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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2003

Commission File No. 1-6695



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JO-ANN STORES, INC.

(Exact name of Registrant as specified in its charter)


|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Ohio                                     |  | 34-0720629                          
|(State or other jurisdiction of          |  | (I.R.S. Employer Identification No.)
|incorporation or organization)           |  |                                     
|                                         |  |                                     
|5555 Darrow Road, Hudson, Ohio           |  | 44236                               
|(Address of principal executive offices) |  | (Zip Code)                          

Registrants telephone number, including area code: (330) 656-2600

Securities registered pursuant to Section 12(b) of the Act:

|                                        |  |                        
|--------------------------------------- |  | -----------------------
|                                        |  | Name of Each Exchange  
|Title of Class                          |  | on Which Registered    
|                                        |  |                        
|Class A Common Stock, Without Par Value |  | New York Stock Exchange
|Class B Common Stock, Without Par Value |  | New York Stock Exchange



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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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment of this Form 10-K/A. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o

The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant as of August 2, 2002 was $409.2 million.

The number of shares outstanding, as of April 11, 2003, of the
registrants Class A Common Stock was 10,423,700 and of the registrants Class
B Common Stock was 9,414,171.

Documents incorporated by reference:

Portions of the following documents are incorporated by reference:



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Proxy Statement for 2003 Annual Meeting of Shareholders  Items 10, 11
and 12 of Part III.



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Introductory Note:

This Amendment No. 1 on Form 10-K/A (this Amendment) amends the Companys
Annual Report on Form 10-K for the fiscal year ended February 1, 2003 filed on
May 2, 2003 (the Original Filing).

The Company is filing this Amendment
in order to amend (a) Part I  Item 8 note 12 Minority
Investment of the notes to the Consolidated Financial Statements, which deals
with expanded disclosure of IdeaForest.com and (b) Part IV-Item
15to include financial statements for IdeaForest.com.

Exhibit No. 23.1 to this
Amendment was identified as Exhibit 23 in the Original Filing and is
being currently dated but is otherwise
unchanged. Exhibit No. 23.2 to this Amendment is being added due to the
addition of the IdeaForest.com financial statements. Exhibit No. 23.3 was
identified as Exhibit 23.1 in the Original Filing and other than the change of
the exhibit number is otherwise unchanged. Section 302 CEO/CFO Certifications
were updated to be compliant with SEC changes effective July 28, 2003 and are
included as Exhibits 31.1 and 31.2. Section 906 CEO/CFO Certifications were
updated to be compliant with SEC changes effective July 28, 2003 and are
included as Exhibits 32.1 and 32.2.

PART I

Except as otherwise stated, the information contained in this report is
given as of February 1, 2003, the end of our latest fiscal year. The words
Jo-Ann Stores, Inc., Jo-Ann Stores, Jo-Ann Fabrics and Crafts, Jo-Ann
etc, Registrant, Company, we, our, and us refer to Jo-Ann Stores,
Inc. and, unless the context requires otherwise, to our subsidiaries. Jo-Ann
Stores, Inc. is an Ohio corporation, founded in 1943. Our fiscal year ends on
the Saturday closest to January 31 and refers to the year in which the period
ends (e.g., fiscal 2003 refers to the period ended February 1, 2003).

Item 1. Business

We are the nations largest fabric and craft specialty retailer, serving
customers in their pursuit of apparel and craft sewing, crafting, home
decorating, and other creative endeavors. Our retail stores (operating as
Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann superstores) feature a
variety of competitively priced merchandise from fabrics and notions used in
crafting, quilting, apparel sewing, and home decorating projects, to craft
components, artificial and dried flowers, and finished seasonal merchandise. As
of February 1, 2003, we operated 919 stores in 48 states (847 traditional
stores and 72 superstores).

Our traditional stores average 14,400 square feet. Net sales per
traditional store were approximately $1.4 million in fiscal 2003. Our
superstores offer an expanded and more comprehensive product assortment than
our traditional stores. Our superstores average 45,400 square feet and in
fiscal 2003, on a per-store basis, averaged $6.0 million in net sales per
superstore or generated more than four times the revenue and approximately 30
percent higher sales per square foot than our traditional stores. We believe
our superstores, which accounted for 25 percent of total fiscal 2003 net sales,
present opportunities for future growth.

Over the past five years, we have invested heavily in our infrastructure,
primarily in the areas of superstore growth and systems and logistics. Although
this infrastructure spending resulted in higher debt levels and interest
expense, it was required in order to improve our operating efficiency and to
build the necessary platform for continued store growth. Major capital
expenditures during this period included:



| |  |  | implementation of our fully integrated enterprise-wide system (SAP
Retail)  completed in fiscal 2001;                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | construction and opening of our Visalia, California distribution
center, our second owned distribution center, completed in fiscal 2002;
and
|
| |  |  | the opening of 65 of our 72 superstores.                                                                                                    

In fiscal 2001, we experienced significant difficulty with the
implementation of SAP Retail, impacting our ability to stay in stock on key
basic products while, at the same time, being overstocked on slower selling
products. As a result, sales were negatively affected and our operating
performance suffered.

As a result of our SAP Retail implementation issues, coupled with the
increased debt levels and a decline in our operating margins, our strategy
shifted from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. At the end of fiscal 2001, we announced
the implementation of a three-year turnaround plan (the Turnaround Plan). A
number of charges were taken during fiscal 2001 and 2002 related to the
Turnaround Plan.

During fiscal 2002 and 2003, the Company made significant strides in
executing its Turnaround Plan and improving its operations. In fact, in the two
years since the announcement of the Turnaround Plan, we have exceeded all of
the financial goals we had established for the original

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three-year plan. In
fiscal 2003, we achieved record earnings and have reduced debt levels, net of
cash, to approximately $100 million, our lowest level in five years, as
discussed further in Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Business Strategy

As we complete our Turnaround Plan in fiscal 2004, we intend to further
improve our operating performance by growing same-store sales, improving gross
margins, and reducing interest expense through further debt reduction. Key
elements of this business strategy are:

Grow Same-Store Sales. Both our traditional stores and superstores
present opportunities to improve same-store sales. Our focus in this effort is
maintaining improved inventory in-stocks, improved retail advertising,
merchandise driven initiatives and store optimization. SAP Retail, together
with our improved distribution network structure, is providing excellent tools
to accomplish these goals. The past year demonstrated that as in-stocks
improve, we are able to consistently supply the desired merchandise and our
customers respond favorably. We have significant opportunity to continue to
leverage improvements as we refine our operations going forward. The
superstore, in particular, has become a more significant component of our
business, generating 25 percent of total net sales in fiscal 2003. We believe
there is substantial same-store sales growth opportunities to be achieved as we
market and merchandise the superstore concept more effectively.

Superstore Growth. Our strategy is to roll out our refined superstore
format across the nation. Based on our research, we believe that our superstore
is a breakthrough concept. Our research has demonstrated that our customers
actually have a better perception of the quality and pricing of our products
when they are presented in our superstore format. We believe that our 35,000
square foot superstore will give us a competitive advantage in the industry.
Our superstores provide a unique shopping experience by offering a full
creative selection  of sewing, crafting, framing, seasonal, floral and home
accessories  all under one roof. In locations where we close a traditional
store and replace it with a superstore, we generate an average sales increase
in the first year of more than 300 percent. We have planned approximately 20
store openings for fiscal 2004, the majority of which will be superstores.

Improve Gross Margins. We believe we can improve gross margins by
refining supply chain management and merchandising in our stores. We
continually examine our product sourcing opportunities to improve our
partnerships with our vendors or source through different channels. Further,
SAP Retail has provided substantial flexibility in assessing product
performance and we measure all of our product utilizing gross margin return on
investment (GMROI). This process enables us to improve our product selection
in our store inventory mix and allows us to reduce the level of non-performing
product. SAP Retail also provides the flexibility to target specific SKU item
performance and placement in the locations where maximum results can be
obtained. We also believe we have further opportunities to reduce store shrink
expense.

Reduce Interest Expense Through Debt Reduction. Our
debt-to-capitalization ratio at February 1, 2003 was 36.0 percent. Debt, net of
cash, to capitalization ratio at February 1, 2003 was 22.0 percent. This is
significantly lower than our debt-to-capitalization ratio at the end of fiscal
2002 of 49.0 percent. We are focused on operational performance improvements
and the generation of cash flow for continued debt reduction as we return to
new store growth. We have set a debt-to-capitalization ratio goal of
approximately 20 percent for fiscal 2004 and we believe that level can be
maintained while growing our store base. Improved inventory productivity
contributed to the debt reduction we achieved in fiscal 2003, and we believe
additional opportunity exists to improve inventory turns and grow our sales
base without necessarily increasing our inventory investment.

2



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Stores

The following table shows our stores by type and state at February 1,
2003:

Traditional
    
    Superstore
    
    TotalAlabama
    
    
    2
    
    
    
    
    
    
    
    2Alaska
    
    
    5
    
    
    
    
    
    
    
    5Arizona
    
    
    14
    
    
    
    4
    
    
    
    18Arkansas
    
    
    3
    
    
    
    
    
    
    
    3California
    
    
    97
    
    
    
    6
    
    
    
    103Colorado
    
    
    14
    
    
    
    
    
    
    
    14Connecticut
    
    
    15
    
    
    
    2
    
    
    
    17Delaware
    
    
    3
    
    
    
    
    
    
    
    3Florida
    
    
    51
    
    
    
    6
    
    
    
    57Georgia
    
    
    9
    
    
    
    6
    
    
    
    15Idaho
    
    
    9
    
    
    
    
    
    
    
    9Illinois
    
    
    42
    
    
    
    
    
    
    
    42Indiana
    
    
    27
    
    
    
    2
    
    
    
    29Iowa
    
    
    11
    
    
    
    
    
    
    
    11Kansas
    
    
    8
    
    
    
    1
    
    
    
    9Kentucky
    
    
    5
    
    
    
    
    
    
    
    5Louisiana
    
    
    7
    
    
    
    
    
    
    
    7Maine
    
    
    5
    
    
    
    
    
    
    
    5Maryland
    
    
    20
    
    
    
    3
    
    
    
    23Massachusetts
    
    
    24
    
    
    
    
    
    
    
    24Michigan
    
    
    46
    
    
    
    10
    
    
    
    56Minnesota
    
    
    17
    
    
    
    5
    
    
    
    22Missouri
    
    
    12
    
    
    
    1
    
    
    
    13Montana
    
    
    7
    
    
    
    
    
    
    
    7Nebraska
    
    
    6
    
    
    
    
    
    
    
    6Nevada
    
    
    4
    
    
    
    2
    
    
    
    6New Hampshire
    
    
    8
    
    
    
    
    
    
    
    8New Jersey
    
    
    16
    
    
    
    
    
    
    
    16New Mexico
    
    
    6
    
    
    
    
    
    
    
    6New York
    
    
    38
    
    
    
    7
    
    
    
    45North Carolina
    
    
    9
    
    
    
    
    
    
    
    9North Dakota
    
    
    4
    
    
    
    
    
    
    
    4Ohio
    
    
    58
    
    
    
    10
    
    
    
    68Oklahoma
    
    
    5
    
    
    
    
    
    
    
    5Oregon
    
    
    26
    
    
    
    
    
    
    
    26Pennsylvania
    
    
    51
    
    
    
    1
    
    
    
    52Rhode Island
    
    
    2
    
    
    
    
    
    
    
    2South Carolina
    
    
    2
    
    
    
    
    
    
    
    2South Dakota
    
    
    2
    
    
    
    
    
    
    
    2Tennessee
    
    
    2
    
    
    
    3
    
    
    
    5Texas
    
    
    54
    
    
    
    
    
    
    
    54Utah
    
    
    13
    
    
    
    
    
    
    
    13Vermont
    
    
    4
    
    
    
    
    
    
    
    4Virginia
    
    
    22
    
    
    
    
    
    
    
    22Washington
    
    
    34
    
    
    
    3
    
    
    
    37West Virginia
    
    
    5
    
    
    
    
    
    
    
    5Wisconsin
    
    
    22
    
    
    
    
    
    
    
    22Wyoming
    
    
    1
    
    
    
    
    
    
    
    1Total
    
    
    847
    
    
    
    72
    
    
    
    919


The following table reflects the number of stores opened, expanded or
relocated, closed and acquired during each of the past five fiscal years
(square footage in thousands):

Stores inFiscal
    
    Stores
    
    Expanded or
    
    Stores
    
    Stores
    
    Operation at
    
    SquareYear
    
    Opened
    
    Relocated
    
    Closed
    
    Acquired
    
    Year-end
    
    Footage1999
    
    
    31
    
    
    
    26
    
    
    
    (47
    )
    
    
    171
    (1)
    
    
    1,058
    
    
    
    15,2702000
    
    
    29
    
    
    
    22
    
    
    
    (61
    )
    
    
    
    
    
    
    1,026
    
    
    
    15,6422001
    
    
    18
    
    
    
    9
    
    
    
    (37
    )
    
    
    
    
    
    
    1,007
    
    
    
    16,0682002
    
    
    12
    
    
    
    10
    
    
    
    (60
    )
    
    
    
    
    
    
    959
    
    
    
    15,8972003
    
    
    3
    
    
    
    6
    
    
    
    (43
    )
    
    
    
    
    
    
    919
    
    
    
    15,435




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|(1) |  | In April 1998, we completed a merger with House of Fabrics, Inc., a chain
of 261 fabric and craft stores located primarily on the West Coast. Of the
261 stores acquired, 90 stores were consolidated with existing traditional
stores. As a result, 171 net new units were added to the store base.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our new store opening costs depend on the building type, store size and
general cost levels in the geographical area. During fiscal 2003, we opened one
superstore. Our average net opening cost of a superstore is $2.1 million, which
includes leasehold improvements, furniture, fixtures and equipment, inventory
(net of payable support) and pre-opening expenses. Also during fiscal 2003,

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we
opened two traditional stores, with an average square footage of approximately
20,000 square feet. Our average net opening cost of a traditional store is $1.0
million, which includes leasehold improvements, furniture, fixtures and
equipment, inventory (net of payable support) and pre-opening expenses.

During fiscal 2004, we expect to open 20 new stores, the majority of which
will be superstores, relocate five traditional stores to the new superstore
format, and close approximately 40 traditional stores, approximately half of
which are related to the superstore openings. We have committed to leases for
21 of the 25 planned projects.

Product Selection

The following table shows our net sales by principal product line as a
percentage of total net sales:

Fiscal Year EndedFebruary 1,
    
    February 2,
    
    February 3,2003
    
    2002
    
    2001Principal product lines:Softlines
    
    
    63
    %
    
    
    64
    %
    
    
    63
    %Hardlines and seasonal
    
    
    37
    %
    
    
    36
    %
    
    
    37
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %


Softlines

We offer a broad and comprehensive assortment of fabrics in both our
traditional and superstore formats. These fabrics are merchandised by end use
much like a department store and are sourced from throughout the world to offer
our customer a combination of unique design, fashion forward trends, and value.
Our assortments feature a combination of national brands, designer labels, as
well as several proprietary brands such as our signature series. Our stores
are organized in the following categories for the convenience of the sewer:



| |  | fashion and sportswear fabrics, used primarily in the construction of
garments for the customer seeking a unique, fashion forward look;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | special occasion fabrics used to construct evening wear, bridal and
special occasion outfits;
|- |  | ---------------------------------------------------------------------------------------------



| |  | craft fabrics, used primarily in the construction of quilts, craft
and seasonal projects for the home;
|- |  | ------------------------------------------------------------------------------------------------------



| |  | juvenile designs for the construction of garments as well as blankets
and decor accessories;
|- |  | --------------------------------------------------------------------------------------------



| |  | special-buy or fabrics representing extreme values for our customer;
|- |  | --------------------------------------------------------------------



| |  | home decorating fabrics and accessories used in home related projects
such as window treatments, furniture and bed coverings. In addition to
the in-store assortment, we offer a special order capability for
additional designs;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a wide array of notions, which represent items incidental to
sewing-related projects  including cutting implements, threads,
zippers, trims, tapes, pins, elastics, buttons and ribbons as well as
the patterns necessary for most sewing projects; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | sewing-related accessories including lighting, organizers, and sewing
machines. Our high volume stores offer a wider selection of sewing
machines through leased departments with third parties from whom we
receive sublease income.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Hardlines and Seasonal

Our company offers a broad assortment of hardlines merchandise for the
creative enthusiast. Our superstores offer the complete array of categories
while our traditional stores, due to their smaller size, merchandise edited
assortments, and in some cases, stock only those assortments necessary to serve
our core customer. We offer the following hardline selections:



| |  | papercrafting components, such as albums, papers, stickers, stamps,
and books used in the popular home based activities of scrapbooking and
card making;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | craft materials, including items used for stenciling, jewelry making,
woodworking, wall decor, and kids crafting;
|- |  | -----------------------------------------------------------------------------------------------------------------



| |  | brand-name fine art materials, including items such as pastels, water
colors, oil paints, acrylics, easels, brushes, paper and canvas;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | yarn and accessories as well as needlecraft kits and supplies;
|- |  | --------------------------------------------------------------



| |  | a comprehensive assortment of books and magazines to provide
inspiration for our customer;
|- |  | ------------------------------------------------------------------------------------------



| |  | framed art, photo albums and ready-made frames and, in superstores,
full service framing departments with picture framing materials,
including custom frames, mat boards, glass, backing materials and
related supplies;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | floral products, including artificial flowers, dried flowers,
artificial plants sold separately or in ready-made and custom floral
arrangements and a broad selection of accessories essential for floral
arranging and wreath making; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | home decor accessories including baskets, candles and accent
collections designed to complement our home decor fashions.
|- |  | ------------------------------------------------------------------------------------------------------------------------

In addition to the basic categories described above, our stores regularly
feature seasonal products, which complement our core merchandising strategy.
Our seasonal offering spans all product lines and includes decorations, gifts
and supplies that focus on holidays including Easter, Halloween and Christmas,
as well as seasonal categories such as patio/garden. We own several private
label seasonal brands including the Cottontale Collection, Spooky Hollow
and Santas Workbench. A large percentage of our seasonal assortments
represent product designed exclusively for us.

During the Christmas selling season, a significant portion of floor and
shelf space is devoted to seasonal crafts, decorating and gift-making
merchandise. Due to the project-oriented nature of these items, our peak
selling season extends longer than that of other retailers and generally runs
from September through December. Accordingly, a fully developed seasonal
merchandising program, including inventory, merchandise layout and
instructional ideas, is implemented in every store during our third quarter of
each fiscal year. This program includes increasing inventory levels so that
each store is fully stocked during our peak-selling season.

During fiscal 2003, 49 percent of superstore net sales were derived from
softlines and 51 percent from hardlines. Conversely, during fiscal 2003, 68
percent of traditional store net sales were derived from softlines and 32
percent from hardlines.

Marketing

Our proprietary mailing list includes more than three million preferred
customers who have shopped with us in the past year. This allows us to
efficiently segment and reach our target market. Through our national
advertising campaign and proprietary mailing list, we believe that we are able
to create high impact, low cost marketing campaigns. We focus our advertising
on direct mail circulars for our traditional stores. For our superstores, we
supplement our direct mail

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advertising program with newspaper insert
advertising. Our circulars and newspaper inserts feature numerous products
offered at competitive prices and emphasize the wide selection of merchandise
available in our stores.

In our efforts to market the Jo-Ann Stores concept we also focus on
developing long-term relationships with our customers. These efforts include
providing knowledge and inspiration in-store through classes, demonstrations
and project sheets. This inspiration is also reinforced in our magazine and
other collateral marketing tactics.

We also reach our customers through our relationship with IdeaForest, an
on-line site for arts and crafts merchandise, creative ideas, advice and
supplies. As part of the strategic relationship, IdeaForest, which operates as
an independent entity, is responsible for all content and technology support to
the joann.com website. We provide product to the site, with customer
fulfillment and service being handled by IdeaForest.

Purchasing

We have numerous domestic and international sources of supply available
for each category of product that we sell. During fiscal 2003, approximately 73
percent of our purchases were sourced domestically and 27 percent were sourced
internationally. Although we have no long-term purchase commitments with any of
our suppliers, we strive to maintain continuity with them. All purchases are
centralized through our store support center, allowing store team leaders and
store team members to focus on customer sales and service and enabling us to
negotiate volume discounts, control product mix and ensure quality. Currently,
none of our suppliers represent more than three percent of our annual purchase
volume and the top ten suppliers represent less than 20 percent of our total
annual purchase volume. We currently utilize approximately 900 merchandise
suppliers, with the top 200 representing more than 80 percent of our purchasing
volume.

Logistics

At the end of fiscal 2003, we operated two owned distribution centers
which ship products to all of our stores on a weekly basis. Based on purchase
dollars, approximately 82 percent of the products in our stores are shipped
through our distribution center network, with the remaining 18 percent of our
purchases shipped directly from our suppliers to our stores. Our primary
distribution center facility is located in Hudson, Ohio and supplies product to
approximately two-thirds of our store base and our Visalia, California
distribution center, which opened in April 2001, services the remaining
one-third of our store base.

We transport product from our distribution centers to our stores utilizing
contract carriers. Merchandise is shipped directly from our distribution
centers to our stores using dedicated core carriers for approximately 90
percent of our store base. For the remaining 10 percent of our chain, we
transport product to the stores using less than truckload carriers or through 3
regional hubs where it is crossdocked for local delivery. We do not own
either the regional hubs or the local delivery vehicles.

Store Operations

Site Selection.We believe that our store locations are integral to our
success. Sites are selected through a coordinated effort of our real estate and
operations management teams. In evaluating the desirability of a potential
store site, we consider both market demographics and site-specific criteria.
Market demographic criteria that we consider important include total
population, number of households, median household income, percentage of home
ownership versus rental, and historical and projected population growth over a
ten-year period. Site-specific criteria that we consider important include
rental terms, our position within the strip shopping

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center, size of the
location, age of the shopping center, co-tenants, proximity to highway access,
traffic patterns and ease of entry from the major roadways framing the strip
location.

Our expansion strategy is to give priority to adding stores in existing
markets in order to create economies of scale associated with advertising,
distribution, field supervision, and other regional expenses. We believe that
there are attractive opportunities in most of our existing markets and numerous
new markets.

Costs of Opening Stores.We employ standard operating procedures that
allow us to efficiently open new stores and integrate them into our information
and distribution systems. We develop a standardized floor plan, inventory
layout, and marketing program for each new store we open. We typically open new
stores during the period from February through October to minimize disruption
to our business and maximize sales during our peak Christmas selling season.

Store Management.Traditional stores generally have four full-time team
members and 10 to 15 part-time team members, while superstores typically have
approximately 15 full-time team members and 35 to 40 part-time team members.
Store team leaders are compensated with a base salary plus a bonus which is
tied to quarterly store sales, customer satisfaction survey results, store
shrink rates and annual store profit.

Traditional store team leaders are typically promoted from a group of top
performing sales team members, some of whom started as our customers. This
continuity serves to solidify long-standing relationships between our stores
and our customers. When a traditional store is closed due to the opening of a
superstore, we generally retain its team members to staff the new superstore.
Superstore team leaders have primarily been staffed with individuals from
outside the Company who have previous experience in managing big-box retail
concepts.

Each store is under the supervision of a district team leader who reports
to a regional vice president. Our human resource and field training departments
are responsible for recruiting and training new store team leaders. Our
prospective store team leaders are assigned to one of our existing stores as
management-trainees for several weeks where they receive in-depth on-the-job
training. In addition, quarterly training seminars are conducted for existing
store team leaders and orientation and training programs are conducted for new
sales team members.

Information Technology

We believe we employ industry leading information technology in our
stores. Our point of sale register transactions are polled nightly and our
point of sale system interfaces with both our financial and merchandising
systems. We utilize point of sale registers and scanning devices to record the
sale of product at a SKU level at the stores. We also utilize handheld radio
frequency terminals for a variety of store tasks including price look-up,
perpetual inventory exception counting, merchandise receiving, vendor returns
and fabric sales processing. In the past year, we installed broadband
communication and new store controllers in all of our traditional stores. The
entire chain has now been upgraded with this technology, resulting in a greatly
enhanced customer checkout experience and a better platform to further automate
internal store communications.

Information obtained from item-level scanning through our point of sale
system enables us to identify important trends to assist in managing inventory
by facilitating the elimination of less profitable SKUs, increasing the
in-stock level of more popular SKUs, analyzing product margins and generating
data for advertising cost/benefit evaluations. We also believe that our point
of sale system allows us to provide better customer service by increasing the
speed and accuracy of register check out, enabling us to more rapidly re-stock
merchandise and efficiently re-price sale items.

In March 2000, we went live on SAP Retail. The completion of the retail
portion of this project merged all of our financial, merchandise, and retail
systems and linked business processes on a single software platform. The total
cost of SAP Retail was approximately $33.0 million and is being

7



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amortized over
five years. We experienced operating difficulties stemming from the
implementation of SAP Retail, as discussed further in Managements Discussion
and Analysis of Financial Condition and Results of Operations.During fiscal
year 2002, we stabilized operations under SAP Retail and the system is now
being used to fine tune our processes. In-stock positions and inventory turns
have significantly improved, primarily driven by our auto-replenishment and the
improved inventory management capabilities.

Status of Product or Line of Business

During fiscal 2003, there was no public announcement nor is there a public
announcement anticipated, about either a new product line or line of business
involving the investment of a material portion of our assets.

Trademarks

We do business under the federally registered trademarks Jo-Ann Fabrics
and Crafts and Jo-Ann etc. We believe that these names are significant to
our business.

Seasonal Business

Our business exhibits seasonality which is typical for most retail
companies, with much stronger sales in the second half of the year than in the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as
we increase our inventory in preparation for our peak selling season.

Customer Base

We are engaged in the retail sale of merchandise to the general public
and, accordingly, no part of our business is dependent upon a single customer
or a few customers. During fiscal 2003, no one store accounted for more than
one percent of our total net sales.

Backlog of Orders

We sell merchandise to the general public on a cash and carry basis and,
accordingly, we have no significant backlog of orders.

Competitive Conditions

We are the largest national category-dominant specialty retailer serving
the retail sewing and crafting industry. Our stores compete with other
specialty fabric and craft retailers and selected mass merchants, including
Wal-Mart, that dedicate a portion of their selling space to a limited selection
of fabrics and craft supply items. We compete on the basis of product
assortment, price, convenience and customer service. We believe the combination
of our product assortment, customer service emphasis, systems technology and
frequent advertising provides us with a competitive advantage.

We have two national competitors in the fabric and craft specialty retail
industry, one in the fabric segment and one in the craft segment of the
industry, with the balance of the competitors being regional and local
operators. We believe that there are only a few competitors with fabric or
crafts sales exceeding $200 million annually. We believe that we have several
advantages over most of our smaller competitors, including:



| |  | purchasing power;
|- |  | -----------------



| |  | ability to support efficient nationwide distribution; and
|- |  | ---------------------------------------------------------

8



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| |  | the financial resources to execute our strategy and capital
investment needs going forward.
|- |  | -------------------------------------------------------------------------------------------

Research and Development

During the three fiscal years ended February 1, 2003, we have not incurred
any material expense on research activities relating to the development of new
products or services or the improvement of existing products or services.

Environmental Disclosure

We are not engaged in manufacturing. Accordingly, we do not believe that
compliance with federal, state and local provisions regulating the discharge of
material into the environment or otherwise relating to the protection of the
environment will have a material adverse effect upon our capital expenditures,
income or competitive position.

Employees

As of February 1, 2003, we had approximately 21,200 full and part-time
employees, of which 19,700 worked in our stores, 400 were employed in our
Hudson distribution center, 200 were employed in our Visalia distribution
center and the balance were located at our store support center. The number of
part-time employees is substantially higher during the Christmas selling
season. We believe our employee turnover is below average for retailers
primarily because our stores are staffed with sewing and crafting enthusiasts.
In addition, we provide an attractive work environment, employee discounts,
flexible hours and competitive compensation packages within the local labor
markets. Our ability to offer flexible scheduling is important in attracting
and retaining these employees since over 70 percent of our employees work
part-time.

The United Steelworkers of America, Upholstery and Allied Industries
Division currently represents employees who work in our Hudson, Ohio
distribution center. Our current contract expires in May 2004. We believe that
our relations with our employees and the union are good.

Foreign Operations and Export Sales

In fiscal 2003, we purchased approximately 27 percent of our products
directly from manufacturers located in foreign countries. These foreign
suppliers are located primarily in Hong Kong, China, and Taiwan. In addition,
many of our domestic suppliers purchase a portion of their products from
foreign suppliers. Because a large percentage of our products are manufactured
or sourced abroad, we are required to order these products further in advance
than would be the case if the products were manufactured domestically. If we
underestimate consumer demand, we may not be able to fully satisfy our
customers on a timely basis. If we overestimate consumer demand, we may be
required to hold goods in inventory for a longer period of time or to reduce
selling prices in order to clear excess inventory at the end of a selling
season. We do not have long-term contracts with any manufacturers.

Foreign manufacturing is also subject to a number of other risks,
including work stoppages, transportation delays and interruptions, political
instability, economic disruptions, the imposition of tariffs and import and
export controls, changes in governmental policies and other events. If any of
these events occur, it could result in a material adverse effect on our
business, financial condition, results of operations and prospects. In
addition, reductions in the value of the U.S. dollar could ultimately increase
the prices that we pay for our products.

Other Available Information

We also make available, free of charge, on our Internet website at
www.joann.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities

9



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Exchange Act of 1934 as
soon as reasonably practicable after we file such material, or furnish it to,
the Securities and Exchange Commission.

Item 2. Properties

Our store support center and Hudson distribution center are located in a
1.4 million square foot facility on 105 acres in Hudson, Ohio. We own both the
facility and the real estate. The distribution center occupies 1.0 million
square feet and the remainder is used as our store support center, a
superstore, and office space we lease to another tenant. In addition, we own 77
acres of land adjacent to our Hudson, Ohio facility.

During January 2001, we completed construction of a 630,000 square foot
distribution center located on an 80-acre site in Visalia, California. We own
both the facility and the real estate.

The remaining properties that we occupy are leased retail store
facilities, located primarily in high-traffic shopping centers. All store
leases are operating leases. Traditional store leases generally have initial
terms of five to ten years and renewal options for up to 20 years. Superstore
leases generally have initial terms of 10-15 years and renewal options
generally ranging from 5- 20 years. Certain store leases contain escalation
clauses and contingent rents based on a percent of net sales in excess of
defined minimums. During the fiscal year ended February 1, 2003, we incurred
$143.0 million of rental expense, including common area maintenance, taxes and
insurance for store locations.

As of February 1, 2003, the current terms of our store leases, assuming we
exercise all lease renewal options, were as follows:

Number ofYear Lease Terms Expire
    
    Store LeasesMonth-to-month
    
    
    112004
    
    
    202005
    
    
    292006
    
    
    242007
    
    
    312008
    
    
    29Thereafter
    
    
    774Total
    
    
    918


Item 3. Legal Proceedings

We are involved in various litigation matters in the ordinary course of
our business. We are not currently involved in any litigation which we expect,
either individually or in the aggregate, will have a material adverse effect on
our financial condition or results of operations.

10



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Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during our fourth
quarter.

Executive Officers of the Registrant

The following information is set forth pursuant to Item 401(b) of
Regulation S-K.

Our executive officers are as follows:

Name
    
    Age
    
    PositionAlan Rosskamm
    
    
    53
    
    
    Chairman of the Board, President and
Chief Executive OfficerDave Bolen
    
    
    51
    
    
    Executive Vice President, Merchandising,
Marketing and LogisticsBrian Carney
    
    
    42
    
    
    Executive Vice President, Chief Financial
OfficerMichael Edwards
    
    
    42
    
    
    Executive Vice President, OperationsValerie Gentile Sachs
    
    
    47
    
    
    Executive Vice President, General Counsel
and SecretaryRosalind Thompson
    
    
    53
    
    
    Executive Vice President, Human Resources


Alan Rosskammhas been Chairman of the Board, President and Chief
Executive Officer of our Company for more than five years. He is a member of
one of the two founding families of our Company and has been employed by us
since 1978. Mr. Rosskamm is the son of Betty Rosskamm. Mr. Rosskamm is also a
Director of Charming Shoppes Inc., a womens apparel retailer.

Dave Bolenhas been Executive Vice President, Merchandising, Marketing and
Logistics of our Company since March 2001. He was Executive Vice President,
Stores and Business Development from August 1997 to March 2001 and Senior Vice
President, General Manager Jo-Ann etc from March 1997 to August 1997. Prior to
joining our Company, he was Executive Vice President-Operations of Michaels
Stores, Inc., a national craft retailer, from July 1994 to August 1996.

Brian Carneyhas been Executive Vice President, Chief Financial Officer of
our Company for more than five years. Prior to joining our Company, he was
Senior Vice President-Finance from May 1996 to August 1997, and Vice President
and Controller from June 1992 to May 1996, of Revco D.S., Inc., a retail
drugstore chain (acquired by CVS Corporation in 1997).

Michael Edwardshas been Executive Vice President, Operations of our
Company since April 2001. Prior to joining our Company, he was Executive Vice
President, Merchandising and Chief Marketing Officer of West Marine, Inc., a
specialty retailer of boating supplies from June 1999 to March 2001. He was
Vice President, General Merchandise Manager of Golfsmith LP, a retailer of golf
equipment from September 1998 to May 1999. Prior to that, Mr. Edwards was with
CompUSA, a retailer of computer-related products, from 1990 to 1998 where he
served as Senior Vice President of Merchandising and Operations during his
tenure. Mr. Edwards was also a Director and Chairman of the Board of iGo
Corporation, a mobile technology products parts provider, from October 1999 to
January 2001.

Valerie Gentile Sachshas been Executive Vice President, General Counsel
and Secretary of our Company since January 2003. Prior to joining our Company
she was the General Counsel of Marconi plc, of London, England, global company
serving the communications industry, from March 2002. Previously she was
Executive Vice President and General Counsel from April 2001 to March 2002, and
Vice President and General Counsel from November 2000 to April 2001 of Marconi
Communications, Inc., the operating company for Marconi in the Americas. From
December 1997 to November 2000 she was Vice President, General Counsel and
Secretary for

11



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RELTEC Corporation, a network equipment and network services
provider, RELTEC Corporation went public in March 1998 and was acquired by
Marconi in April 1999.

Rosalind Thompsonhas been Executive Vice President, Human Resources of
our Company since December 1999. She was previously Senior Vice President,
Human Resources from March 1992 to December 1999.

PART II

Item 5. Market for the Registrants Common Equity and Related Stockholder Matters

The Companys Class A and Class B common shares are traded on the New York
Stock Exchange under the ticker symbols JAS.a and JAS.b, respectively. The
number of Class A and Class B common shareholders of record as of April 11,
2003 were 675 and 584, respectively.

The quarterly high and low closing stock prices for fiscal 2003 and 2002
are presented in the table below:

Class A
    
    Class BCommon Stock
    
    Common StockHigh
    
    Low
    
    High
    
    LowFiscal 2003:February 1, 2003
    
    $
    26.85
    
    
    $
    21.81
    
    
    $
    22.85
    
    
    $
    18.19November 2, 2002
    
    
    33.75
    
    
    
    23.35
    
    
    
    26.69
    
    
    
    18.32August 3, 2002
    
    
    29.25
    
    
    
    19.15
    
    
    
    21.50
    
    
    
    14.50May 4, 2002
    
    
    20.34
    
    
    
    10.70
    
    
    
    17.30
    
    
    
    9.15Fiscal 2002:February 2, 2002
    
    $
    11.10
    
    
    $
    3.90
    
    
    $
    9.30
    
    
    $
    2.25November 3, 2001
    
    
    5.81
    
    
    
    4.25
    
    
    
    3.80
    
    
    
    2.50August 4, 2001
    
    
    4.95
    
    
    
    3.95
    
    
    
    3.25
    
    
    
    2.25May 5, 2001
    
    
    5.60
    
    
    
    3.90
    
    
    
    4.75
    
    
    
    2.83


The Company did not pay dividends on its common stock during fiscal 2003
and fiscal 2002. The Companys dividend policy has been to retain earnings for
the operation and growth of its business. Payments of dividends, if any, in the
future will be determined by the Board of Directors in light of appropriate
business conditions.

See Part III, Item 12 for a description of our equity compensation plans.

12



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##### 



Item 6. Selected Financial Data

The following table presents our selected financial data for each of the
ten years ending February 1, 2003. The selected financial data was derived from
the audited financial statements and should be read in conjunction with
"Managements Discussion and Analysis of Financial Condition and Results of
Operations, the consolidated financial statements and notes thereto and other
financial data that we have filed with the Securities and Exchange Commission.
The Company presents earnings before interest, taxes, depreciation and
amortization (EBITDA) because management believes that EBITDA could be useful
for investors in assessing our operating performance and our performance
relative to our financial obligations. Additionally, EBITDA is a measure
commonly used and referred to by financial analysts because of its usefulness
in evaluating operating performance. EBITDA is a non-GAAP financial measurement
and should not be considered in isolation or as a substitute for other measures
of performance. Additionally, EBITDA may not be comparable to financial data as
defined or used by other companies. We have included a reconciliation of our
reported net income to EBITDA at the bottom of the table.

Fiscal Year EndedFeb 1,
    
    Feb 2,
    
    Feb 3,
    
    Jan 29,
    
    Jan 30,
    
    Jan 31,
    
    Feb 1,
    
    Jan 27,
    
    Jan 28,
    
    Jan 29,2003
    
    2002
    
    2001(a)
    
    2000
    
    1999
    
    1998
    
    1997(a)
    
    1996
    
    1995
    
    1994(Dollars in millions, except earnings per share data)Operating Results:Net sales
    
    $
    1,682.0
    
    
    $
    1,570.3
    
    
    $
    1,483.3
    
    
    $
    1,381.5
    
    
    $
    1,242.9
    
    
    $
    975.0
    
    
    $
    929.0
    
    
    $
    834.6
    
    
    $
    677.3
    
    
    $
    582.1Total net sales
percentage
Increase
    
    
    7.1
    %
    
    
    5.9
    %
    
    
    7.4
    %
    
    
    11.2
    %
    
    
    27.5
    %
    
    
    5.0
    %
    
    
    11.3
    %
    
    
    23.2
    %
    
    
    16.4
    %
    
    
    1.4
    %Same-store sales
percentage
increase (b)
    
    
    8.4
    %
    
    
    5.9
    %
    
    
    1.3
    %
    
    
    4.5
    %
    
    
    3.5
    %
    
    
    3.8
    %
    
    
    7.5
    %
    
    
    3.0
    %
    
    
    1.0
    %
    
    
    (4.4
    )%Gross margin
    
    
    777.5
    
    
    
    693.1
    
    
    
    645.1
    
    
    
    633.2
    
    
    
    564.0
    
    
    
    441.5
    
    
    
    412.1
    
    
    
    378.5
    
    
    
    299.3
    
    
    
    251.6Selling, general
and
administrative
expenses
    
    
    642.9
    
    
    
    644.2
    
    
    
    589.2
    
    
    
    533.8
    
    
    
    476.7
    
    
    
    363.1
    
    
    
    340.9
    
    
    
    319.9
    
    
    
    257.2
    
    
    
    223.4Depreciation and
amortization
    
    
    36.1
    
    
    
    39.3
    
    
    
    38.3
    
    
    
    32.0
    
    
    
    27.7
    
    
    
    21.7
    
    
    
    21.2
    
    
    
    18.2
    
    
    
    14.0
    
    
    
    12.0Operating
profit
    
    
    98.5
    
    
    
    9.6
    
    
    
    17.6
    
    
    
    67.4
    
    
    
    34.5
    
    
    
    56.7
    
    
    
    50.0
    
    
    
    40.4
    
    
    
    28.1
    
    
    
    16.2Operating profit
percent of net
sales
    
    
    5.9
    %
    
    
    0.6
    %
    
    
    1.2
    %
    
    
    4.9
    %
    
    
    2.8
    %
    
    
    5.8
    %
    
    
    5.4
    %
    
    
    4.8
    %
    
    
    4.1
    %
    
    
    2.8
    %Net income
(loss)
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )
    
    $
    25.6
    
    
    $
    13.4
    
    
    $
    30.6
    
    
    $
    24.6
    
    
    $
    17.8
    
    
    $
    12.1
    
    
    $
    1.9Net income percent
of net sales
    
    
    2.7
    %
    
    
    (0.9
    )%
    
    
    (0.9
    )%
    
    
    1.9
    %
    
    
    1.1
    %
    
    
    3.1
    %
    
    
    2.6
    %
    
    
    2.1
    %
    
    
    1.8
    %
    
    
    0.3
    %EBITDA
    
    $
    134.6
    
    
    $
    48.9
    
    
    $
    55.9
    
    
    $
    99.4
    
    
    $
    62.2
    
    
    $
    78.4
    
    
    $
    71.2
    
    
    $
    58.6
    
    
    $
    42.1
    
    
    $
    28.2EBITDA percent of
net sales
    
    
    8.0
    %
    
    
    3.1
    %
    
    
    3.8
    %
    
    
    7.2
    %
    
    
    5.0
    %
    
    
    8.0
    %
    
    
    7.7
    %
    
    
    7.0
    %
    
    
    6.2
    %
    
    
    4.8
    %Per Share Data
(c):Net income (loss)
- diluted
    
    $
    2.23
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )
    
    $
    1.38
    
    
    $
    0.67
    
    
    $
    1.59
    
    
    $
    1.26
    
    
    $
    0.91
    
    
    $
    0.65
    
    
    $
    0.35Average shares
outstanding -
diluted
(000s)
    
    
    20,106
    
    
    
    18,444
    
    
    
    18,041
    
    
    
    18,583
    
    
    
    19,904
    
    
    
    20,592
    
    
    
    21,216
    
    
    
    19,293
    
    
    
    18,749
    
    
    
    18,877Financial
Position:Cash
    
    $
    63.2
    
    
    $
    21.1
    
    
    $
    17.5
    
    
    $
    21.4
    
    
    $
    20.4
    
    
    $
    14.8
    
    
    $
    12.6
    
    
    $
    11.6
    
    
    $
    21.9
    
    
    $
    7.7Inventories
    
    
    363.1
    
    
    
    369.0
    
    
    
    451.0
    
    
    
    442.5
    
    
    
    404.0
    
    
    
    278.9
    
    
    
    280.6
    
    
    
    322.6
    
    
    
    274.7
    
    
    
    223.8Current assets
    
    
    471.7
    
    
    
    438.2
    
    
    
    505.8
    
    
    
    497.9
    
    
    
    480.1
    
    
    
    312.3
    
    
    
    308.7
    
    
    
    351.8
    
    
    
    315.8
    
    
    
    247.1Property,
equipment and
leasehold
improvements,
net
    
    
    190.3
    
    
    
    210.1
    
    
    
    190.2
    
    
    
    194.7
    
    
    
    164.0
    
    
    
    110.0
    
    
    
    94.6
    
    
    
    102.0
    
    
    
    84.1
    
    
    
    75.6Current
liabilities
    
    
    205.8
    
    
    
    205.4
    
    
    
    223.5
    
    
    
    208.1
    
    
    
    209.2
    
    
    
    164.8
    
    
    
    141.2
    
    
    
    129.2
    
    
    
    127.5
    
    
    
    80.2Long-term debt
    
    
    162.9
    
    
    
    223.7
    
    
    
    240.0
    
    
    
    245.2
    
    
    
    182.5
    
    
    
    24.7
    
    
    
    72.1
    
    
    
    155.5
    
    
    
    127.0
    
    
    
    102.5Shareholders
equity
    
    
    289.4
    
    
    
    232.8
    
    
    
    248.8
    
    
    
    259.4
    
    
    
    249.0
    
    
    
    231.1
    
    
    
    189.8
    
    
    
    171.4
    
    
    
    151.8
    
    
    
    148.4Per Share Data
(c):Book value (d)
    
    $
    14.81
    
    
    $
    12.49
    
    
    $
    13.67
    
    
    $
    14.54
    
    
    $
    13.10
    
    
    $
    12.31
    
    
    $
    10.59
    
    
    $
    9.27
    
    
    $
    8.25
    
    
    $
    8.16Shares
outstanding, net
of treasury
shares (000s)
    
    
    19,543
    
    
    
    18,632
    
    
    
    18,207
    
    
    
    17,845
    
    
    
    19,012
    
    
    
    18,767
    
    
    
    17,921
    
    
    
    18,486
    
    
    
    18,398
    
    
    
    18,194


13



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##### 



Item 6. Selected Financial Data (Continued)

Fiscal Year EndedFeb 1,
    
    Feb 2,
    
    Feb 3,
    
    Jan 29,
    
    Jan 30,
    
    Jan 31,
    
    Feb 1,
    
    Jan 27,
    
    Jan 28,
    
    Jan 29,2003
    
    2002
    
    2001(a)
    
    2000
    
    1999
    
    1998
    
    1997(a)
    
    1996
    
    1995
    
    1994(Dollars in millions, except earnings per share data)Other Financial
Information:Return on average equity
(e)
    
    
    17.2
    %
    
    
    (6.2
    )%
    
    
    (5.4
    )%
    
    
    10.1
    %
    
    
    5.6
    %
    
    
    14.5
    %
    
    
    13.6
    %
    
    
    11.0
    %
    
    
    8.1
    %
    
    
    1.3
    %Capital expenditures
    
    $
    22.7
    
    
    $
    66.5
    
    
    $
    35.9
    
    
    $
    67.4
    
    
    $
    75.1
    
    
    $
    36.6
    
    
    $
    13.2
    
    
    $
    34.7
    
    
    $
    11.7
    
    
    $
    8.5Long-term debt to total
capitalization
    
    
    36.0
    %
    
    
    49.0
    %
    
    
    49.1
    %
    
    
    48.6
    %
    
    
    42.3
    %
    
    
    9.7
    %
    
    
    27.5
    %
    
    
    47.6
    %
    
    
    45.6
    %
    
    
    40.9
    %Store Count:Traditional stores
    
    
    847
    
    
    
    889
    
    
    
    949
    
    
    
    984
    
    
    
    1,034
    
    
    
    896
    
    
    
    913
    
    
    
    935
    
    
    
    964
    
    
    
    655Superstores
    
    
    72
    
    
    
    70
    
    
    
    58
    
    
    
    42
    
    
    
    24
    
    
    
    7
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Total
    
    
    919
    
    
    
    959
    
    
    
    1,007
    
    
    
    1,026
    
    
    
    1,058
    
    
    
    903
    
    
    
    914
    
    
    
    936
    
    
    
    964
    
    
    
    655Store Square Footage
(000s)Traditional stores
    
    
    12,165
    
    
    
    12,684
    
    
    
    13,381
    
    
    
    13,685
    
    
    
    14,144
    
    
    
    11,794
    
    
    
    11,566
    
    
    
    11,476
    
    
    
    11,424
    
    
    
    7,481Superstores
    
    
    3,270
    
    
    
    3,213
    
    
    
    2,687
    
    
    
    1,957
    
    
    
    1,126
    
    
    
    325
    
    
    
    46
    
    
    
    46
    
    
    
    
    
    
    
    Total
    
    
    15,435
    
    
    
    15,897
    
    
    
    16,068
    
    
    
    15,642
    
    
    
    15,270
    
    
    
    12,119
    
    
    
    11,612
    
    
    
    11,522
    
    
    
    11,424
    
    
    
    7,481EBITDA Reconciliation:Net income (loss)
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )
    
    $
    25.6
    
    
    $
    13.4
    
    
    $
    30.6
    
    
    $
    24.6
    
    
    $
    17.8
    
    
    $
    12.1
    
    
    $
    1.9Income tax provision
(benefit)
    
    
    27.6
    
    
    
    (8.8
    )
    
    
    (4.3
    )
    
    
    15.6
    
    
    
    8.6
    
    
    
    19.1
    
    
    
    14.8
    
    
    
    10.6
    
    
    
    7.6
    
    
    
    3.9Depreciation and
amortization
    
    
    36.1
    
    
    
    39.3
    
    
    
    38.3
    
    
    
    32.0
    
    
    
    27.7
    
    
    
    21.7
    
    
    
    21.2
    
    
    
    18.2
    
    
    
    14.0
    
    
    
    12.0Interest expense, net
    
    
    26.0
    
    
    
    32.7
    
    
    
    29.0
    
    
    
    26.2
    
    
    
    12.5
    
    
    
    5.9
    
    
    
    10.6
    
    
    
    12.0
    
    
    
    8.4
    
    
    
    5.6Losses from extraordinary
items/discontinued
operations
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.8Equity and asset impairment
losses of minority
investment
    
    
    
    
    
    
    
    
    
    
    6.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    134.6
    
    
    $
    48.9
    
    
    $
    55.9
    
    
    $
    99.4
    
    
    $
    62.2
    
    
    $
    78.4
    
    
    $
    71.2
    
    
    $
    58.6
    
    
    $
    42.1
    
    
    $
    28.2




---

|(a) |  | 53-week year.
|--- |  | -------------



|(b) |  | Same-store sales are defined as net sales from stores that have been open
one year or more. Net sales are included in the same-store sales
calculation on the first day of the first month following the one-year
anniversary of a stores opening. In conjunction with the expansion or
relocation of our stores, we exclude the net sales results from these
stores in our same-store sales calculation until the first day of the
first month following the one year anniversary of its expansion or
relocation. Further, in a 53 week year, net sales are compared to the
comparable 53 weeks of the prior period.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | The number of shares and per share data have been restated to give effect
to changes required by Statement of Financial Accounting Standards No.
128, Earnings Per Share, and the Recapitalization Amendment, effective
August 2, 1995, which has been accounted for as if it were a two-for-one
stock split.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Book value is calculated by dividing shareholders equity by shares
outstanding, net of treasury shares.
|--- |  | --------------------------------------------------------------------------------------------------------



|(e) |  | Return on average equity is calculated by dividing net income by the
average of the Company shareholders equity as of the beginning and end of
its current fiscal year.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



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##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

For an understanding of the significant factors that influenced our
performance during the past three fiscal years, the following discussion should
be read in conjunction with the audited consolidated financial statements and
notes to the consolidated financial statements presented in this Form 10-K/A.

We are the nations largest fabric and craft specialty retailer, serving
customers in their pursuit of apparel and craft sewing, crafting, home
decorating, and other creative endeavors. Our retail stores (operating as
Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann superstores) feature a
variety of competitively priced merchandise from fabrics and notions used in
crafting, quilting, apparel sewing, and home decorating projects, to craft
components, artificial and dried flowers, and finished seasonal merchandise. As
of February 1, 2003, we operated 919 stores in 48 states (847 traditional
stores and 72 superstores).

Our traditional stores average 14,400 square feet. Net sales per
traditional store average $1.4 million. Our superstores offer an expanded and
more comprehensive product assortment than our traditional stores. Our
superstores average 45,400 square feet and in fiscal 2003, on a per-store
basis, averaged $6.0 million in net sales per superstore or generated more than
four times the revenue and approximately 30% higher sales per square foot than
our traditional stores. We believe our superstores, which accounted for 25% of
fiscal 2003 net sales, present opportunities for future growth.

Over the past five years, we have invested heavily in our infrastructure,
primarily in the areas of superstore growth and systems and logistics. Although
this infrastructure spending resulted in higher debt levels and interest
expense, it was required in order to improve our operating efficiency and to
build the necessary platform for continued growth. Major capital expenditures
during this period included:



| |  | implementation of our fully integrated enterprise-wide system (SAP
Retail)  completed in fiscal 2001;
|- |  | --------------------------------------------------------------------------------------------------------



| |  | construction and opening of our Visalia, California distribution
center, our second owned distribution center, completed in fiscal 2002;
and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | the opening of 65 of our 72 superstores.
|- |  | ----------------------------------------

In fiscal 2001, we experienced significant difficulty with the
implementation of SAP Retail, negatively impacting our ability to stay in stock
on key basic products while, at the same time, being overstocked on slower
selling products. As a result, sales were negatively affected and our operating
performance suffered.

As a result of the SAP Retail implementation issues, coupled with the
increased debt levels and a decline in our operating margins, our strategy
shifted from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. At the end of fiscal 2001, we announced
the implementation of our turnaround plan (the Turnaround Plan). A number of
charges (the Turnaround Charges) were taken during fiscal 2002 and 2001
related to the Turnaround Plan. See the discussion below under Turnaround
Charges and Litigation Settlement.

During fiscal 2002 and 2003, the Company made significant strides in
executing its Turnaround Plan and improving its operations. In fact, in the two
years since the announcement of the Turnaround Plan, we have exceeded all of
our financial goals we had established for the original three-year plan. In
fiscal 2003, we achieved record earnings and have reduced debt levels, net of
cash, to less than $100 million, our lowest level in five years.

15



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##### 



Results of Operations

The following table sets forth the financial information through operating
profit, expressed as a percentage of net sales. The following discussion should
be read in conjunction with our consolidated financial statements and related
notes thereto.

Percentage of Net SalesFiscal Year EndedFeb 1, 2003
    
    Feb 2, 2002
    
    Feb 3, 2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    46.2
    %
    
    
    44.1
    %
    
    
    43.5
    %Selling, general and administrative
expenses
    
    
    38.2
    %
    
    
    41.0
    %
    
    
    39.7
    %Depreciation and amortization
    
    
    2.1
    %
    
    
    2.5
    %
    
    
    2.6
    %Operating profit
    
    
    5.9
    %
    
    
    0.6
    %
    
    
    1.2
    %


Comparison of the 52 Weeks Ended February 1, 2003 and February 2, 2002

Net sales.Net sales for fiscal 2003 were $1.682 billion compared with
$1.570 billion in fiscal 2002, an increase of $112.0 million, or 7.1%.
Same-store sales increased 8.4% for fiscal 2003 compared with a same-store
sales increase of 5.9% for the prior year. Same-store sales generated all of
the overall net sales increase, as we operated 40 fewer stores at the end of
fiscal 2003 than a year ago. Store square footage decreased 2.9% during the
year.

By store format, our same-store sales for traditional stores increased
8.5% for fiscal 2003 compared with a 5.1% same-store sales increase in fiscal
2002. Approximately 75% of the increase is attributable to an increase in
average ticket, with the remaining 25% attributable to increased customer
traffic. Same-store sales for superstores, which accounted for 25% of total
revenues, increased 7.8% for fiscal 2003 compared with a 9.4% same-store sales
increase in fiscal 2002. Approximately 60% of the increase is attributable to
increased customer traffic, with the remainder attributable to an increase in
average ticket. We attribute the improvement in same-store sales to strong
industry fundamentals, improved merchandising initiatives as well as an
improved inventory in-stock position on key basic items and advertised items in
our stores.

Gross margin.As you review our gross margin performance, we believe you
should consider the following important information related to charges recorded
in fiscal 2002 (which are discussed in further detail below under Turnaround
Charges and Litigation Settlement"):



| |  | During fiscal 2002, sales related to the SKU Reduction Initiative
totaled $34 million, recorded at zero gross margin. This negatively
impacted the fiscal 2002 gross margin rate by approximately 100 basis
points (100 basis points equal one percent).
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During fiscal 2002, $2.6 million of the $19.7 million in Turnaround
Charges were recorded in cost of sales. This negatively impacted the
fiscal 2002 gross margin rate by approximately 20 basis points.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross margin for fiscal 2003 was $777.5 million compared with $693.1
million in fiscal 2002. As a percentage of net sales, fiscal 2003 gross margin
was 46.2% compared with 44.1% in the prior year, an increase of 210 basis
points. Turnaround Charges recorded in fiscal 2002 accounted for approximately
20 basis points of the improvement, while the absence of the SKU Reduction
Initiative sales accounted for another 100 basis points of the improvement. The
remaining margin rate improvement was largely driven by improvement in the
store shrink expense rate of approximately 150 basis points. Partially
offsetting this improvement were lower selling margins caused by the more
challenging retail environment in the third and fourth quarters of fiscal 2003,
which necessitated promotional pricing, particularly on seasonal goods, to be
more aggressive versus the year earlier period.

16



---



##### 



Selling, general and administrative expenses.Selling, general and
administrative (SG&A) expenses include store and administrative payroll,
employee benefits, distribution costs, store occupancy costs, advertising
expenses and administrative expenses. As you review our SG&A performance, we
believe you should consider the following important information related to
charges recorded in fiscal 2002 (which is discussed in further detail below
under Turnaround Charges and Litigation Settlement):



| |  | During fiscal 2002, $17.1 million of the $19.7 million in Turnaround
Charges were recorded in SG&A. This negatively impacted the SG&A rate by
approximately 110 basis points.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During fiscal 2002, the settlement of certain California wage
litigation resulted in a charge of $6.5 million. This negatively
impacted the SG&A rate by approximately 40 basis points.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SG&A expenses were $642.9 million for fiscal 2003 versus $644.2 million in
fiscal 2002. As a percentage of sales, SG&A expenses decreased 280 basis points
to 38.2% of net sales versus 41.0% of net sales for fiscal 2002. The Turnaround
Charges recorded in fiscal 2002 discussed above accounted for 150 basis points
of the improvement. The remaining rate improvement was due to positive expense
leverage realized primarily in store expenses, with strong cost controls
complementing the favorable impact of improved same-store sales growth.

Depreciation and amortization.Depreciation and amortization expense for
fiscal 2003 decreased $3.2 million to $36.1 million from $39.3 million in
fiscal 2002. This decrease is attributable to discontinuing goodwill
amortization, pursuant to the adoption of SFAS No. 142, which lowered
amortization expense by $0.7 million, and a slowdown in our capital
expenditures.

Operating profit.Operating profit for fiscal 2003 was $98.5 million,
compared with $9.6 million for fiscal 2002. The fiscal 2002 operating profit
was impacted by the Turnaround Charges recorded. See the Gross margin and
Selling, general and administrative expenses discussions above.

Interest expense.Interest expense for fiscal 2003 was $26.0 million,
compared with $32.7 million in fiscal 2002, a decrease of $6.7 million.
Substantially all of this decrease is attributable to a decrease in average
debt levels. Our average debt levels during fiscal 2003 were $239 million
compared with $319 million during fiscal 2002. During fiscal 2003 we
repurchased, in the open market, $27.1 million of our 10 3/8% subordinated
notes at a purchase price of $28.3 million or 4.3% over par. The premium we
paid on the purchase plus a pro-rata portion of the capitalized deferred
finance charges totaling $1.9 million pre-tax were written off and recorded in
SG&A expense, as discussed under Liquidity and Capital Resources below.

Income taxes.Our effective income tax rate was 38.0% for both fiscal
2003 and fiscal 2002.

Extraordinary item.In the first quarter of fiscal 2002, we entered into
a new $365.0 million senior secured credit facility (the Credit Facility).
Deferred finance charges written-off under the prior senior credit facility
totaled $0.6 million after-tax, or $0.03 per diluted share, and were recorded
as an extraordinary item.

Comparison of the 52 Weeks Ended February 2, 2002 and the 53 Weeks Ended
February 3, 2001

Our results for fiscal 2002 demonstrated strong progress on our Turnaround
Plan initiatives.

Net sales.Net sales for fiscal 2002 were $1.570 billion compared with
$1.483 billion in fiscal 2001, an increase of $87.0 million, or 5.9%. Fiscal
2001 was a 53-week year. Excluding the 53rd week, sales increased 7.5% over
fiscal 2001. Same-store sales increased $82.8 million, or 5.9%, for fiscal 2002
over fiscal 2001. Same-store sales increased 1.3% for fiscal 2001 over fiscal
2000. The remainder of the net sales increase was due to the increase in the
number of superstores in operation. We operated 70 superstores at February 2,
2002 compared to 58 superstores at February 3, 2001.

17



---



##### 



By store format, our same-store sales performance for traditional stores
increased 5.1%. Approximately 70% of the increase was attributable to a higher
average ticket, with the remainder attributable to an increase in customer
traffic. Same-store sales for superstores increased 9.4%, approximately 65% of
which was attributable to an increase in customer traffic, with the remainder
attributable to a higher average ticket. Each of our major product categories
experienced positive same-store sales growth for the year.

We believe the improvement in same-store sales year over year is primarily
due to an improved inventory in-stock position in our stores. Sales performance
was particularly strong in our hardlines and home decor categories. Clearance
sales associated with the SKU Reduction Initiative contributed approximately
$34 million in sales for the year, but were recorded at a zero gross margin. At
the end of fiscal 2002, we had completed our SKU Reduction Initiative.

Gross margin.As you review our gross margin performance, we believe you
should consider the following important information (which is discussed in
further detail below under Turnaround Charges and Litigation Settlement"):



| |  | Fiscal 2002 charges:
|- |  | --------------------



| |  | Sales related to the SKU Reduction Initiative totaled $34 million,
recorded at zero gross margin. This negatively impacted the gross margin
rate by approximately 100 basis points.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $2.6 million of the $19.7 million in Turnaround Charges were recorded
in cost of sales. This negatively impacted the gross margin rate by
approximately 20 basis points.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During fiscal 2001, $23.0 million of the $29.7 million in Turnaround
Charges were recorded in cost of sales. This negatively impacted the
gross margin rate by approximately 160 basis points.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross margin for fiscal 2002 was $693.1 million compared with $645.1
million in fiscal 2001. As a percentage of net sales, fiscal 2002 gross margin
was 44.1% compared with 43.5% in the prior year, an increase of 60 basis
points. The SKU Reduction Initiative and Turnaround Charges recorded in fiscal
2002 and 2001, discussed above, accounted for 40 basis points of improvement.
Higher shrink expense incurred during fiscal year 2002 was more than offset by
higher realized store margin rates. Shrink expense, as a percentage of sales,
deteriorated 100 basis points from our shrink rates in fiscal 2001.

The shrink expense increase resulted from a deterioration in our shrink
rate versus the prior year, consistent with the trend identified in the first
half of the year and disclosed in our quarterly Form 10-Q filings throughout
fiscal 2002. Our store shrink accrual rates are adjusted based upon the
performance of annual physical inventories taken throughout the year. Physical
inventories are concentrated in the nine months between January and September.
At the end of the fourth quarter, we had inventoried, reconciled and recorded
the inventory results of all our stores.

Selling, general and administrative expenses.SG&A expenses include store
and administrative payroll, employee benefits, distribution costs, store
occupancy costs, advertising expenses and administrative expenses. As you
review our SG&A performance, we believe you should consider the following
important information (which is discussed in further detail below under
Turnaround Charges and Litigation Settlement"):



| |  | Fiscal 2002 charges:
|- |  | --------------------



| |  | $17.1 million of the $19.7 million in Turnaround Charges were
recorded in SG&A. This negatively impacted the fiscal 2002 SG&A rate by
approximately 110 basis points.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We recorded $6.5 million for the settlement of certain California
litigation. This negatively impacted the fiscal 2002 SG&A rate by
approximately 40 basis points.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



---



##### 





| |  | During fiscal 2001, $6.7 million of the $29.7 million in Turnaround
Charges were recorded in SG&A. This negatively impacted the fiscal 2001
SG&A rate by approximately 45 basis points.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SG&A expenses were $644.2 million for fiscal 2002 versus $589.2 million in
fiscal 2001. As a percentage of sales, SG&A expenses increased 130 basis points
to 41.0% of net sales in fiscal 2002 versus 39.7% of net sales for fiscal 2001.
Approximately 110 basis points of the deterioration in the SG&A rate to sales
was due to the Turnaround Charges and litigation settlement discussed above. In
addition, SG&A expense leverage was negatively impacted primarily by higher
distribution expenses due to the opening of our second distribution center in
Visalia, California. The opening of this distribution center necessitated
operating a three distribution center network for approximately the first eight
months of fiscal 2002 until our contract facility in Rancho Cucamonga,
California was closed in September. The start-up costs of our Visalia
distribution center, coupled with the duplicative cost of running a three
distribution center network for eight months, added approximately $3.0 million
in distribution expenses in fiscal 2002.

Depreciation and amortization.Depreciation and amortization expense for
fiscal 2002 was $39.3 million compared with $38.3 million in fiscal 2001, an
increase of $1.0 million. The increase in depreciation expense was primarily
due to two additional months of depreciation related to SAP Retail, which we
began depreciating in April 2000.

Operating profit.Operating profit for fiscal 2002 was $9.6 million,
compared with $17.6 million in fiscal 2001, a decrease of $8.0 million.
Operating profit for both fiscal 2002 and 2001 was impacted by the Turnaround
Charges and the litigation settlement. See the Gross
margin and Selling,
general and administrative expenses discussions above.

Interest expense.Interest expense for fiscal 2002 was $32.7 million,
compared with $29.0 million in fiscal 2001, an increase of $3.7 million. The
increase is primarily due to the impact of higher average borrowings partially
offset by a lower average interest rate. Our average debt levels during fiscal
2002 were $319 million compared with $269 million during fiscal 2001. The
increase in average borrowings is due primarily to the unwind of a synthetic
lease facility used to finance our Visalia distribution center and a change in
import letters of credit terms from 120 days to sight, as discussed under
Liquidity and Capital Resources below.

Income taxes.Our effective income tax rate was 38.0% for both fiscal
2002 and fiscal 2001.

Equity and asset impairment losses of minority investment.On June 6,
2000, we announced the formation of a strategic relationship with IdeaForest,
an on-line destination site for arts and crafts merchandise, creative ideas,
advice and supplies. As part of the strategic relationship, IdeaForest, which
operates as an independent entity, is responsible for all content and
technology support to the joann.com website. We provide product to the site,
with customer fulfillment and service being handled by IdeaForest. We invested
$6.5 million in IdeaForest, which, combined with our contribution of strategic
assets, entitled us to a 28.5% ownership interest. During fiscal 2001, we
recorded equity losses of $3.2 million related to this minority investment,
$2.1 million of which was recorded during the first three quarters of fiscal
2001.

During the fourth quarter of fiscal 2001, we reduced the carrying value of
our investment in IdeaForest to zero, which resulted in a $3.3 million charge.
Our decision to reduce the carrying value of our investment to zero was
predicated on operating projections prepared by IdeaForest that resulted in the
their cash balance being reduced to near zero before cash flow positive
operating status was achieved. Currently, IdeaForests operations on an
annualized basis are not yet profitable, but the company is approaching a cash
flow breakeven level. We remain committed to an online presence and we will
continue to evaluate our options with IdeaForest as the company demonstrates
continued improvement in its operations.

Extraordinary Item.In the first quarter of fiscal 2002, we entered into
the Credit Facility, consisting of a $325.0 million revolving credit facility
and a $40.0 million term loan facility. The

19



---



##### 



Credit Facility replaced our prior senior credit and synthetic lease
facilities. Deferred finance charges written-off under the prior senior credit
facility totaled $0.6 million after-tax, or $0.03 per diluted share, and were
recorded as an extraordinary item. See the discussion under Liquidity and
Capital Resources  Sources of Liquidity below.

Turnaround Charges and Litigation Settlement

During the three years ended February 1, 2003, we recorded various charges
associated with a turnaround plan (the Turnaround Plan) that we initiated in
fiscal 2001. These charges included store closing costs, inventory markdowns to
net realizable value in connection with the SKU Reduction Initiative and store
closings, and asset impairment losses for store fixtures and leaseholds.
Collectively, we have referred to these charges as the turnaround charges
(Turnaround Charges). We also recorded a litigation settlement charge of $6.5
million in fiscal 2002.

Store Closing Charges.We review the productivity of our store base on an
ongoing basis and actively manage our real estate to preserve maximum
flexibility in lease terms. As a result, we have very few stores in operation
that are not cash flow positive on a four-wall contribution basis. In
addition, despite an aggressive store rationalization policy, pursuant to which
we have closed approximately 250 stores in the last five years, we are paying
rent on just five store locations where we have not yet obtained a sublease
tenant or executed a lease termination.

In accordance with the applicable accounting literature (Emerging Issues
Task Force Issue (EITF) 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of and Staff Accounting Bulletin No.
100, Restructuring and Impairment Charges,) we recorded pre-tax charges in
operating expenses of $17.1 million in fiscal 2002 and $6.7 million in fiscal
2001 for restructuring and asset impairment costs resulting from 148 identified
store closings associated with the Turnaround Plan. We also incurred expenses
of $0.5 million and $1.2 million, in fiscal 2002 and 2001, respectively, for
store closings unrelated to the Turnaround Plan.

As discussed in Note 1  Significant Accounting Policies, effective
December 31, 2002, we are required to account for the costs of store closings
under SFAS No. 146. In addition, we have adopted the new accounting
requirements related to asset impairment as required by SFAS No. 144, effective
February 3, 2002.

Through the end of fiscal 2003, we have closed 120 of the stores
identified for closure as part of the Turnaround Plan. All of the remaining
stores to be closed, with the exception of eight store locations, are scheduled
to close in the next 24 months. These eight store locations will continue to be
operated, due to our inability to successfully negotiate an acceptable
arrangement to exit the lease. A total of $7.7 million for estimated lease
obligations, associated with the stores to be closed as part of the Turnaround
Plan, were reversed in the fourth quarter of fiscal 2003. The reversal related
to stores where estimates were revised, as well as the eight stores we could
not close. We also recorded an asset impairment charge in the fourth quarter of
fiscal 2002 of $6.7 million for these eight stores and other store locations,
representing the difference between the asset carrying value and the future net
discounted cash flows estimated to be generated by those assets. The remainder
of the store closing charges in fiscal 2003, highlighted in the table below,
represents lease obligations and other costs associated with stores identified
for closure in fiscal 2004 that were not part of the Turnaround Plan.

The charges to the statement of operations for the three fiscal years
ended February 1, 2003 related to store closings are summarized below (dollars
in millions), and include charges for both store closings as part of our
turnaround initiatives, as well as store closings from normal operating
activity.

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Fiscal Year Ended2003
    
    2002
    
    2001Store Closing Charges:Non-cancelable lease obligations
    
    $
    (5.9
    )
    
    $
    9.6
    
    
    $
    4.1Asset impairment
    
    
    6.7
    
    
    
    5.0
    
    
    
    Other costs
    
    
    0.6
    
    
    
    3.0
    
    
    
    3.8Total
    
    $
    1.4
    
    
    $
    17.6
    
    
    $
    7.9


Non-cancelable lease obligationsinclude the lesser of the estimated
buyout or remaining lease obligations of the stores to be closed. Estimated
continuing lease obligations were reduced by anticipated sublease rental
income.

Asset impairmentsinclude write-downs of fixed assets to estimated fair
value for stores closed, or scheduled to be closed, and certain other store
locations where impairment exists. The asset impairment represents the
difference between the asset carrying value and our estimate of the future net
discounted cash flows to be generated by those assets.

Other costsrepresent other miscellaneous store closing costs, including
among other things, costs related to fixtures, signage and register removal.

In accordance with EITF 96-9 Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring, we also recorded in cost of goods
sold the markdown of certain inventory contained in the stores identified for
closing to its net realizable value. Inventory write-downs recorded were $2.4
million in fiscal 2003 and $2.6 million in fiscal 2002. The inventory reserve
remaining at February 1, 2003 is $2.4 million.

Summarized below is a reconciliation of the beginning and ending store
closing reserve balances for the three years ended February 1, 2003 (dollars in
millions):

Non-cancelableLease
    
    Asset
    
    OtherObligations
    
    Impairments
    
    Costs
    
    TotalBalance at Jan 29, 2000
    
    $
    4.4
    
    
    $
    
    
    
    $
    
    
    
    $
    4.4Amounts charged to income
    
    
    4.1
    
    
    
    
    
    
    
    3.8
    
    
    
    7.9Utilization:Cash
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (3.0
    )Non-Cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at Feb 3, 2001
    
    
    5.5
    
    
    
    
    
    
    
    3.8
    
    
    
    9.3Amounts charged to income
    
    
    9.6
    
    
    
    5.0
    
    
    
    3.0
    
    
    
    17.6Utilization:Cash
    
    
    (3.9
    )
    
    
    
    
    
    
    (5.6
    )
    
    
    (9.5
    )Non-Cash
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    (5.0
    )Balance at Feb 2, 2002
    
    
    11.2
    
    
    
    
    
    
    
    1.2
    
    
    
    12.4Amounts charged to income
    
    
    (5.9
    )
    
    
    6.7
    
    
    
    0.6
    
    
    
    1.4Utilization:Cash
    
    
    (1.8
    )
    
    
    
    
    
    
    (0.9
    )
    
    
    (2.7
    )Non-Cash
    
    
    
    
    
    
    (6.7
    )
    
    
    
    
    
    
    (6.7
    )Balance at Feb 1, 2003
    
    $
    3.5
    
    
    $
    
    
    
    $
    0.9
    
    
    $
    4.4


SKU Reduction Initiative.During the fourth quarter of fiscal 2001, we
commenced the SKU Reduction Initiative which entailed a thorough review of our
inventory investment and gross margin

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performance by item (or SKU) utilizing
analytical capabilities available under SAP Retail. This analysis identified
approximately 10,000 active items, totaling more than $50 million at cost, that
were under-performing and that we decided to discontinue. In connection with
this initiative, we recorded a $23.0 million pre-tax charge to reserve for the
portion of this product that we estimated would be sold below cost. However,
liquidating this inventory at reduced selling prices put pressure on overall
realized gross margins in fiscal 2002, since the sales were recorded at a zero
gross margin. The SKU Reduction Initiative was our first step of an ongoing,
disciplined, detailed review of our product mix. We began clearance programs in
the second quarter of fiscal 2002 designed to eliminate this product. These
clearance programs were completed by the end of fiscal 2002.

Litigation Settlement.In August 2000, a former employee of the Company
filed a purported class action complaint against the Company, on behalf of the
Companys former and current California store management employees. The
complaint was filed in the Superior Court of California and alleged the Company
violated certain California laws by erroneously treating its store management
employees as exempt employees who are not entitled to overtime compensation.
This case was consolidated with a similar class action complaint filed in
October 2000 in the Superior Court of California. This case was settled in
fiscal 2002 for $6.5 million. The settlement was paid in the first quarter of
fiscal 2003.

Liquidity and Capital Resources

The following table provides cash flow related information for the three
fiscal years ended February 1, 2003.

2003
    
    2002
    
    2001Net cash provided by operating activities
    
    $
    119.2
    
    
    $
    88.2
    
    
    $
    39.0Net cash used for investing activities
    
    
    (22.7
    )
    
    
    (66.5
    )
    
    
    (40.7
    )Net cash used for financing activities
    
    
    (54.4
    )
    
    
    (18.1
    )
    
    
    (2.2
    )Net increase (decrease) in cash and cash equivalents
    
    $
    42.1
    
    
    $
    3.6
    
    
    $
    (3.9
    )Ending cash and cash equivalents
    
    $
    63.2
    
    
    $
    21.1
    
    
    $
    17.5


Net Cash Provided By Operating Activities

Net cash provided by operating activities was $119.2 million in fiscal
2003, compared with $88.2 million in fiscal 2002, an increase of $31.0 million
driven by our strong operating performance. Cash flows from operating
activities, before changes in operating assets and liabilities, increased
$100.9 million, substantially all of which was driven by the Companys improved
results of operations.

Inventories decreased $5.9 million in fiscal 2003, compared with a
decrease of $82.0 million in fiscal 2002. The large decrease in fiscal 2002 was
attributable to our successful execution of plans to reduce overall inventory
levels through a combination of the SKU Reduction Initiative, store closings,
and better utilization of the forecasting and replenishment capabilities aided
by the installation of SAP Retail in the prior year. We continued to improve
our inventory management in fiscal 2003, as we improved our inventory turns to
approximately 2.5 times, compared with 2.1 times in fiscal 2002 and 1.8 times
in fiscal 2001.

Accounts payable increased $6.8 million in fiscal 2003 compared with a
decrease of $40.9 million in fiscal 2002. The decrease in fiscal 2002 was due
to the significant reduction in inventory levels and as a result of payment
changes we initiated under our import letter of credit arrangements. We utilize
letters of credit in the procurement of imported product for resale, which
represented approximately 27% of our total annual purchases in fiscal 2003.
Beginning in late fiscal 2001, we changed our dating on import letters of
credit to approximately 10 days, or

22



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sight terms, from our historic terms of
120 days, in exchange for more favorable discount terms from our vendors. This
resulted in an approximately $30.0 million decrease in accounts payable and a
corresponding increase in the Companys debt outstanding.

Net cash provided by operating activities was $88.2 million in fiscal
2002, compared with $39.0 million in fiscal 2001, an increase of $49.2 million
driven by improvements in working capital. Most notably, inventories, net of
payables support, decreased $41.1 million.

Net Cash Used For Investing Activities

Net cash used for investing activities for fiscal 2003 totaled $22.7
million compared with $66.5 million in fiscal 2002. Capital expenditures were
$22.7 million during fiscal 2003 versus $66.5 million in fiscal 2002 and are
discussed further below under the caption Capital
Expenditures.

Net cash used for investing activities for fiscal 2002 totaled $66.5
million compared with $40.7 million in fiscal 2001. Capital expenditures were
$66.5 million during fiscal 2002 versus $35.9 million in fiscal 2001.

Capital Expenditures

Capital expenditures for fiscal 2003 totaled $22.7 million, our lowest
level of capital spending in six years, as we focused on maximizing cash flow
to reduce debt. During the year, we opened one superstore and two traditional
stores and converted two larger traditional stores to our superstore format. We
also relocated four traditional stores and closed 42 smaller or under-
performing traditional stores and one superstore.

Capital expenditures of $66.5 million in fiscal 2002 included
approximately $40.0 million related to the unwind of a synthetic lease facility
which was replaced by our new Credit Facility (discussed further under
Financing below). The synthetic lease facility was originally used to finance
the construction and equipment cost of our distribution center in Visalia,
California. During fiscal 2001, construction was completed on this new 630,000
square foot distribution center. This facility was fully operational and
shipping product to more than 300 stores, or over 30% of our chain, by the end
of the second quarter of fiscal 2002.

Excluding the unwind of the synthetic lease, capital expenditures of $26.5
million during fiscal 2002 related primarily to the opening of new superstores
and other store related projects. During the year, we opened 12 superstores,
relocated or expanded 10 and closed 60 smaller or under-performing traditional
stores.

We anticipate capital expenditures in fiscal 2004 of approximately $50
million. The bulk of this spending pertains to new store openings and continued
improvements in the existing store base. We plan to open approximately 20
stores during fiscal 2004, the majority of them superstores.

Net Cash Used For Financing Activities

Net cash used for financing activities during fiscal 2003 was $54.4
million, primarily related to a $60.8 million net decrease in debt borrowings
resulting from the cash generated by our strong operating performance. During
fiscal 2003 we repurchased, in the open market, $27.1 million of our 10 3/8%
senior subordinated notes (the Notes) at a purchase price of $28.3 million or
4.3% over par.

Net cash used for financing activities during fiscal 2002 was $18.1
million, primarily related to a $16.3 million net decrease in debt borrowings.
This debt reduction was achieved despite the unwinding of a $40.0 million
synthetic lease, which added $40.0 million to our balance sheet debt levels,
and changes to our letter of credit payment terms, which we estimate added
$30.0 million

23



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##### 



to our debt levels. The debt reduction was achieved primarily
through our inventory reduction efforts as described above under
Net Cash
Provided By Operating Activities.

Common Share Repurchases

During fiscal 2003, we purchased a total of 0.2 million of our common
shares at an aggregate price of $3.4 million, utilizing proceeds received from
stock option exercises. As of February 1, 2003, we are authorized to purchase
up to an additional 1.3 million shares of our common stock under previous
authorizations from our Board of Directors.

Sources of Liquidity

We have three principal sources of liquidity: cash from operations, cash
and cash equivalents on hand, and the Credit Facility. Our liquidity is not
currently dependent on the use of off-balance sheet transactions other than
letters of credit and operating leases, which are typical in a retail
environment. We believe that our Credit Facility, coupled with cash on hand and
cash from operations, will be sufficient to cover our working capital, capital
expenditure and debt service requirement needs for the foreseeable future.

In April 2001, we entered into the Credit Facility, which replaced our
prior senior credit and synthetic lease facilities. The Credit Facility expires
on April 30, 2005. The Credit Facility consists of a $365.0 million credit
facility providing for $325.0 million in revolving loans and a $40.0 million
term loan, both secured by a first priority perfected security interest in our
inventory, accounts receivable, property and other assets. The Credit Facility
is fully and unconditionally guaranteed by each of our subsidiaries. Interest
on borrowings under the Credit Facility is calculated at the banks base rate
or London Interbank Offered Rate (LIBOR) plus 1.75% to 2.25%, depending on
the level of excess availability (as defined in the credit agreement) that is
maintained. At February 1, 2003, our interest on borrowings under our Credit
Facility was LIBOR plus 1.75%. The Credit Facility contains a sub-limit for
letters of credit of $150.0 million. Proceeds from the Credit Facility were
used to repay all outstanding borrowings under our prior senior credit facility
and synthetic lease facility.

The term loan portion of the Credit Facility replaces a $40.0 million
synthetic lease facility that we used to finance the construction of our West
Coast distribution center. The synthetic lease facility was accounted for as an
operating lease, with interest payments capitalized until the facility began
operations. As a result of the unwind of the synthetic lease facility, we
recorded the appropriate assets and debt obligation of $40.0 million on our
balance sheet in the first quarter of fiscal 2002.

Effective May 15, 2001, in connection with our financing under the Credit
Facility, the agent bank for the Credit Facility assumed assignment of our two
outstanding interest rate swap agreements. On May 16, 2001, the agent bank
terminated those interest rate swap agreements and established a new interest
rate swap with a fixed LIBOR rate of 6.72 percent and a notional amount of
$90.0 million, reducing to $40.0 million on May 1, 2003, until its expiration
on April 30, 2005.

As of February 1, 2003, we had borrowings outstanding of $40.0 million
under the Credit Facility at an interest rate of 3.5% (which excludes the
impact of the interest rate swap referred to above) and $47.7 million of
letters of credit outstanding.

The Companys weighted average interest rate (including the impact of the
interest rate swaps referred to above) and weighted average borrowings under
the Credit Facility, prior senior credit facility and other lines of credit
were 7.9% and $104.7 million during fiscal 2003 and 7.2% and $169.0 million
during fiscal 2002. The increase in the average interest rate is due to the
decrease in borrowings, that, in turn, caused the current swap arrangement
(priced at a fixed LIBOR rate of

24



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6.72% on a notional amount of $90 million) to
have a more significant impact on the average interest rate under the credit
facility than in the prior year.

On May 5, 1999 we issued the $150.0 million, 10 3/8% Notes, due May 1,
2007. Interest on the Notes is payable on May 1 and November 1 of each year. We
have the option of redeeming the Notes at any time after May 1, 2003, in
accordance with certain call provisions. The Notes represent unsecured
obligations that are subordinated to the Credit Facility and are fully and
unconditionally guaranteed by each of our subsidiaries.

During fiscal 2003, we purchased $27.1 million face value of the Notes.
The purchases were made at an aggregate premium of 104.3% to par value. The
$1.9 million pre-tax ($1.2 million after-tax) of aggregate losses include the
premium to par value and the write off of deferred costs and original issue
discount and are reflected in SG&A expenses. We have given notice to the
indenture trustee that, on May 1, 2003, we intend to redeem $41.5 million face
value of the Notes in accordance with the call provisions of the Notes
indenture.

Our total debt-to-capitalization ratio was 36.0% at February 1, 2003 and
49.0% at February 2, 2002. We have a goal to further reduce debt levels during
fiscal 2004 by utilizing cash provided by operating activities and cash on
hand.

Contractual Obligations and Commitments

The following tables summarize our future cash outflows resulting from
contractual obligations and commitments as of February 1, 2003:

Payments Due by PeriodLess thanTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsSubordinated notes
    
    $
    122.9
    
    
    $
    
    
    
    $
    
    
    
    $
    122.9
    
    
    $
    Credit Facility  revolving
facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Credit Facility  term loan
    
    
    40.0
    
    
    
    
    
    
    
    40.0
    
    
    
    
    
    
    
    Letters of credit (1)
    
    
    47.7
    
    
    
    47.7
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases (2)
    
    
    687.7
    
    
    
    116.8
    
    
    
    213.1
    
    
    
    153.0
    
    
    
    204.8Total Contractual Cash Obligations
    
    $
    898.3
    
    
    $
    164.5
    
    
    $
    253.1
    
    
    $
    275.9
    
    
    $
    204.8




---

|(1) |  | Includes commercial letters of credit of $28.6 million and $19.1 million
of standby letters of credit.
|--- |  | ------------------------------------------------------------------------------------------------------



|(2) |  | The remaining cash payments include $1.0 million associated with lease
obligations for stores closed.
|--- |  | -----------------------------------------------------------------------------------------------------

Seasonality and Inflation

Our business exhibits seasonality, which is typical for most retail
companies. Our sales are much stronger in the second half of the year than the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as
we increase our inventory in preparation for our peak selling season.

We believe that inflation has not had a significant effect on the growth
of net sales or on net income over the past three years. There can be no
assurance, however, that our operating results will not be affected by
inflation in the future.

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Derivative Financial Instruments and Market Risk

We are exposed to foreign currency fluctuations on merchandise that is
sourced internationally and the impact of interest rate changes on our
outstanding borrowings under the Credit Facility.

We believe foreign currency exchange rate fluctuations do not contain
significant market risk due to the nature of our relationships with our
international vendors. All merchandise contracts are denominated in U.S.
dollars and are subject to negotiation prior to our commitment for purchases.
As a result, there is not a direct correlation between merchandise prices and
fluctuations in the exchange rate. We sourced approximately 27% of our
purchases internationally in fiscal 2003.

In the normal course of business, we employ established policies and
procedures to manage our exposure to changes in interest rates. Our objective
in managing the exposure to interest rate changes is to limit the volatility
and impact of interest rate changes on earnings and cash flows. Interest rate
swaps are primarily utilized to achieve this objective. We utilize interest
rate swaps to manage net exposure to interest rate changes related to our debt
structure. We estimate that a one-percent increase or decrease in interest
rates, based on fiscal 2003 average debt levels, would cause an increase or
decrease to interest expense of $0.3 million. This includes the impact
resulting from our interest rate swap arrangement, as discussed below.

On March 15, 1998, we entered into a five-year interest rate swap
agreement to hedge our interest rate exposure. The notional amount of this
interest rate swap was $50.0 million, with a fixed LIBOR of 5.98%. On September
5, 2000, we entered into a separate interest rate swap agreement to further
hedge our interest rate exposure. The interest rate swap had a term of five
years effective May 1, 2001, with a notional amount of $40.0 million and a
fixed LIBOR rate of 6.80%. Effective May 15, 2001, the agent bank for the
Credit Facility assumed assignment of our two interest rate swap agreements and
on May 16, 2001, terminated those interest rate swap agreements and established
a new interest rate swap with a fixed LIBOR rate of 6.72% and notional amount
of $90.0 million, reducing to $40.0 million on May 1, 2003, until its
expiration on April 30, 2005.

Effective February 4, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. In accordance
with SFAS No. 133, we have reviewed and designated all of our interest rate
swap agreements as cash flow hedges and recognized the fair value of the
interest rate swap agreements on the balance sheet. Changes in the fair value
of these agreements are recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects earnings.
During fiscal 2003 and 2002, unrealized after tax net income (losses) of $0.4
million and ($3.0) million, respectively, were recorded in other comprehensive
income (loss). The comprehensive loss for fiscal 2002 included a $1.7 million
cumulative transition adjustment, as of the date of adoption of SFAS No. 133.
The pre-tax income (loss) as a result of hedge ineffectiveness (income) expense
for fiscal 2003 and 2002 was $(0.3) million and $1.0 million, respectively, and
is reflected in interest expense.

Critical Accounting Policies

The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures of contingent assets
and liabilities. We base our estimates on historical experience and on other
assumptions that we believe to be relevant under the circumstances, the results
of which form the basis for making judgments about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results could differ from these estimates under different assumptions and/or
conditions. We continually evaluate the information used to make these
estimates as our business and the economic environment changes. The use of
estimates is

26



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##### 



pervasive throughout our financial statements, but the accounting
policies and estimates we consider most critical are as follows:

Inventory Valuation

Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis. Inventory valuation methods require certain
management estimates and judgments. These include estimates of shrink, as well
as estimates of net realizable value on product designated for clearance, which
affects the ending inventory valuation at cost as well as the gross margins
reported for the year.

Our accrual for shrink is based on the actual historical shrink results of
our recent store physical inventories. These estimates are compared to actual
results as physical inventory counts are taken and reconciled to the general
ledger. Substantially all of our store physical inventory counts are taken in
the first three-quarters of each year and the shrink accrual recorded at
February 1, 2003 is based on shrink results of prior physical inventories. All
of our store locations that have been open one year or more are physically
inventoried once a year. We will continue to monitor and adjust our shrink rate
estimates based on the results of store physical inventories and shrink trends.

We estimate our reserve for clearance product based on the consideration
of a variety of factors, including, but not limited to, quantities of slow
moving or carryover seasonal merchandise on hand, historical recovery
statistics and future merchandising plans. The accuracy of our estimates can be
affected by many factors, some of which are outside of our control, including
changes in economic conditions and consumer buying trends. Historically, we
have not experienced significant differences in our estimates of recovery
compared with actual results.

Vendor allowances

The Company receives allowances from its vendors through a variety of
programs and arrangements, including cash discounts, purchase quantity
discounts, co-operative advertising and markdown reimbursement programs. Cash
and purchase discounts are recognized as a reduction of cost of goods sold when
the related inventory has been sold. Co-operative advertising allowances are
currently reported as a reduction of cost of sales as earned. Markdown
reimbursements are credited to cost of goods sold during the period in which
the related inventory is sold.

In November 2002, the EITF reached a consensus on EITF 02-16, Accounting
by a Customer (including a Reseller) for Certain Consideration Received from a
Vendor. Among other conclusions reached, EITF 02-16 requires that
consideration received from a vendor be presumed to be a reduction of the cost
of the vendors products or services. This presumption can be overcome if the
consideration can be shown to represent either a payment for assets or services
delivered to the vendor or a reimbursement of costs incurred by the reseller to
sell the vendors products. Under the transition rules set forth in EITF 02-16
this treatment is required for all agreements entered into or modified after
December 31, 2002. The Company does not expect that its adoption in fiscal 2004
will have a material impact on its results of operations or financial position.

Valuation of Long-Lived Assets

Long-lived assets and certain identifiable intangibles historically have
been reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows estimated by us to be
generated by those assets. If such assets are considered to be impaired, the
impairment to be recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.

27



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In July 2001, the FASB issued SFAS No. 142, Goodwill and Intangible
Assets (SFAS No. 142). SFAS No. 142 establishes accounting standards for
intangible assets and goodwill. The Company adopted SFAS No. 142 on February 3,
2002. The Company performed the first of the required impairment tests of
goodwill and based upon the transition impairment test performed on recorded
goodwill, no impairment to goodwill exists. In the fourth quarter of fiscal
2003, the Company also performed the required annual impairment test of the
carrying amount of goodwill and determined that no goodwill impairment existed.
Application of the non-amortization provision of SFAS No. 142 reduced
amortization expense by approximately $0.7 million for the fiscal year ending
February 1, 2003. The prior fiscal year included amortization expense of $0.7
million.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
supersedes SFAS No. 121 to supply a single accounting approach for measuring
impairment of long-lived assets, including a segment of a business accounted
for as a discontinued operation or those to be sold or disposed of other than
by sale. SFAS No. 144 was adopted in fiscal 2003. See the asset impairment
discussion contained above in Turnaround Charges and
Litigation Settlement.

Accrued Store Closing Costs

Prior to December 31, 2002, we accrued costs related to stores closed or
identified for closing, which include future rental obligations, carrying
costs, and other closing costs. These expenses were accrued when we had
committed to closing or relocating a store and were calculated at the lesser of
future rental obligations remaining under the lease (less estimated sublease
rental income) or the estimated lease termination cost. The determination of
the accrual was dependent on our ability to make estimates of costs to be
incurred post-closing and of sublease rental income to be received from
subleases. Differences in our estimates and assumptions could result in an
accrual requirement different from the calculated accrual. The carrying values
of long-lived assets for stores identified for closure are reduced to estimated
fair value.

In July 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No.146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 also establishes that the liability should initially be measured
and recorded at fair value. SFAS No. 146 replaces EITF Issue No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Under Issue 94-3, a
liability for an exit cost was recognized at the date of our commitment to an
exit plan. Accordingly, SFAS 146 may affect the timing of recognizing exit and
restructuring costs, if any, as well as the amounts recognized.

Accrued Expenses

We estimate certain material expenses in an effort to record those
expenses in the period incurred. Our most material estimates relate to
compensation, taxes and insurance related expenses, portions of which we are
self-insured for. Our workers compensation and general liability insurance
accruals are recorded based on insurance claims processed as well as historical
claims experience for claims incurred, but not yet reported. These estimates
are based on historical loss development factors. Our employee medical
insurance accruals are recorded based on our medical claims processed as well
as historical medical claims experience for claims incurred but not yet
reported. Differences in our estimates and assumptions could result in an
accrual requirement materially different from the calculated accrual.

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Recent Accounting Pronouncements

In addition to the accounting pronouncements referenced above in our
discussion of critical accounting policies, the following accounting
pronouncements may have an impact on our results of operations or financial
position, as discussed further below.

SFAS No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections

In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS No. 145 concludes that debt extinguishments
should not be classified as an extraordinary item. SFAS No. 145 also requires
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 did not
have a significant impact on the Companys results of operations or financial
position in fiscal 2003.

FASB Interpretation 45, Guarantors Accounting and Disclosure Requirements for
Guarantees

In November 2002, the FASB issued Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees. The interpretation
elaborates on the disclosures to be made in interim and annual financial
statements of a guarantor about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. Initial recognition and measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. As of February 1, 2003, we did not have
any outstanding guarantees, other than subsidiary guarantees of parent debt as
disclosed in Note 14 to the consolidated financial statements.

SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, SFAS 148 amends SFAS
123 to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee compensation.
It also amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information. We have
adopted the disclosure requirements of SFAS 148 in this Form 10-K/A for the
fiscal year ended February 1, 2003.

Cautionary Statement Concerning
Forward-Looking Statements

Certain statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements which reflects
the Companys current views of future events and financial performance, involve
certain risks and uncertainties. When used herein, the terms anticipates,
plans, estimates, expects, believes, and similar expressions as they
relate to us or future events or conditional verbs such as will, should,
would, may, and could are intended to identify such forward-looking
statements. Our actual results, performance or achievements may materially
differ from those expressed or implied in the forward-looking statements. Risks
and uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, changes in
customer demand, changes in trends in the fabric and craft industry,
seasonality, the availability of merchandise,

29



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##### 



changes in the competitive pricing for products, the impact of our and our
competitors store openings and closings, fuel and energy costs, changes in
tariff and freight rates, consumer debt levels, and other capital market and
geo-political conditions. Additional discussion of some of these and other
risks and uncertainties is contained elsewhere under Managements Discussion
and Analysis and Quantitative and Qualitative Disclosures About Market Risk.
We caution readers not to place undue reliance on these forward-looking
statements which are restricted as to the dates they were made. We assume no
obligation to update any of the forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in the Derivative
Financial Instruments and Market Risk section ofManagements Discussion and
Analysis of Financial Condition and Results of Operations.

30



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Item 8. Financial Statements and Supplementary Data

Jo-Ann Stores, Inc.

Index to Consolidated Financial Statements

PageReport of Management
    
    
    32Report of Independent Auditors
    
    
    33Report of Former Independent Public Accountants
    
    
    34Consolidated Balance Sheets as of February 1, 2003 and
February 2, 2002
    
    
    35Consolidated Statements of Operations for each of the three
fiscal years in the period ended February 1, 2003
    
    
    36Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended February 1, 2003
    
    
    37Consolidated Statements of Shareholders Equity for each of
the three fiscal years in the period ended February 1,
2003
    
    
    38Notes to Consolidated Financial Statements
    
    
    39Report of Former Independent Public Accountants on the
Financial Statement Schedule
    
    
    63Schedule II  Valuation and Qualifying Accounts
    
    
    64


31



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##### 



Report of Management

We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001. The opinion of Ernst & Young LLP, the
Companys independent auditors, for the year ended February 1, 2003, on those
financial statements is included. The opinion of Arthur Andersen LLP, who have
ceased operations, the Companys former independent public accountants, for the
years ended February 2, 2002 and February 3, 2001, on those financial
statements is included. The primary responsibility for the integrity of the
financial information included in this annual report rests with management.
This information is prepared in accordance with accounting principles generally
accepted in the United States, based on our best estimates and judgments and
giving due consideration to materiality.

The Company maintains accounting and control systems which are designed to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use, and which produce records adequate for preparation of
financial information. There are limits inherent in all systems of internal
control based on the recognition that the cost of such systems should not
exceed the benefits to be derived. We believe our systems provide this
appropriate balance.

The Board of Directors pursues its responsibility for these financial
statements through the Audit Committee, composed exclusively of outside
directors. The Audit Committee meets periodically with management, our internal
auditors and our independent auditors to discuss the adequacy of financial
controls, the quality of financial reporting, and the nature, extent and
results of the audit effort. Both the internal auditors and independent
auditors have private and confidential access to the Audit Committee at all
times.

Alan Rosskamm
    
    Brian P. CarneyChairman of the Board,
    
    Executive Vice President,President and Chief Executive Officer
    
    Chief Financial Officer


32



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##### 



Report of Independent Auditors

To the Shareholders and Board of Directors of Jo-Ann Stores, Inc.:

We have audited the accompanying consolidated balance sheet of Jo-Ann
Stores, Inc. and subsidiaries as of February 1, 2003, and the related
consolidated statements of operations, shareholders equity and cash flows for
the fiscal year then ended. Our audit also included the financial statement
schedule for the fiscal year ended February 1, 2003 listed in Item 15(a). These
financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit. The consolidated financial
statements and schedule of the Company as of February 2, 2002, and for each of
the fiscal years in the two year period ended February 2, 2002, were audited by
other auditors, who have ceased operations and whose reports dated March 7,
2002 expressed an unqualified opinion.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the 2003 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Jo-Ann Stores, Inc. and subsidiaries at February 1, 2003 and the
consolidated results of their operations and their cash flows for the fiscal
year then ended in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the financial statement schedule for
the year ended February 1, 2003, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



| | /s/ Ernst & Young LLP
| | ---------------------

Cleveland, Ohio,
March 10, 2003.

33



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##### 



Report of Former Independent Public Accountants

This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with the Companys filing on Form 10-K for the fiscal year
ended February 2, 2002. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K/A nor has Arthur
Andersen LLP provided a consent to the inclusion of its report in this Form
10-K/A. See Exhibit 23.3 for further discussion.

To the Shareholders and Board of Directors of Jo-Ann Stores, Inc.:

We have audited the accompanying consolidated balance sheets of Jo-Ann
Stores, Inc. (an Ohio corporation) and Subsidiaries as of February 2, 2002 and
February 3, 2001, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three fiscal years in the
period ended February 2, 2002. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jo-Ann Stores, Inc. and
Subsidiaries as of February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 2, 2002 in conformity with accounting principles
generally accepted in the United States.

As explained in Note 11 to the consolidated financial statements,
effective February 4, 2001, the Company changed its method of accounting for
derivative instruments.

/s/ Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

34



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##### 



Jo-Ann Stores, Inc.

Consolidated Balance Sheets

February 1,
    
    February 2,2003
    
    2002(Dollars in millions,except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    63.2
    
    
    $
    21.1Inventories
    
    
    363.1
    
    
    
    369.0Deferred income taxes
    
    
    28.2
    
    
    
    30.6Prepaid expenses and other current assets
    
    
    17.2
    
    
    
    17.5Total current assets
    
    
    471.7
    
    
    
    438.2Property, equipment and leasehold improvements, net
    
    
    190.3
    
    
    
    210.1Goodwill, net
    
    
    26.5
    
    
    
    26.5Other assets
    
    
    16.0
    
    
    
    18.9Total assets
    
    $
    704.5
    
    
    $
    693.7Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    129.9
    
    
    $
    123.1Accrued expenses
    
    
    75.9
    
    
    
    82.3Total current liabilities
    
    
    205.8
    
    
    
    205.4Long-term debt
    
    
    162.9
    
    
    
    223.7Deferred income taxes
    
    
    37.2
    
    
    
    23.6Other long-term liabilities
    
    
    9.2
    
    
    
    8.2Commitments and contingenciesShareholders equity:Preferred stock, no par value, 5,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock:Class A, stated value $0.05 per share; 75,000,000
authorized, Issued and outstanding 10,241,884 and
9,825,802, respectively
    
    
    0.5
    
    
    
    0.6Class B, stated value $0.05 per share; 75,000,000
authorized, Issued and outstanding 9,300,936 and
8,806,211, respectively
    
    
    0.5
    
    
    
    0.5Additional paid-in capital
    
    
    113.9
    
    
    
    99.7Unamortized restricted stock awards
    
    
    (0.4
    )
    
    
    (0.6
    )Retained earnings
    
    
    217.8
    
    
    
    172.9Accumulated other comprehensive loss
    
    
    (2.6
    )
    
    
    (3.0
    )329.7
    
    
    
    270.1Treasury stock, at cost
    
    
    (40.3
    )
    
    
    (37.3
    )Total shareholders equity
    
    
    289.4
    
    
    
    232.8Total liabilities and shareholders equity
    
    $
    704.5
    
    
    $
    693.7


See notes to consolidated financial statements

35



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##### 



Jo-Ann Stores, Inc.

Consolidated Statements of Operations

Fiscal Year EndedFebruary 1,
    
    February 2,
    
    February 3,2003
    
    2002
    
    2001(Dollars in millions, exceptearnings per share data)Net sales
    
    $
    1,682.0
    
    
    $
    1,570.3
    
    
    $
    1,483.3Cost of sales
    
    
    904.5
    
    
    
    877.2
    
    
    
    838.2Gross margin
    
    
    777.5
    
    
    
    693.1
    
    
    
    645.1Selling, general and administrative expenses
    
    
    642.9
    
    
    
    644.2
    
    
    
    589.2Depreciation and amortization
    
    
    36.1
    
    
    
    39.3
    
    
    
    38.3Operating profit
    
    
    98.5
    
    
    
    9.6
    
    
    
    17.6Interest expense, net
    
    
    26.0
    
    
    
    32.7
    
    
    
    29.0Income (loss) before income taxes
    
    
    72.5
    
    
    
    (23.1
    )
    
    
    (11.4
    )Income tax provision (benefit)
    
    
    27.6
    
    
    
    (8.8
    )
    
    
    (4.3
    )Income (loss) before equity loss and extraordinary
item
    
    
    44.9
    
    
    
    (14.3
    )
    
    
    (7.1
    )Equity and asset impairment losses of minority
investment
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Income (loss) before extraordinary item
    
    
    44.9
    
    
    
    (14.3
    )
    
    
    (13.6
    )Extraordinary item, loss related to early retirement of
debt, net of tax benefit of $0.4 million
    
    
    
    
    
    
    (0.6
    )
    
    
    Net income (loss)
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )Basic net income (loss) per common share:Before extraordinary item
    
    $
    2.34
    
    
    $
    (0.78
    )
    
    $
    (0.75
    )Extraordinary item
    
    
    
    
    
    
    (0.03
    )
    
    
    $
    2.34
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )Diluted net income (loss) per common share:Before extraordinary item
    
    $
    2.23
    
    
    $
    (0.78
    )
    
    $
    (0.75
    )Extraordinary item
    
    
    
    
    
    
    (0.03
    )
    
    
    $
    2.23
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )


See notes to consolidated financial statements

36



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##### 



Jo-Ann Stores, Inc.

Consolidated Statements of Cash Flows

Fiscal Year EndedFebruary 1,
    
    February 2,
    
    February 3,2003
    
    2002
    
    2001(Dollars in millions)Net cash flows from operating activities:Net income (loss)
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    36.1
    
    
    
    39.3
    
    
    
    38.3Deferred income taxes
    
    
    15.7
    
    
    
    (8.3
    )
    
    
    (4.2
    )Loss on disposal of fixed assets
    
    
    2.3
    
    
    
    1.2
    
    
    
    1.7Equity and asset impairment losses of minority
investment
    
    
    
    
    
    
    
    
    
    
    6.5Extraordinary item, net of tax
    
    
    
    
    
    
    0.6
    
    
    
    Loss associated with purchase of senior
subordinated notes
    
    
    1.9
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Decrease (increase) in inventories
    
    
    5.9
    
    
    
    82.0
    
    
    
    (8.5
    )Increase (decrease) in accounts payable
    
    
    6.8
    
    
    
    (40.9
    )
    
    
    14.4(Decrease) increase in accrued expenses
    
    
    (2.8
    )
    
    
    21.2
    
    
    
    3.9Settlement of income tax contingency
    
    
    
    
    
    
    
    
    
    
    (3.5
    )Other, net
    
    
    8.4
    
    
    
    8.0
    
    
    
    4.0Net cash provided by operating activities
    
    
    119.2
    
    
    
    88.2
    
    
    
    39.0Net cash flows used for investing activities:Capital expenditures
    
    
    (22.7
    )
    
    
    (66.5
    )
    
    
    (35.9
    )Minority investment
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Other, net
    
    
    
    
    
    
    
    
    
    
    1.7Net cash used for investing activities
    
    
    (22.7
    )
    
    
    (66.5
    )
    
    
    (40.7
    )Net cash flows used for financing activities:Proceeds from senior secured credit facility, net
    
    
    
    
    
    
    171.6
    
    
    
    Repayment of prior senior credit facility
    
    
    
    
    
    
    (123.8
    )
    
    
    Net change in revolving credit facility
    
    
    (33.7
    )
    
    
    (69.1
    )
    
    
    (5.2
    )Purchase of senior subordinated notes
    
    
    (28.3
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    8.5
    
    
    
    
    
    
    
    Purchase of common stock
    
    
    (3.4
    )
    
    
    (0.4
    )
    
    
    (0.1
    )Other, net
    
    
    2.5
    
    
    
    3.6
    
    
    
    3.1Net cash used for financing activities
    
    
    (54.4
    )
    
    
    (18.1
    )
    
    
    (2.2
    )Net increase (decrease) in cash and cash equivalents
    
    
    42.1
    
    
    
    3.6
    
    
    
    (3.9
    )Cash and cash equivalents at beginning of year
    
    
    21.1
    
    
    
    17.5
    
    
    
    21.4Cash and cash equivalents at end of year
    
    $
    63.2
    
    
    $
    21.1
    
    
    $
    17.5Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    22.5
    
    
    $
    30.6
    
    
    $
    27.7Income taxes, net of refunds
    
    
    4.9
    
    
    
    0.5
    
    
    
    3.4


See notes to consolidated financial statements

37



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##### 



Jo-Ann Stores, Inc.

Consolidated Statements of Shareholders Equity

Unamortized
    
    
    
    
    
    
    
    
    
    AccumulatedClass A
    
    Class B
    
    Additional
    
    Restricted
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCommon
    
    Common
    
    Paid-In
    
    Stock
    
    Treasury
    
    Retained
    
    Comprehensive
    
    Shareholders'Stock
    
    Stock
    
    Capital
    
    Awards
    
    Stock
    
    Earnings
    
    Loss
    
    Equity(Dollars in millions)Balance, January 29, 2000
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    97.9
    
    
    $
    (2.1
    )
    
    $
    (38.8
    )
    
    $
    201.4
    
    
    
    
    
    
    $
    259.4Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13.6
    )
    
    
    
    
    
    
    (13.6
    )Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13.6
    )Restricted stock awards
activity, net
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuance of treasury
shares
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    1.0Issuance of common
stock  Associate Stock
Ownership Plan
    
    
    0.1
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7Balance, February 3, 2001
    
    
    0.6
    
    
    
    0.5
    
    
    
    99.2
    
    
    
    (1.2
    )
    
    
    (38.1
    )
    
    
    187.8
    
    
    
    
    
    
    
    248.8Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14.9
    )
    
    
    
    
    
    
    (14.9
    )Cumulative effect of change
in accounting for
derivatives, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.7
    )
    
    
    (1.7
    )Change in fair value of
derivatives, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.9
    )Restricted stock awards
activity, net
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Issuance of treasury
shares
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    0.9Issuance of common
stock  Associate Stock
Ownership Plan
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Balance, February 2, 2002
    
    
    0.6
    
    
    
    0.5
    
    
    
    99.7
    
    
    
    (0.6
    )
    
    
    (37.3
    )
    
    
    172.9
    
    
    
    (3.0
    )
    
    
    232.8Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44.9
    
    
    
    
    
    
    
    44.9Change in fair value of
derivatives, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45.3Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.5Tax benefit on options
exercised
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.6Restricted stock awards
activity, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Purchase of common stock
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.3
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Issuance of treasury
shares
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.9Issuance of common
stock  Associate Stock
Ownership Plan
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5Balance, February 1, 2003
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    113.9
    
    
    $
    (0.4
    )
    
    $
    (40.3
    )
    
    $
    217.8
    
    
    $
    (2.6
    )
    
    $
    289.4


See notes to consolidated financial statements

38



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements

Note 1  Significant Accounting Policies

Nature of Operations

Jo-Ann Stores, Inc. (the Company), an Ohio corporation, is a fabric and
craft retailer with 919 retail stores in 48 states at February 1, 2003. The 847
traditional and 72 superstores feature a broad line of apparel, craft and home
decorating fabrics, notions, crafts, seasonal and home accessories and floral
and framing products.

The significant accounting policies applied in preparing the accompanying
consolidated financial statements of the Company are summarized below:

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. Certain amounts in the fiscal 2002 and 2001 financial
statements have been reclassified in order to conform with the current year
presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Since actual results may
differ from those estimates, the Company revises its estimates and assumptions,
as new information becomes available.

Fiscal Year

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 2003 refers to the
year ended February 1, 2003). Fiscal 2001 was a 53-week year.

Cash and Cash Equivalents

Cash equivalents are all highly liquid investments with original
maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis. Inventory valuation methods require certain
management estimates and judgments, which affect the ending inventory valuation
at cost as well as the gross margins reported for the year. These valuation
methods include estimates of net realizable value on product designated for
clearance and estimates of shrink between periods when the Company conducts
store physical inventories to substantiate inventory balances.

The Companys accrual for shrink is based on the actual historical shrink
results of recent store physical inventories. These estimates are compared to
actual results as physical inventory counts are taken and reconciled to the
general ledger. Substantially all of our store physical inventory counts are
taken in the first three quarters of each year and the shrink accrual recorded
at February 1, 2003 is based on shrink results of prior physical inventories.
All store locations that have been open one year or longer are physically
inventoried once a year. The Company

39



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

continually monitors and adjusts the shrink rate estimates based on the results
of store physical inventories and shrink trends.

Inventory reserves for clearance product are estimated based on the
consideration of a variety of factors, including, but not limited to,
quantities of slow moving or carryover seasonal merchandise on hand, historical
recovery statistics and future merchandising plans. The accuracy of the
Companys estimates can be affected by many factors, some of which are outside
of the Companys control, including changes in economic conditions and consumer
buying trends.

During the fourth quarter of fiscal 2001, management developed a
turnaround plan (the Turnaround Plan), which resulted from a thorough
analysis of the Companys business prompted by operating trends that were
occurring. As a result of the Companys decline in earnings, significant
increases in debt and inventory levels, and issues surrounding the
implementation of SAP Retail, the Companys strategy shifted from accelerating
the growth of its superstore concept to improving the productivity of its
existing asset base and realizing the benefits from the completed
infrastructure investments.

As part of the Turnaround Plan, the Company commenced a SKU Reduction
Initiative, which entailed a thorough review of the Companys inventory
investment and gross margin performance by item or SKU. This analysis
identified approximately 10,000 active items, totaling more than $50 million at
cost, that were under performing and that the Company decided to discontinue.
In accordance with EITF 96-9 Classification of Inventory Markdowns and Other
Costs Associated with a Restructuring, the Company recorded a $23.0 million
pre-tax charge to cost of goods sold in the fourth quarter of fiscal 2001 to
reflect the markdown of this inventory to its net realizable value. Clearance
programs were begun in the second quarter of fiscal 2002 designed to eliminate
this product. These clearance programs were completed by the end of fiscal
2002.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
provided over the estimated useful life of the assets principally by the
straight-line method. The major classes of assets and ranges of estimated
useful lives are: buildings from 10 to 40 years; furniture, fixtures and
equipment from 2 to 10 years; and leasehold improvements for 10 years or the
remainder of the lease term, whichever is shorter. Maintenance and repair
expenditures are charged to expense as incurred and improvements and major
renewals are capitalized.

Software Development

The Company capitalized $2.7 million and $0.6 million in fiscal 2003 and
fiscal 2002, respectively, for internal use software acquired from third
parties. The capitalized amounts are included in property, equipment and
leasehold improvements and are being amortized on a straight-line basis over
periods ranging from three to five years beginning at the time the software
becomes operational.

Goodwill

Goodwill represents the excess of purchase price and related costs over
the fair value assigned to the net tangible assets acquired from House of
Fabrics, Inc. (HOF). The goodwill recorded at February 1, 2003 was
non-deductible for tax purposes.

40



---



##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

Effective February 3, 2002, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standard (SFAS)
No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS No.
142, goodwill is no longer amortized but is subject to impairment testing,
using fair value-based approaches. Prior to the adoptions of SFAS No. 142,
goodwill was amortized using the straight-line method over an estimated using
life of 40 years. As part of adopting this standard, the Company completed a
transitional impairment test as of February 3, 2002 for goodwill and determined
that the carrying value of the Company did not exceed its estimated fair value
as determined by utilizing various valuation techniques. In the fourth quarter
of fiscal 2003, the Company also performed the required annual impairment test
of the carrying amount of goodwill and determined that no goodwill impairment
existed. Application of the non-amortization provision of SFAS No. 142 reduced
amortization expense by approximately $0.7 million for fiscal 2003. Fiscal 2002
and 2001 included amortization expense of $0.7 million and $0.9 million,
respectively. Other intangible assets with definite useful lives are required
to continue to be amortized over their respective estimated useful lives. The
Company did not have other intangible assets at February 1, 2003.

Impairment of Long-lived Assets

Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized, but must be reviewed at least annually (see above).

Effective February 3, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,to supply a single accounting
approach for measuring impairment of long-lived assets, including definite
lived intangible assets, businesses accounted for as a discontinued operation,
assets to be sold and assets to be disposed of other than by sale. The initial
adoption of SFAS No. 144 did not have a significant impact on the Companys
results of operations or financial position. See Note 3  Store Closings for
details related to the results of impairment testing performed during the
fourth quarter of fiscal 2003.

Under SFAS No. 144, long-lived assets, except for goodwill and indefinite
lived intangible assets, are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of the assets to future net cash flows estimated by the Company to be
generated by such assets. If such assets are considered to be impaired, the
impairment to be recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
recorded at the lower of carrying value or estimated net realizable value.

Accrued Store Closing Costs

The Company accrues costs related to stores closed or identified for
closing, which include future rental obligations, carrying costs, and other
closing costs. Historically, these expenses were accrued when the Company
committed to closing or relocating a store. The determination of the accrual
was dependent on the Companys ability to make estimates of costs to be
incurred post-closing. Future rental obligations are calculated at the lesser
of contractual obligations remaining under the lease (less estimated sublease
rental income) or the estimated lease termination cost. Differences in
estimates and assumptions could result in an accrual requirement materially
different

41



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

from the calculated accrual. The carrying values of long-lived assets for
stores identified for closure are reduced to estimated fair value.

In July 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 also establishes that the liability should initially be measured
and recorded at fair value. SFAS No. 146 replaces EITF Issue No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Under Issue 94-3, a
liability for an exit cost was recognized at the date of our commitment to an
exit plan. Accordingly, SFAS 146 may affect the timing of recognizing future
exit and restructuring costs, if any, as well as the amounts recognized. See
Note 3  Store Closings.

Accrued Expenses

Certain material expenses are estimated in an effort to record those
expenses in the period incurred. The most material estimates relate to
compensation, taxes and insurance related expenses, portions of which the
Company is self-insured for. Workers compensation and general liability
insurance accruals are recorded based on insurance claims processed as well as
historical claims experience for claims incurred, but not yet reported. These
estimates are based on historical loss development factors. Employee medical
insurance accruals are recorded based on medical claims processed as well as
historical medical claims experience for claims incurred but not yet reported.
Differences in the Companys estimates and assumptions could result in an
accrual requirement materially different from the calculated accrual. Accrued
expenses at fiscal 2003 consists of the following (dollars in millions):

Accrued compensation
    
    $
    23.1Accrued taxes
    
    
    10.6Accrued insurance
    
    
    11.6Other accrued expenses
    
    
    30.6$
    75.9


Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to
deliver, or conveys a right to receive cash or another financial instrument.
The carrying values of cash and cash equivalents and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. The price of the 10 3/8 percent senior subordinated notes
(the Notes) at February 1, 2003 in the high yield debt market was 106.5
percent to par value. Accordingly, the fair value of the 10 3/8 percent Notes
was $130.9 million versus their carrying value of $122.9 million.

In the normal course of business, the Company employs established policies
and procedures to manage exposure to changes in interest rates. The Companys
objective in managing the exposure to interest rate changes is to limit the
volatility and impact of interest rate changes on earnings and cash flows.
Interest rate swaps are primarily utilized to achieve this objective. Interest
rate swaps are utilized to manage net exposure to interest rate changes related
to the Companys

42



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

debt structure. The interest rate swap agreements require the Company to pay a
fixed interest rate while receiving a floating interest rate based on LIBOR.
The Company does not enter into financial instruments for trading purposes.

On March 15, 1998, the Company entered into a five-year interest rate swap
agreement to hedge its interest rate exposure. The notional amount of this
interest rate swap was $50.0 million, with a fixed LIBOR of 5.98 percent. On
September 5, 2000, the Company entered into a separate interest rate swap
agreement to further hedge its interest rate exposure. The interest rate swap
had a term of five years effective May 1, 2001, with a notional amount of $40.0
million and a fixed LIBOR rate of 6.80 percent. Effective May 15, 2001, the
agent for the Credit Facility assumed assignment of the Companys two
outstanding interest rate swap agreements and on May 16, 2001, terminated those
interest rate swap agreements and established a new interest rate swap with a
fixed LIBOR rate of 6.72 percent and a notional amount of $90.0 million,
reducing to $40.0 million on May 1, 2003, until its expiration on April 30,
2005.

Effective February 4, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. In accordance
with SFAS No. 133, the Company has reviewed and designated all of its interest
rate swap agreements as cash flow hedges and now recognizes the fair value of
its interest rate swap agreements on the balance sheet. Changes in the fair
value of these agreements are recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects earnings.
During fiscal 2003 and fiscal 2002, unrealized after-tax net gains (losses) of
$0.4 million and ($3.0) million, respectively, were recorded in other
comprehensive income (loss). The fiscal 2002 after-tax net loss included a $1.7
million cumulative transition adjustment, as of the date of adoption of SFAS
No. 133. The hedge ineffectiveness (income) expense for fiscal 2003 and 2002
was $(0.3) million and $1.0 million, respectively, and is reflected in interest
expense.

Income Taxes

The Company accounts for income taxes pursuant to the asset and liability
method. Under that method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax rate is
recognized in income or expense in the period that the change is effective.

Revenue Recognition

The Company recognizes revenue at the time of sale of merchandise to its
customers in compliance with Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. The Company allows for merchandise to be
returned under most circumstances, however, the Company does not provide a
reserve as the amounts of returns have not historically had a material impact
on the financial statements.

43



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

Store Opening Expenses

Store opening expenses are charged to operations as incurred.

Advertising Costs

The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $39.7 million, $37.9 million
and $39.5 million for fiscal 2003, 2002 and 2001, respectively.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with
SFAS No. 128, Earnings per Share. Basic earnings per common share are
computed by dividing net income (loss) by the weighted average number of shares
outstanding during the year. Diluted earnings per share for fiscal 2003 include
the effect of the assumed exercise of dilutive stock options under the treasury
stock method. Stock options are antidilutive for fiscal 2002 and fiscal 2001
and therefore are excluded from the calculation of diluted earnings per share.
Basic and diluted earnings per share are as follows:

Fiscal Year Ended2003
    
    2002
    
    2001(Dollars in millions, except per share data)Income (loss) before extraordinary
item
    
    $
    44.9
    
    
    $
    (14.3
    )
    
    $
    (13.6
    )Extraordinary item
    
    
    
    
    
    
    (0.6
    )
    
    
    Net income (loss)
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )Weighted average shares:Basic
    
    
    19,166,337
    
    
    
    18,444,141
    
    
    
    18,041,192Incremental shares from assumed
exercise of stock options
    
    
    939,926
    
    
    
    
    
    
    
    Diluted
    
    
    20,106,263
    
    
    
    18,444,141
    
    
    
    18,041,192Basic net income (loss) per common
share:Before extraordinary item
    
    $
    2.34
    
    
    $
    (0.78
    )
    
    $
    (0.75
    )Extraordinary item
    
    
    
    
    
    
    (0.03
    )
    
    
    $
    2.34
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )Diluted net income (loss) per common
share:Before extraordinary item
    
    $
    2.23
    
    
    $
    (0.78
    )
    
    $
    (0.75
    )Extraordinary item
    
    
    
    
    
    
    (0.03
    )
    
    
    $
    2.23
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )


Stock-Based Compensation

The Company applies the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
in accounting for stock options granted under its stock plans (see Note 8 -
Stock Based Compensation Plans).

44



---



##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1  Significant Accounting Policies (Continued)

Accordingly, no compensation cost has been recognized for options granted under
the Companys stock plans. If the Company had determined compensation cost for
the stock options based on the fair value at the grant dates for awards under
the stock plans consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, the Companys net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts shown in the table below
(dollars in millions, except per share data):

Fiscal Year Ended2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (13.6
    )Less: Stock-based compensation determined under the fair
value method, net of tax
    
    
    2.2
    
    
    
    2.1
    
    
    
    2.5Pro forma net income
    
    $
    42.7
    
    
    $
    (17.0
    )
    
    $
    (16.1
    )Basic income (loss) per common share:As reported
    
    $
    2.34
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )Pro forma
    
    
    2.22
    
    
    
    (0.92
    )
    
    
    (0.89
    )Diluted income (loss) per common share:As reported
    
    $
    2.23
    
    
    $
    (0.81
    )
    
    $
    (0.75
    )Pro forma
    
    
    2.14
    
    
    
    (0.92
    )
    
    
    (0.89
    )


The pro forma disclosures presented are not representative of the future
effects on net income and net income per share.

For purposes of computing the pro forma disclosures above, the fair values
of the options granted under the stock plans were determined at the date of
grant separately for Class A and Class B option grants using the Black-Scholes
option pricing model. The Company does not pay dividends, so no dividend rate
assumption was made. The significant assumptions used to calculate the fair
value of Class A and Class B option grants were as follows:

Fiscal Year Ended2003
    
    2002
    
    2001Risk-free interest ratesClass A
    
    
    4.3
    %
    
    
    5.2
    %
    
    
    6.4
    %Class B
    
    3.0% to 4.9%
    
    4.8% to 4.9%
    
    6.2% to 6.6%Expected volatility of underlying
stockClass A
    
    
    .466
    
    
    
    .460
    
    
    
    .380Class B
    
    
    .484 to .555
    
    
    
    .460
    
    
    
    .380Expected lifeClass A
    
    5 years
    
    10 years
    
    10 yearsClass B
    
    6 years
    
    6 years
    
    6 years


Assumptions utilized for the purchase of shares under the employee stock
purchase program (Class A shares) are as follows: risk-free interest rates
ranging from 1.5 percent to 2.2 percent, expected volatility ranging from .510
to .705, expected lives of six months and no expected dividends.

45



---



##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2  Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consists of the following
(dollars in millions):

Fiscal Year2003
    
    2002Land and buildings
    
    $
    52.9
    
    
    $
    51.9Furniture, fixtures and equipment
    
    
    272.9
    
    
    
    267.7Leasehold improvements
    
    
    70.2
    
    
    
    69.3Construction in progress
    
    
    7.2
    
    
    
    3.7403.2
    
    
    
    392.6Less accumulated depreciation
    
    
    (212.9
    )
    
    
    (182.5
    )Property, equipment and leasehold improvements, net
    
    $
    190.3
    
    
    $
    210.1


Note 3  Store Closings

The Company reviews the productivity of its store base on an ongoing basis
and actively manages its real estate to preserve maximum flexibility in its
lease terms. In accordance with the applicable accounting literature (Emerging
Issues Task Force Issue (EITF) 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring), Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of and Staff Accounting Bulletin No.
100, Restructuring and Impairment Charges,) the Company recorded a $17.1
million pre-tax charge to operating expenses in fiscal 2002 and a $6.7 million
pre-tax charge to operating expenses in fiscal 2001 for restructuring and asset
impairment costs resulting from 148 identified store closings associated with
the Turnaround Plan. The Company also incurred expenses of $0.5 million and
$1.2 million, in fiscal 2002 and 2001, respectively, for store closings
unrelated to the Turnaround Plan.

As discussed earlier under Note 1  Significant Accounting Policies, the
Company, effective December 31, 2002, is required to account for costs of store
closings under SFAS No. 146. In addition, the Company has adopted the new
accounting requirements related to asset impairment as required by SFAS No.
144, effective February 3, 2002.

Through the end of fiscal 2003, the Company has closed 120 of the stores
identified for closure as part of the Turnaround Plan. All of the remaining
stores to be closed, with the exception of eight store locations, are scheduled
to close in the next 24 months. The eight store locations will continue to be
operated, due to the Companys inability to successfully negotiate an
acceptable arrangement to exit the lease. A total of $7.7 million for estimated
lease obligations of stores to be closed as part of the Turnaround Plan were
reversed in the fourth quarter of fiscal 2003. The reversal related to stores
where estimates were revised, as well as the eight stores we could not close.
The Company also recorded an asset impairment charge in the fourth quarter of
fiscal 2002 of $6.7 million for these eight stores and other store locations,
representing the difference between the asset carrying value and the future net
discounted cash flows estimated to be generated by those assets. The remainder
of the store closing charges in fiscal 2003, highlighted in the table below,
represents lease obligations and other costs associated with stores identified
for closure in fiscal 2004 that were not part of the Turnaround Plan.

The charges to the statement of operations for the three fiscal years
ended February 1, 2003 related to store closings. The store closing charges are
summarized as follows (dollars in millions),

46



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 3  Store Closings (Continued)

and include charges both as part of our turnaround initiatives, as well as
store closings from normal operating activity.

Fiscal Year Ended2003
    
    2002
    
    2001Store Closing Charges:Non-cancelable lease obligations
    
    $
    (5.9
    )
    
    $
    9.6
    
    
    $
    4.1Asset impairment
    
    
    6.7
    
    
    
    5.0
    
    
    
    Other costs
    
    
    0.6
    
    
    
    3.0
    
    
    
    3.8Total
    
    $
    1.4
    
    
    $
    17.6
    
    
    $
    7.9


Non-cancelable lease obligationsinclude the lesser of the estimated
buyout or remaining lease obligations of the stores to be closed. Estimated
continuing lease obligations were reduced by anticipated sublease rental
income.

Asset impairmentsinclude write-downs of fixed assets for stores closed,
or scheduled to be closed, and certain other store locations where impairment
exists, to estimated fair value. The asset impairment represents the difference
between the asset carrying value and the future net discounted cash flows
estimated by us to be generated by those assets.

Other costsrepresent other miscellaneous store closing costs, including
among other things, costs related to fixtures, signage and register removal.

In accordance with EITF 96-9 Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring, the Company also recorded in cost
of goods sold the markdown of certain inventory contained in the stores
identified for closing to its net realizable value. Inventory write-downs
recorded were $2.3 million in fiscal 2003 and $2.6 million in fiscal 2002. The
inventory reserve remaining at February 1, 2003 is $2.7 million.

Summarized below is a reconciliation of the beginning and ending store
closing reserve balances for the three fiscal years ended February 1, 2003
(dollars in millions):

Non-CancelableLease
    
    Asset
    
    OtherObligations
    
    Impairments
    
    Costs
    
    TotalBalance at Jan 29, 2000
    
    $
    4.4
    
    
    $
    
    
    
    $
    
    
    
    $
    4.4Amounts charged to income
    
    
    4.1
    
    
    
    
    
    
    
    3.8
    
    
    
    7.9Utilization:Cash
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (3.0
    )Non-Cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at Feb 3, 2001
    
    
    5.5
    
    
    
    
    
    
    
    3.8
    
    
    
    9.3Amounts charged to income
    
    
    9.6
    
    
    
    5.0
    
    
    
    3.0
    
    
    
    17.6Utilization:Cash
    
    
    (3.9
    )
    
    
    
    
    
    
    (5.6
    )
    
    
    (9.5
    )Non-Cash
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    (5.0
    )Balance at Feb 2, 2002
    
    
    11.2
    
    
    
    
    
    
    
    1.2
    
    
    
    12.4Amounts charged to income
    
    
    (5.9
    )
    
    
    6.7
    
    
    
    0.6
    
    
    
    1.4Utilization:Cash
    
    
    (1.8
    )
    
    
    
    
    
    
    (0.9
    )
    
    
    (2.7
    )Non-Cash
    
    
    
    
    
    
    (6.7
    )
    
    
    
    
    
    
    (6.7
    )Balance at Feb 1, 2003
    
    $
    3.5
    
    
    $
    
    
    
    $
    0.9
    
    
    $
    4.4


47



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 4  Income Taxes

The significant components of the income tax provision (benefit) are as
follows (dollars in millions):

Fiscal Year Ended2003
    
    2002
    
    2001Current:Federal
    
    $
    9.0
    
    
    $
    (0.4
    )
    
    $
    6.9State and local
    
    
    2.9
    
    
    
    (0.1
    )
    
    
    (0.7
    )11.9
    
    
    
    (0.5
    )
    
    
    6.2Deferred
    
    
    15.7
    
    
    
    (8.3
    )
    
    
    (10.5
    )Income tax provision (benefit)
    
    $
    27.6
    
    
    $
    (8.8
    )
    
    $
    (4.3
    )


The reconciliation of income tax at the statutory rate to the income tax
provision (benefit) is as follows:

Fiscal Year Ended2003
    
    2002
    
    2001Federal income tax at the statutory rate
    
    $
    25.4
    
    
    $
    (8.1
    )
    
    $
    (4.0
    )Effect of:State and local taxes
    
    
    2.9
    
    
    
    (0.4
    )
    
    
    (0.2
    )Other, net
    
    
    (0.7
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Income tax provision (benefit)
    
    $
    27.6
    
    
    $
    (8.8
    )
    
    $
    (4.3
    )


48



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 4  Income Taxes (Continued)

The significant components of the Companys deferred tax assets and
liabilities are as follows:

Fiscal YearAsset/(Liability)2003
    
    2002CurrentDeferred tax assets:Inventory items
    
    $
    15.7
    
    
    $
    17.3Employee benefits
    
    
    2.4
    
    
    
    2.9Lease obligations
    
    
    8.0
    
    
    
    6.0Other
    
    
    3.5
    
    
    
    5.829.6
    
    
    
    32.0Deferred tax liabilities:Basis difference in net assets acquired
    
    
    (1.4
    )
    
    
    (1.4
    )Net current deferred tax asset
    
    $
    28.2
    
    
    $
    30.6Non-currentDeferred tax assets:NOL carryforward
    
    $
    
    
    
    $
    8.4Equity investment
    
    
    2.5
    
    
    
    2.5Other
    
    
    0.4
    
    
    
    2.0Valuation allowance
    
    
    (2.5
    )
    
    
    (2.5
    )0.4
    
    
    
    10.4Deferred tax liabilities:Depreciation
    
    
    (36.7
    )
    
    
    (33.5
    )Basis difference in net assets acquired
    
    
    (0.6
    )
    
    
    (0.6
    )Other
    
    
    (0.3
    )
    
    
    0.1(37.6
    )
    
    
    (34.0
    )Net non-current deferred tax liability
    
    $
    (37.2
    )
    
    $
    (23.6
    )


The Company has recorded a valuation allowance for losses on the minority
equity investment which may not be realizable.

Note 5  Financing

Long-term debt consists of the following (dollars in millions):

Fiscal Year2003
    
    2002Credit Facility  term loan
    
    $
    40.0
    
    
    $
    40.0Credit Facility  revolver
    
    
    
    
    
    
    33.7Senior subordinated notes
    
    
    122.9
    
    
    
    150.0Long-term debt
    
    $
    162.9
    
    
    $
    223.7


49



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5  Financing (Continued)

Secured Credit Facilities

In April 2001, the Company entered into a $365.0 million senior secured
credit facility (the Credit Facility) which expires on April 30, 2005. The
Credit Facility consists of a $325.0 million revolving credit facility and a
$40.0 million term loan, both secured by a first priority perfected security
interest in the inventory, accounts receivable, property and other assets of
the Company. There is no penalty if the Company elects to prepay the term loan
principal, which is due on April 30, 2005. The Credit Facility is fully and
unconditionally guaranteed by each of the Companys subsidiaries. The Credit
Facility contains a letter of credit sub-limit of $150.0 million. Interest on
borrowings under the Credit Facility is calculated at the banks base rate or
London Interbank Offered Rate (LIBOR) plus 1.75 percent to 2.25 percent,
depending on the level of excess availability (as defined in the Credit
Agreement) that is maintained. Proceeds from the Credit Facility were used to
repay all outstanding borrowings under the Companys prior $300.0 million
senior credit facility and a $40.0 million synthetic lease facility that the
Company had originally used to finance the construction of a distribution
center in Visalia, California.

As of February 1, 2003, the Company had borrowings outstanding of $40.0
million under the Credit Facility at an interest rate of 3.5% (which excludes
the impact of the interest rate swap referred to in Financial Instruments of
Note 1  Significant Accounting Policies) and $47.7 million of letters of
credit outstanding. The Company pays quarterly commitment fees of between 1.25
percent and 2.25 percent per annum on outstanding letters of credit under the
Credit Facility. The Company also pays quarterly fees of 0.375 percent per
annum on the unused portion of the Credit Facility.

The Credit Facility does not contain any financial covenant tests as long
as excess availability, as defined, is greater than $35.0 million. A minimum
net worth financial covenant test exists if excess availability is less than
$35.0 million. In addition, capital expenditures under the Credit Facility are
limited to $50.0 million per year, with any unused portion carried forward and
available for use. The Credit Facility permits the repurchase of common shares
of the Company, the repurchase of senior subordinated notes, and the payment of
cash dividends (up to $5.0 million) in any fiscal year, subject to maintaining
certain levels of excess availability. Excess availability under the Credit
Facility was $155.0 million on February 1, 2003.

The Companys weighted average interest rate (including the impact of the
interest rate swaps referred to in Financial Instruments of Note 1 -
Significant Accounting Policies) under the Credit Facility, prior senior credit
facility and other lines of credit were 7.9 percent during fiscal 2003, 7.2
percent during fiscal 2002, and 7.9 percent during fiscal 2001.

Senior Subordinated Notes

On May 5, 1999, the Company issued $150.0 million of 10 3/8 percent Notes
due May 1, 2007. Interest on the Notes is payable on May 1 and November 1 of
each year. Deferred charges and the original issue discount (the Notes were
issued at 98.5 percent of face value) recorded at issuance in the amounts of
$4.3 million and $2.3 million, respectively, are reflected in other long-term
assets and are being amortized as interest expense over the term of the notes
utilizing the effective interest method. The Company has the option of
redeeming the Notes at any time on or after May 1, 2003, in accordance with
certain call provisions of the Notes Indenture. The Notes represent unsecured
obligations that are subordinated to the Credit Facility and are fully and
unconditionally guaranteed by each of the Companys subsidiaries.

50



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5  Financing (Continued)

During fiscal 2003, the Company purchased $27.1 million face value of the
Notes. The purchases were made at an aggregate price of 104.3 percent to par
value. The $1.9 million of aggregate pre-tax loss includes the premium to par
value ($1.2 million) and the write off of deferred costs and original issue
discount ($0.7 million) are reflected in selling, general, and administrative
expenses.

Note 6  Commitments and Contingencies

The Company is involved in various litigation matters in the ordinary
course of its business. The Company is not currently involved in any
litigation, which it expects, either individually or in the aggregate, will
have a material adverse effect on its financial condition or results of
operations.

On August 16, 2000, Sandy Lortz, a former employee of the Company, filed a
purported class action complaint (the Lortz Complaint) against the Company,
on behalf of the Companys former and current California store management
employees. The Lortz Complaint was filed in the Superior Court of California
and alleged the Company violated certain California laws by erroneously
treating its store management employees as exempt employees who are not
entitled to overtime compensation. This case was consolidated with a similar
class action complaint filed on behalf of Regina Salas, filed on October 24,
2000 in the Superior Court of California. A settlement in this case was reached
and a pre-tax charge of $6.5 million was recorded in the fourth quarter of
fiscal 2002. The settlement was paid in the first quarter of fiscal 2003.

Note 7  Capital Stock

The following table details the common stock ($0.05 stated value) activity
for fiscal 2003 and fiscal 2002:

Common Shares OutstandingNet of TreasurySharesClass A
    
    Class B
    
    Total
    
    in TreasuryBalance at February 3, 2001
    
    
    9,364,896
    
    
    
    8,842,123
    
    
    
    18,207,019
    
    
    
    3,578,673Issuance of restricted stock awards
    
    
    20,000
    
    
    
    500
    
    
    
    20,500
    
    
    
    Issuance of common stock -Associate Stock Ownership Plan
    
    
    296,483
    
    
    
    
    
    
    
    296,483
    
    
    
    Deferred stock
    
    
    406
    
    
    
    467
    
    
    
    873
    
    
    
    Cancellation of restricted stock
awards
    
    
    (17,000
    )
    
    
    
    
    
    
    (17,000
    )
    
    
    Purchase of common stock
    
    
    (37,881
    )
    
    
    (36,879
    )
    
    
    (74,760
    )
    
    
    74,760Issuance of treasury shares
    
    
    198,898
    
    
    
    
    
    
    
    198,898
    
    
    
    (198,898
    )Balance at February 2, 2002
    
    
    9,825,802
    
    
    
    8,806,211
    
    
    
    18,632,013
    
    
    
    3,454,535Options exercised
    
    
    221,789
    
    
    
    589,827
    
    
    
    811,616
    
    
    
    Issuance of restricted stock awards
    
    
    9,000
    
    
    
    
    
    
    
    9,000
    
    
    
    Issuance of common stock -Associate Stock Ownership Plan
    
    
    218,275
    
    
    
    
    
    
    
    218,275
    
    
    
    Cancellation of restricted stock
awards
    
    
    (13,500
    )
    
    
    
    
    
    
    (13,500
    )
    
    
    Purchase of common stock
    
    
    (60,604
    )
    
    
    (95,102
    )
    
    
    (155,706
    )
    
    
    155,706Issuance of treasury shares
    
    
    41,122
    
    
    
    
    
    
    
    41,122
    
    
    
    (41,122
    )Balance at February 1, 2003
    
    
    10,241,884
    
    
    
    9,300,936
    
    
    
    19,542,820
    
    
    
    3,569,119


51



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7  Capital Stock (Continued)

The Companys Class A common shares have voting rights while Class B
common shares have no voting rights.

Shareholders Rights Plan

On October 31, 2000, the Company amended and restated its Shareholders
Rights Plan (the Rights Plan). Under the Rights Plan, as amended and
restated, one right is issued for each Class A and Class B common share
outstanding. The rights are exercisable only if a person or group buys or
announces a tender offer for 15 percent or more of the outstanding Class A
common shares as defined in the Rights Plan. When exercisable, each right
initially entitles a holder of Class A and Class B common shares to purchase
one Class A common share for $60.00, or under certain circumstances, one Class
A common share for $0.50. The rights, which do not have voting privileges,
expire in October 2010, but may be redeemed by the Board of Directors prior to
that time, under certain circumstances, for $0.005 per right. Until the rights
become exercisable, they have no effect on earnings per share.

Right to Acquire Shares

The Company is a party to an agreement with certain members of the two
founding families of the Company, whereby the Company has a right of first
refusal to acquire, at market prices, common shares disposed of by either of
the families. The total number of both Class A and Class B common shares,
subject to this agreement, was approximately 4.3 million shares as of February
1, 2003.

Note 8  Stock-Based Compensation Plans

1998 Incentive Compensation Plan

The 1998 Incentive Compensation Plan (the 1998 Plan) includes a stock
option program, a restricted stock program and an employee stock purchase
program for employees, and a stock option program, a restricted stock and
deferred stock program for non-employee directors. Shares subject to awards
under the 1998 Plan may be Class A or Class B common shares. The total number
of shares subject to awards, other than those granted under the employee stock
purchase program, are limited in any fiscal year to (1) four percent of the
number of shares outstanding at the beginning of the fiscal year, plus (2) for
each of the two prior fiscal years, the excess of four percent of the number of
shares outstanding at the beginning of each such fiscal year over the number of
shares subject to awards actually granted in each such fiscal year.

52



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8  Stock-Based Compensation Plans (Continued)

The following table summarizes award activity and the number of shares
available for future awards under the 1998 Plan at February 1, 2003:

Stock
    
    RestrictedOptions
    
    Stock
    
    TotalAvailable at January 29, 2000
    
    
    
    
    
    
    
    
    
    
    560,079Fiscal year 2001 calculated available
    
    
    
    
    
    
    
    
    
    
    713,796Granted
    
    
    (1,552,250
    )
    
    
    (15,375
    )
    
    
    (1,567,625
    )Cancellations
    
    
    344,300
    
    
    
    4,875
    
    
    
    349,175Available at February 3, 2001
    
    
    
    
    
    
    
    
    
    
    55,425Fiscal year 2002 calculated available
    
    
    
    
    
    
    
    
    
    
    672,856Granted
    
    
    (426,700
    )
    
    
    (18,000
    )
    
    
    (444,700
    )Cancellations
    
    
    264,381
    
    
    
    16,000
    
    
    
    280,381Available at February 2, 2002
    
    
    
    
    
    
    
    
    
    
    563,962Fiscal year 2003 calculated available
    
    
    
    
    
    
    
    
    
    
    745,280Granted
    
    
    (202,250
    )
    
    
    
    
    
    
    (202,250
    )Cancellations
    
    
    163,189
    
    
    
    3,000
    
    
    
    166,189Available at February 1, 2003
    
    
    
    
    
    
    
    
    
    
    1,273,181




Employee Stock Option Program

The employee 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 following the date of grant and generally expire
seven to ten years after the date of the grant. Stock options granted under the
Plan may become exercisable or expire under different terms as approved by the
Compensation Committee of the Board of Directors.



Restricted Stock Program

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. All restrictions to such restricted
shares terminate if the grantee remains in the continuous service of the
Company throughout the vesting period. Unearned compensation resulting from the
issuance of restricted shares is being amortized over the vesting periods, and
the unamortized portion has been reflected as a reduction of shareholders
equity.

The following table summarizes the restricted shares granted and weighted
average grant price under the 1998 Plan:

Class A Common Shares
    
    Class B Common SharesWeighted
    
    
    
    
    
    WeightedRestricted
    
    Average
    
    Restricted
    
    AverageShares
    
    Grant
    
    Shares
    
    GrantFiscal Year
    
    Granted
    
    Price
    
    Granted
    
    Price2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    2002
    
    
    18,000
    
    
    
    4.49
    
    
    
    
    
    
    
    2001
    
    
    15,000
    
    
    
    6.74
    
    
    
    375
    
    
    
    7.92


53



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8  Stock-based Compensation Plans (Continued)

Employee Stock Purchase Program

The employee stock purchase program (the Associate Stock Ownership Plan or
ASOP) was established in April 1999, and enables employees to subscribe to
purchase shares of 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 ASOP
meets the requirements of Section 423 of the Internal Revenue Code of 1986. 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 fiscal 2003, 2002 and
2001, stock purchase rights of 218,275 shares, 296,483 shares and 248,476
shares, respectively, were granted and exercised under the ASOP.

Non-Employee Directors Deferred Stock Program

On March 9, 2000, the Company established a deferred stock program for
non-employee directors. This program allows non-employee directors to elect to
convert the retainer and meeting fee portion of their cash compensation into
deferred stock units. Under this feature, non-employee directors make an
irrevocable election prior to the Companys annual shareholders meeting
whereby they can elect to convert a percentage (0 percent to 100 percent in 25
percent increments) of their cash compensation for the following year to
deferred stock units. One-half of the cash compensation deferred is converted
into Class A stock units and one-half into Class B stock units. The conversion
of cash compensation to deferred stock units is based on the closing market
price of Class A and Class B common shares on the date the cash compensation
would have been payable if it were paid in cash. These deferred stock units are
credited to an account of each non-employee director, although no stock is
issued until the earlier of an elected distribution date, as selected by the
non-employee director, or retirement. During fiscal 2003, 2002 and 2001, 487
Class A units, 3,410 Class A units and 3,552 Class A units, respectively, and
579 Class B units, 5,036 Class B units and 3,997 Class B units, respectively,
were deferred under the deferred stock program.

Non-employee Directors Stock Option Plan

Under the 1996 Stock Option Plan for Non-Employee Directors (the
Directors Stock Option Plan), the Company had granted stock options to each
non-employee director upon the completion of each year of service at prices not
less than the fair market value of the common stock at the date of the grant.
The options become exercisable to the extent of one-fourth of the optioned
shares for each full year of continuous service following the date of grant and
generally expire ten years after the date of the grant. The Directors Stock
Option Plan is no longer used to grant stock options to non-employee directors
of the Company.

Other Plans

In addition to the 1998 Plan, nonqualified stock options have been granted
to certain officers and key employees under the 1990 Employee Stock Option and
Stock Appreciation Rights Plan (the 1990 Plan) at prices not less than fair
market value of the common stock at the date of grant. Vesting and expiration
periods are identical to options issued under the 1998 Plan. The 1990 Plan
terminated on March 14, 2000. The termination of the plan does not affect stock
options outstanding granted prior to the termination.

54



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8  Stock-based Compensation Plans (Continued)

In addition to the 1998 Plan, restricted shares of the Companys common
stock are available for, and have been awarded to, executive officers, senior
management and other key employees under the 1994 Executive Incentive Plan (the
Executive Plan). At February 1, 2003, 11,000 Class A restricted shares were
outstanding under the Executive Plan and 360,000 Class A and 451,000 Class B
common shares are available for future awards.

In March 2000, the Board of Directors authorized for issuance and
subsequently granted 319,000 Class B common shares for stock options. Stock
options granted under this authorization became exercisable and expire in
accordance with the provisions of the 1998 Plan.

The following is a summary of the Companys stock option activity for the
1998 Plan, the 1990 Plan and the Directors Stock Option Plan (collectively the
Plans):

Class A Options
    
    Class B OptionsTotalWeighted
    
    
    
    
    
    Weighted
    
    Class AAverage
    
    
    
    
    
    Average
    
    andNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Class BOptions
    
    Price
    
    Options
    
    Price
    
    OptionsOutstanding at January 29, 2000
    
    
    624,789
    
    
    $
    11.99
    
    
    
    2,216,769
    
    
    $
    13.87
    
    
    
    2,841,558Granted
    
    
    10,000
    
    
    
    8.75
    
    
    
    1,921,250
    
    
    
    7.67
    
    
    
    1,931,250Exercised
    
    
    (7,838
    )
    
    
    7.76
    
    
    
    (2,588
    )
    
    
    6.47
    
    
    
    (10,426
    )Canceled
    
    
    (150,562
    )
    
    
    10.66
    
    
    
    (703,337
    )
    
    
    11.40
    
    
    
    (853,899
    )Outstanding at February 3, 2001
    
    
    476,389
    
    
    
    12.41
    
    
    
    3,432,094
    
    
    
    10.91
    
    
    
    3,908,483Granted
    
    
    18,283
    
    
    
    4.84
    
    
    
    408,417
    
    
    
    3.16
    
    
    
    426,700Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    (116,892
    )
    
    
    15.24
    
    
    
    (457,201
    )
    
    
    11.08
    
    
    
    (574,093
    )Outstanding at February 2, 2002
    
    
    377,780
    
    
    
    11.17
    
    
    
    3,383,310
    
    
    
    9.92
    
    
    
    3,761,090Granted
    
    
    12,500
    
    
    
    23.23
    
    
    
    189,750
    
    
    
    18.20
    
    
    
    202,250Exercised
    
    
    (221,789
    )
    
    
    10.64
    
    
    
    (589,827
    )
    
    
    10.47
    
    
    
    (811,616
    )Canceled
    
    
    (25,600
    )
    
    
    17.52
    
    
    
    (266,139
    )
    
    
    9.97
    
    
    
    (291,739
    )Outstanding at February 1, 2003
    
    
    142,891
    
    
    $
    11.91
    
    
    
    2,717,094
    
    
    $
    10.37
    
    
    
    2,859,985


Class A Options
    
    Class B OptionsTotalWeighted
    
    
    
    
    
    Weighted
    
    Class AAverage
    
    
    
    
    
    Average
    
    andNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Class BOptions
    
    Price
    
    Options
    
    Price
    
    OptionsExercisable at:February 1, 2003
    
    
    114,916
    
    
    $
    11.33
    
    
    
    1,041,950
    
    
    $
    13.14
    
    
    
    1,156,866February 2, 2002
    
    
    353,814
    
    
    
    11.33
    
    
    
    1,282,589
    
    
    
    14.01
    
    
    
    1,636,403February 3, 2001
    
    
    444,889
    
    
    
    12.05
    
    
    
    1,194,538
    
    
    
    14.13
    
    
    
    1,639,427Weighted average fair value of
options granted during fiscal:2003
    
    $
    10.73
    
    
    
    
    
    
    $
    9.922002
    
    
    2.91
    
    
    
    
    
    
    
    1.372001
    
    
    5.44
    
    
    
    
    
    
    
    3.76


55



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8  Stock-based Compensation Plans (Continued)

The following table summarizes the status of stock options outstanding and
exercisable at February 1, 2003:

Class A
      
      Class AOptions
          Outstanding
      
      Options ExercisableWeightedWeighted
      
      Average
      
      
      
      
      
      WeightedRange of
      
      Average
      
      Remaining
      
      
      
      
      
      AverageNumber
      
      Exercise
      
      Exercise
      
      Contractual
      
      Number
      
      ExerciseOutstanding
      
      Prices
      
      Price
      
      Life
      
      Exercisable
      
      Price55,491
      
      $
      4.40 to $7.75
      
      
      $
      6.94
      
      
      3.1 years
      
      
      46,516
      
      
      $
      7.4138,900
      
      
      8.06 to 15.06
      
      
      
      8.97
      
      
      2.6 years
      
      
      33,900
      
      
      
      9.0148,500
      
      
      15.19 to 29.06
      
      
      
      19.95
      
      
      5.6 years
      
      
      34,500
      
      
      
      18.91142,891
      
      $
      4.40 to $29.06
      
      
      $
      11.91
      
      
      3.8 years
      
      
      114,916
      
      
      $
      11.33


Class
          B
      
      Class BOptions
          Outstanding
      
      Options ExercisableWeightedWeighted
      
      Average
      
      
      
      
      
      WeightedRange of
      
      Average
      
      Remaining
      
      
      
      
      
      AverageNumber
      
      Exercise
      
      Exercise
      
      Contractual
      
      Number
      
      ExerciseOutstanding
      
      Prices
      
      Price
      
      Life
      
      Exercisable
      
      Price625,644
      
      $
      2.40 to $7.75
      
      
      $
      5.18
      
      
      6.9 years
      
      
      205,473
      
      
      $
      3.471,226,650
      
      
      7.75 to 10.94
      
      
      
      8.34
      
      
      7.0 years
      
      
      168,177
      
      
      
      10.66864,800
      
      
      11.38 to 26.66
      
      
      
      17.02
      
      
      5.8 years
      
      
      668,300
      
      
      
      16.742,717,094
      
      $
      2.40 to $26.66
      
      
      $
      10.37
      
      
      6.6 years
      
      
      1,041,950
      
      
      $
      13.14


Note 9  Savings Plan and Postretirement Benefits

The Company sponsors the Jo-Ann Stores, Inc. Savings Plan 401(k) (the
Savings Plan), which is a tax deferred savings plan whereby eligible
employees may elect quarterly to contribute up to the lesser of 15 percent of
annual compensation or the statutory maximum. The Company makes a 50 percent
matching contribution in the form of the Companys common stock, up to a
maximum employee contribution of four percent of the employees annual
compensation. Employer contributions of the Companys common stock have been
made through the issuance of shares out of treasury or by purchasing shares on
the open market. The amount of the Companys matching contributions during
fiscal 2003, 2002 and 2001 were $0.9 million, $1.0 million and $1.0 million,
respectively. Plan assets included 742,825 shares of Class A common shares and
223,847 shares of Class B common shares at February 1, 2003. Holders of the
Class A common shares are entitled to vote their respective shares.

The Company does not provide post-retirement health care benefits for its
employees.

Note 10  Leases

With the exception of one superstore, all of the Companys retail stores
operate out of leased facilities. Traditional store leases generally have
initial terms of five to ten years and renewal options for up to 20 years.
Superstore leases generally have initial terms of 10-15 years and renewal
options generally ranging from 5-20 years. Certain leases contain escalation
clauses and provide for contingent rents based on a percent of sales in excess
of defined minimums. In certain instances, the Company is required to pay its
pro rata share of real estate taxes and common area

56



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 10  Leases

maintenance expenses. The Company also leases certain computer and store
equipment, generally under five-year or less lease terms.

The following is a schedule of future minimum rental payments under
non-cancelable operating leases:

MinimumFiscal Year Ended
    
    Rentals(Dollars in millions)2004
    
    $
    116.82005
    
    
    111.52006
    
    
    101.62007
    
    
    84.52008
    
    
    68.5Thereafter
    
    
    204.8$
    687.7


Rent expense was as follows:

Fiscal Year Ended
    
    2003
    
    2002
    
    2001(Dollars in millions)Minimum rentals
    
    $
    122.6
    
    
    $
    122.6
    
    
    $
    124.6Contingent rentals
    
    
    4.1
    
    
    
    2.7
    
    
    
    2.3Sublease rentals
    
    
    (7.5
    )
    
    
    (6.0
    )
    
    
    (4.8
    )$
    119.2
    
    
    $
    119.3
    
    
    $
    122.1


Note 11  Quarterly Financial Information (Unaudited)

Summarized below are the unaudited results of operations by quarter for
fiscal 2003 and 2002:

First
    
    Second
    
    Third
    
    FourthFiscal 2003
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter(Dollars in millions, except per share data)Net sales
    
    $
    372.4
    
    
    $
    353.7
    
    
    $
    430.1
    
    
    $
    525.8Gross margin
    
    
    180.8
    
    
    
    171.6
    
    
    
    197.4
    
    
    
    227.7Net income
    
    
    8.7
    
    
    
    2.0
    
    
    
    8.9
    
    
    
    25.3Net income per common share:Basic
    
    $
    0.46
    
    
    $
    0.11
    
    
    $
    0.46
    
    
    $
    1.30Diluted
    
    
    0.43
    
    
    
    0.10
    
    
    
    0.44
    
    
    
    1.24


Net income in the fourth quarter of fiscal 2003 was increased $2.2
million, net-of-tax, due to certain year-end adjustments. Gross margin
increased by $4.3 million pre-tax as a result of adjustments to the shrink
reserve, net of an increase in the closed store inventory reserves. Selling,
general and administrative expenses increased $0.7 million as a result of
adjustments made to the closed store reserves for asset impairment and
non-cancelable lease obligations.

57



---



##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 11  Quarterly Financial Information (Unaudited) (Continued)

First
    
    Second
    
    Third
    
    FourthFiscal 2002
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter(Dollars in millions, except per share data)Net sales
    
    $
    328.9
    
    
    $
    330.2
    
    
    $
    413.0
    
    
    $
    498.2Gross margin
    
    
    151.1
    
    
    
    139.2
    
    
    
    182.6
    
    
    
    220.2Net income (loss)
    
    
    (6.4
    )
    
    
    (16.1
    )
    
    
    (11.3
    )
    
    
    18.9Net income (loss) per common share:Basic
    
    $
    (0.35
    )
    
    $
    (0.88
    )
    
    $
    (0.61
    )
    
    $
    1.02Diluted
    
    
    (0.35
    )
    
    
    (0.88
    )
    
    
    (0.61
    )
    
    
    1.01


Net income in the fourth quarter was decreased by $4.0 million,
net-of-tax, due to the settlement of certain litigation. Selling, general and
administrative expenses increased $6.5 million due to this settlement. See Note
6  Commitments and Contingencies.

Note 12  Minority Investment

On June 6, 2000, the Company announced that it had entered into a
strategic relationship with IdeaForest.com, Inc. (IdeaForest), an on-line
destination site for arts and crafts merchandise, creative ideas, advice and
supplies. As part of the strategic relationship, IdeaForest, which operates as
an independent entity, is responsible for all content and technology support to
the joann.com website. The Company provides product to the site, with customer
fulfillment and service being handled by IdeaForest. The Company invested $6.5
million in IdeaForest, which, combined with the Companys contribution of
strategic assets, entitled the Company to a 28.5 percent ownership interest.
The investment in IdeaForest is accounted for using the equity method. During
fiscal 2001, the Company recorded equity losses of $3.2 million related to this
minority investment.

During the fourth quarter of fiscal 2001, the Company reduced the carrying
value of the its investment in IdeaForest to zero, which resulted in a $3.3
million charge. The decision to reduce the carrying value of the investment to
zero was predicated on operating projections prepared by IdeaForest that
resulted in its cash balance being reduced to near zero before cash flow
positive operating status was achieved. Currently, IdeaForests operations on
an annualized basis are not yet profitable, but the company is approaching a
cash flow breakeven level. The Company remains committed to an online presence
and will continue to evaluate its options with IdeaForest as the company
demonstrates continued improvement in its operations.

The other 71.5% of IdeaForest.com, Inc. is owned by a variety of
investors, none of which are related to Jo-Ann Stores, Inc. or are affiliated
with the Company. While the Company has no obligation to provide further
funding to IdeaForest.com, Inc., the Company has entered into a written letter
of understanding that provides the Company the right, but not the obligation,
to participate in any future rounds of equity funding that IdeaForest.com may
enter into to raise capital, at a level no less than 20% of the total round of
financing. IdeaForest.com currently has no plans to raise additional capital.

58



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13  Consolidating Financial Statements

The Companys 10 3/8 percent senior subordinated notes and Credit Facility
are fully and unconditionally guaranteed, on a joint and several basis, by the
wholly-owned subsidiaries of the Company. The senior subordinated notes are
subordinated to the Companys Credit Facility. Summarized consolidating
financial information of the Company (excluding its subsidiaries) and the
guarantor subsidiaries as of and for the years ended February 1, 2003 is as
follows:

February 1, 2003
    
    February 2, 2002Consolidating
    
    
    
    
    
    Guarantor
    
    
    
    
    
    
    
    
    
    
    
    
    
    GuarantorBalance Sheets
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)AssetsCurrent assets:Cash and temporary
cash investments
    
    $
    60.2
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    63.2
    
    
    $
    17.5
    
    
    $
    3.6
    
    
    $
    
    
    
    $
    21.1Inventories
    
    
    132.9
    
    
    
    230.2
    
    
    
    
    
    
    
    363.1
    
    
    
    152.8
    
    
    
    216.2
    
    
    
    
    
    
    
    369.0Deferred income
taxes
    
    
    21.5
    
    
    
    6.7
    
    
    
    
    
    
    
    28.2
    
    
    
    25.4
    
    
    
    5.2
    
    
    
    
    
    
    
    30.6Prepaid expenses and
other current
assets
    
    
    11.2
    
    
    
    6.0
    
    
    
    
    
    
    
    17.2
    
    
    
    10.4
    
    
    
    7.1
    
    
    
    
    
    
    
    17.5Total current assets
    
    
    225.8
    
    
    
    245.9
    
    
    
    
    
    
    
    471.7
    
    
    
    206.1
    
    
    
    232.1
    
    
    
    
    
    
    
    438.2Property, equipment and
leasehold
improvements, net
    
    
    65.8
    
    
    
    124.5
    
    
    
    
    
    
    
    190.3
    
    
    
    64.7
    
    
    
    145.4
    
    
    
    
    
    
    
    210.1Goodwill, net
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    26.5Other assets
    
    
    14.6
    
    
    
    1.4
    
    
    
    
    
    
    
    16.0
    
    
    
    17.3
    
    
    
    1.6
    
    
    
    
    
    
    
    18.9Investment in
subsidiaries
    
    
    22.6
    
    
    
    
    
    
    
    (22.6
    )
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    (3.6
    )
    
    
    Intercompany
receivable
    
    
    371.4
    
    
    
    
    
    
    
    (371.4
    )
    
    
    
    
    
    
    418.0
    
    
    
    
    
    
    
    (418.0
    )
    
    
    Total assets
    
    $
    700.2
    
    
    $
    398.3
    
    
    $
    (394.0
    )
    
    $
    704.5
    
    
    $
    709.7
    
    
    $
    405.6
    
    
    $
    (421.6
    )
    
    $
    693.7Liabilities and
Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    130.3
    
    
    $
    (0.4
    )
    
    $
    
    
    
    $
    129.9
    
    
    $
    122.7
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    123.1Accrued expenses
    
    
    94.7
    
    
    
    (18.8
    )
    
    
    
    
    
    
    75.9
    
    
    
    111.2
    
    
    
    (28.9
    )
    
    
    
    
    
    
    82.3Total current
liabilities
    
    
    225.0
    
    
    
    (19.2
    )
    
    
    
    
    
    
    205.8
    
    
    
    233.9
    
    
    
    (28.5
    )
    
    
    
    
    
    
    205.4Long-term debt
    
    
    162.9
    
    
    
    
    
    
    
    
    
    
    
    162.9
    
    
    
    223.7
    
    
    
    
    
    
    
    
    
    
    
    223.7Deferred income
taxes
    
    
    17.6
    
    
    
    19.6
    
    
    
    
    
    
    
    37.2
    
    
    
    14.6
    
    
    
    9.0
    
    
    
    
    
    
    
    23.6Other long-term
liabilities
    
    
    5.3
    
    
    
    3.9
    
    
    
    
    
    
    
    9.2
    
    
    
    4.7
    
    
    
    3.5
    
    
    
    
    
    
    
    8.2Intercompany payable
    
    


    
    
    
    
    371.4
    
    
    
    (371.4
    )
    
    
    
    
    
    
    
    
    
    
    418.0
    
    
    
    (418.0
    )



Shareholders equity:Common stock
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Additional paid-in
capital
    
    
    113.9
    
    
    
    
    
    
    
    
    
    
    
    113.9
    
    
    
    99.7
    
    
    
    
    
    
    
    
    
    
    
    99.7Unamortized
restricted stock
awards
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Retained earnings
    
    
    217.8
    
    
    
    22.6
    
    
    
    (22.6
    )
    
    
    217.8
    
    
    
    172.9
    
    
    
    3.6
    
    
    
    (3.6
    )
    
    
    172.9Accumulated other
comprehensive
loss
    
    
    (2.6
    )
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (3.0
    )329.7
    
    
    
    22.6
    
    
    
    (22.6
    )
    
    
    329.7
    
    
    
    270.1
    
    
    
    3.6
    
    
    
    (3.6
    )
    
    
    270.1Treasury stock, at
cost
    
    
    (40.3
    )
    
    
    
    
    
    
    
    
    
    
    (40.3
    )
    
    
    (37.3
    )
    
    
    
    
    
    
    
    
    
    
    (37.3
    )Total shareholders
equity
    
    
    289.4
    
    
    
    22.6
    
    
    
    (22.6
    )
    
    
    289.4
    
    
    
    232.8
    
    
    
    3.6
    
    
    
    (3.6
    )
    
    
    232.8Total liabilities and
shareholders
equity
    
    $
    700.2
    
    
    $
    398.3
    
    
    $
    (394.0
    )
    
    $
    704.5
    
    
    $
    709.7
    
    
    $
    405.6
    
    
    $
    (421.6
    )
    
    $
    693.7


59



---



##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13  Consolidating Financial Statements (Continued)

Fiscal Year EndedFebruary 1, 2003
    
    February 2, 2002ConsolidatingStatements
    
    
    
    
    
    Guarantor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Guarantorof Operations
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    924.7
    
    
    $
    1,525.6
    
    
    $
    (768.3
    )
    
    $
    1,682.0
    
    
    $
    862.6
    
    
    $
    1,614.7
    
    
    $
    (907.0
    )
    
    $
    1,570.3Cost of sales
    
    
    562.1
    
    
    
    1,110.7
    
    
    
    (768.3
    )
    
    
    904.5
    
    
    
    528.2
    
    
    
    1,256.0
    
    
    
    (907.0
    )
    
    
    877.2Gross margin
    
    
    362.6
    
    
    
    414.9
    
    
    
    
    
    
    
    777.5
    
    
    
    334.4
    
    
    
    358.7
    
    
    
    
    
    
    
    693.1Selling, general and
administrative
expenses
    
    
    320.0
    
    
    
    322.9
    
    
    
    
    
    
    
    642.9
    
    
    
    326.1
    
    
    
    318.1
    
    
    
    
    
    
    
    644.2Depreciation and
amortization
    
    
    13.0
    
    
    
    23.1
    
    
    
    
    
    
    
    36.1
    
    
    
    15.3
    
    
    
    24.0
    
    
    
    
    
    
    
    39.3Operating profit
(loss)
    
    
    29.6
    
    
    
    68.9
    
    
    
    
    
    
    
    98.5
    
    
    
    (7.0
    )
    
    
    16.6
    
    
    
    
    
    
    
    9.6Interest expense,
net
    
    
    9.8
    
    
    
    16.2
    
    
    
    
    
    
    
    26.0
    
    
    
    14.5
    
    
    
    18.2
    
    
    
    
    
    
    
    32.7Income (loss) before
income taxes
    
    
    19.8
    
    
    
    52.7
    
    
    
    
    
    
    
    72.5
    
    
    
    (21.5
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (23.1
    )Income tax provision
(benefit)
    
    
    8.9
    
    
    
    18.7
    
    
    
    
    
    
    
    27.6
    
    
    
    (8.5
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (8.8
    )Income (loss) before
equity loss and
extraordinary
item
    
    
    10.9
    
    
    
    34.0
    
    
    
    
    
    
    
    44.9
    
    
    
    (13.0
    )
    
    
    (1.3
    )
    
    
    
    
    
    
    (14.3
    )Equity income (loss)
from subsidiaries
    
    
    34.0
    
    
    
    
    
    
    
    (34.0
    )
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    1.3
    
    
    
    Income (loss) before
extraordinary
item
    
    
    44.9
    
    
    
    34.0
    
    
    
    (34.0
    )
    
    
    44.9
    
    
    
    (14.3
    )
    
    
    (1.3
    )
    
    
    1.3
    
    
    
    (14.3
    )Extraordinary item, net
of tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Net income (loss)
    
    $
    44.9
    
    
    $
    34.0
    
    
    $
    (34.0
    )
    
    $
    44.9
    
    
    $
    (14.9
    )
    
    $
    (1.3
    )
    
    $
    1.3
    
    
    $
    (14.9
    )


Fiscal Year Ended February 3, 2001GuarantorConsolidating Statements of Operations
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net sales
    
    $
    815.7
    
    
    $
    1,436.9
    
    
    $
    (769.3
    )
    
    $
    1,483.3Cost of sales
    
    
    511.1
    
    
    
    1,096.4
    
    
    
    (769.3
    )
    
    
    838.2Gross margin
    
    
    304.6
    
    
    
    340.5
    
    
    
    
    
    
    
    645.1Selling, general and administrative expenses
    
    
    293.7
    
    
    
    295.5
    
    
    
    
    
    
    
    589.2Depreciation and amortization
    
    
    17.1
    
    
    
    21.2
    
    
    
    
    
    
    
    38.3Operating profit (loss)
    
    
    (6.2
    )
    
    
    23.8
    
    
    
    
    
    
    
    17.6Interest expense, net
    
    
    13.5
    
    
    
    15.5
    
    
    
    
    
    
    
    29.0Income (loss) before income taxes
    
    
    (19.7
    )
    
    
    8.3
    
    
    
    
    
    
    
    (11.4
    )Income tax provision (benefit)
    
    
    (7.6
    )
    
    
    3.3
    
    
    
    
    
    
    
    (4.3
    )Income (loss) before equity loss and extraordinary item
    
    
    (12.1
    )
    
    
    5.0
    
    
    
    
    
    
    
    (7.1
    )Equity and asset impairment losses of minority investment
    
    
    (6.5
    )
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Equity income (loss) from subsidiaries
    
    
    5.0
    
    
    
    
    
    
    
    (5.0
    )
    
    
    Income (loss) before extraordinary item
    
    
    (13.6
    )
    
    
    5.0
    
    
    
    (5.0
    )
    
    
    (13.6
    )Extraordinary item, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (13.6
    )
    
    $
    5.0
    
    
    $
    (5.0
    )
    
    $
    (13.6
    )


60



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13  Consolidating Financial Statements (Continued)

Fiscal Year EndedFebruary 1, 2003
    
    February 2, 2002ConsolidatingStatements of
    
    
    
    
    
    Guarantor
    
    
    
    
    
    
    
    
    
    
    
    
    
    GuarantorCash Flows
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash provided by
operating
activities
    
    $
    107.6
    
    
    $
    11.6
    
    
    $
    
    
    
    $
    119.2
    
    
    $
    31.4
    
    
    $
    56.8
    
    
    $
    
    
    
    $
    88.2Net cash flows used for
investing activities:Capital
expenditures
    
    
    (10.5
    )
    
    
    (12.2
    )
    
    
    
    
    
    
    (22.7
    )
    
    
    (9.6
    )
    
    
    (56.9
    )
    
    
    
    
    
    
    (66.5
    )Net cash used for
investing
activities
    
    
    (10.5
    )
    
    
    (12.2
    )
    
    
    
    
    
    
    (22.7
    )
    
    
    (9.6
    )
    
    
    (56.9
    )
    
    
    
    
    
    
    (66.5
    )Net cash flows used for
financing activities:Proceeds from senior
secured credit
facility, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171.6
    
    
    
    
    
    
    
    
    
    
    
    171.6Repayment of prior
senior credit
facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (123.8
    )
    
    
    
    
    
    
    
    
    
    
    (123.8
    )Net change in
revolving credit
facility
    
    
    (33.7
    )
    
    
    
    
    
    
    
    
    
    
    (33.7
    )
    
    
    (69.1
    )
    
    
    
    
    
    
    
    
    
    
    (69.1
    )Repurchase of senior
subordinated
notes
    
    
    (28.3
    )
    
    
    
    
    
    
    
    
    
    
    (28.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from
exercise of stock
options
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of common
stock
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Other, net
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    3.6Net cash used for
financing
activities
    
    
    (54.4
    )
    
    
    
    
    
    
    
    
    
    
    (54.4
    )
    
    
    (18.1
    )
    
    
    
    
    
    
    
    
    
    
    (18.1
    )Net increase (decrease)
in cash
    
    
    42.7
    
    
    
    (0.6
    )
    
    
    
    
    
    
    42.1
    
    
    
    3.7
    
    
    
    (0.1
    )
    
    
    
    
    
    
    3.6Cash and temporary cash
investments at
beginning of year
    
    
    17.5
    
    
    
    3.6
    
    
    
    
    
    
    
    21.1
    
    
    
    13.8
    
    
    
    3.7
    
    
    
    
    
    
    
    17.5Cash and temporary cash
investments at end of
year
    
    $
    60.2
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    63.2
    
    
    $
    17.5
    
    
    $
    3.6
    
    
    $
    
    
    
    $
    21.1


61



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##### 



Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Fiscal Year Ended February 3, 2001GuarantorConsolidating Statements of Cash Flows
    
    Parent
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(Dollars in millions)Net cash provided by operating activities
    
    $
    19.0
    
    
    $
    20.0
    
    
    $
    
    
    
    $
    39.0Net cash flows used for investing activities:Capital expenditures
    
    
    (13.4
    )
    
    
    (22.5
    )
    
    
    
    
    
    
    (35.9
    )Minority investment
    
    
    (6.5
    )
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Other, net
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    1.7Net cash used for investing activities
    
    
    (19.9
    )
    
    
    (20.8
    )
    
    
    
    
    
    
    (40.7
    )Net cash flows used for financing activities:Net change in revolving credit facility
    
    
    (5.2
    )
    
    
    
    
    
    
    
    
    
    
    (5.2
    )Purchase of common stock
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Other, net
    
    
    3.1
    
    
    
    
    
    
    
    
    
    
    
    3.1Net cash used for financing activities
    
    
    (2.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Net decrease in cash
    
    
    (3.1
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    (3.9
    )Cash and cash equivalents at beginning of year
    
    
    16.9
    
    
    
    4.5
    
    
    
    
    
    
    
    21.4Cash and cash equivalents at end of year
    
    $
    13.8
    
    
    $
    3.7
    
    
    $
    
    
    
    $
    17.5


62



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##### 



Report of Former Independent Public Accountants On the Financial Statement
Schedule

This is a copy of the report on the financial schedule previously issued
by Arthur Andersen LLP in connection with the Companys filing on Form 10-K for
the fiscal year ended February 2, 2002. This report on the financial statement
schedule has not been reissued by Arthur Andersen LLP in connection with this
filing on Form 10-K/A nor has Arthur Andersen LLP provided a consent to the
inclusion of its report on the financial statement schedule included on page 64
in this Form 10-K/A. For further discussion, see Exhibit 23.3.

To the Shareholders and Board of Directors
of Jo-Ann Stores, Inc.:

We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Jo-Ann Stores,
Inc. and Subsidiaries included in this Form 10-K, and have issued our report
thereon dated March 7, 2002. Our audits were made for the purpose of forming an
opinion on those financial statements taken as a whole. The schedule on page 57
is the responsibility of the Companys management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

63



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##### 



Schedule II

Jo-Ann Stores, Inc.
Valuation and Qualifying Accounts
Fiscal Year Ended 2003, 2002 and 2001(Dollars in millions)

Balance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    End ofof Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodFebruary 1, 2003
Closed store reserve
    
    $
    12.4
    
    
    $
    1.4
    
    
    $
    
    
    
    $
    (9.4
    )
    
    $
    4.4February 2, 2002
Closed store reserve
    
    
    9.3
    
    
    
    17.6
    
    
    
    
    
    
    
    (14.5
    )
    
    
    12.4February 3, 2001
Closed store reserve
    
    
    4.4
    
    
    
    7.9
    
    
    
    
    
    
    
    (3.0
    )
    
    
    9.3


64



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##### 



Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure

Our financial statements for 2001 and 2002 were audited by Arthur Andersen
LLP. As a result of Arthur Andersen ceasing its operations, we changed our
auditors to Ernst & Young LLP on May 29, 2002. This change was reported in a
Current Report on Form 8-K dated May 29, 2002. The Company had no disagreements
with Arthur Andersen during fiscal 2001 or fiscal 2002.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information required by this Item 10 as to the Directors of the Registrant
is incorporated herein by reference to the information set forth under the
caption Nominees to and Current Members of the Board of Directors in the
Registrants definitive proxy statement for its 2003 Annual Meeting of
Shareholders to be held on June 10, 2003 (the Proxy Statement), which is
expected to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the
end of the Companys fiscal year. Information required by this Item 10 as to
the Executive Officers of the Registrant is included under Item 4 of Part I of
this Form 10-K/A as permitted by Instruction 3 to Item 401(b) of Regulation
S-K. Information required by Item 405 of Regulation S-K is incorporated herein
by reference to the information set forth in the Proxy Statement under the
caption Section 16(a) Beneficial Ownership Reporting Compliance.

Information required by this Item 10 as to Involvement in Certain Legal
Proceedings is included under Item 3, Legal Proceedings contained in this
document.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated herein by
reference to the information set forth under the captions Compensation of
Directors and Executive Compensation in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item 12 is incorporated herein by
reference to the information set forth under the caption Principal
Shareholders in the Proxy Statement.

Equity Compensation Plan Information

Number of securitiesremaining availableNumber of securities
    
    
    
    
    
    for future issuanceto be issued upon
    
    
    
    
    
    under equityexercise of
    
    Weighted-average
    
    compensation plansoutstanding options,
    
    exercise price of
    
    (excludingwarrants
    
    outstanding options,
    
    securities reflectedand rights
    
    warrants and rights
    
    in column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation plans approved
by security holders
    
    
    2,634,985
    
    
    $
    10.68
    
    
    
    1,774,939Equity compensation plans not
approved by security
holders(1)
    
    
    225,000
    
    
    
    7.75Total
    
    
    2,859,985
    
    
    $
    10.45
    
    
    
    1,774,939


65



---



##### 





---

|(1) |  | On February 9, 2001, the Company registered 319,000 Class B common shares
to be issued in connection with options to purchase Class B common shares
pursuant to award agreements with certain employees. The options were
granted under the rules provided for in the 1998 Incentive Compensation
Plan. As of February 1, 2003, 225,000 of the 319,000 securities registered
remain to be issued.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. Certain Relationships and Related Transactions

Ira Gumberg, one of our Directors, is President and Chief Executive
Officer and a principal shareholder of J.J. Gumberg Co., which manages numerous
shopping centers. Twelve of these shopping centers contain stores of our
Company. Two of the leases were entered into after Mr. Gumberg became a
Director of our Company, and we believe such leases are on terms no less
favorable to us than could have been obtained from an unrelated party. The
aggregate rent and related occupancy charges paid during fiscal 2003, 2002 and
2001 on these stores amounted to $1.4 million, $1.3 million and $1.4 million,
respectively.

Betty Rosskamm, Alma Zimmerman and the Company have entered into an
agreement, dated September 26, 1997, relating to their Jo-Ann Stores Class A
and Class B common shares. Under this agreement, Betty Rosskamm and her lineal
descendants and permitted holders, and Alma Zimmerman and her lineal
descendants and permitted holders, may each sell up to 200,000 Class A common
shares in any calendar year and may not sell more than 100,000 of those shares
in any 180-day period. Mrs. Rosskamm and Mrs. Zimmerman collectively, may each
sell up to 100,000 of their Class B common shares in any 60-day period. If
either Mrs. Rosskamm or Mrs. Zimmerman plan to sell a number of their Class A
common shares in excess of the number permitted under the agreement, they must
first offer to sell those shares to the other family party to the agreement,
and then with the other familys permission, to the Company. If either Mrs.
Rosskamm or Mrs. Zimmerman plan to sell a number of their Class B common shares
in excess of the number permitted under the agreement, each family must first
offer to sell those shares to the Company.

Item 14. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
promulgated by the Securities and Exchange Commission under the Securities Exchange Act of
1934). Within the 90 days prior to the filing of our Annual Report on
Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management, including the
President and Chief Executive Officer along with the Chief Financial Officer (Chief Accounting
Officer), of the effectiveness of the design and operation of our disclosure controls and procedures.
Based upon that evaluation, our President and Chief Executive Officer along with our Chief
Financial Officer concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company and its consolidated subsidiaries
required to be included in our periodic reports filed with the SEC. There have been no significant
changes in our internal controls or in other factors that could significantly affect internal controls
subsequent to the date we carried out the evaluation.







66



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##### 



PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report:

(1) and (2) Financial Statements and Financial Statement Schedules



| |  | The consolidated financial statements and the related financial statement
schedule filed as part of this Form 10-K/A are located as set forth in the
index on page 31 of this report.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The IdeaForest.com financial statements filed as part of this Form
10-K/A are located as set forth in Exhibit 99 of this report.                                                     

(3) Exhibits

ExhibitNumber
    
    Exhibit Description3.1
    
    Amended Articles of Incorporation of Jo-Ann Stores, Inc.
(filed as an Exhibit 3.1 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)3.1.1
    
    Certificate of Amendment to the Amended Articles of
Incorporation (filed as an Exhibit 3.1(b) to the
Registrants Form 10-K filed with the Commission on April
16, 1999 and incorporated herein by reference)3.2
    
    Regulations of Jo-Ann Stores, Inc., as amended
(filed as an Exhibit 3.2 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)4.1
    
    Form of Amended and Restated Rights Agreement, dated October
31 2000, between the Registrant and National City Bank, as
Rights Agent (filed as an Exhibit 4.1 to the Registrants
Form 10-K filed with the Commission on May 4, 2001 and
incorporated herein by reference)4.2
    
    Indenture between the Registrant and FCA Financial, Inc.,
Fabri-Centers of South Dakota, Inc., Fabri-Centers of
California, Inc., FCA of Ohio, Inc., and House of Fabrics,
Inc., as guarantors, and Harris Trust and Savings Bank, as
trustee relating to the 10 3/8% Senior Subordinated Notes
Due 2007 (filed as an Exhibit 4.2 to the Registrants Form
S-4 filed with the Commission on June 16, 1999 and
incorporated herein by reference)4.3
    
    Form of Certificate of the 10 3/8% Senior Subordinated Notes
due 2007 (filed as an Exhibit 4.3 to the Registrants Form
S-4 filed with the Commission on June 16, 1999 and
incorporated herein by Reference)4.4
    
    Registration Rights Agreement among the Registrant, FCA
Financial, Inc., Fabri-Centers of South Dakota, Inc.,
Fabri-Centers of California, Inc., FCA of Ohio, Inc., and
House of Fabrics, Inc., and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Goldman, Sachs & Co., and Banc One
Capital Markets, Inc. relating to the 10 3/8% Senior
Subordinated Notes due 2007 (filed as an Exhibit 4.4 to the
Registrants Form S-4 filed with the Commission on June 16,
1999 and incorporated herein by reference)10.1
    
    Form of Split Dollar Life Insurance Agreement between the
Registrant and certain of its officers (filed as an
Exhibit 10.1 to the Registrants Form 10-K filed with the
Commission on May 2, 2003 and incorporated herein
by reference)*10.2
    
    List of Executive Officers who are parties to the Split
Dollar Life Insurance Agreement with the Registrant (filed as
an Exhibit 10.2 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)10.2.1
    
    Split Dollar Life Insurance Agreement and Assignment with
New York Life Insurance Company between the Registrant and
Alan Rosskamm dated May 27, 1994 (filed as an Exhibit 10.2.1
to the Registrants Form 10-K filed with the Commission on
May 2, 2003 and incorporated herein by reference)*10.2.2
    
    Split Dollar Life Insurance Agreement and Assignment with
The Northwestern Mutual Life Insurance Company between the
Registrant and Alan Rosskamm dated May 27, 1994 (filed as an
Exhibit 10.2.2 to the Registrants Form 10-K filed with the
Commission on May 2, 2003 and incorporated herein by reference)*10.3
    
    Split Dollar Life Insurance Agreement and Assignment between
the Registrant and Alma Zimmerman dated September 22, 1984
(filed as an Exhibit 10.3 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)*10.4
    
    Split Dollar Life Insurance Agreements and Assignments
between the Registrant and Betty Rosskamm dated October 19,
1984 (filed as an Exhibit 10.4 to the Registrants Form 10-K
filed with the Commission on May 2, 2003 and incorporated herein
by reference)*10.5
    
    Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, as
amended (filed as an Exhibit 10.5 to the Registrants Form 10-K
filed with the Commission on May 2, 2003 and incorporated herein
by reference)*10.6
    
    List of Executive Officers who participate in the
Registrants Supplemental Retirement Plan, as amended (filed as
an Exhibit 10.6 to the Registrants Form 10-K filed with the
Commission on May 2, 2003 and incorporated herein by reference)


67



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##### 



ExhibitNumber
    
    Exhibit Description10.7
    
    Employment Agreement dated July 30, 2001 between the
Registrant and Alan Rosskamm (filed as an Exhibit 10.7 to
the Registrants Form 10-K filed with the Commission on May
2, 2002 and incorporated herein by reference)*10.7.1
    
    Form of Employment Agreement between the Registrant and
certain Executive Officers (filed as an Exhibit 10.7.1 to
the Registrants Form 10-K filed with the Commission on May
2, 2002 and incorporated herein by reference)*10.7.2
    
    List of Executive Officers who are parties to an Employment
Agreement with the Registrant (filed as an Exhibit 10.7.2 to
the Registrants Form 10-K filed with the Commission on
May 2, 2003 and incorporated herein by reference)10.8
    
    Fabri-Centers of America, Inc. 1990 Employees Stock Option
and Stock Appreciation Rights Plan, as amended
(filed as an Exhibit 10.8 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)*10.9
    
    Fabri-Centers of America, Inc. 1998 Incentive Compensation
Plan (filed as an Appendix A to the Registrants Proxy
Statement for its Annual Meeting held on June 4, 1998 filed
with the Commission on Schedule 14A on May 8, 1998 and
incorporated herein by reference)*10.10
    
    Amended and Restated Agreement dated September 26, 1997
among Fabri-Centers of America, Inc., Betty Rosskamm and
Justin Zimmerman and Alma Zimmerman (filed as an Exhibit
10.2 to the Registrants Form 10-K filed with the Commission
on April 16, 1999 and incorporated herein by reference)10.11
    
    Credit Agreement dated as of April 24, 2001 among the
Registrant, as borrower, Fleet National Bank, as Issuing
Bank, Fleet Retail Finance Inc., as Administrative Agent and
Collateral Agent, Congress Financial Corporation, as
Documentation Agent, GMAC Commercial Credit, LLC, National
City Commercial Finance, Inc. and The Group / Business
Credit, Inc. as Co-Agents and Fleet Securities Inc. as
Arranger and Syndication Agent (filed as an Exhibit 10.1 to
the Registrants Form 10-Q filed with the Commission on June
19, 2001 and incorporated herein by reference)*10.12
    
    Amendment No. 1 to Credit Agreement dated as of April 24,
2001 (filed as an Exhibit 10.12 to the Registrants Form 10-Q
filed with the Commission on June 19, 2001 and incorporated
herein by reference)10.13
    
    Fabri-Centers of America, Inc. Executive Incentive Plan
(filed as an Exhibit 11 to the Registrants Form 10-K filed
with the Commission on May 2, 2003 and incorporated herein
by reference)*12
    
    Ratio of Earnings to Fixed Charges (filed as an Exhibit 12 to
the Registrants Form 10-K filed with the Commission on
May 2, 2003 and incorporated herein by reference)21
    
    Subsidiaries of Jo-Ann Stores, Inc. (filed as an Exhibit 21 to
the Registrants Form 10-K filed with the Commission on
May 2, 2003 and incorporated herein by reference)23.1
    
    Consent of Ernst & Young LLP, Independent Auditors23.2
    
    Consent of Ernst & Young LLP, Independent Auditors (IdeaForest.com)23.3
    
    Notice regarding Consent of Arthur Andersen LLP24
    
    Power of Attorney31.1
    
    Certification by Chief Executive Officer (Section 302)31.2
    
    Certification by Chief Financial Officer (Section 302)32.1
    
    Certification of Principal Executive Officer (Section 906)32.2
    
    Certification of Principal Financial Officer (Section 906)99
    
    Financial statements for IdeaForest.com




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* Indicates a management contract or compensatory plan or arrangement


(b) Reports on Form 8-K

Not Applicable

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##### 



SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

JO-ANN STORES, INC.

By:        
                
/s/ ALAN ROSSKAMM
    
    September 9, 2003Alan RosskammPresident and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

Signature
    
    Title/s/ ALAN ROSSKAMMAlan Rosskamm
    
    Chairman of the Board and Director
(Chief Executive Officer)/s/ BRIAN P. CARNEY*Brian P. Carney
    
    Executive Vice President and Chief Financial Officer
(Chief Accounting Officer)/s/ SCOTT COWEN*Scott Cowen
    
    Director/s/ IRA GUMBERG*Ira Gumberg
    
    Director/s/ FRANK NEWMAN*Frank Newman
    
    Director/s/ BERYL RAFF*Beryl Raff
    
    Director/s/ GREGG SEARLE*Gregg Searle
    
    Director/s/ TRACEY THOMAS TRAVIS*Tracey Thomas Travis
    
    Director


The undersigned, by signing his name hereto, does hereby sign this Form
10-K/A Annual Report on behalf of the above-named officers and directors of
Jo-Ann Stores, Inc., pursuant to powers of attorney executed on behalf of each
of such officers and directors.

*By:
                
 /s/ ALAN ROSSKAMM
    
    September 9, 2003Alan Rosskamm, Attorney-in-Fact


69



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##### 



Exhibit Index

ExhibitNumber
    
    Exhibit Description23.1
    
    Consent of Ernst & Young LLP, Independent Auditors23.2
    
    Consent of Ernst & Young LLP, Independent Auditors (IdeaForest.com)23.3
    
    Notice regarding Consent of Arthur Andersen LLP24
    
    Power of Attorney31.1
    
    Certification by Chief Executive Officer (Section 302)31.2
    
    Certification by Chief Financial Officer (Section 302)32.1
    
    Certification of Principal Executive Officer (Section 906)32.2
    
    Certification of Principal Financial Officer (Section 906)99
    
    Financial statements for
IdeaForest.com


70