##### Table of Contents



United States
Securities and Exchange Commission
 WASHINGTON, D.C. 20549
 
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 29, 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
 þ o
  o þ o
 o þ




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##### 



Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended July 29, 2006
  
 Page NumbersPart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets  July 29, 2006 (Unaudited),
January 28, 2006 and July 30, 2005 (Unaudited)
    
    
    1Unaudited Consolidated Statements of Operations for the Thirteen
and Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005
    
    
    2Unaudited Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    27EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-10.6EX-10.7EX-10.8EX-10.9EX-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)July 29,
    
    
    January 28,
    
    
    July 30,2006
    
    
    2006
    
    
    2005(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15.3
    
    
    $
    17.9
    
    
    $
    16.7Inventories
    
    
    511.3
    
    
    
    514.7
    
    
    
    574.0Deferred income taxes
    
    
    38.0
    
    
    
    38.0
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    24.7
    
    
    
    35.2
    
    
    
    19.0Total current assets
    
    
    589.3
    
    
    
    605.8
    
    
    
    631.0Property, equipment and leasehold improvements, net
    
    
    340.6
    
    
    
    331.7
    
    
    
    252.6Goodwill, net
    
    
    
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.6
    
    
    
    9.3
    
    
    
    11.3Total assets
    
    $
    939.5
    
    
    $
    946.8
    
    
    $
    922.0Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    166.5
    
    
    $
    146.6
    
    
    $
    199.2Accrued expenses
    
    
    64.9
    
    
    
    94.1
    
    
    
    51.2Total current liabilities
    
    
    231.4
    
    
    
    240.7
    
    
    
    250.4Long-term debt
    
    
    225.0
    
    
    
    203.7
    
    
    
    174.8Deferred income taxes
    
    
    23.2
    
    
    
    23.2
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    84.2
    
    
    
    79.8
    
    
    
    54.7Shareholders 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 27,179,517; 27,050,507 and 26,485,584 shares, respectively
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.3Additional paid-in capital
    
    
    169.1
    
    
    
    165.4
    
    
    
    158.6Retained earnings
    
    
    248.8
    
    
    
    276.6
    
    
    
    298.7419.3
    
    
    
    443.4
    
    
    
    458.6Treasury stock, at cost, 3,608,288; 3,675,439 and 3,723,989 shares, respectively
    
    
    (43.6
    )
    
    
    (44.0
    )
    
    
    (44.1
    )Total shareholders equity
    
    
    375.7
    
    
    
    399.4
    
    
    
    414.5Total liabilities and shareholders equity
    
    $
    939.5
    
    
    $
    946.8
    
    
    $
    922.0
  1




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##### Table of Contents



Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)
 Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 29,
    
    July 30,
    
    July 29,
    
    July 30,2006
    
    2005
    
    2006
    
    2005(Dollars in millions, except share and per share data)Net sales
    
    $
    363.2
    
    
    $
    383.8
    
    
    $
    787.9
    
    
    $
    804.5Cost of sales
    
    
    190.9
    
    
    
    199.0
    
    
    
    417.6
    
    
    
    414.9Gross margin
    
    
    172.3
    
    
    
    184.8
    
    
    
    370.3
    
    
    
    389.6Selling, general and administrative expenses
    
    
    186.9
    
    
    
    176.4
    
    
    
    376.6
    
    
    
    357.0Store pre-opening and closing costs
    
    
    2.6
    
    
    
    4.0
    
    
    
    8.1
    
    
    
    8.9Depreciation and amortization
    
    
    12.3
    
    
    
    10.1
    
    
    
    23.9
    
    
    
    20.6Operating (loss) profit
    
    
    (29.5
    )
    
    
    (5.7
    )
    
    
    (38.3
    )
    
    
    3.1Interest expense, net
    
    
    3.9
    
    
    
    2.5
    
    
    
    7.4
    
    
    
    4.6Loss before income taxes
    
    
    (33.4
    )
    
    
    (8.2
    )
    
    
    (45.7
    )
    
    
    (1.5
    )Income tax benefit
    
    
    (12.2
    )
    
    
    (3.1
    )
    
    
    (16.9
    )
    
    
    (0.6
    )Loss before cumulative effect of accounting change
    
    
    (21.2
    )
    
    
    (5.1
    )
    
    
    (28.8
    )
    
    
    (0.9
    )Cumulative effect of change in accounting principle,
net of tax
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    Net loss
    
    $
    (21.2
    )
    
    $
    (5.1
    )
    
    $
    (27.8
    )
    
    $
    (0.9
    )Loss per common share  basic:Loss before cumulative effect of accounting change
    
    $
    (0.90
    )
    
    $
    (0.23
    )
    
    $
    (1.23
    )
    
    $
    (0.04
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    Net loss
    
    $
    (0.90
    )
    
    $
    (0.23
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )Loss per common share  diluted:Loss before cumulative effect of accounting change
    
    $
    (0.90
    )
    
    $
    (0.23
    )
    
    $
    (1.23
    )
    
    $
    (0.04
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    Net loss
    
    $
    (0.90
    )
    
    $
    (0.23
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )Weighted average shares outstanding (in thousands):Basic
    
    
    23,469
    
    
    
    22,580
    
    
    
    23,388
    
    
    
    22,525Diluted
    
    
    23,469
    
    
    
    22,580
    
    
    
    23,388
    
    
    
    22,525
  2




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Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Twenty-Six Weeks EndedJuly 29,
    
    
    July 30,2006
    
    
    2005(Dollars in millions)Net cash flows provided by (used for) operating activities:Net loss
    
    $
    (27.8
    )
    
    $
    (0.9
    )Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    23.9
    
    
    
    20.6Stock-based compensation expense
    
    
    3.3
    
    
    
    3.0Cumulative effect of change in accounting principle
    
    
    (1.0
    )
    
    
    Tax benefit on stock-based compensation plan awards
    
    
    
    
    
    
    0.6Amortization of deferred financing costs
    
    
    0.5
    
    
    
    0.4Loss on disposal of fixed assets
    
    
    0.4
    
    
    
    0.4Changes in operating assets and liabilities:Decrease (increase) in inventories
    
    
    3.4
    
    
    
    (134.3
    )Decrease in prepaid expenses and other current assets
    
    
    10.5
    
    
    
    3.3Increase in accounts payable
    
    
    19.9
    
    
    
    32.0Decrease in accrued expenses
    
    
    (29.8
    )
    
    
    (40.4
    )Increase in lease obligations, net
    
    
    4.4
    
    
    
    9.7Increase in other long-term liabilities
    
    
    
    
    
    
    1.0Other, net
    
    
    (0.6
    )
    
    
    (0.4
    )Net cash provided by (used for) operating activities
    
    
    7.1
    
    
    
    (105.0
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (33.2
    )
    
    
    (35.6
    )Net cash used for investing activities
    
    
    (33.2
    )
    
    
    (35.6
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    21.3
    
    
    
    74.8Proceeds from stock-based compensation plans
    
    
    1.7
    
    
    
    2.6Other, net
    
    
    0.5
    
    
    
    0.3Net cash provided by financing activities
    
    
    23.5
    
    
    
    77.7Net decrease in cash and cash equivalents
    
    
    (2.6
    )
    
    
    (62.9
    )Cash and cash equivalents at beginning of period
    
    
    17.9
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    15.3
    
    
    $
    16.7Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    7.2
    
    
    $
    4.4Income taxes, net of refunds
    
    
    4.4
    
    
    
    27.1
  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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##### Table of Contents



Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 29,
    
    July 30,
    
    July 29,
    
    July 30,Dollars in millions
    
    2006
    
    2005
    
    2006
    
    2005Stock option compensation expense
    
    $
    0.7
    
    
    $
    0.7
    
    
    $
    1.3
    
    
    $
    1.5Restricted stock award amortization
    
    
    1.3
    
    
    
    (0.4
    )
    
    
    2.0
    
    
    
    1.5$
    2.0
    
    
    $
    0.3
    
    
    $
    3.3
    
    
    $
    3.0
 Stock Options
   5




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##### Table of Contents



Twenty-Six Weeks EndedJuly 29,
    
    July 30,2006
    
    2005Weighted average fair value of options granted
    
    $5.74
    
    $12.85Expected volatility of underlying stock
    
    .465 to .584
    
    .550 to .568Risk-free interest rates
    
    4.2% to 5.2%
    
    3.5% to 4.2%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
    
    
    175,500
    
    
    
    13.86Exercised
    
    
    (44,800
    )
    
    
    11.77Cancelled
    
    
    (350,290
    )
    
    
    16.88Outstanding at July 29, 2006
    
    
    1,832,322
    
    
    $
    15.34
    
    
    4.4 years
    
    $
    3,249,674Expected to vest
    
    
    1,740,008
    
    
    $
    15.41
    
    
    4.3 years
    
    $
    3,156,723Exercisable at July 29, 2006
    
    
    1,091,553
    
    
    $
    14.48
    
    
    3.4 years
    
    $
    2,717,864
 (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
  6




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Restricted Stock  Time-Based Awards
   Weighted-Number of
    
    Average GrantShares
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    661,910
    
    
    $
    20.83Granted
    
    
    275,586
    
    
    
    13.49Vested
    
    
    (26,401
    )
    
    
    17.46Cancelled
    
    
    (150,401
    )
    
    
    19.49Outstanding at July 29, 2006
    
    
    760,694
    
    
    $
    18.55
   Restricted Stock  Performance-Based Awards
   Weighted-Number of
    
    Average GrantShares
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    801,600
    
    
    $
    29.00Cancelled
    
    
    (126,950
    )
    
    
    29.06Outstanding at July 29, 2006
    
    
    674,650
    
    
    $
    29.04Expected to Vest
    
    
    
    
    
    $
    
  7




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##### Table of Contents



Employee Stock Purchase Program
  Note 3  Earnings Per Share
   Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 29,
    
    July 30,
    
    July 29,
    
    July 30,2006
    
    2005
    
    2006
    
    2005Weighted average shares outstanding:Basic common shares
    
    
    23,469
    
    
    
    22,580
    
    
    
    23,388
    
    
    
    22,525Incremental shares from assumed
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incremental restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted common shares
    
    
    23,469
    
    
    
    22,580
    
    
    
    23,388
    
    
    
    22,525
   8




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Note 4  Shareholders Equity
  Net Common
    
    Treasury
    
    
    Common Stock Stated
    
    Additional 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
    
    
    44
    
    
    
    (8
    )
    
    
    
    
    
    
    
    0.4
    
    
    
    0.1Purchase of common stock
    
    
    (7
    )
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuance of treasury shares
    
    
    66
    
    
    
    (66
    )
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4Associate stock ownership plan
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    Stock-based compensation
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    3.3
    
    
    
    Cumulative effect of change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    Year-to-date activity
    
    
    196
    
    
    
    (67
    )
    
    
    
    
    
    
    
    3.7
    
    
    
    0.4Balance, July 29, 2006
    
    
    23,571
    
    
    
    3,608
    
    
    
    $
    1.4
    
    
    $
    169.1
    
    
    $
    (43.6
    )
  Note 5  Recent Accounting Pronouncements
 Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  An Interpretation of FASB Statement No. 109
  9




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Note 6  Consolidating Financial Statements (Unaudited)
   Consolidating Balance Sheets  July 29, 2006
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    13.2
    
    
    $
    2.1
    
    
    $
    
    
    
    $
    15.3Inventories
    
    
    209.7
    
    
    
    301.6
    
    
    
    
    
    
    
    511.3Deferred income taxes
    
    
    27.6
    
    
    
    10.4
    
    
    
    
    
    
    
    38.0Prepaid expenses and other current assets
    
    
    14.4
    
    
    
    10.3
    
    
    
    
    
    
    
    24.7Total current assets
    
    
    264.9
    
    
    
    324.4
    
    
    
    
    
    
    
    589.3Property, equipment and leasehold improvements,
net
    
    
    152.9
    
    
    
    187.7
    
    
    
    
    
    
    
    340.6Other assets
    
    
    8.1
    
    
    
    1.5
    
    
    
    
    
    
    
    9.6Investment in subsidiaries
    
    
    50.0
    
    
    
    
    
    
    
    (50.0
    )
    
    
    Intercompany receivable
    
    
    411.9
    
    
    
    
    
    
    
    (411.9
    )
    
    
    Total assets
    
    $
    887.8
    
    
    $
    513.6
    
    
    $
    (461.9
    )
    
    $
    939.5Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    155.0
    
    
    $
    11.5
    
    
    $
    
    
    
    $
    166.5Accrued expenses
    
    
    69.4
    
    
    
    (4.5
    )
    
    
    
    
    
    
    64.9Total current liabilities
    
    
    224.4
    
    
    
    7.0
    
    
    
    
    
    
    
    231.4Long-term debt
    
    
    225.0
    
    
    
    
    
    
    
    
    
    
    
    225.0Deferred income taxes
    
    
    6.5
    
    
    
    16.7
    
    
    
    
    
    
    
    23.2Lease obligations and other long-term liabilities
    
    
    56.2
    
    
    
    28.0
    
    
    
    
    
    
    
    84.2Intercompany payable
    
    
    
    
    
    
    411.9
    
    
    
    (411.9
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    169.1
    
    
    
    
    
    
    
    
    
    
    
    169.1Retained earnings
    
    
    248.8
    
    
    
    50.0
    
    
    
    (50.0
    )
    
    
    248.8419.3
    
    
    
    50.0
    
    
    
    (50.0
    )
    
    
    419.3Treasury stock, at cost
    
    
    (43.6
    )
    
    
    
    
    
    
    
    
    
    
    (43.6
    )Total shareholders equity
    
    
    375.7
    
    
    
    50.0
    
    
    
    (50.0
    )
    
    
    375.7Total liabilities and shareholders equity
    
    $
    887.8
    
    
    $
    513.6
    
    
    $
    (461.9
    )
    
    $
    939.5
 10




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Note 6  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
 11




---



##### Table of Contents



Note 6  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations  Thirteen Weeks Ended July 29, 2006 and July 30, 2005
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    200.4
    
    
    $
    281.3
    
    
    $
    (118.5
    )
    
    $
    363.2Cost of sales
    
    
    115.4
    
    
    
    194.0
    
    
    
    (118.5
    )
    
    
    190.9Gross margin
    
    
    85.0
    
    
    
    87.3
    
    
    
    
    
    
    
    172.3Selling, general and administrative expenses
    
    
    96.7
    
    
    
    90.2
    
    
    
    
    
    
    
    186.9Store pre-opening and closing costs
    
    
    1.0
    
    
    
    1.6
    
    
    
    
    
    
    
    2.6Depreciation and amortization
    
    
    6.2
    
    
    
    6.1
    
    
    
    
    
    
    
    12.3Operating loss
    
    
    (18.9
    )
    
    
    (10.6
    )
    
    
    
    
    
    
    (29.5
    )Interest expense, net
    
    
    1.7
    
    
    
    2.2
    
    
    
    
    
    
    
    3.9Loss before income taxes
    
    
    (20.6
    )
    
    
    (12.8
    )
    
    
    
    
    
    
    (33.4
    )Income tax benefit
    
    
    (7.5
    )
    
    
    (4.7
    )
    
    
    
    
    
    
    (12.2
    )Loss before equity loss
    
    
    (13.1
    )
    
    
    (8.1
    )
    
    
    
    
    
    
    (21.2
    )Equity loss from subsidiaries
    
    
    (8.1
    )
    
    
    
    
    
    
    8.1
    
    
    
    Net loss
    
    $
    (21.2
    )
    
    $
    (8.1
    )
    
    $
    8.1
    
    
    $
    (21.2
    )
 July 30, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    208.4
    
    
    $
    319.2
    
    
    $
    (143.8
    )
    
    $
    383.8Cost of sales
    
    
    131.7
    
    
    
    211.1
    
    
    
    (143.8
    )
    
    
    199.0Gross margin
    
    
    76.7
    
    
    
    108.1
    
    
    
    
    
    
    
    184.8Selling, general and administrative expenses
    
    
    89.2
    
    
    
    87.2
    
    
    
    
    
    
    
    176.4Store pre-opening and closing costs
    
    
    2.9
    
    
    
    1.1
    
    
    
    
    
    
    
    4.0Depreciation and amortization
    
    
    5.0
    
    
    
    5.1
    
    
    
    
    
    
    
    10.1Operating (loss) profit
    
    
    (20.4
    )
    
    
    14.7
    
    
    
    
    
    
    
    (5.7
    )Interest expense, net
    
    
    0.9
    
    
    
    1.6
    
    
    
    
    
    
    
    2.5(Loss) income before income taxes
    
    
    (21.3
    )
    
    
    13.1
    
    
    
    
    
    
    
    (8.2
    )Income tax (benefit) provision
    
    
    (8.1
    )
    
    
    5.0
    
    
    
    
    
    
    
    (3.1
    )(Loss) income before equity income
    
    
    (13.2
    )
    
    
    8.1
    
    
    
    
    
    
    
    (5.1
    )Equity income from subsidiaries
    
    
    8.1
    
    
    
    
    
    
    
    (8.1
    )
    
    
    Net (loss) income
    
    $
    (5.1
    )
    
    $
    8.1
    
    
    $
    (8.1
    )
    
    $
    (5.1
    )
 12




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##### Table of Contents



Note 6  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations
Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    435.6
    
    
    $
    581.5
    
    
    $
    (229.2
    )
    
    $
    787.9Cost of sales
    
    
    250.7
    
    
    
    396.1
    
    
    
    (229.2
    )
    
    
    417.6Gross margin
    
    
    184.9
    
    
    
    185.4
    
    
    
    
    
    
    
    370.3Selling, general and administrative expenses
    
    
    191.4
    
    
    
    185.2
    
    
    
    
    
    
    
    376.6Store pre-opening and closing costs
    
    
    3.6
    
    
    
    4.5
    
    
    
    
    
    
    
    8.1Depreciation and amortization
    
    
    12.2
    
    
    
    11.7
    
    
    
    
    
    
    
    23.9Operating loss
    
    
    (22.3
    )
    
    
    (16.0
    )
    
    
    
    
    
    
    (38.3
    )Interest expense, net
    
    
    3.2
    
    
    
    4.2
    
    
    
    
    
    
    
    7.4Loss before income taxes
    
    
    (25.5
    )
    
    
    (20.2
    )
    
    
    
    
    
    
    (45.7
    )Income tax benefit
    
    
    (9.4
    )
    
    
    (7.5
    )
    
    
    
    
    
    
    (16.9
    )Loss before equity loss &
cumulative effect
    
    
    (16.1
    )
    
    
    (12.7
    )
    
    
    
    
    
    
    (28.8
    )Equity loss from subsidiaries
    
    
    (12.7
    )
    
    
    
    
    
    
    12.7
    
    
    
    Loss before cumulative effect
    
    
    (28.8
    )
    
    
    (12.7
    )
    
    
    12.7
    
    
    
    (28.8
    )Cumulative effect of accounting change, net
of tax
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Net loss
    
    $
    (27.8
    )
    
    $
    (12.7
    )
    
    $
    12.7
    
    
    $
    (27.8
    )
 July 30, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    439.0
    
    
    $
    666.1
    
    
    $
    (300.6
    )
    
    $
    804.5Cost of sales
    
    
    273.3
    
    
    
    442.2
    
    
    
    (300.6
    )
    
    
    414.9Gross margin
    
    
    165.7
    
    
    
    223.9
    
    
    
    
    
    
    
    389.6Selling, general and administrative expenses
    
    
    180.9
    
    
    
    176.1
    
    
    
    
    
    
    
    357.0Store pre-opening and closing costs
    
    
    6.3
    
    
    
    2.6
    
    
    
    
    
    
    
    8.9Depreciation and amortization
    
    
    9.8
    
    
    
    10.8
    
    
    
    
    
    
    
    20.6Operating (loss) profit
    
    
    (31.3
    )
    
    
    34.4
    
    
    
    
    
    
    
    3.1Interest expense, net
    
    
    1.8
    
    
    
    2.8
    
    
    
    
    
    
    
    4.6(Loss) income before income taxes
    
    
    (33.1
    )
    
    
    31.6
    
    
    
    
    
    
    
    (1.5
    )Income tax (benefit) provision
    
    
    (12.6
    )
    
    
    12.0
    
    
    
    
    
    
    
    (0.6
    )(Loss) income before equity income
    
    
    (20.5
    )
    
    
    19.6
    
    
    
    
    
    
    
    (0.9
    )Equity income from subsidiaries
    
    
    19.6
    
    
    
    
    
    
    
    (19.6
    )
    
    
    Net (loss) income
    
    $
    (0.9
    )
    
    $
    19.6
    
    
    $
    (19.6
    )
    
    $
    (0.9
    )
 13




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##### Table of Contents



Note 6  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows
Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005
 July 29, 2006GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (19.9
    )
    
    $
    27.0
    
    
    $
    
    
    
    $
    7.1Net cash flows used for investing activities:Capital expenditures
    
    
    (5.9
    )
    
    
    (27.3
    )
    
    
    
    
    
    
    (33.2
    )Net cash used for investing activities
    
    
    (5.9
    )
    
    
    (27.3
    )
    
    
    
    
    
    
    (33.2
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    21.3
    
    
    
    
    
    
    
    
    
    
    
    21.3Proceeds from stock-based compensation plans
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    1.7Other, net
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Net cash provided by financing activities
    
    
    23.5
    
    
    
    
    
    
    
    
    
    
    
    23.5Net decrease in cash and cash equivalents
    
    
    (2.3
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (2.6
    )Cash and cash equivalents at beginning of period
    
    
    15.5
    
    
    
    2.4
    
    
    
    
    
    
    
    17.9Cash and cash equivalents at end of period
    
    $
    13.2
    
    
    $
    2.1
    
    
    $
    
    
    
    $
    15.3
 July 30, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (121.6
    )
    
    $
    16.6
    
    
    $
    
    
    
    $
    (105.0
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (18.8
    )
    
    
    (16.8
    )
    
    
    
    
    
    
    (35.6
    )Net cash used for investing activities
    
    
    (18.8
    )
    
    
    (16.8
    )
    
    
    
    
    
    
    (35.6
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    74.8
    
    
    
    
    
    
    
    
    
    
    
    74.8Proceeds from stock-based compensation plans
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    2.6Other, net
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Net cash provided by financing activities
    
    
    77.7
    
    
    
    
    
    
    
    
    
    
    
    77.7Net decrease in cash and cash equivalents
    
    
    (62.7
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (62.9
    )Cash and cash equivalents at beginning of period
    
    
    76.6
    
    
    
    3.0
    
    
    
    
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    13.9
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    16.7
 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General Overview
 Jo-Ann Fabrics and Crafts Jo-Ann
   Executive Overview
   15




---



##### Table of Contents




    
    Net sales decreased 5.4% to $363.2 million from $383.8 million in the prior
year. Net sales from stores open one year or more (same-store sales) decreased 8.4%
versus a 0.5% same-store sales decrease for the second quarter last year. The decline in
same-store sales was a result of decreased customer transactions. Customer traffic has
been relatively flat year-over-year, but the conversion rate is down, resulting in the
transaction count decrease.
    
    Our gross margin rate declined by 80 basis points, to 47.4% of net sales this
quarter versus 48.2% for the second quarter last year. The decrease is attributable to
steps we have taken to reduce inventory and is primarily due to higher markdowns related to
clearance activity compared with the prior year.
    
    Our selling, general and administrative expenses (SG&A), excluding those
expenses separately identified in the statement of operations, increased 550 basis points
to 51.5% of net sales from 46.0% of net sales in the second quarter last year. During the
quarter, we recorded separation costs related to the former chief executive officer of $4.4
million. The loss of expense leverage stemmed from negative same-store sales performance,
coupled with increases in logistic costs related to the opening of our distribution center
in Opelika, Alabama and higher fixed cost store expenses, primarily resulting from new
superstores and the larger year-over-year superstore base.SG&A includes stock-based compensation expense of $2.0 million, net of estimated
forfeitures, in the second quarter of fiscal 2007, compared with $0.3 million in the second
quarter last year. In the prior year quarter, an adjustment of $1.7 million was recognized
to reduce previously recorded expense for performance awards due to revised expectations of
operating performance.
    
    Store pre-opening and closing costs decreased $1.4 million for the second
quarter of fiscal 2007 to $2.6 million, compared with $4.0 million in the second quarter
last year, primarily due to the timing of expenses related to store activity
year-over-year.
    
    Second quarter net loss was $21.2 million or $(0.90) per diluted share, versus
a net loss of $5.1 million or $(0.23) per diluted share last year.
 16




---



##### Table of Contents



Results of Operations
  Percentage of Net SalesThirteen
    
    Twenty-Six WeeksWeeks Ended
    
    EndedJuly 29,
    
    July 30,
    
    July 29,
    
    July 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    47.4
    %
    
    
    48.2
    %
    
    
    47.0
    %
    
    
    48.4
    %Selling, general and
administrative expenses
    
    
    51.5
    %
    
    
    46.0
    %
    
    
    47.8
    %
    
    
    44.4
    %Store pre-opening and closing costs
    
    
    0.7
    %
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    1.1
    %Depreciation and amortization
    
    
    3.3
    %
    
    
    2.7
    %
    
    
    3.1
    %
    
    
    2.5
    %Operating (loss) profit
    
    
    (8.1
    )%
    
    
    (1.5
    )%
    
    
    (4.9
    )%
    
    
    0.4
    %
 Comparison of the Thirteen Weeks Ended July 29, 2006 to July 30, 2005
 Net Sales .
   Gross Margin.
 17




---



##### Table of Contents



Selling, general and administrative expenses.
 Share-Based Payment,
 Store pre-opening and closing costs.
  Depreciation and amortization.
 Interest expense.
 Income taxes.
 18




---



##### Table of Contents



Comparison of the Twenty-Six Weeks Ended July 29, 2006 to July 30, 2005
 Net Sales .
    Gross Margin.
 Selling, general and administrative expenses.
  19




---



##### Table of Contents



Store pre-opening and closing costs.
  Depreciation and amortization.
 Interest expense.
 Income taxes.
 Cumulative effect of change in accounting principle.
 Liquidity and Capital Resources
  20




---



##### Table of Contents



Dollars in millions
    
    2007
    
    2006Net cash provided by (used for) operating activities
    
    $
    7.1
    
    
    $
    (105.0
    )Net cash used for investing activities
    
    
    (33.2
    )
    
    
    (35.6
    )Net cash provided by financing activities
    
    
    23.5
    
    
    
    77.7Net decrease in cash and cash equivalents
    
    $
    (2.6
    )
    
    $
    (62.9
    )Ending cash and cash equivalents
    
    $
    15.3
    
    
    $
    16.7
 Net cash provided by (used for) operating activities
   Net cash used for investing activities
  Twenty-Six Weeks EndedJuly 29,
    
    
    July 30,Dollars in millions
    
    2006
    
    
    2005Cash
    
    $
    22.3
    
    
    $
    29.8Cash  landlord reimbursed
    
    
    10.9
    
    
    
    5.8Total
    
    $
    33.2
    
    
    $
    35.6
  21




---



##### Table of Contents



Net cash provided by financing activities
   Off-Balance Sheet Transactions
  Business Outlook
  
    
    Negative same-store sales performance, although we expect the decline to not
be as significant as the first half of fiscal 2007;
    
    Gross margin rate improvement for the full year of 75 to 125 basis points.
For the back half of the year, we expect year-over-year improvement in margin rates of 225
to 325 basis points, compared with the same period in fiscal 2006. Although a substantial
improvement relative to fiscal 2006, this represents a return to pre-fiscal 2006 gross
margin rates;
    
    Selling, general and administrative expenses increase of 95 to 125 basis
points as a percentage of net sales from fiscal 2006. For the back half of the year, we
expect year-over-year change in expense leverage of a 30 basis point improvement to a 20
basis point deterioration, compared with the same period in fiscal 2006;
    
    Capital spending for the full year of $45 to $50 million primarily related to
the opening of the 26 new stores; and
 22




---



##### Table of Contents




    
    Strengthening of the balance sheet through inventory reduction of $45 to $50
million as of the end of the fiscal year, and a resulting debt reduction by fiscal year end
of $40 to $50 million.
  Seasonality and Inflation
   Critical Accounting Policies
  Cautionary Statement Concerning Forward-Looking Statements
  23




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   24




---



##### Table of Contents



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 Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orof Shares Purchased
    
    per Share
    
    Programs
    
    ProgramsApril 30  May 27, 2006
    
    
    
    
    
    $
    
    
    
    
    905,310
    
    
    
    1,244,690May 28  July 1, 2006
    
    
    
    
    
    $
    
    
    
    
    905,310
    
    
    
    1,244,690July 229, 2006
    
    
    234
    
    
    $
    13.52
    
    
    
    905,544
    
    
    
    1,244,456Total
    
    
    234
    
    
    $
    13.52
    
    
    
    905,544
    
    
    
    1,244,456
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 a)
    
    An Annual Meeting of Shareholders of the Company was held on June 14,
2006.b)
    
    Scott Cowen, Alan Rosskamm and Gregg Searle were elected to the Board
of Directors in the class whose term of office expires in 2009.c)
    
    The nominees for Directors as listed in the proxy statement were
elected with the following vote:
 Nominee
    
    Votes For
    
    Votes WithheldScott Cowen
    
    
    15,636,267
    
    
    
    4,522,581Alan Rosskamm
    
    
    17,781,808
    
    
    
    2,377,040Gregg Searle
    
    
    17,801,732
    
    
    
    2,357,116
 25




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##### Table of Contents



Item 5. Other Information
   
 Item 6. Exhibits
 Exhibits
 No.
    
    Exhibit Description10.1
    
    Letter Agreement entered into on June 29, 2006 between the Company
and Darrell Webb regarding Mr. Webbs employment with the Company10.2
    
    Employment Agreement dated July 24, 2006 between the Company and
Darrell Webb10.3
    
    Letter Agreement entered into on July 10, 2006 between the Company
and Travis Smith regarding Mr. Smiths employment with the Company10.4
    
    Employment Agreement dated July 31, 2006 between the Company and
Travis Smith10.5
    
    Letter Agreement entered into on July 27, 2006 between the Company
and James Kerr regarding Mr. Kerrs employment with the Company10.6
    
    Employment Agreement dated July 27, 2006 between the Company and
James Kerr10.7
    
    Split Dollar Insurance Agreement dated July 27, 2006 between the
Company and James Kerr10.8
    
    Split Dollar Insurance Agreement dated July 28, 2006 between the
Company and David Holmberg10.9
    
    Schedule to Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan,
effective as of July 27, 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
 26




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##### Table of Contents



SIGNATURES
  JO-ANN STORES, INC.DATE: September 7, 2006
    /s/ Darrell WebbDarrell Webb,President and Chief Executive Officer/s/ James KerrJames Kerr,Executive Vice President and Chief Financial Officer 27