
    
    3.0
    
    
    
    5.0Total
    
    $
    11.6
    
    
    $
    13.1
 We continue to anticipate capital expenditures for the full fiscal year 2006 to be
approximately $110 to $120 million which is net of expected tenant allowances of approximately $20
million from landlords. During the first quarter of fiscal 2006, we opened 11 superstores and one
traditional store and closed 14 traditional stores. For the balance of the fiscal year, we expect to open 29 more superstores, six in the second
quarter and the remainder in the third quarter, and four more traditional stores. We will close
approximately 35 more traditional stores between now and the end of the fiscal year, most of those
in connection with the store openings. 16




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##### Table of Contents



Net cash provided by (used for) financing activities During the first quarter of fiscal 2005, we completed certain capital financing initiatives.
In February 2004, we issued $100 million of 7 1/2 percent senior subordinated notes, which enabled
us to repurchase the remaining $64.4 million of our 10 3/8 percent senior subordinated notes that
were outstanding at the beginning of the year. In April 2004, we amended our senior credit
facility, extending the term until May 2009 and reducing the commitment to $350 million from $365
million. Net cash provided by financing activities was $2.2 million during the first quarter of fiscal
2006 compared with net cash used for financing activities of $10.0 million during the same period
in fiscal 2005. Debt borrowings were $100 million at the end of the first quarter which was
unchanged from the beginning of the year and a decrease of $6.6 million from the same period in
the prior year. As of April 30, 2005, we had the ability to borrow $230.3 million under our credit facility,
subject to the borrowing base calculation, as defined. Our debt-to-capitalization ratio was 19.3% at April 30, 2005, 19.7% at January 29, 2005 and
23.0% at May 1, 2004. 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 16, 2005, that was furnished to the Securities and Exchange
Commission on Form 8-K, we provided earnings guidance for the full fiscal year and second quarter
of fiscal 2006. We are estimating fiscal 2006 earnings to be approximately $1.88 to $2.03 per
diluted share. For the second quarter, we are estimating a net loss of $0.10 to $0.15
per share, compared with earnings of $0.01 per diluted share in the prior year. Our actual results in the second quarter and full year are highly dependent on the net sales
and operating margin performance we are able to achieve. Seasonality and Inflation Our business exhibits seasonality, which is typical for most retail companies. Our net 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 17




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##### Table of Contents



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 fiscal 2005
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, longer-term unseasonable weather or wide spread severe
weather, the impact of our and our competitors store openings and closings,
the successful and timely completion and integration of the Companys new distribution center,
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. 18




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, the Company employs established policies and procedures to
manage exposure to changes in interest rates. The Companys objective in managing the exposure to
interest rate changes is to limit the volatility and impact of interest rate changes on earnings
and cash flows. This is accomplished through the debt structure set in place in early fiscal 2005,
which consisted of fixed rate senior subordinated notes and a variable rate senior bank credit
facility, that is designed to be a working capital facility. In the past, the Company also
utilized interest rate swaps to achieve this objective. The Company utilized interest rate swaps
to manage net exposure to interest rate changes related to the Companys variable rate bank credit
facilities. The interest rate swap agreements required the Company to pay a fixed interest rate
while receiving a floating interest rate based on London Interbank Offered Rate (LIBOR). The
Company does not enter into financial instruments for trading purposes. The Company had a $40.0
million interest rate swap with a fixed LIBOR rate of 6.72 percent that expired on April 30, 2005. 
 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 effectiveness 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. Management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The Company reviewed its
lease accounting practices in light of the pronouncement of the Office of the Chief Accountant of
the Securities and Exchange Commission in its letter to the American Institute of Certified Public
Accountants on February 7, 2005 relating to certain lease accounting issues. As a result of this
review, the Company decided to restate certain of its previously issued financial statements to
reflect the correction in lease accounting practices, that were reflected in the Companys Annual
Report on Form 10-K for the fiscal year-ended January 29, 2005. The Company further concluded that
this control deficiency with respect to lease accounting represented a material weakness in its
internal controls over financial reporting, and accordingly, that its disclosure controls and
procedures were not effective as of January 29, 2005. However, the Company has since remediated
these deficiencies in its controls and procedures during the first quarter of fiscal 2006 by
implementing additional review procedures over the selection and monitoring of appropriate
assumptions and factors affecting its lease accounting practices. There have been no other changes
in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) of the Exchange Act, as amended, that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 19




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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. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by Jo-Ann Stores, Inc. Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    of Shares that MayTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the Plans orPurchased
    
    
    per Share
    
    
    or Programs
    
    
    ProgramsJanuary 30
 Feb. 26, 2005
    
    
    6,333
    
    
    $
    29.58
    
    
    
    877,525
    
    
    
    1,272,475February 27
 April 2, 2005
    
    
    6,647
    
    
    $
    28.99
    
    
    
    884,172
    
    
    
    1,265,828April 3-30, 2005
    
    
    772
    
    
    $
    28.23
    
    
    
    884,944
    
    
    
    1,265,056Total
    
    
    13,752
    
    
    $
    29.22
    
    
    
    884,944
    
    
    
    1,265,056
 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. In the table above, the total number of shares purchased represents 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. 
 Item 6. Exhibits a) Exhibits 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
 20




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##### Table of Contents



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 9, 2005
    /s/ Alan RosskammAlan Rosskamm,President and Chief Executive Officer /s/ Brian P. CarneyBrian P. Carney,Executive Vice President and Chief Financial Officer 21