##### 



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 29, 2006 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)
 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 a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one). Large
accelerated filer
o    Accelerated filer
þ    Non-accelerated filer
o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.): Yes o   No
þ 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 2,
2006: 24,100,072




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##### 



Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended April 29, 2006  Page NumbersPart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets -- April
29, 2006 (Unaudited),
January 28, 2006 and April 30, 2005 (Unaudited)
    
    
    1Unaudited Consolidated Statements of
Operations for the Thirteen
Weeks Ended April 29, 2006 and April 30, 2005
    
    
    2Unaudited Consolidated Statements of
Cash Flows for the
Thirteen Weeks Ended April 29, 2006 and April 30, 2005
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23




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##### 



PART I. FINANCIAL INFORMATION  Item 1. Financial Statements
 Jo-Ann Stores, Inc.
Consolidated Balance Sheets
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)April 29,
    
    
    January 28,
    
    
    April 30,2006
    
    
    2006
    
    
    2005(Dollars in millions, except share and per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    26.1
    
    
    $
    17.9
    
    
    $
    43.2Inventories
    
    
    463.0
    
    
    
    514.7
    
    
    
    446.4Deferred income taxes
    
    
    38.0
    
    
    
    38.0
    
    
    
    21.3Prepaid expenses and other current assets
    
    
    26.8
    
    
    
    35.2
    
    
    
    20.7Total current assets
    
    
    553.9
    
    
    
    605.8
    
    
    
    531.6Property, equipment and leasehold improvements, net
    
    
    333.9
    
    
    
    331.7
    
    
    
    238.8Goodwill, net
    
    
    
    
    
    
    
    
    
    
    27.1Other assets
    
    
    10.2
    
    
    
    9.3
    
    
    
    11.4Total assets
    
    $
    898.0
    
    
    $
    946.8
    
    
    $
    808.9Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    131.7
    
    
    $
    146.6
    
    
    $
    153.2Accrued expenses
    
    
    76.6
    
    
    
    94.1
    
    
    
    59.9Total current liabilities
    
    
    208.3
    
    
    
    240.7
    
    
    
    213.1Long-term debt
    
    
    190.0
    
    
    
    203.7
    
    
    
    100.0Deferred income taxes
    
    
    23.2
    
    
    
    23.2
    
    
    
    27.6Lease obligations and other long-term liabilities
    
    
    82.4
    
    
    
    79.8
    
    
    
    49.8Shareholders 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 27,148,372; 27,050,507 and 26,458,708 shares, respectively
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.3Additional paid-in capital
    
    
    166.5
    
    
    
    165.4
    
    
    
    157.4Retained earnings
    
    
    270.0
    
    
    
    276.6
    
    
    
    303.8437.9
    
    
    
    443.4
    
    
    
    462.5Treasury stock, at cost, 3,644,439; 3,675,439 and 3,734,217 shares, respectively
    
    
    (43.8
    )
    
    
    (44.0
    )
    
    
    (44.1
    )Total shareholders equity
    
    
    394.1
    
    
    
    399.4
    
    
    
    418.4Total liabilities and shareholders equity
    
    $
    898.0
    
    
    $
    946.8
    
    
    $
    808.9
  1




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##### 



Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited) Thirteen Weeks EndedApril 29,
    
    April 30,2006
    
    2005(Dollars in millions,
exceptshare and per share data)Net sales
    
    $
    424.7
    
    
    $
    420.7Cost of sales
    
    
    226.7
    
    
    
    215.9Gross margin
    
    
    198.0
    
    
    
    204.8Selling, general and administrative expenses
    
    
    189.7
    
    
    
    180.6Store pre-opening and closing costs
    
    
    5.5
    
    
    
    4.9Depreciation and amortization
    
    
    11.6
    
    
    
    10.5Operating (loss) profit
    
    
    (8.8
    )
    
    
    8.8Interest expense, net
    
    
    3.5
    
    
    
    2.1(Loss) income before income taxes
    
    
    (12.3
    )
    
    
    6.7Income tax (benefit) provision
    
    
    (4.7
    )
    
    
    2.5(Loss) income before cumulative effect of accounting change
    
    
    (7.6
    )
    
    
    4.2Cumulative effect of change in accounting principle, net of tax
    
    
    1.0
    
    
    
    Net (loss) income
    
    $
    (6.6
    )
    
    $
    4.2(Loss) income per common share  basic:(Loss) income before cumulative effect of accounting change
    
    $
    (0.32
    )
    
    $
    0.19Cumulative effect of change in accounting principle
    
    
    0.04
    
    
    
    Net (loss) income
    
    $
    (0.28
    )
    
    $
    0.19(Loss) income per common share  diluted:(Loss) income before cumulative effect of accounting change
    
    $
    (0.32
    )
    
    $
    0.18Cumulative effect of change in accounting principle
    
    
    0.04
    
    
    
    Net (loss) income
    
    $
    (0.28
    )
    
    $
    0.18Weighted average shares outstanding (in thousands):Basic
    
    
    23,316
    
    
    
    22,479Diluted
    
    
    23,316
    
    
    
    23,208
 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 29,
    
    April 30,2006
    
    2005(Dollars in millions)Net cash flows provided by (used for) operating activities:Net (loss) income
    
    $
    (6.6
    )
    
    $
    4.2Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    11.6
    
    
    
    10.5Stock-based compensation expense
    
    
    1.3
    
    
    
    2.7Cumulative effect of change in accounting principle
    
    
    (1.0
    )
    
    
    Tax benefit on stock-based compensation plan awards
    
    
    
    
    
    
    0.4Amortization of deferred financing costs
    
    
    0.2
    
    
    
    0.2Loss on disposal of fixed assets
    
    
    0.3
    
    
    
    0.3Changes in operating assets and liabilities:Decrease (increase) in inventories
    
    
    51.7
    
    
    
    (6.7
    )Decrease in prepaid expenses and other current assets
    
    
    8.4
    
    
    
    1.6Decrease in accounts payable
    
    
    (14.9
    )
    
    
    (14.0
    )Decrease in accrued expenses
    
    
    (18.1
    )
    
    
    (31.7
    )Increase in lease obligations, net
    
    
    2.4
    
    
    
    5.1Increase in other long-term liabilities
    
    
    0.2
    
    
    
    0.7Other, net
    
    
    (0.9
    )
    
    
    (0.3
    )Net cash provided by (used for) operating activities
    
    
    34.6
    
    
    
    (27.0
    )Net cash flows used for investing activities:Capital expenditures
    
    
    (14.1
    )
    
    
    (11.6
    )Net cash used for investing activities
    
    
    (14.1
    )
    
    
    (11.6
    )Net cash flows (used for) provided by financing activities:Net change in revolving credit facility
    
    
    (13.7
    )
    
    
    Proceeds from stock-based compensation plans
    
    
    1.2
    
    
    
    2.2Other, net
    
    
    0.2
    
    
    
    Net cash (used for) provided by financing activities
    
    
    (12.3
    )
    
    
    2.2Net increase (decrease) in cash and cash equivalents
    
    
    8.2
    
    
    
    (36.4
    )Cash and cash equivalents at beginning of period
    
    
    17.9
    
    
    
    79.6Cash and cash equivalents at end of period
    
    $
    26.1
    
    
    $
    43.2Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    5.1
    
    
    $
    4.2Income taxes, net of refunds
    
    
    4.4
    
    
    
    19.7
 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 nations largest specialty
retailer of fabrics and one of the largest specialty retailers of crafts operating 825 retail
stores in 47 states at April 29, 2006. The 663 traditional stores and 162 superstores feature a
variety of competitively priced merchandise used in sewing, crafting and home decorating
projects, including fabrics, notions, yarn, crafts, frames, paper crafting material, 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 2007 refers to the year-ended February 3, 2007). Fiscal 2007 is a 53-week year. 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 2006 year-end and interim financial statements have been
reclassified in order to conform to the current year presentation. 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 28, 2006. 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
April 30, 2005 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. Note 2  Stock-Based Compensation The Company administers its stock-based compensation award programs utilizing the 1998
Incentive Compensation Plan (1998 Plan). This plan provides for the grant of stock options,
restricted stock, and stock equivalent units to employees and non-employee directors. It also
allows for the operation of an employee stock purchase program and a deferred stock program for
non-employee directors. The number of shares available for future awards under the 1998 Plan as of
April 29, 2006 was 1,397,601. The Company has several other stock-based compensation award plans
that have terminated, thus no new awards may be granted, but past awards remain outstanding under
those plans. A full description of the various plans is contained in Note 7 to the consolidated
financial statements of the Companys Annual Report on Form 10-K
for the fiscal year-ended January 28,
2006. Prior to January 29, 2006, the Company used the fair value method of accounting as outlined in
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. The Company had voluntarily adopted this method of accounting in fiscal 2004 under
the permitted modified prospective method. 4




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##### 



Effective January 29, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment, (SFAS No. 123R), which replaces SFAS No. 123, using the modified prospective method.
SFAS No. 123R requires stock-based compensation to be measured using the fair value method of
accounting. The adoption of SFAS No. 123R did not have a significant impact on the Companys
financial condition or results of operations. The adoption of the new standard did result in a
cumulative after-tax income item, which is discussed below. Among other things, SFAS No. 123R changes the manner of accounting for forfeitures of
stock-based awards. Previously, the Company accounted for forfeitures as they occurred, which is
no longer permitted. The Company must now estimate expected forfeitures as of the date the awards
are granted and record compensation expense only for those awards that are ultimately expected to
vest. Stock-based compensation expense is recognized over the vesting period of the awards. Further, upon adoption, the Company must also estimate the forfeitures that are expected to
occur on awards that are currently outstanding and reduce the previously recognized compensation
expense. The after-tax amount of this reduction is presented on the statement of operations as a
cumulative effect of a change in accounting principle. The Company estimated its forfeiture rates
based on its historical experience during the preceding ten years and recorded a cumulative
after-tax adjustment of $1.0 million, or $0.04 per diluted common share in the first quarter of
fiscal 2007. Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions
resulting from the exercise of stock options or the issuance of shares under other stock-based
compensation programs as operating cash flows in the statement of cash flows. SFAS No. 123R
requires that cash flows resulting from the tax benefits of deductions in excess of the
compensation cost recognized for stock-based awards be classified as financing cash flows. The
gross excess tax benefit classified as a financing cash inflow in the first quarter of fiscal 2007
was not significant. The following table shows the expense recognized by the Company for stock-based compensation: Thirteen Weeks EndedDollars in millions
    
    April 29, 2006
    
    
    April 30, 2005Stock option compensation expense
    
    $
    0.6
    
    
    $
    0.8Restricted stock award amortization
    
    
    0.7
    
    
    
    1.9$
    1.3
    
    
    $
    2.7
 Stock Options The employee and non-employee director stock options granted under the 1998 Plan generally
become exercisable to the extent of one-fourth of the optioned shares for each full year of
continuous employment or service following the date of grant and generally expire seven to ten
years after the date of the grant. Stock options granted under the 1998 Plan may become
exercisable or expire under different terms as approved by the Compensation Committee of the Board
of Directors. The Company estimates the fair value of options granted using the Black-Scholes option-pricing
model. The Black-Scholes model requires several assumptions, which management developed and
updates regularly based on historical trends and current market observations. The fair values of
the options granted under the stock plans are determined at the date of grant. The Company does not
pay dividends, thus, no dividend rate assumption is used. 5




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##### 



The Company estimates expected volatility based on the historical volatility of the price of
the common stock over the expected life of the awards. The expected life represents the period of
time that stock-based awards are expected to be outstanding. The Company also uses historical
experience to estimate stock-based award exercises and employee terminations. The risk-free
interest rate is based on applicable U.S. Treasury yields that approximate the expected life of
stock-based awards granted. The significant fair value assumptions were as follows: Thirteen Weeks EndedApril 29,
    
    April 30,2006
    
    2005Weighted average fair value of options
granted
    
    $5.93
    
    $13.21Expected volatility of underlying stock
    
    .491 to .584
    
    .559 to .568Risk-free interest rates
    
    4.2% to 4.4%
    
    3.5% to 4.2%Expected life
    
    2.2 to 5.2 years
    
    4 yearsExpected life  Employee Stock
Purchase Program
    
    6 months
    
    6 months
 The following table summarizes activity, pricing and other information for the Companys
stock options for the thirteen weeks ended April 29, 2006: Weighted-Average
    
    
    Weighted-Average
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Per Option
    
    
    Contractual Term
    
    
    ValueaOutstanding at January 28, 2006
    
    
    2,051,912
    
    
    $
    15.66Granted
    
    
    24,500
    
    
    
    12.24Exercised
    
    
    (3,125
    )
    
    
    5.21Cancelled
    
    
    (291,189
    )
    
    
    16.89Outstanding at April 29, 2006
    
    
    1,782,098
    
    
    $
    15.43
    
    
    4.4 years
    
    $
    1,938,886Expected to vest
    
    
    1,698,895
    
    
    $
    15.48
    
    
    4.3 years
    
    $
    1,936,624Exercisable at April 29, 2006
    
    
    1,105,148
    
    
    $
    13.99
    
    
    3.5 years
    
    $
    1,921,643




|(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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The total intrinsic value of options exercised during the first quarter of fiscal 2007
and fiscal 2006 were $24,700 and $1.5 million, respectively.

Restricted Stock Awards

The vesting periods for the restricted shares granted under the 1998 Plan are up to five years
for employee restricted shares and up to six years for non-employee director restricted shares.
The time-based and performance-based awards vest 50 percent at the end of three years, with the
remaining 50 percent vesting at the end of the fourth year. The performance-based award provides
the potential to receive generally up to three times that amount in additional shares, dependent on
the Company achieving certain net income performance criteria that are measured at the end of the
third year. The expense recognition for the value of restricted shares is based on the vesting
period and an estimate regarding certain performance levels over the three-year measurement period.

6



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##### 



Restricted Stock  Time-Based Awards As of April 29, 2006, 629,328 shares of restricted stock were outstanding in which the
restrictions lapse upon the achievement of continued employment over a specified period of time
(time-based restricted stock awards). The following table summarizes activity for time-based restricted stock awards for the
thirteen weeks ended April 29, 2006: Weighted-Number of
    
    
    Average GrantShares
    
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    661,910
    
    
    $
    20.83Granted
    
    
    103,050
    
    
    
    12.22Vested
    
    
    (25,711
    )
    
    
    17.30Cancelled
    
    
    (109,921
    )
    
    
    19.89Outstanding at April 29, 2006
    
    
    629,328
    
    
    $
    19.71
 The fair value of restricted shares is determined based on the closing trading price of
the Companys shares on the grant date. Conceptually, a restricted share is considered an option
with an exercise price of zero. Therefore, the fair value of a share is the same as the intrinsic
value of such an option on that share. During the first quarter of fiscal 2007 and fiscal 2006, the Company granted time-based
restricted stock awards with weighted-average grant-date fair values of $12.22, and $30.06,
respectively. As of April 29, 2006, there was $6.3 million of total unrecognized compensation cost
related to restricted awards expected to vest, which is expected to be recognized over a
weighted-average period of 1.6 years. The total fair value of shares fully vested during the first
quarter of fiscal 2007 was $0.3 million. There were no shares that vested during the first quarter
of fiscal 2006. Restricted Stock  Performance-Based Awards The performance-based awards are issued only upon the achievement of specific measurable
performance criteria. Performance can be achieved on three different levels, minimum
(Threshold), midpoint (Target) or maximum (Superior). No expense was recognized in the first
quarter of fiscal 2007 for performance awards based on the Companys current and expected future
performance. During the first quarter of fiscal 2006, $1.1 million of expense was recognized for
performance awards. The following table summarizes information about the performance-based restricted stock awards
assuming the Superior performance level for the thirteen weeks ended April 29, 2006: Weighted-Number of
    
    
    Average GrantShares
    
    
    Date Fair ValueOutstanding at January 28, 2006
    
    
    801,600
    
    
    $
    29.00Cancelled
    
    
    (126,750
    )
    
    
    29.07Outstanding at April 29, 2006
    
    
    674,850
    
    
    $
    28.98Expected to Vest
    
    
    
    
    
    $
    
 Based upon the Companys current and expected performance, the Company expects that the
Threshold performance level for both the fiscal 2006 and 2005 performance-based restricted stock
awards will not be attained. 7




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##### 



Employee Stock Purchase Program The employee stock purchase program (the Associate Stock Ownership Plan or ASOP) enables
employees to subscribe to purchase shares of the Companys common stock on offering dates at
six-month intervals, at a purchase price equal to the lesser of 85 percent of the fair market value
of the common stock on the first or last day of the offering period. The total number of shares
subject to stock purchase rights granted in any fiscal year for the ASOP may not exceed 1,000,000
shares. During the thirteen weeks ended April 29, 2006 and April 30, 2005, stock purchase rights of
102,561 shares and 53,705 shares, respectively, were granted and exercised under the ASOP. The
stock-based compensation expense was not significant for all the quarters presented. Note 3  Earnings Per Share Basic (loss) earnings per common share are computed by dividing net (loss) income by the
weighted average number of shares outstanding during the period. Diluted (loss) earnings per
common share include the effect of the assumed exercise of dilutive stock-based awards under the
treasury stock method. The following table presents information necessary to calculate basic and diluted (loss)
earnings per common share (shares in thousands): Thirteen Weeks EndedApril 29,
    
    April 30,2006
    
    2005Weighted average shares outstanding:Basic common shares
    
    
    23,316
    
    
    
    22,479Incremental shares from assumed
exercise of stock options
    
    
    
    
    
    
    579Incremental restricted shares
    
    
    
    
    
    
    150Diluted common shares
    
    
    23,316
    
    
    
    23,208
 For the first quarter of fiscal 2007, all outstanding stock options were excluded from
the calculation of diluted net loss per common share, because they would have an anti-dilutive
effect due to the Companys net loss. For the first quarter of fiscal 2007, an average of 485,429
stock options had exercise prices below the average market price of the Companys common shares
and an average of 1,376,403 stock options had exercise prices above the average market price of
the Companys common shares. As of April 29, 2006, the Company had 629,328 time-based restricted
stock awards issued and not yet vested, which were excluded from the calculation of diluted common
shares. For the first quarter of fiscal 2006, the calculation of diluted net income per common share
reflects the impact of stock options that had exercise prices below the average market price of
the Companys common shares for the respective period. For the first quarter of fiscal 2006, an
average of 64,850 stock options were not included in the computation of diluted net income per
common share, because the exercise price of the stock options exceeded the average market price
and would have been anti-dilutive. 8




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##### 



Note 4  Shareholders Equity
  CommonNet
    
    
    
    
    
    
    
    Stock
    
    
    AdditionalCommon
    
    
    Treasury
    
    
    
    Stated
    
    
    Paid-In
    
    
    TreasuryShares
    
    
    Shares
    
    
    
    Value
    
    
    Capital
    
    
    Stock(Shares in thousands)
    
    
    
    (Dollars in millions)Balance, January 28, 2006
    
    
    23,375
    
    
    
    3,675
    
    
    
    $
    1.4
    
    
    $
    165.4
    
    
    $
    (44.0
    )Exercise of stock options
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of common stock
    
    
    (7
    )
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuance of treasury shares
    
    
    38
    
    
    
    (38
    )
    
    
    
    
    
    
    
    0.2
    
    
    
    0.3Associate stock ownership plan
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    Stock-based compensation
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Cumulative effect of a change inaccounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    Year-to-date activity
    
    
    129
    
    
    
    (31
    )
    
    
    
    
    
    
    
    1.1
    
    
    
    0.2Balance, April 29, 2006
    
    
    23,504
    
    
    
    3,644
    
    
    
    $
    1.4
    
    
    $
    166.5
    
    
    $
    (43.8
    )
  9




---



##### 



Note 5  Consolidating Financial Statements (Unaudited)
   Consolidating Balance Sheets  April 29, 2006
 GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and cash equivalents
    
    $
    22.6
    
    
    $
    3.5
    
    
    $
    
    
    
    $
    26.1Inventories
    
    
    203.9
    
    
    
    259.1
    
    
    
    
    
    
    
    463.0Deferred income taxes
    
    
    27.6
    
    
    
    10.4
    
    
    
    
    
    
    
    38.0Prepaid expenses and other current assets
    
    
    16.6
    
    
    
    10.2
    
    
    
    
    
    
    
    26.8Total current assets
    
    
    270.7
    
    
    
    283.2
    
    
    
    
    
    
    
    553.9Property, equipment and leasehold improvements, net
    
    
    147.1
    
    
    
    186.8
    
    
    
    
    
    
    
    333.9Other assets
    
    
    8.7
    
    
    
    1.5
    
    
    
    
    
    
    
    10.2Investment in subsidiaries
    
    
    58.1
    
    
    
    
    
    
    
    (58.1
    )
    
    
    Intercompany receivable
    
    
    354.5
    
    
    
    
    
    
    
    (354.5
    )
    
    
    Total assets
    
    $
    839.1
    
    
    $
    471.5
    
    
    
    $(412.6
    )
    
    $
    898.0Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    134.5
    
    
    $
    (2.8
    )
    
    $
    
    
    
    $
    131.7Accrued expenses
    
    
    58.5
    
    
    
    18.1
    
    
    
    
    
    
    
    76.6Total current liabilities
    
    
    193.0
    
    
    
    15.3
    
    
    
    
    
    
    
    208.3Long-term debt
    
    
    190.0
    
    
    
    
    
    
    
    
    
    
    
    190.0Deferred income taxes
    
    
    6.5
    
    
    
    16.7
    
    
    
    
    
    
    
    23.2Lease obligations and other long-term liabilities
    
    
    55.5
    
    
    
    26.9
    
    
    
    
    
    
    
    82.4Intercompany payable
    
    
    
    
    
    
    354.5
    
    
    
    (354.5
    )
    
    
    Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Additional paid-in capital
    
    
    166.5
    
    
    
    
    
    
    
    
    
    
    
    166.5Retained earnings
    
    
    270.0
    
    
    
    58.1
    
    
    
    (58.1
    )
    
    
    270.0437.9
    
    
    
    58.1
    
    
    
    (58.1
    )
    
    
    437.9Treasury stock, at cost
    
    
    (43.8
    )
    
    
    
    
    
    
    
    
    
    
    (43.8
    )Total shareholders equity
    
    
    394.1
    
    
    
    58.1
    
    
    
    (58.1
    )
    
    
    394.1Total liabilities and shareholders equity
    
    $
    839.1
    
    
    $
    471.5
    
    
    
    $(412.6
    )
    
    $
    898.0
 10




---



##### 



Note 5  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




---



##### 



Note 5  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating
Statements of Operations  Thirteen Weeks Ended April 29, 2006 and April 30, 2005
 April 29, 2006GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net sales
    
    $
    235.2
    
    
    $
    300.2
    
    
    $
    (110.7
    )
    
    $
    424.7Cost of sales
    
    
    135.3
    
    
    
    202.1
    
    
    
    (110.7
    )
    
    
    226.7Gross margin
    
    
    99.9
    
    
    
    98.1
    
    
    
    
    
    
    
    198.0Selling, general and administrative expenses
    
    
    94.7
    
    
    
    95.0
    
    
    
    
    
    
    
    189.7Store pre-opening and closing costs
    
    
    2.6
    
    
    
    2.9
    
    
    
    
    
    
    
    5.5Depreciation and amortization
    
    
    6.0
    
    
    
    5.6
    
    
    
    
    
    
    
    11.6Operating loss
    
    
    (3.4
    )
    
    
    (5.4
    )
    
    
    
    
    
    
    (8.8
    )Interest expense, net
    
    
    1.5
    
    
    
    2.0
    
    
    
    
    
    
    
    3.5Loss before income taxes
    
    
    (4.9
    )
    
    
    (7.4
    )
    
    
    
    
    
    
    (12.3
    )Income tax benefit
    
    
    (1.9
    )
    
    
    (2.8
    )
    
    
    
    
    
    
    (4.7
    )Loss before equity loss &
cumulative effect
    
    
    (3.0
    )
    
    
    (4.6
    )
    
    
    
    
    
    
    (7.6
    )Equity loss from subsidiaries
    
    
    (4.6
    )
    
    
    
    
    
    
    4.6
    
    
    
    Loss before cumulative effect
    
    
    (7.6
    )
    
    
    (4.6
    )
    
    
    4.6
    
    
    
    (7.6
    )Cumulative effect of accounting change,
net of tax
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Net loss
    
    $
    (6.6
    )
    
    $
    (4.6
    )
    
    $
    4.6
    
    
    $
    (6.6
    )
 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
    
    
    91.7
    
    
    
    88.9
    
    
    
    
    
    
    
    180.6Store pre-opening and closing costs
    
    
    3.4
    
    
    
    1.5
    
    
    
    
    
    
    
    4.9Depreciation and amortization
    
    
    4.8
    
    
    
    5.7
    
    
    
    
    
    
    
    10.5Operating (loss) profit
    
    
    (10.9
    )
    
    
    19.7
    
    
    
    
    
    
    
    8.8Interest expense, net
    
    
    0.9
    
    
    
    1.2
    
    
    
    
    
    
    
    2.1(Loss) income before income taxes
    
    
    (11.8
    )
    
    
    18.5
    
    
    
    
    
    
    
    6.7Income tax provision (benefit)
    
    
    (4.5
    )
    
    
    7.0
    
    
    
    
    
    
    
    2.5(Loss) income 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
 12




---



##### 



Note 5  Consolidating Financial Statements (Unaudited)  CONTINUED
 Consolidating Statements of Cash Flows  Thirteen Weeks Ended April 29, 2006 and April 30, 2005
 April 29, 2006GuarantorParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    21.3
    
    
    $
    13.3
    
    
    $
    
    
    
    $
    34.6Net cash flows used for investing activities:Capital expenditures
    
    
    (1.9
    )
    
    
    (12.2
    )
    
    
    
    
    
    
    (14.1
    )Net cash used for investing activities
    
    
    (1.9
    )
    
    
    (12.2
    )
    
    
    
    
    
    
    (14.1
    )Net cash flows used for financing activities:Net change in revolving credit facility
    
    
    (13.7
    )
    
    
    
    
    
    
    
    
    
    
    (13.7
    )Proceeds from stock-based compensation plans
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Other, net
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Net cash used for financing activities
    
    
    (12.3
    )
    
    
    
    
    
    
    
    
    
    
    (12.3
    )Net
increase in cash and cash equivalents
    
    
    7.1
    
    
    
    1.1
    
    
    
    
    
    
    
    8.2Cash and cash equivalents at beginning of period
    
    
    15.5
    
    
    
    2.4
    
    
    
    
    
    
    
    17.9Cash and cash equivalents at end of period
    
    $
    22.6
    
    
    $
    3.5
    
    
    $
    
    
    
    $
    26.1
 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: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
 13




---



##### 



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
   14




---



##### 




    
    Net sales increased 1.0% to $424.7 million. Same-store sales decreased 3.9%
versus a 0.6% same-store sales increase for the first quarter last year.
 
    
    Our gross margin rate declined by 210 basis points, to 46.6% of net sales this
quarter versus 48.7% for the first 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. As expected, in our effort to sell-through excess and discontinued
inventory, the first quarter gross margin rate performance was significantly impacted.
 
    
    Our selling, general and administrative expenses (SG&A), excluding those
expenses separately identified in the statement of operations, increased 180 basis points
to 44.7% of net sales from 42.9% of net sales in the first quarter last year. The loss of
expense leverage stemmed from the negative same-store sales performance, coupled with
logistic costs related to the opening of our distribution center in Opelika, Alabama and
increases in operating expenses, primarily driven by increases in store fixed expenses and
advertising, resulting from the larger number of superstores in our store base.
 SG&A includes stock-based compensation expense of $1.3 million, net of estimated
forfeitures, in the first quarter of fiscal 2007, compared with $2.7 million in the first
quarter last year. The reduced expense is attributable to an expectation that no
performance-based shares will be earned under our restricted stock program, based on our
current operating performance. In the first quarter last year, we recorded $1.1 million for
the performance-based component of stock-based compensation expense.
 
    
    Store pre-opening and closing costs increased $0.6 million for the first
quarter of fiscal 2007 to $5.5 million, compared with $4.9 million in the first quarter
last year, primarily due to the higher level of store closing activity year-over-year.
 
    
    As of the beginning of the first quarter, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123R).
SFAS No. 123R among other things, changes the method of accounting for forfeited
share-based awards. As a result, during the first quarter, we recorded a cumulative effect
of the change in accounting principle credit of $1.0 million, net of tax, to reduce
previously recognized expense for estimated forfeitures on existing awards which have not
yet vested (See Note 2 to the consolidated interim financial statements).
 
    
    First quarter net loss was $6.6 million or $(0.28) per diluted share, versus
net income of $4.2 million or $0.18 per diluted share last year. First quarter results
were positively impacted by $0.04 per diluted share due to the cumulative effect of the
change in accounting principle related to adoption of SFAS No. 123R.
 Recent Developments and Business Update
   15




---



##### 



Results of Operations
  Percentage of Net SalesThirteen Weeks EndedApril 29,
    
    
    April 30,2006
    
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    46.6
    %
    
    
    48.7
    %Selling, general and administrative expenses
    
    
    44.7
    %
    
    
    42.9
    %Store pre-opening and closing costs
    
    
    1.3
    %
    
    
    1.2
    %Depreciation and amortization
    
    
    2.7
    %
    
    
    2.5
    %Operating (loss) profit
    
    
    (2.1
    )%
    
    
    2.1
    %
 Comparison of the Thirteen Weeks Ended April 29, 2006 to April 30, 2005
 Net Sales .
   16




---



##### 



Gross Margin.
 Selling, general and administrative expenses.
  Store pre-opening and closing costs.
 Depreciation and amortization.
 Interest expense.
 Income taxes.
 17




---



##### 



Cumulative effect of change in accounting principle.
 Liquidity and Capital Resources
   Dollars in millions
    
    2007
    
    
    2006Net cash provided by (used for) operating activities
    
    $
    34.6
    
    
    $
    (27.0
    )Net cash used for investing activities
    
    
    (14.1
    )
    
    
    (11.6
    )Net cash (used for) provided by financing activities
    
    
    (12.3
    )
    
    
    2.2Net increase (decrease) in cash and cash equivalents
    
    $
    8.2
    
    
    $
    (36.4
    )Ending cash and cash equivalents
    
    $
    26.1
    
    
    $
    43.2
 Net cash provided by (used for) operating activities
   18




---



##### 



Net cash used for investing activities
  Thirteen Weeks EndedApril 29,
    
    
    April 30,Dollars in millions
    
    2006
    
    
    2005Cash
    
    $
    6.2
    
    
    $
    8.6Cash  landlord reimbursed
    
    
    7.9
    
    
    
    3.0Total
    
    $
    14.1
    
    
    $
    11.6
    Net cash (used for) provided by financing activities
   19




---



##### 



Off-Balance Sheet Transactions
  Seasonality and Inflation
   Critical Accounting Policies
  Cautionary Statement Concerning Forward-Looking Statements
  20




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  21




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by Jo-Ann Stores, Inc.
 Total Number ofShares Purchased as
    
    Maximum Number ofPart of Publicly
    
    Shares that May Yet BeTotal Number
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased Under theof Shares Purchased
    
    per Share
    
    Programs
    
    Plans or ProgramsJanuary 29
 Feb. 25, 2006
    
    
    212
    
    
    $
    13.90
    
    
    
    898,849
    
    
    
    1,251,151February 26
 April 1, 2006
    
    
    6,140
    
    
    $
    12.18
    
    
    
    904,989
    
    
    
    1,245,011April 2-29, 2006
    
    
    321
    
    
    $
    12.66
    
    
    
    905,310
    
    
    
    1,244,690Total
    
    
    6,673
    
    
    $
    12.26
    
    
    
    905,310
    
    
    
    1,244,690
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
 Exhibits
 31.1
    
    Section 302 Certification By Chief Executive Officer31.2
    
    Section 302 Certification By Principal Financial Officer32.1
    
    Section 906 Certification of Principal Executive Officer and
Principal Financial Officer
 22




---



##### 



SIGNATURES
  JO-ANN STORES, INC.
 DATE: June 8, 2006
    
    /s/ Alan Rosskamm

Alan Rosskamm,
President and Chief Executive Officer
/s/ James Kerr

James Kerr,
Vice President, Chief Accounting Officer
 23