##### 



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 October 29, 2005
 Commission File No. 1-6695
 
 Jo-Ann
Stores, Inc.
  Ohio
    
    34-0720629(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)5555 Darrow Road, Hudson, Ohio
    
    44236(Address of principal executive offices)
    
    (Zip Code)
 (330) 656-2600
 þ o
 þ o
 o þ




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Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended October 29, 2005
 Page NumbersPart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets  October 29, 2005 (Unaudited),January 29, 2005 and October 30, 2004 (Unaudited)
    
    
    1Consolidated Statements of Operations (Unaudited) for the Thirteen andThirty-Nine Weeks Ended October 29, 2005 and October 30, 2004
    
    
    2Consolidated Statements of Cash Flows (Unaudited) for theThirty-Nine Weeks Ended October 29, 2005 and October 30, 2004
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Conditionand Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    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
    
    
    25Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    
    
    27




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##### 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 Jo-Ann Stores, Inc.
Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)October 29,
    
    
    January 29,
    
    
    October 30,2005
    
    
    2005
    
    
    2004(Restated)(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    24.1
    
    
    $
    79.6
    
    
    $
    33.7Inventories
    
    
    654.1
    
    
    
    439.7
    
    
    
    530.2Deferred income taxes
    
    
    21.3
    
    
    
    21.3
    
    
    
    18.5Prepaid expenses and other current assets
    
    
    24.5
    
    
    
    22.3
    
    
    
    19.1Total current assets
    
    
    724.0
    
    
    
    562.9
    
    
    
    601.5Property, equipment and leasehold improvements, net
    
    
    297.3
    
    
    
    238.0
    
    
    
    232.3Goodwill, net
    
    
    27.1
    
    
    
    27.1
    
    
    
    26.5Other assets
    
    
    10.9
    
    
    
    11.3
    
    
    
    9.7Total assets
    
    $
    1,059.3
    
    
    $
    839.3
    
    
    $
    870.0Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    203.1
    
    
    $
    167.2
    
    
    $
    167.0Accrued expenses
    
    
    56.3
    
    
    
    91.6
    
    
    
    59.7Total current liabilities
    
    
    259.4
    
    
    
    258.8
    
    
    
    226.7Long-term debt
    
    
    290.0
    
    
    
    100.0
    
    
    
    200.0Deferred income taxes
    
    
    27.6
    
    
    
    27.6
    
    
    
    28.7Lease obligations and other long-term liabilities
    
    
    70.0
    
    
    
    44.0
    
    
    
    40.6Shareholders equity:Preferred stock, no par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    
    
    
    
    Common stock, stated value $0.05 per share; 150,000,000 authorized,
issued 26,719,306; 26,321,934 and 26,284,562 shares, respectively
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Additional paid-in capital
    
    
    160.5
    
    
    
    151.8
    
    
    
    149.4Retained earnings
    
    
    294.6
    
    
    
    299.6
    
    
    
    267.3Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (0.5
    )456.4
    
    
    
    452.7
    
    
    
    417.5Treasury stock, at cost, 3,707,402; 3,737,407 and 3,735,102
shares, respectively
    
    
    (44.1
    )
    
    
    (43.8
    )
    
    
    (43.5
    )Total shareholders equity
    
    
    412.3
    
    
    
    408.9
    
    
    
    374.0Total liabilities and shareholders equity
    
    $
    1,059.3
    
    
    $
    839.3
    
    
    $
    870.0
 1
       Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)
 Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedOctober 29,
    
    October 30,
    
    October 29,
    
    October 30,2005
    
    2004
    
    2005
    
    2004(Restated)
    
    
    
    
    
    (Restated)(Dollars in millions, except share and per share data)Net sales
    
    $
    474.2
    
    
    $
    448.3
    
    
    $
    1,278.7
    
    
    $
    1,224.2Cost of sales
    
    
    257.9
    
    
    
    234.1
    
    
    
    672.8
    
    
    
    629.1Gross margin
    
    
    216.3
    
    
    
    214.2
    
    
    
    605.9
    
    
    
    595.1Selling, general and administrative expenses
    
    
    200.8
    
    
    
    180.2
    
    
    
    554.8
    
    
    
    505.0Store pre-opening and closing costs
    
    
    8.5
    
    
    
    6.5
    
    
    
    17.4
    
    
    
    15.0Depreciation and amortization
    
    
    10.5
    
    
    
    10.9
    
    
    
    31.1
    
    
    
    31.9Stock-based compensation expense, net
    
    
    (1.8
    )
    
    
    1.9
    
    
    
    1.2
    
    
    
    5.9Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating (loss) profit
    
    
    (1.7
    )
    
    
    14.7
    
    
    
    1.4
    
    
    
    33.1Interest expense, net
    
    
    4.1
    
    
    
    3.8
    
    
    
    8.7
    
    
    
    10.8(Loss) income before income taxes
    
    
    (5.8
    )
    
    
    10.9
    
    
    
    (7.3
    )
    
    
    22.3Income tax (benefit) provision
    
    
    (1.7
    )
    
    
    4.0
    
    
    
    (2.3
    )
    
    
    8.4Net (loss) income
    
    $
    (4.1
    )
    
    $
    6.9
    
    
    $
    (5.0
    )
    
    $
    13.9Net
(loss) income per common share  basic
    
    $
    (0.18
    )
    
    $
    0.31
    
    
    $
    (0.22
    )
    
    $
    0.63Net
(loss) income per common share  diluted
    
    $
    (0.18
    )
    
    $
    0.30
    
    
    $
    (0.22
    )
    
    $
    0.61Weighted average shares outstanding (in thousands):Basic
    
    
    22,703
    
    
    
    22,289
    
    
    
    22,589
    
    
    
    22,077Diluted
    
    
    22,703
    
    
    
    22,952
    
    
    
    22,589
    
    
    
    22,828
  2      Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,2005
    
    
    2004(Restated)(Dollars in millions)Net cash flows used for operating activities:Net (loss) income
    
    $
    (5.0
    )
    
    $
    13.9Adjustments to reconcile net (loss) income to net cash
used for operating activities:Depreciation and amortization
    
    
    31.1
    
    
    
    31.9Stock-based compensation expense, net
    
    
    1.2
    
    
    
    5.9Tax benefit on stock-based compensation plan awards
    
    
    1.0
    
    
    
    4.9Amortization of deferred financing costs
    
    
    0.7
    
    
    
    1.3Loss on disposal of fixed assets
    
    
    1.4
    
    
    
    2.3Loss associated with purchase of senior subordinated notes
    
    
    
    
    
    
    4.2Changes in operating assets and liabilities:Increase in inventories
    
    
    (214.4
    )
    
    
    (125.6
    )Increase in accounts payable
    
    
    35.9
    
    
    
    45.0Decrease in accrued expenses
    
    
    (35.3
    )
    
    
    (16.4
    )Other, net
    
    
    23.5
    
    
    
    9.7Net cash used for operating activities
    
    
    (159.9
    )
    
    
    (22.9
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (91.8
    )
    
    
    (48.0
    )Net cash used for investing activities
    
    
    (91.8
    )
    
    
    (48.0
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    
    
    
    
    97.4Purchase of 10 3/8% senior subordinated notes
    
    
    
    
    
    
    (66.6
    )Net change in revolving credit facility
    
    
    190.0
    
    
    
    50.7Proceeds from stock-based compensation plans
    
    
    5.5
    
    
    
    9.7Other, net
    
    
    0.7
    
    
    
    (4.0
    )Net cash provided by financing activities
    
    
    196.2
    
    
    
    87.2Net (decrease) increase in cash and cash equivalents
    
    
    (55.5
    )
    
    
    16.3Cash and cash equivalents at beginning of period
    
    
    79.6
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    24.1
    
    
    $
    33.7Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    8.8
    
    
    $
    9.9Income taxes, net of refunds
    
    
    26.9
    
    
    
    22.6
  3
      Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc
 Note 1    Basis of Presentation
   Note 2 Restatement of Prior Financial
Information
  Note 2  Restatement of Prior Financial Information
 Note 2  Restatement of Prior
Financial Information
 4
      (Unaudited)October 30, 2004BeforeRestatement
    
    Adjustments
    
    As RestatedConsolidated Balance SheetProperty, equipment and leasehold improvements, net
    
    $
    213.9
    
    
    $
    18.4
    
    
    $
    232.3Total assets
    
    
    854.7
    
    
    
    15.3
    
    
    
    870.0Deferred income taxes, net
    
    
    13.9
    
    
    
    (3.7
    )
    
    
    10.2Lease obligations and other long-term liabilities
    
    
    12.4
    
    
    
    28.2
    
    
    
    40.6Retained earnings
    
    
    273.3
    
    
    
    (6.0
    )
    
    
    267.3Total shareholders equity
    
    
    380.1
    
    
    
    (6.1
    )
    
    
    374.0Total liabilities and shareholders equity
    
    
    854.7
    
    
    
    15.3
    
    
    
    870.0
 Thirteen Weeks Ended October 30, 2004Consolidated Statements of OperationsSelling, general and administrative expenses
    
    $
    181.2
    
    
    
    ($1.0
    )
    
    $
    180.2Store pre-opening and closing costs
    
    
    5.5
    
    
    
    1.0
    
    
    
    6.5Depreciation and amortization
    
    
    10.2
    
    
    
    0.7
    
    
    
    10.9Operating profit
    
    
    15.4
    
    
    
    (0.7
    )
    
    
    14.7Net income
    
    
    7.3
    
    
    
    (0.4
    )
    
    
    6.9Basic net income per common share
    
    
    0.33
    
    
    
    (0.02
    )
    
    
    0.31Diluted net income per common share
    
    
    0.32
    
    
    
    (0.02
    )
    
    
    0.30
 Thirty-Nine Weeks Ended October 30, 2004Consolidated Statements of OperationsSelling, general and administrative expenses
    
    $
    508.0
    
    
    
    ($3.0
    )
    
    $
    505.0Store pre-opening and closing costs
    
    
    13.0
    
    
    
    2.0
    
    
    
    15.0Depreciation and amortization
    
    
    29.8
    
    
    
    2.1
    
    
    
    31.9Operating profit
    
    
    34.2
    
    
    
    (1.1
    )
    
    
    33.1Net income
    
    
    14.5
    
    
    
    (0.6
    )
    
    
    13.9Basic net income per common share
    
    
    0.66
    
    
    
    (0.03
    )
    
    
    0.63Diluted net income per common share
    
    
    0.64
    
    
    
    (0.03
    )
    
    
    0.61
 Consolidated Statements of Cash FlowsNet cash used for operating activities
    
    
    (28.2
    )
    
    
    5.3
    
    
    
    (22.9
    )Net cash used for investing activities
    
    
    (42.7
    )
    
    
    (5.3
    )
    
    
    (48.0
    )
 Note 3    Earnings Per Share
  5
      Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedOctober 29,
    
    October 30,
    
    October 29,
    
    October 30,2005
    
    2004
    
    2005
    
    2004Weighted average shares outstanding:Basic common shares
    
    
    22,703
    
    
    
    22,289
    
    
    
    22,589
    
    
    
    22,077Incremental shares from assumed
exercise of stock options
    
    
    
    
    
    
    553
    
    
    
    
    
    
    
    649Incremental restricted shares
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    102Diluted common shares
    
    
    22,703
    
    
    
    22,952
    
    
    
    22,589
    
    
    
    22,828
   Note 4   Shareholders Equity
  CommonNet
    
    
    
    
    
    
    Stock
    
    AdditionalCommon
    
    Treasury
    
    
    Stated
    
    Paid-In
    
    TreasuryShares
    
    Shares
    
    
    Value
    
    Capital
    
    Stock(Shares in thousands)
    

    
    
    (Dollars in millions)Balance, January 29, 2005
    
    
    22,585
    
    
    
    3,737
    
    
    
    $
    1.3
    
    
    $
    151.8
    
    
    $
    (43.8
    )Exercise of stock options
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    
    3.1
    
    
    
    Purchase of common stock
    
    
    (25
    )
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Issuance of treasury shares
    
    
    55
    
    
    
    (55
    )
    
    
    
    
    
    
    
    1.0
    
    
    
    0.4Associate stock ownership plan
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    Tax benefit on equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    Stock-based compensation
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    Year-to-date activity
    
    
    427
    
    
    
    (30
    )
    
    
    
    
    
    
    
    8.7
    
    
    
    (0.3
    )Balance, October 29, 2005
    
    
    23,012
    
    
    
    3,707
    
    
    
    $
    1.3
    
    
    $
    160.5
    
    
    $
    (44.1
    )
  6
      Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,Dollars in millions
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net (loss) income
    
    $
    (4.1
    )
    
    $
    6.9
    
    
    $
    (5.0
    )
    
    $
    13.9Other comprehensive
income, net of tax
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    1.1Comprehensive (loss) income
    
    $
    (4.1
    )
    
    $
    7.2
    
    
    $
    (5.0
    )
    
    $
    15.0
 Note 5    Recent Accounting Pronouncements
 Emerging Issues Task Force Issue 05-06: Determining the Amortization Period for Leasehold
Improvements
  Staff Accounting Bulletin No. 107, Share-Based Payment
  Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment
  7
      8
      Note 6  Consolidating Financial Statements (Unaudited)
 1 2 Note 2  Restatement of Prior Financial
Information
  Consolidating Balance Sheets  October 29, 2005
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    20.7
    
    
    $
    3.4
    
    
    $
    
    
    
    $
    24.1Inventories
    
    
    256.6
    
    
    
    397.5
    
    
    
    
    
    
    
    654.1Deferred income taxes
    
    
    16.5
    
    
    
    4.8
    
    
    
    
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    15.6
    
    
    
    8.9
    
    
    
    
    
    
    
    24.5Total current assets
    
    
    309.4
    
    
    
    414.6
    
    
    
    
    
    
    
    724.0Property, equipment and leasehold improvements,
net
    
    
    136.8
    
    
    
    160.5
    
    
    
    
    
    
    
    297.3Goodwill, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.4
    
    
    
    1.5
    
    
    
    
    
    
    
    10.9Investment in subsidiaries
    
    
    120.5
    
    
    
    
    
    
    
    (120.5
    )
    
    
    Intercompany receivable
    
    
    367.9
    
    
    
    
    
    
    
    (367.9
    )
    
    
    Total assets
    
    $
    944.0
    
    
    $
    603.7
    
    
    
    ($488.4
    )
    
    $
    1,059.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    143.5
    
    
    $
    59.6
    
    
    $
    
    
    
    $
    203.1Accrued expenses
    
    
    40.9
    
    
    
    15.4
    
    
    
    
    
    
    
    56.3Total current liabilities
    
    
    184.4
    
    
    
    75.0
    
    
    
    
    
    
    
    259.4Long-term debt
    
    
    290.0
    
    
    
    
    
    
    
    
    
    
    
    290.0Deferred income taxes
    
    
    7.7
    
    
    
    19.9
    
    
    
    
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    49.6
    
    
    
    20.4
    
    
    
    
    
    
    
    70.0Intercompany payable
    
    
    
    
    
    
    367.9
    
    
    
    (367.9
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    160.5
    
    
    
    
    
    
    
    
    
    
    
    160.5Retained earnings
    
    
    294.6
    
    
    
    120.5
    
    
    
    (120.5
    )
    
    
    294.6456.4
    
    
    
    120.5
    
    
    
    (120.5
    )
    
    
    456.4Treasury stock, at cost
    
    
    (44.1
    )
    
    
    
    
    
    
    
    
    
    
    (44.1
    )Total shareholders equity
    
    
    412.3
    
    
    
    120.5
    
    
    
    (120.5
    )
    
    
    412.3Total liabilities and shareholders equity
    
    $
    944.0
    
    
    $
    603.7
    
    
    
    ($488.4
    )
    
    $
    1,059.3
 9
      Note 6
 Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Balance Sheets  January 29, 2005
 GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    76.6
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    79.6Inventories
    
    
    159.6
    
    
    
    280.1
    
    
    
    
    
    
    
    439.7Deferred income taxes
    
    
    16.5
    
    
    
    4.8
    
    
    
    
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    14.3
    
    
    
    8.0
    
    
    
    
    
    
    
    22.3Total current assets
    
    
    267.0
    
    
    
    295.9
    
    
    
    
    
    
    
    562.9Property, equipment and leasehold improvements,
net
    
    
    106.9
    
    
    
    131.1
    
    
    
    
    
    
    
    238.0Goodwill, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    27.1Other assets
    
    
    9.8
    
    
    
    1.5
    
    
    
    
    
    
    
    11.3Investment in subsidiaries
    
    
    90.6
    
    
    
    
    
    
    
    (90.6
    )
    
    
    Intercompany receivable
    
    
    295.4
    
    
    
    
    
    
    
    (295.4
    )
    
    
    Total assets
    
    $
    769.7
    
    
    $
    455.6
    
    
    $
    (386.0
    )
    
    $
    839.3Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    155.8
    
    
    $
    11.4
    
    
    $
    
    
    
    $
    167.2Accrued expenses
    
    
    71.8
    
    
    
    19.8
    
    
    
    
    
    
    
    91.6Total current liabilities
    
    
    227.6
    
    
    
    31.2
    
    
    
    
    
    
    
    258.8Long-term debt
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    100.0Deferred income taxes
    
    
    7.8
    
    
    
    19.8
    
    
    
    
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    25.4
    
    
    
    18.6
    
    
    
    
    
    
    
    44.0Intercompany payable
    
    
    
    
    
    
    295.4
    
    
    
    (295.4
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Additional paid-in capital
    
    
    151.8
    
    
    
    
    
    
    
    
    
    
    
    151.8Retained earnings
    
    
    299.6
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    299.6452.7
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    452.7Treasury stock, at cost
    
    
    (43.8
    )
    
    
    
    
    
    
    
    
    
    
    (43.8
    )Total shareholders equity
    
    
    408.9
    
    
    
    90.6
    
    
    
    (90.6
    )
    
    
    408.9Total liabilities and shareholders equity
    
    $
    769.7
    
    
    $
    455.6
    
    
    $
    (386.0
    )
    
    $
    839.3
 10
      Note
6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations  Thirteen Weeks Ended October 29, 2005 and October 30, 2004
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    260.9
    
    
    $
    418.3
    
    
    $
    (205.0
    )
    
    $
    474.2Cost of sales
    
    
    173.8
    
    
    
    289.1
    
    
    
    (205.0
    )
    
    
    257.9Gross margin
    
    
    87.1
    
    
    
    129.2
    
    
    
    
    
    
    
    216.3Selling, general and administrative expenses
    
    
    94.2
    
    
    
    106.6
    
    
    
    
    
    
    
    200.8Store pre-opening and closing costs
    
    
    5.9
    
    
    
    2.6
    
    
    
    
    
    
    
    8.5Depreciation and amortization
    
    
    5.3
    
    
    
    5.2
    
    
    
    
    
    
    
    10.5Stock-based compensation expense, net
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    (1.8
    )Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss) profit
    
    
    (16.5
    )
    
    
    14.8
    
    
    
    
    
    
    
    (1.7
    )Interest expense, net
    
    
    1.3
    
    
    
    2.8
    
    
    
    
    
    
    
    4.1(Loss) income before income taxes
    
    
    (17.8
    )
    
    
    12.0
    
    
    
    
    
    
    
    (5.8
    )Income tax (benefit) provision
    
    
    (3.4
    )
    
    
    1.7
    
    
    
    
    
    
    
    (1.7
    )(Loss) income before equity income
    
    
    (14.4
    )
    
    
    10.3
    
    
    
    
    
    
    
    (4.1
    )Equity income (loss) from subsidiaries
    
    
    10.3
    
    
    
    
    
    
    
    (10.3
    )
    
    
    Net (loss) income
    
    $
    (4.1
    )
    
    $
    10.3
    
    
    $
    (10.3
    )
    
    $
    (4.1
    )
 October 30, 2004 (Restated)GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    244.4
    
    
    $
    328.0
    
    
    $
    (124.1
    )
    
    $
    448.3Cost of sales
    
    
    149.6
    
    
    
    208.6
    
    
    
    (124.1
    )
    
    
    234.1Gross margin
    
    
    94.8
    
    
    
    119.4
    
    
    
    
    
    
    
    214.2Selling, general and administrative expenses
    
    
    88.5
    
    
    
    91.7
    
    
    
    
    
    
    
    180.2Store pre-opening and closing costs
    
    
    4.0
    
    
    
    2.5
    
    
    
    
    
    
    
    6.5Depreciation and amortization
    
    
    4.7
    
    
    
    6.2
    
    
    
    
    
    
    
    10.9Stock-based compensation expense
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
(loss) profit
    
    
    (4.3
    )
    
    
    19.0
    
    
    
    
    
    
    
    14.7Interest expense, net
    
    
    1.3
    
    
    
    2.5
    
    
    
    
    
    
    
    3.8(Loss) income  before income taxes
    
    
    (5.6
    )
    
    
    16.5
    
    
    
    
    
    
    
    10.9Income tax provision (benefit)
    
    
    (2.1
    )
    
    
    6.1
    
    
    
    
    
    
    
    4.0(Loss) income before equity income
    
    
    (3.5
    )
    
    
    10.4
    
    
    
    
    
    
    
    6.9Equity income from subsidiaries
    
    
    10.4
    
    
    
    
    
    
    
    (10.4
    )
    
    
    Net income
    
    $
    6.9
    
    
    $
    10.4
    
    
    $
    (10.4
    )
    
    $
    6.9
 11
      Note
6   Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Operations  Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    699.9
    
    
    $
    1,084.4
    
    
    $
    (505.6
    )
    
    $
    1,278.7Cost of sales
    
    
    447.1
    
    
    
    731.3
    
    
    
    (505.6
    )
    
    
    672.8Gross margin
    
    
    252.8
    
    
    
    353.1
    
    
    
    
    
    
    
    605.9Selling, general and administrative expenses
    
    
    272.1
    
    
    
    282.7
    
    
    
    
    
    
    
    554.8Store pre-opening and closing costs
    
    
    12.2
    
    
    
    5.2
    
    
    
    
    
    
    
    17.4Depreciation and amortization
    
    
    15.1
    
    
    
    16.0
    
    
    
    
    
    
    
    31.1Stock-based compensation expense, net
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
(loss) profit
    
    
    (47.8
    )
    
    
    49.2
    
    
    
    
    
    
    
    1.4Interest expense, net
    
    
    3.1
    
    
    
    5.6
    
    
    
    
    
    
    
    8.7(Loss) income before income taxes
    
    
    (50.9
    )
    
    
    43.6
    
    
    
    
    
    
    
    (7.3
    )Income tax (benefit) provision
    
    
    (16.0
    )
    
    
    13.7
    
    
    
    
    
    
    
    (2.3
    )(Loss) income before equity income
    
    
    (34.9
    )
    
    
    29.9
    
    
    
    
    
    
    
    (5.0
    )Equity income (loss) from subsidiaries
    
    
    29.9
    
    
    
    
    
    
    
    (29.9
    )
    
    
    Net (loss) income
    
    $
    (5.0
    )
    
    $
    29.9
    
    
    $
    (29.9
    )
    
    $
    (5.0
    )
 October 30, 2004 (Restated)GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    662.7
    
    
    $
    937.0
    
    
    $
    (375.5
    )
    
    $
    1,224.2Cost of sales
    
    
    395.5
    
    
    
    609.1
    
    
    
    (375.5
    )
    
    
    629.1Gross margin
    
    
    267.2
    
    
    
    327.9
    
    
    
    
    
    
    
    595.1Selling, general and administrative expenses
    
    
    250.8
    
    
    
    254.2
    
    
    
    
    
    
    
    505.0Store pre-opening and closing costs
    
    
    7.6
    
    
    
    7.4
    
    
    
    
    
    
    
    15.0Depreciation and amortization
    
    
    13.5
    
    
    
    18.4
    
    
    
    
    
    
    
    31.9Stock-based compensation expense
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Debt repurchase expenses
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Operating
(loss) profit
    
    
    (14.8
    )
    
    
    47.9
    
    
    
    
    
    
    
    33.1Interest expense, net
    
    
    4.1
    
    
    
    6.7
    
    
    
    
    
    
    
    10.8(Loss) income before income taxes
    
    
    (18.9
    )
    
    
    41.2
    
    
    
    
    
    
    
    22.3Income tax
(benefit) provision
    
    
    (7.3
    )
    
    
    15.7
    
    
    
    
    
    
    
    8.4(Loss) income before equity income
    
    
    (11.6
    )
    
    
    25.5
    
    
    
    
    
    
    
    13.9Equity income from subsidiaries
    
    
    25.5
    
    
    
    
    
    
    
    (25.5
    )
    
    
    Net income
    
    $
    13.9
    
    
    $
    25.5
    
    
    $
    (25.5
    )
    
    $
    13.9
 12
      Note 6
 Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows  Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004
 October 29, 2005GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (206.2
    )
    
    $
    46.3
    
    
    $
    
    
    
    $
    (159.9
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (45.9
    )
    
    
    (45.9
    )
    
    
    
    
    
    
    (91.8
    )Net cash used for investing activities
    
    
    (45.9
    )
    
    
    (45.9
    )
    
    
    
    
    
    
    (91.8
    )Net cash flows provided by financing activities:Net change in revolving credit facility
    
    
    190.0
    
    
    
    
    
    
    
    
    
    
    
    190.0Proceeds from stock-based compensation plans
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    5.5Other, net
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Net cash provided by financing activities
    
    
    196.2
    
    
    
    
    
    
    
    
    
    
    
    196.2Net
(decrease) increase in cash and cash equivalents
    
    
    (55.9
    )
    
    
    0.4
    
    
    
    
    
    
    
    (55.5
    )Cash and cash equivalents at beginning of period
    
    
    76.6
    
    
    
    3.0
    
    
    
    
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    20.7
    
    
    $
    3.4
    
    
    $
    
    
    
    $
    24.1
 October 30, 2004 (Restated)GuarantorParent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash (used for) provided by operating activities
    
    $
    (45.0
    )
    
    $
    22.1
    
    
    $
    
    
    
    $
    (22.9
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (26.0
    )
    
    
    (22.0
    )
    
    
    
    
    
    
    (48.0
    )Net cash used for investing activities
    
    
    (26.0
    )
    
    
    (22.0
    )
    
    
    
    
    
    
    (48.0
    )Net cash flows provided by financing activities:Proceeds from issuance of 7.5% senior subordinated notes, net
    
    
    97.4
    
    
    
    
    
    
    
    
    
    
    
    97.4Purchase of 10 3/8% senior subordinated notes
    
    
    (66.6
    )
    
    
    
    
    
    
    
    
    
    
    (66.6
    )Net change in revolving credit facility
    
    
    50.7
    
    
    
    
    
    
    
    
    
    
    
    50.7Proceeds from stock-based compensation plans
    
    
    9.7
    
    
    
    
    
    
    
    
    
    
    
    9.7Other, net
    
    
    (4.0
    )
    
    
    
    
    
    
    
    
    
    
    (4.0
    )Net cash provided by financing activities
    
    
    87.2
    
    
    
    
    
    
    
    
    
    
    
    87.2Net increase in cash and cash equivalents
    
    
    16.2
    
    
    
    0.1
    
    
    
    
    
    
    
    16.3Cash and cash equivalents at beginning of period
    
    
    14.3
    
    
    
    3.1
    
    
    
    
    
    
    
    17.4Cash and cash equivalents at end of period
    
    $
    30.5
    
    
    $
    3.2
    
    
    $
    
    
    
    $
    33.7
 13
      Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Restatement of Prior
Financial Information
 General Overview
 Jo-Ann Fabrics and Crafts Jo-Ann
   Executive Overview
  14
      
    
    Net sales increased 5.8% to $474.2 million due to the impact of new superstore
openings. Net sales from stores open one year or more (same-store sales) increased 0.7%
versus a 0.9% same-store sales decrease for the third quarter last year. Our average
ticket increased 2.7% for the third quarter of fiscal 2006, but was largely offset by a
decline in customer traffic.
    
    Our gross margin rate, as a percentage of sales, declined by 220 basis points,
to 45.6% of net sales this quarter versus 47.8% for the third quarter last year. This is
due to a more price-focused environment, an increased level of coupon-assisted sales, and
an increased level of promotional and clearance activity compared to a year ago.
    
    Our selling, general and administrative expenses (SG&A) as a percentage of
sales, excluding those expenses separately identified in the statement of operations,
increased 210 basis points from 40.2% in the third quarter last year to 42.3% this year.
The reduced leverage for the quarter stemmed from essentially flat same-store sales
performance, coupled with higher advertising spending, logistics costs, and normal
inflationary increases in operating expenses.
    
    Store pre-opening and closing costs increased $2.0 million for the third
quarter to $8.5 million, due to a higher number of store openings and closings and the
timing of real estate activity year-over-year.
    
    Stock-based compensation expense for the third quarter was a credit of $1.8
million, compared with a $1.9 million expense in the same period last year. As discussed
in further detail below, the change in stock-based compensation expense is primarily
attributable to an adjustment in our performance expectation used to compute expense for
the performance-based shares portion of our restricted stock grants. In addition,
stock-based compensation expense was credited for expense previously recognized for
executives who have recently left the Company.
 15
      Results of Operations
  Percentage of Net SalesThirteen
    
    
    Thirty-NineWeeks Ended
    
    
    Weeks EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    45.6
    %
    
    
    47.8
    %
    
    
    47.4
    %
    
    
    48.6
    %Selling, general and administrative expenses
    
    
    42.3
    %
    
    
    40.2
    %
    
    
    43.4
    %
    
    
    41.3
    %Store pre-opening and closing costs
    
    
    1.8
    %
    
    
    1.5
    %
    
    
    1.4
    %
    
    
    1.2
    %Depreciation and amortization
    
    
    2.2
    %
    
    
    2.4
    %
    
    
    2.4
    %
    
    
    2.6
    %Stock-based compensation expense, net
    
    
    (0.3
    )%
    
    
    0.4
    %
    
    
    0.1
    %
    
    
    0.5
    %Debt repurchase expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    %Operating (loss) profit
    
    
    (0.4
    )%
    
    
    3.3
    %
    
    
    0.1
    %
    
    
    2.7
    %
 Comparison of the Thirteen Weeks Ended October 29, 2005 to October 30, 2004
 Net Sales.
   16
      Gross Margin.
 Selling, general and administrative expenses.
   Store pre-opening and closing costs.
  Depreciation and amortization.
 Stock-based compensation expense.
 17
      Interest expense.
 Income taxes.
 Comparison of the Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004
 Net Sales.
   18
      Gross Margin.
 Selling, general and administrative expenses.
   Store pre-opening and closing costs.
  Depreciation and amortization.
 Stock-based compensation expense.
 19
      Debt repurchase expenses.
 Interest expense.
 Income taxes.
  Liquidity and Capital Resources
  20
      Dollars in millions
    
    2006
    
    2005(Restated)Net cash used for operating activities
    
    $
    (159.9
    )
    
    $
    (22.9
    )Net cash used for investing activities
    
    
    (91.8
    )
    
    
    (48.0
    )Net cash provided by financing activities
    
    
    196.2
    
    
    
    87.2Net (decrease) increase in cash and cash equivalents
    
    $
    (55.5
    )
    
    $
    16.3Ending cash and cash equivalents
    
    $
    24.1
    
    
    $
    33.7
 Net cash used for operating activities
   Net cash used for investing activities
  Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,Dollars in millions
    
    2005
    
    
    2004(Restated)Cash
    
    $
    76.5
    
    
    $
    42.7Cash  landlord reimbursed
    
    
    15.3
    
    
    
    5.3Total
    
    $
    91.8
    
    
    $
    48.0
  21
      Net cash provided by financing activities
 1 2
    Off-Balance Sheet Transactions
  Business Update
  22
      Recent Developments
   Seasonality and Inflation
   Critical Accounting Policies
  Cautionary Statement Concerning Forward-Looking Statements
  23
      Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
    24
      PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by Jo-Ann Stores, Inc.
 Total Number of
    
    Maximum 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
    
    ProgramsJuly 31 August 27, 2005
    
    
    6,887
    
    
    $
    26.05
    
    
    
    895,562
    
    
    
    1,254,438August 28  October 1, 2005
    
    
    647
    
    
    $
    19.08
    
    
    
    896,209
    
    
    
    1,253,791October 2-29, 2005
    
    
    
    
    
    
    
    
    
    
    896,209
    
    
    
    1,253,791Total
    
    
    7,534
    
    
    $
    25.45
    
    
    
    896,209
    
    
    
    1,253,791
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  25
      Item 6. Exhibits
 Exhibits
 10.1
    
    Employment Agreement dated October 21, 2005 between Jo-Ann
Stores, Inc. and Mr. Alan Rosskamm (incorporated herein by
reference to Exhibit 10.1 of Form 8-K, filed with the Commission
on October 26, 2005).10.2
    
    Employment Agreement dated October 21, 2005 between Jo-Ann
Stores, Inc. and Mr. David Holmberg (incorporated herein by
reference to Exhibit 10.2 of Form 8-K, filed with the Commission
on October 26, 2005).10.3
    
    Employment Agreement dated October 21, 2005 between Jo-Ann
Stores, Inc. and Ms. Rosalind Thompson (incorporated herein by
reference to Exhibit 10.3 of Form 8-K, filed with the Commission
on October 26, 2005).31.1
    
    Section 302 Certification By Chief Executive Officer31.2
    
    Section 302 Certification By Vice President, Controller (Acting
Principal Financial Officer)32.1
    
    Section 906 Certification of Principal Executive Officer and
Acting Principal Financial Officer
 26
      SIGNATURES
  JO-ANN STORES, INC.
 DATE:  December 8, 2005
    /s/ Alan RosskammAlan Rosskamm,Chairman, President and Chief Executive Officer/s/ James KerrJames Kerr,Vice President, Controller
(Acting Principal Financial Officer) 27