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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 28, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number 1 - 9482
HANCOCK FABRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 64-0740905
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
3406 West Main Street, Tupelo, MS 38801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(662) 842-2834
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common stock ($ .01 par value) New York Stock Exchange
Rights New York Stock Exchange
Securities Registered Pursuant to Section 12 (g) of the Act:
None
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 [ ]
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10 - K or any
amendment to this Form 10 - K. [X]
As of April 16, 2001, there were 16,711,623 shares of Hancock Fabrics, Inc. $
.01 par value stock held by non-affiliates with an aggregate market value of
$130,350,659. As of April 16, 2001, there were 17,208,087 shares of Hancock
Fabrics, Inc. $ .01 par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2000 Annual Report
to shareholders Parts I, II and IV
Portions of the Proxy Statement
for the 2000 Annual Meeting of
shareholders Part III
2000 ANNUAL REPORT ON FORM 10 - K
TABLE OF CONTENTS
PART I Page
Item 1. Business................................................. 4
Item 2. Properties............................................... 5
Item 3. Legal Proceedings........................................ 6
Item 4. Submission of Matters to a Vote of Security Holders...... 6
Executive Officers of Registrant.................................... 7
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.................................. 8
Item 6. Selected Financial Data................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 8
Item 7a. Other Matters............................................ 8
Item 8. Financial Statements and Supplementary Data.............. 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................. 9
PART III
Item 10. Directors and Executive Officers of Registrant............ 9
Item 11. Executive Compensation.................................... 9
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 9
Item 13. Certain Relationships and Related Transactions............ 9
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8 - K........................................... 10
Signatures........................................................... 15
PART I
Item 1. BUSINESS
Hancock Fabrics, Inc. (the "Company", which may be referred to as we, us or our)
was incorporated in 1987 as a successor to the retail and wholesale fabric
business of Hancock Textile Co., Inc., a Mississippi corporation and a wholly
owned subsidiary of Lucky Stores, Inc., a Delaware Corporation ("Lucky").
Founded in 1957, we operated as a private company until 1972 when we were
acquired by Lucky. We became a publicly owned company as a result of the
distribution of shares of common stock to the shareholders of Lucky on May 4,
1987.
The Company is engaged in the retail and wholesale fabric business, selling
fabrics and related accessories to the sewing and home decorating market and at
wholesale to independent retailers. We are one of the largest fabric retailers
in the United States. At January 28, 2001, we operated 443 fabric stores in 42
states. As a wholesaler of fabrics and related items, we sell to independent
retail fabric stores through the wholesale distribution facility in Tupelo,
Mississippi.
Operations
Our stores offer a wide selection of apparel fabrics, home decorating products
(which include drapery and upholstery fabrics and home accent pieces), notions
(which include sewing aids and accessories such as zippers, buttons, threads and
ornamentation), patterns, quilting materials and supplies and related items.
Each of our retail stores maintains an inventory that includes cotton, woolen
and synthetic staple fabrics such as broadcloth, poplin, gaberdine, unbleached
muslin and corduroy, as well as seasonal and current fashion fabrics.
Our stores are primarily located in neighborhood shopping centers. During 2000,
we opened 9 stores and closed 19.
As a wholesaler, we sell to over 100 independent retailers in markets in which
the Company has elected not to open our own stores. These wholesale customers
accounted for approximately 1% of our total sales for the fiscal year ended
January 28, 2001.
Marketing
We principally serve the sewing and home decorating markets, which largely
consist of women who make clothing for their families and decorations for their
homes or who hire professional seamstresses to sew for them. Quilters and
hobbyists also comprise a portion of the base of customers, as do consumers of
bridal, party, prom and special occasion merchandise.
We offer our customers a wide selection of products at prices that we believe
are generally lower than the prices charged by our competitors. In addition to
staple fabrics and notions for clothing and home decoration, we provide a
variety of seasonal and current fashion apparel merchandise.
We use promotional advertising, primarily through newspapers, direct mail and
television, to reach target customers. We mail ten to sixteen direct mail
promotions each year to approximately 1.2 million households. The "Accents on
Style" magazine published by Southern Progress, which contains sewing
instructions, fashion ideas and product advertisements is available at no charge
in our stores. In addition to local television advertising, we advertise on the
HGTV network that reaches approximately 65 million households.
-4-
Distribution and Supply
Our retail stores and wholesale customers are served by our 525,000 square foot
warehouse, distribution and headquarters facility in Tupelo, Mississippi. This
facility is adequate for the near term and we have no major expansion plans for
2001.
Contract trucking firms, common carriers and parcel delivery are used to deliver
merchandise from our warehouse and vendors to our retail stores and wholesale
customers.
Bulk quantities of fabric are purchased from domestic and foreign mills, fabric
jobbers and importers. We have no long-term contracts for the purchase of
merchandise and did not purchase more than 5% of our merchandise from any one
supplier during the fiscal year ended January 28, 2001. We have experienced no
difficulty in maintaining satisfactory sources of supply.
Competition
We are among the largest fabric retailers in the United States. We principally
compete with other national and regional fabric store chains on the basis on
price, selection, quality, service and location.
Our competition has changed significantly in recent years due to rapid expansion
that began in the fabric industry in the late 1980's, which ultimately led to
financial difficulties for many of our competitors and to significant industry
consolidation.
Seasonality
Our business is slightly seasonal. Peak sales periods occur during the fall and
pre-Easter weeks, while the lowest sales periods occur during the summer and the
month of January.
Employees
At January 28, 2001, we employed approximately 6,500 people on a full-time and
part-time basis, approximately 6,200 of who work in our retail stores. The
remainder works in the Tupelo warehouse, distribution and headquarters facility.
Government Regulation
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wages, overtime and other working conditions. A significant
number of our employees are paid at rates related to Federal and state minimum
wages and, accordingly, any increase in the minimum wage would affect our labor
cost.
Item 2. PROPERTIES
The Company's 443 retail stores average approximately 12,800 square feet and are
located principally in neighborhood shopping centers.
With the exception of four owned locations, our retail stores are leased. The
original lease terms generally range from 10 to 20 years and most leases contain
one or more renewal options, usually of five years in length. At January 28,
2001, the remaining terms of the leases for stores in operation including
renewal options, averaged approximately 11 years. During 2001, 68 store leases
will expire. We are currently negotiating renewals on certain of these leases.
-5-
The 525,000 square foot warehouse, distribution and headquarters facility in
Tupelo, Mississippi is owned by the Company and is not subject to any mortgage
or similar encumbrance. This facility is located on approximately 59 acres of
land, providing room for future expansion.
Reference is made to the information contained in Note 7 to the Consolidated
Financial Statements included in the accompanying 2000 Annual Report to
Shareholders for information concerning our long-term obligations under leases.
Item 3. LEGAL PROCEEDINGS
The Company is a party to several legal proceedings and claims. Although the
outcome of such proceedings and claims cannot be determined with certainty, we
are of the opinion that it is unlikely that these proceedings and claims will
have a material effect on the financial condition or operating results of the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-6-
Executive Officers of the Company
---------------------------------
Office Presently Held and Business
Name Age Experience During Past Five Years
- ---- --- ---------------------------------
Larry G. Kirk 54 Chairman of the Board and Chief Executive
Officer from June 1997. Chief Executive
Officer and President from June 1996,
President and Chief Financial Officer prior
thereto, Director from December 1990.
Jack W. Busby, Jr. 58 President, Chief Operating Officer and
Director from June 1997. Executive Vice
President and Chief Operating Officer from
June 1996, Executive Vice President and
Director of Retail Operations prior thereto.
Bruce D. Smith 42 Senior Vice President, Chief Financial
Officer and Treasurer from March 1997,
Senior Vice President from November 1996.
Prior thereto, Executive Vice President and
Chief Financial Officer with Fred's, Inc.
The term of each of the officers expires June 14, 2001.
There are no family relationships among the executive officers.
There are no arrangements or understandings pursuant to which any person was
selected as an officer.
-7-
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock and the associated common stock purchase rights are
listed on the New York Stock Exchange and trade under the symbol HKF. Additional
information required by this item is incorporated by reference from the table
"Quarterly Financial Data" on page 8 and the table "Market Information" on page
25 of the 2000 Annual Report to Shareholders.
Item 6. SELECTED FINANCIAL DATA
Historical financial information is incorporated by reference from the table
"Five-Year Summary of Significant Financial Information" on page 8 of the 2000
Annual Report to Shareholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is incorporated by reference from pages 9 to 11 of the 2000 Annual
Report to Shareholders.
Item 7a. OTHER MATTERS
Quantitative and Qualitative Disclosure about Market Risk
The Company has no holding of derivative financial or commodity instruments at
January 28, 2001. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Company's Revolving Credit
Agreement bear interest at a negotiated rate, a floating rate (the higher of the
federal funds rate plus 1/2% or the prime rate), a rate derived from the money
market rate, or a rate derived from the London Interbank Offered Rate. An
increase in interest rates of 100 basis points would not significantly affect
the Company's results. All of the Company's business is transacted in U. S.
dollars and, accordingly, foreign exchange rate fluctuations have never had a
significant impact on the Company, and they are not expected to in the
foreseeable future.
Other Matters
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance as to the appropriate timing for
recognition of revenue. The Company recognizes revenue upon the delivery of the
product to the customer. The Company adopted SAB 101 in the fourth quarter of
fiscal year 2000, as required, and has concluded that SAB 101 did not have any
impact on its financial statements.
-8-
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, subsequently amended by SFAS 137 and 138.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
The Company is not holding any derivative financial or commodity instruments and
does not believe adoption in 2001 will have any financial statement impact.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated by reference from the "Report
of Independent Accountants" found on page 21 and from the Consolidated Financial
Statements on pages 12-21 of the 2000 Annual Report to Shareholders.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Directors of the Company is incorporated by reference from
the discussion under Item 1 of our Proxy Statement for the 2001 Annual Meeting
of Shareholders. The balance of the response to this item is contained in the
discussion entitled "Executive Officers of the Company" in Part I of this
report.
Item 11. EXECUTIVE COMPENSATION
Information about executive compensation is incorporated by reference from the
discussion under the heading "Compensation of Executive Officers and Directors"
in our Proxy Statement for the 2001 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information about security ownership of certain beneficial owners and management
is incorporated by reference from the table on page 2 of the Proxy Statement for
the 2001 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information about certain relationships and related transactions concerning
"Executive Officers of the Registrant" is included in Part I.
-9-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8 - K
Pages in the 2000
Annual Report to
Shareholders
------------
14 (a) (1) Financial Statements
Report of Independent Accountants........................... 21
Consolidated Statement of Income............................ 12
Consolidated Balance Sheet.................................. 13
Consolidated Statement of Cash Flows........................ 14
Consolidated Statement of Shareholders' Equity.............. 15
Notes to Consolidated Financial Statements.................. 16-21
14 (a) (2) Consolidated Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements.
Supplementary data:
Selected Quarterly Financial Data....................... 8
14 (a) (3)
3.1 e Certificate of Incorporation of Registrant.
3.2 f By-Laws of Registrant.
4.1 c Certificate of Incorporation of Registrant.
4.2 f By-Laws of Registrant.
4.3 l Amended and Restated Rights Agreement between Registrant and
Continental Stock Transfer Company dated as of March 23,1987 and
amended and restated most recently on March 4, 2001.
4.4 d Agreement between Registrant and Continental Stock Transfer and
Trust Company (as Rights Agent) dated July 16, 1992.
4.5 i Credit Agreement between Registrant and Wachovia Bank as Agent and
Lenders as Signatories Hereto ("Wachovia Credit Agreement") dated as
of April 16, 1999.
10.1 i Wachovia Credit Agreement dated as of April 16, 1999.
10.2 f Form of Indemnification Agreements dated June 8, 1995 between
Registrant and each of Jack W. Busby, Jr., R. Randolph Devening, Don
L. Fruge, Larry G. Kirk and Donna L. Weaver.
-10-
10.3 f Form of Indemnification Agreements dated June 8, 1995 between
Registrant and each of Dean W. Abraham, Bradley A. Berg, Larry D.
Fair, James A.Gilmore, David A. Lancaster, Billy M. Morgan, James A.
Nolting, William D.Smothers and Carl W. Zander.
10.4 g Form of Indemnification Agreement dated June 13, 1996 between the
Registrant and each of Tom R.Collins, Jeffie L. Gatlin, Ellen J.
Kennedy, Bruce E. Rockstad and William A. Sheffield, Jr.
10.5 g Indemnification Agreement dated June 13, 1996 between the Registrant
and Bruce D. Smith dated December 10, 1996.
10.6 h Indemnification Agreement between Registrant and Phil L. Munie dated
March 13, 1997.
10.7 b ? Agreement between Registrant and Jack W. Busby, Jr. dated June 9,
1998.
10.8 b ? Agreement to Secure Certain Contingent Payments between Registrant
and Jack W. Busby, Jr. dated June 9, 1988.
10.9 a ? Agreement between Registrant and Larry G. Kirk dated June 9, 1998.
10.10a ? Agreement to Secure Certain Contingent Payments between Registrant
and Larry G. Kirk dated June 9, 1988.
10.11f ? Form of Amendment, Extension and Restatement of Severance
Agreement between Registrant and each of Jack W. Busby, Jr. and Larry
G. Kirk dated March 14, 1996.
10.12g ? Amendment to Deferred Compensation Agreement, Severance Agreement
and Agreement to Secure Contingent Payments between Registrant and
Larry G. Kirk dated June 13, 1996.
10.13g ? Amendment to Deferred Compensation and Agreement to Secure Certain
Contingent Payments between Registrant and Jack W. Busby, Jr. dated
June 13, 1996.
10.14g ? Agreement between Registrant and Bruce D. Smith dated December 10,
1996.
10.15g ? Severance Agreement between Registrant and Bruce D. Smith dated
December 10, 1996.
10.16g ? Agreement to Secure Certain Contingent Payments between Registrant
and Bruce D. Smith dated December 10, 1996.
10.17 e ? Supplemental Retirement Plan, as amended.
10.18 g ? 1996 Stock Option Plan.
10.19 c ? Extra Compensation Plan.
10.20 g ? 1995 Restricted Stock Plan.
10.21 i ? Officer Incentive Compensation Plan.
10.22j Indemnification Agreement between Registrant and Roger T. Knox dated
June 21, 1999.
10.23j Indemnification Agreement between Registrant and Clayton E.
Stallings dated March 15, 2000.
10.24j ? Form of Agreement and Renewal of Severance Agreement between
Registrant and each of Larry G. Kirk, Jack W. Busby, Jr. and Bruce D.
Smith dated May 4, 1999.
10.25 k ? 2000 Stock Compensation Plan for Non-Employee Directors.
13 Portions of the Hancock Fabrics, Inc. 2000 Annual Report to
Shareholders (for the fiscal year ended January 28, 2001) incorporated
by reference in this filing.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
-11-
a Incorporated by reference from Registrant's Form 10 - K dated April
26, 1990 as filed with the Securities and Exchange Commission.
b Incorporated by reference from Registrant's Form 10 - K dated April
26, 1991 as filed with the Securities and Exchange Commission.
c Incorporated by reference from Registrant's Form 10 - K dated April
27, 1992 as filed with the Securities and Exchange Commission.
d Incorporated by reference from Registrant's Form 10 - K dated April
26, 1993 as filed with the Securities and Exchange Commission.
e Incorporated by reference from Registrant's Form 10 - K dated April
24, 1995 as filed with the Securities and Exchange Commission.
f Incorporated by reference from Registrant's Form 10 - K dated April
22, 1996 as filed with the Securities and Exchange Commission.
g Incorporated by reference from Registrant's Form 10 - K dated April
22, 1997 as filed with the Securities and Exchange Commission.
h Incorporated by reference from Registrant's Form 10 - K dated April
27, 1998 as filed with the Securities and Exchange Commission.
i Incorporated by reference from Registrant's Form 10 - K dated April
30, 1999 as filed with the Securities and Exchange Commission.
j Incorporated by reference from Registrant's Form 10 - K dated April
25, 2000 as filed with the Securities and Exchange Commission.
k Incorporated by reference from Registrant's Form S - 8 dated December
27, 2000 as filed with the Securities and Exchange Commission.
l Incorporated by reference from Registrant's Form 8 - K dated April 6,
2001 as filed with the Securities and Exchange Commission.
? Denotes management contract or compensatory plan or arrangement.
-12-
(b) Reports on Form 8 - K
The registrant filed no reports on Form 8 - K during the last quarter of the
period covered by this report.
Shareholders may obtain copies of any of these exhibits by writing to the
Secretary at the executive offices of the Company. Please include payment in the
amount of $1.00 for each document, plus $.25 for each page ordered, to cover
copying, handling and mailing charges.
-13-
UNDERTAKING IN CONNECTION WITH
REGISTRATION STATEMENTS ON FORM S-8
For purposes of complying with the amendments to the rules governing Form S-8
(effective July 13, 1990) under the Securities Act of 1933 (the "Act"), the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-17215 (filed September 15, 1987), 33-29138 (filed June 12, 1989),
33-55419 (filed September 12, 1994), 333-32295 (filed July 28, 1997), 333-32229
(filed July 28, 1997) and 333-52788 (filed December 27, 2000):
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 512 (h) of Regulation S-K, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
-14-
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) 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, on the 27th day of April
2001.
HANCOCK FABRICS, INC
By /s/ Larry G. Kirk
--------------------------------
Larry G. Kirk
Chairman of the Board and Chief
Executive Officer
By /s/ Bruce D. Smith
--------------------------------
Bruce D. Smith
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on this 27th day of April 2001.
Signature Title
--------- -----
/s/ Larry G. Kirk Chairman of the Board, Chief Executive
- ----------------------------- Officer and Director
(Larry G. Kirk)
/s/ Jack W. Busby President, Chief Operating Officer and
- ----------------------------- Director
(Jack W. Busby)
/s/ R. Randolph Devening Director
- -----------------------------
(R. Randolph Devening)
/s/ Don L. Fruge Director
- ------------------------------
(Don L. Fruge)
/s/ Roger T. Knox Director
- ------------------------------
(Roger T. Knox)
/s/ Donna L. Weaver Director
- ----------------------
(Donna L. Weaver)
-15-
Exhibit 13
FIVE-YEAR SUMMARY OF SIGNIFICANT FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------
(in thousands, except per
share and store amounts) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Sales $385,245 $381,572 $392,303 $381,910 $378,218
Earnings before income taxes 17,053 10,650 5,590 24,842 20,282
Net earnings 10,867 6,816 3,556 15,324 12,481
Earnings per common share
Basic .65 .38 .18 .74 .59
Diluted .65 . 38 . 18 . 72 . 58
Total assets 192,729 195,562 192,404 195,558 187,843
Capital expenditures 4,041 8,017 8,839 2,712 2,314
Long- and short-term indebtedness 16,000 31,000 29,000 10,000 3,000
Common shareholders' equity 82,552 76,867 77,152 106,691 105,273
- ------------------------------------------------------------------------------------------------
Common shares outstanding, net 17,285 18,652 18,595 21,114 21,315
Stores in operation 443 453 462 481 462
QUARTERLY FINANCIAL DATA (unaudited)
- -----------------------------------------------------------------------------------------------------
Years ended January 28, 2001 and January 30, 2000
(in thousands, except per share amounts)
Net Per Common Share
Gross Earnings Net Earnings/(Loss) Cash
Sales Profit (Loss) Basic Diluted Dividend
- -----------------------------------------------------------------------------------------------------
2000
First Quarter $ 98,123 $ 47,965 $ 2,183 $.12 $.12 $.025
Second Quarter 86,046 43,486 582 .03 .03 .025
Third Quarter 99,864 50,527 3,066 .19 .19 .025
Fourth Quarter 101,212 53,856 5,036 .31 .31 .025
- -----------------------------------------------------------------------------------------------------
$385,245 $195,834 $10,867 $.65 $.65 $.10
=====================================================================================================
1999
First Quarter $ 96,365 $45,296 $1,104 $.06 $.06 $.10
Second Quarter 82,848 40,067 (759) (.04) (.04) .10
Third Quarter 98,962 49,576 2,499 .14 .14 .10
Fourth Quarter 103,397 50,932 3,972 .22 .22 .025
- -----------------------------------------------------------------------------------------------------
$381,572 $185,871 $6,816 $.38 $.38 $.325
=====================================================================================================
-8-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table presents the percentage of sales for the periods indicated
and percentage changes from period to period of certain items included in the
Consolidated Statement of Income:
Percent Change
Percent of Net Sales from Prior Year
------------------------ -----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 1.0% (2.7%) 2.7%
Comparable store sales 2.0% 0.0% (2.9%)
Gross margin 50.8% 48.7% 48.6%
Selling, general and
administrative expenses* 44.5% 44.0% 45.8% 1.9% (6.5%) 13.5%
Pretax earnings* 4.4% 2.8% 1.4% 60.1% 90.5% (77.5%)
Net earnings* 2.8% 1.8% .9% 59.4% 91.7% (76.8%)
* 1998 expenses and pretax earnings include the effect of an unusual charge
totaling $10.0 million (2.5% of sales), as discussed further below. The impact
of the charge on net earnings was $6.3 million (1.6% of sales).
2000 vs 1999
Sales for 2000 increased $3.7 million from 1999, primarily due to a 2.0%
increase in comparable store sales. The increase was partially offset by a
reduction in sales of $3.4 million from net store opening and closing activity.
Hancock closed 19 stores and opened 9 in 2000 resulting in a total of 443 stores
at year end.
Comparable store sales benefited from the continuing store repositioning
strategy, new product additions in the home decorating and accessories category
and the positive impact of store remodels, including the store-within-a-store
home decorating concept in partnership with Waverly Fabrics.
Hancock's gross margin increased due to new product additions, ongoing
reallocation of the mix of merchandise and continued close attention to routine
obsolescence. The LIFO (last-in, first-out) charge was $650 thousand in 2000 as
compared to a $475 thousand credit in 1999.
Selling, general and administrative expenses increased as a percentage of sales
in 2000 as a result of wage pressures during this period of low unemployment, as
well as higher insurance and utility costs. More efficient use of advertising
helped to offset a portion of these expense increases.
Interest expense decreased by $200 thousand in 2000 due to lower average
outstanding borrowings somewhat offset by a higher interest rate environment.
Income tax expense increased by $2.4 million due to the improvement in pretax
earnings over 1999.
1999 vs 1998
Sales for 1999 decreased $10.7 million from 1998, primarily due to a reduction
in sales of $10.9 million from net store opening and closing activity. The
decrease in sales was partially offset by a marginal increase in comparable
store sales. Hancock closed 52 stores and opened 43 in 1999, resulting in a
total of 453 stores at year end.
Comparable store sales improvement over 1998 came from expansions in the home
decorating category and the positive impact of store remodels. These gains were
offset by deflation in product prices, which continued from 1998 into the first
half of 1999, and by the adverse impact of competitor liquidations.
Hancock's gross margin increased slightly due to changes in the merchandise mix,
which offset promotional pricing designed to make up the sales shortfall created
by deflation and competitor liquidations. There was a LIFO (last-in, first-out)
credit of $475 thousand in 1999 as compared to a credit of $300 thousand in
1998.
-9-
Selling, general and administrative expenses increased as a percentage of sales
in 1999 before the effect of a $10.0 million charge in 1998. Competition for
labor drove up payroll costs. Moreover, startup costs associated with the
acquisition of 29 Mae's Fabric stores, which were acquired too late in the year
to make a significant sales contribution, resulted in higher selling, general
and administrative expenses. In addition, expenses as a percentage of sales were
higher due to the deleveraging of the expense base caused by the absence of
comparable store sales gains.
Interest expense increased by $1.1 million in 1999 due to higher interest rates
on the outstanding borrowings. Income tax expense increased by $1.8 million due
to the improvement in pretax earnings over 1998.
Financial Position
Hancock traditionally maintains a strong financial position as evidenced by the
following information as of the end of fiscal years 2000, 1999 and 1998 (dollars
in thousands):
2000 1999 1998
---- ---- ----
Cash and cash equivalents $ 3,891 $ 6,904 $ 6,959
Net cash flows provided by (used in):
Operating activities $ 22,848 $ 17,077 $ 24,954
Investing activities $ (3,635) $ (10,732) $ (9,516)
Financing activities $ (22,226) $ (6,400) $ (15,536)
Working capital $ 79,877 $ 92,911 $ 98,718
Long-term indebtedness
to total capitalization 16.2% 28.7% 27.3%
Historically, Hancock has financed its operations with internally generated cash
flow. During 2000, cash flows from operations were used to purchase property and
equipment, repay borrowings, pay dividends and repurchase stock. During 1999,
cash flows from operations, supplemented by $2 million in borrowings, were used
to purchase property and equipment, pay dividends, repurchase stock and acquire
the leases of Mae's Fabrics.
Hancock purchased treasury stock of $5.5 million, $2.2 million and $28.8 million
in 2000, 1999 and 1998, respectively. Hancock plans to use future cash in excess
of capital improvement needs for the retirement of debt and the purchase of
treasury stock as market and financial conditions dictate.
Capital Requirements
Hancock's primary capital requirements are for the financing of inventories and,
to a lesser extent, for capital expenditures relating to store locations and its
distribution facility. Funds for such purposes are generated from Hancock's
operations and, if necessary, supplemented by borrowings from commercial
lenders.
Capital expenditures amounted to $4.0 million in 2000, $8.0 million in 1999 and
$8.8 million in 1998. The capital costs associated with remodeling 178 stores
and opening 73 new stores during the three-year period (including the Mae's
Fabrics stores acquired in 1999), purchasing and implementing a new merchandise
management system, and normal capital maintenance for stores and the
distribution center, accounted for the majority of these requirements.
Hancock estimates that capital expenditures for 2001 will approximate $8.0
million. Anticipated expenditures include the costs for 35 to 40 planned new
stores, the remodeling of approximately 150 stores, and capital maintenance in
the existing retail stores and distribution center. Internally generated funds
are expected to be sufficient to finance these capital expenditures.
In addition to operating cash flows, Hancock has available credit of $44 million
as of January 28, 2001 under Hancock's $60 million revolving credit facility.
Hancock believes the total of $60 million is adequate for Hancock's foreseeable
needs in the near term.
-10-
Effects of Inflation
The impact of inflation on labor and occupancy costs can significantly affect
Hancock's operations. Many of Hancock's employees are paid hourly rates related
to the Federal minimum wage; accordingly, any increases will affect Hancock. In
addition, payroll taxes, employee benefits and other employee costs continue to
increase. Costs of new leases for new store locations remain stable, but renewal
costs of older leases continue to increase. Utilities, maintenance and insurance
costs have also risen. Hancock believes the practice of maintaining adequate
operating margins through a combination of price adjustments and costs controls,
careful evaluation of occupancy needs and efficient purchasing practices are the
most effective tools for coping with increasing costs and expenses.
Inflation is one of the key factors used in the calculation of the LIFO charge
or credit to Cost of goods sold. A deflationary trend in product costs in 1998
and 1999, combined with inventory reductions, caused LIFO credits in both years.
In 2000, an increase in the PPI indices resulted in a LIFO charge.
Seasonality
Hancock's business is slightly seasonal. Peak sales periods occur during the
fall and pre-Easter weeks, while the lowest sales periods occur during the
summer and the month of January.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor"
for certain qualifying forward-looking statements. Certain information included
herein contains statements that are forward-looking, such as statements related
to financial items and results, plans for future expansion, store closure and
other business development activities, capital spending or financing sources,
capital structure, stability of interest rates during periods of borrowings and
the effects of regulation, general economic trends, changes in consumer demand
or purchase patterns, delays or interruptions in the flow of merchandise between
the Company's suppliers and/or its distribution center and its stores, a
disruption in the Company's data processing services and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future. Accordingly, such
results may differ materially from those expressed in any forward-looking
statements by or on behalf of Hancock. These risks and uncertainties include,
but are not limited to, those described above.
Recent Accounting Pronouncements
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance as to the appropriate timing for
recognition of revenue. The Company recognizes revenue upon the delivery of the
product to a customer. The Company adopted SAB 101 in the fourth quarter, as
required, and has concluded that SAB 101 did not have any impact on its
financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, subsequently amended by SFAS 137 and 138.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
The Company is not holding any derivative financial or commodity instruments and
does not believe adoption in 2001 will have any significant financial statement
impact.
-11-
Consolidated Statement of Income
- --------------------------------------------------------------------------------------------------------------
Years Ended January 28, 2001, January 30, 2000 and
January 31,1999
(in thousands, except for per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Sales $ 385,245 $ 381,572 $ 392,303
Cost of goods sold 189,411 195,701 201,521
- --------------------------------------------------------------------------------------------------------------
Gross profit 195,834 185,871 190,782
- --------------------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 171,269 168,041 179,818
Depreciation and amortization 5,289 4,800 4,101
Interest expense 2,410 2,618 1,472
Interest income (187) (238) (199)
- --------------------------------------------------------------------------------------------------------------
Total operating and interest expenses 178,781 175,221 185,192
- --------------------------------------------------------------------------------------------------------------
Earnings before taxes 17,053 10,650 5,590
Income taxes 6,186 3,834 2,034
- --------------------------------------------------------------------------------------------------------------
Net earnings and comprehensive income $ 10,867 $ 6,816 $ 3,556
- --------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ . 65 $ . 38 $ . 18
Diluted $ . 65 $ . 38 $ . 18
- --------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
Basic 16,810 18,056 19,741
Diluted 16,815 18,056 19,997
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
-12-
Consolidated Balance Sheet
- ----------------------------------------------------------------------------------------------------------
January 28, 2001 and January 30, 2000
(in thousands, except for per share amounts) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,891 $ 6,904
Receivables, less allowance for doubtful
accounts of $70 in 2000 and 1999 589 2,347
Inventories 138,657 140,750
Prepaid expenses 1,677 1,596
- ----------------------------------------------------------------------------------------------------------
Total current assets 144,814 151,597
Property and equipment, at depreciated cost 25,616 26,947
Deferred tax assets 10,486 10,091
Pension payment in excess of required contribution 3,078
Other assets 8,735 6,927
- ----------------------------------------------------------------------------------------------------------
Total assets $ 192,729 $ 195,562
==========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 38,665 $ 39,072
Accrued liabilities 15,367 13,344
Deferred tax liabilities 4,726 3,438
Income taxes 6,179 2,832
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 64,937 58,686
Long-term debt obligations 16,000 31,000
Postretirement benefits other than pensions 21,278 20,895
Reserve for store closings 3,012 4,161
Other liabilities 4,950 3,953
- ----------------------------------------------------------------------------------------------------------
Total liabilities 110,177 118,695
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 12)
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares
authorized; 29,190,335 and 29,139,726 issued and
outstanding, respectively 292 291
Additional paid-in capital 39,094 39,142
Retained earnings 183,917 174,815
Treasury stock, at cost, 11,905,738 and
10,487,738 shares held, respectively (135,583) (130,086)
Deferred compensation on restricted
stock incentive plan (5,168) (7,295)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 82,552 76,867
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 192,729 $ 195,562
==========================================================================================================
See accompanying notes to the consolidated financial statements.
-13-
Consolidated Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
Years Ended January 28, 2001, January 30, 2000 and
January 31, 1999 (in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 10,867 $ 6,816 $ 3,556
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation and amortization 5,289 4,800 4,101
LIFO 650 (475) (300)
Deferred income taxes 893 1,488 4,236
Amortization of deferred compensation on
restricted stock incentive plan 2,173 1,390 1,310
Reserve for closed stores 8,604
Write-off of investment 1,363
Loss on disposal of fixed assets 60 295 230
Interest expense on closed store accrual 253 346
Issuance of shares as compensation for professional services 95
(Increase) decrease in assets
Receivables and prepaid expenses 1,677 303 (428)
Inventory at current cost 1,443 1,974 5,919
Change in pension payment in excess of required contribution (3,078)
Other noncurrent assets (2,191) 10 13
Increase (decrease) in liabilities
Accounts payable (407) 2,191 1,390
Accrued liabilities 3,350 (210) (4,839)
Current income tax obligations 3,123 430 (1,596)
Postretirement benefits other than pensions 383 561 588
Payments against closed store accrual (2,729) (2,816)
Other liabilities 997 (26) 807
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,848 17,077 24,954
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (4,041) (8,017) (8,839)
Proceeds from disposition of property and equipment 138 67 27
Acquisition of Mae's stores 268 (2,782)
Other (704)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,635) (10,732) (9,516)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement (15,000) 2,000 19,000
Purchase of treasury stock (5,497) (2,219) (28,820)
Proceeds from exercise of stock options 2,235
Issuance of shares under directors' stock plan 36 68
Cash dividends paid (1,765) (6,181) (8,019)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,226) (6,400) (15,536)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,013) (55) (98)
Cash and cash equivalents:
Beginning of year 6,904 6,959 7,057
- ----------------------------------------------------------------------------------------------------------------
End of year $ 3,891 $ 6,904 $ 6,959
================================================================================================================
Supplemental disclosures Cash paid during the year for:
Interest $ 2,407 $ 2,608 $ 1,452
Income taxes $ 3,029 $ 2,543 $ 4,852
================================================================================================================
See accompanying notes to the consolidated financial statements.
-14-
Consolidated Statement of Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended January 28, 2001, January 30, 2000 and January 31, 1999
(in thousand, except number of shares)
- --------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid -In Retained Treasury Stock Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance February 1, 1998 28,253,013 $283 $31,382 $178,643 (7,139,074) $(99,047) $(4,570) $106,691
Net earnings and comprehensive 3,556 3,556
income
Cash dividends ($.40 per share) (8,019) (8,019)
Exercise of stock options 202,250 2 2,233 2,235
Issuance of restricted stock 89,950 1,349 (1,349)
Cancellation of restricted stock (2,400) (30) 30
Amortization and vesting of deferred
compensation on restricted stock 131 1,310 1,441
incentive plan
Issuance of shares under directors' 5,013 68 68
stock plan
Purchase of treasury stock (2,813,807) (28,820) (28,820)
- --------------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1999 28,547,826 285 35,133 174,180 (9,952,881) (127,867) (4,579) 77,152
Net earnings and comprehensive income 6,816 6,816
Cash dividends ($.325 per share) (6,181) (6,181)
Issuance of restricted stock 595,600 6 4,126 (4,132)
Cancellation of restricted stock (3,700) (26) 26
Amortization and vesting of deferred
compensation on restricted stock (91) 1,390 1,299
incentive plan
Purchase of treasury stock (534,857) (2,219) (2,219)
- --------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 2000 29,139,726 291 39,142 174,815 (10,487,738) (130,086) (7,295) 76,867
Net earnings and comprehensive income 10,867 10,867
Cash dividends ($.10 per share) (1,765) (1,765)
Issuance of restricted stock 21,500 64 (64)
Cancellation of restricted stock (2,700) (18) 18
Amortization and vesting of deferred
compensation on restricted stock (224) 2,173 1,949
incentive plan
Issuance of shares under directors' 9,521 36 36
stock plan
Issuance of shares as compensation
for professional services 22,288 1 94 95
Purchase of treasury stock (1,418,000) (5,497) (5,497)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 28, 2001 29,190,335 $292 $39,094 $183,917 (11,905,738) $ (135,583) $ (5,168) $ 82,552
=================================================================================================================================
See accompanying notes to the consolidated financial statements
-15-
Notes to Consolidated Financial Statements
Note 1 - Description of Business
Hancock Fabrics, Inc. ("Hancock") is a retail and wholesale merchant of fabric
and related home sewing and decorating accessories. Hancock operates 443 stores
in 42 states, supplies over 100 independent wholesale customers and operates
three internet stores under its domain names, hancockfabrics.com and
homedecoratingaccents.com. The Company is in one business segment and follows
the requirements of Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Note 2 - Summary of Accounting Policies
Consolidated financial statements include the accounts of Hancock and its wholly
owned subsidiaries. All intercompany accounts and transactions are eliminated.
Hancock maintains its financial records on a 52-53 week fiscal year ending on
the Sunday closest to January 31. Fiscal years 2000, 1999 and 1998, as used
herein, refer to the years ended January 28, 2001, January 30, 2000 and January
31, 1999, respectively. Each of these three fiscal years contained 52 weeks.
Use of estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period is required by management in the preparation of the
financial statements in accordance with generally accepted accounting
principles. Actual results could differ from those estimates.
Cash and cash equivalents include cash on hand, amounts due from banks and
repurchase agreements having original maturities of three months or less and are
reflected as such for purposes of reporting cash flows.
Inventories consist of fabrics, sewing notions and related accessories held for
resale and are valued at the lower of cost or market; cost is determined by the
last-in, first-out ("LIFO") method. The current cost of inventories exceeded the
LIFO cost by approximately $40 million at January 28, 2001 and January 30, 2000.
Depreciation is computed by use of the straight-line method over the estimated
useful lives of buildings, fixtures and equipment. Leasehold costs and
improvements are amortized over the lesser of their estimated useful lives or
the remaining lease term. Average depreciable lives are as follows: buildings
and improvements 15-20 years; fixtures and equipment 3-8 years; and
transportation equipment 3-5 years.
Maintenance and repairs are charged to expense as incurred and major
improvements are capitalized.
Advertising, including production costs, is charged to expense the first day of
the advertising period. Advertising expense for 2000, 1999 and 1998, was $16.2
million, $18.0 million and $19.0 million, respectively.
Preopening costs of new stores are charged to expense as incurred in accordance
with Statement of Position 98-5, Reporting on the Costs of Start-up Activities.
Long-term investments are recorded using the equity method of accounting.
Earnings per share is presented for basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company (see Note 11).
Financial instruments are evaluated pursuant to Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instrument: cash and receivables - the
carrying amounts approximate fair value because of the short maturity of those
instruments; long-term debt - the fair value of Hancock's long-term debt is
estimated based on the current borrowing rates available to Hancock for bank
loans with similar terms and average maturities. The carrying amounts
approximate fair value because the interest rates reflect current market rates.
Throughout all years presented, Hancock did not have any financial derivative
instruments outstanding.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Stock options are accounted for using the methods prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Pro forma information regarding net
income and earnings per share as calculated under the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is presented in Note 10.
Comprehensive income is reported in accordance with Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The Company did
not have any comprehensive income items as defined by SFAS 130 in any of the
three years ended January 28, 2001.
Treasury stock is repurchased periodically by the Company. These treasury stock
transactions are recorded using the cost method.
Recent Accounting Pronouncements. On December 3, 1999, the staff of the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides
guidance as to the appropriate timing for recognition of revenue. The Company
recognizes revenue upon the delivery of the product to a customer. The Company
adopted SAB 101 in the fourth quarter, as required, and has concluded that SAB
101 did not have any impact on its financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133. Accounting for Derivative
Instruments and Hedging Activities, subsequently amended by SFAS 137 and 138.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
The Company is not holding any derivative financial or commodity instruments and
does not believe adoption in 2001 will have any financial statement impact.
Note 3 - Acquisition of Mae's Fabrics Store Leases
Effective April 27, 1999, the Company agreed to acquire certain operating leases
of Mae's Fabrics stores for a cash payment of approximately $2.8 Million. During
fiscal year 2000 the company received $268,000 in connection with the escrow
settlement associated with this acquisition resulting in a total purchase price
of $2.5 million. Twenty-nine lease assignments were made for stores operating in
the Mid-Atlantic States. This acquisition was accounted for as a purchase. As no
tangible assets were acquired, the entire purchase price was assigned to
goodwill which is being amortized on a straight-line basis over 15 years.
Amortization expense for this goodwill was $170,000 and $46,000 for 2000 and
1999, respectively. Operating results for the twenty-nine locations have been
included with those of the Company since the time the stores opened during 1999.
-16-
Note 4 - Property and Equipment (in thousands)
2000 1999
---- ----
Buildings and improvements $ 12,416 $ 12,416
Leasehold improvements 5,445 5,259
Fixtures and equipment 48,450 43,823
Transportation equipment 1,700 1,732
Construction in progress 165 2,677
---------- -----------
68,176 65,907
Accumulated depreciation and amortization (45,473) (41,881)
---------- -----------
22,703 24,026
Land 2,913 2,921
---------- -----------
$ 25,616 $ 26,947
========== ===========
Note 5 - Accrued Liabilities (in thousands)
2000 1999
---- ----
Payroll and benefits $ 4,734 $ 2,138
Property taxes 3,787 3,532
Sales taxes 1,796 1,753
Current portion of reserve for closed stores (Note 13) 1,064 2,391
Other 3,986 3,530
$ 15,367 $ 13,344
=========== ===========
Note 6 - Long-Term Debt Obligations (in thousands)
2000 1999
---- ----
Revolving credit agreement $ 16,000 $ 31,000
=========== ===========
As of April 16, 1999, Hancock entered into a three-year, $60 million
uncollateralized revolving credit arrangement with a group of banks. This
agreement provides for an annual facility fee, which was 0.25% of the total
facility amount as of January 28, 2001. Borrowings under the revolving credit
agreement bear interest at a negotiated rate, a floating rate (the higher of the
federal funds rate plus 1/2% or the prime rate), a rate derived from the Money
Market Rate or a rate derived from the London Interbank Offered Rate. This
agreement replaced a similar agreement that had been in place since 1993.
At January 28, 2001, the effective interest rate on the outstanding borrowings
was 6.76%. Under the most restrictive covenants of these agreements, Hancock is
required to maintain a specified consolidated tangible net worth, a debt to cash
flow ratio and a fixed charge coverage ratio.
Hancock also has an arrangement that provides for up to $10 million in letters
of credit.
Note 7 - Long-Term Leases
Hancock leases its retail fabric store locations under noncancelable operating
leases expiring at various dates through 2020. Certain of the leases for store
locations provide for additional rent based on sales volume.
2000 1999 1998
----------- ----------- -----------
Rent expense consists of the following (in thousands):
Minimum rent $ 30,780 $ 30,535 $ 30,489
Additional rent based on sales 222 208 229
----------- ----------- -----------
$ 31,002 $ 30,743 $ 30,718
=========== =========== ===========
Minimum rental payments as of January 28, 2001 are as follows (in thousands):
Fiscal Year
2001 $ 27,581
2002 23,951
2003 20,065
2004 16,873
2005 14,038
Thereafter 33,656
Total minimum lease payments $ 136,164
===========
Note 8 - Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
2000 1999 1998
---- ---- ----
Currently payable (receivable)
Federal $ 4,965 $ 2,346 $ (2,080)
State 328 (122)
----------- ----------- ------------
5,293 2,346 (2,202)
----------- ----------- ------------
Deferred
Current 1,288 876 5,875
Noncurrent (395) 612 (1,639)
----------- ----------- ------------
893 1,488 4,236
----------- ----------- ------------
$ 6,186 $ 3,834 $ 2,034
=========== =========== ============
-17-
The 1998 current income tax benefit relates primarily to a $14,150,000 deduction
for changes in the Company's intercompany markup on merchandise for tax
purposes. Deferred income taxes are provided in recognition of temporary
differences in reporting certain revenues and expenses for financial statement
and income tax purposes.
The net current deferred tax assets (liabilities) are comprised of the following
(in thousands):
2000 1999
---- ----
Current deferred tax assets
Accrual for medical insurance $ 732 $ 534
Accrual for workers' compensation 280 377
Other items 1,109 1,327
----------- -----------
Gross current deferred tax assets 2,121 2,238
Current deferred tax liabilities
Inventory valuation (6,847) (5,676)
------------ ------------
$ (4,726) $ (3,438)
============ ============
The net noncurrent deferred tax assets(liabilities) are comprised of the
following (in thousands):
2000 1999
---- ----
Noncurrent deferred tax assets
Postretirement benefits other than pensions $ 7,724 $ 7,251
Accrual for store closing costs 748 1,310
Accrual for pension 550
Difference in recognition of restricted stock expense 705 505
Deferred compensation liability 899 810
Other deferred deduction items 202 589
-------- ---------
Gross noncurrent deferred tax assets 10,828 10,465
Noncurrent deferred tax liabilities
Depreciation (342) (200)
Accrual for pension (174)
-------- ----------
$ 10,486 $ 10,091
======== =========
The ultimate realization of a significant portion of this asset is dependent
upon the generation of future taxable income sufficient to offset the related
deductions.
A reconciliation of the statutory Federal income tax rate to the effective tax
rate is as follows:
2000 1999 1998
---- ---- ----
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax effect 1.5 .5 1.3
Effect of change in state rates (.9)
Other (.2) .5 1.0
-------- ------- ------
Effective tax rate 36.3% 36.0% 36.4%
======== ======= ======
Note 9 - Shareholders' Interest
Authorized Capital. Hancock's authorized capital includes five million shares of
$.01 par value preferred stock, none of which have been issued.
Common Stock Purchase Rights. Hancock has entered into a Common Stock Purchase
Rights Agreement, as amended, (the "Rights Agreement"), with Continental Stock
Transfer & Trust Company as Rights Agent. The Rights Agreement, in certain
circumstances, would permit shareholders to purchase common stock at prices
which would be substantially below market value. These circumstances include the
earlier of (i) the tenth day after an announcement that a person or group has
acquired beneficial ownership of 20% or more of the Hancock shares, with certain
exceptions such as a tender offer that is approved by a majority of Hancock's
Board of Directors, or (ii) the tenth day, or such later date as set by
Hancock's Board of Directors, after a person or group commences, or announces
its intention to commence, a tender or exchange offer, the consummation of which
would result in beneficial ownership of 30% or more of the Hancock shares.
Stock Repurchase Plan. In prior years and continuing in fiscal 2000, repurchases
of almost 12,000,000 shares have been made. As of January 28, 2001, 1,565,892
shares are available for repurchase under the most recent authorization.
Issuance of shares as compensation for professional services. During 2000, the
Company issued 21,333 shares of common stock valued at $90,498 to Creative
Network Studios for advertising and marketing services. The Company also issued
955 shares of common stock valued at $4,084 to Vinalrac H. M. Garmon for
marketing services. These issuances were exempt from registration pursuant to
Section 4 (2) of the Securities Act of 1933, as amended, as they did not involve
a public offering of securities.
Note 10 - Employee Benefit Plans
Stock Options. In 1996, Hancock adopted the 1996 Stock Option Plan (the "1996
Plan") which authorized the granting of options to employees for up to two
million shares of common stock at an exercise price of no less than 50% of fair
market value on the date the options are granted. The exercise price of options
granted under this Plan have equaled the fair market value on the grant date. As
of January 28, 2001, 77,400 options remain to be granted under the 1996 Plan.
The 1996 Plan was established to provide for the continued issuance of stock
options to employees when the shares available for grants under a preceding
plan, the 1987 Stock Option Plan (the "1987 Plan"), were depleted. As
promulgated in the plan prospectus, the 1987 Plan expired on March 22, 1997;
however, options granted under the 1987 Plan extend beyond the termination date.
-18-
A summary of activity in the plans for the years ended January 28, 2001, January
30, 2000 and January 31, 1999 follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,669,500 $ 9.84 2,307,000 $ 10.76 2,174,050 $10.20
Granted 588,100 4.25 523,600 5.81 426,200 12.63
Canceled (136,100) 8.91 (161,100) 9.88 (91,000) 11.85
Exercised (202,250) 8.31
Outstanding --------- --------- ---------
at end of year 3,121,500 8.83 2,669,500 9.84 2,307,000 10.76
Exercisable ========= ========= =========
at end of year 2,317,150 $ 10.25 1,984,800 $ 10.58 1,592,200 $ 9.85
========= ========= =========
The options outstanding at January 28, 2001 are exercisable at prices ranging
from $4.25 to $14.25 per share. The weighted average remaining contractual life
of all outstanding options was 6.69 years at January 28, 2001.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issues to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 2000, 1999 and 1998 consistent
with the method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net earnings for 2000, 1999 and 1998 would have been
reduced by approximately $629,000, $950,000 and $1.3 million respectively.
Diluted earnings per share would have been reduced by $.04, $.06 and $.07 for
2000, 1999 and 1998, respectively. The weighted average grant-date fair value of
options granted during 2000, 1999 and 1998 was $1.50, $2.09 and $3.71,
respectively. The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2000, 1999 and 1998, respectively: dividend
yields of 1.82%, .94% and 2.10% average expected volatility of .43, .37 and .33;
risk-free interest rates of 4.68%, 5.88% and 4.75%; and an average expected life
of 4.1 years.
Restricted Stock. On December 6, 1995, Hancock adopted the 1995 Restricted Stock
Plan to provide for the issuance of restricted stock awards to employees. The
aggregate number of shares that may be issued or reserved for issuance pursuant
to the 1995 Restricted Stock Plan shall not exceed one million shares (subject
to adjustment as provided in the Plan). During 2000, 1999 and 1998, restricted
shares of 21,500, 595,600 and 89,950 respectively, were issued to officers and
key employees under the plan. As of January 28, 2001, 871,000 shares are
outstanding for which restrictions have not been lifted and 2,750 shares remain
available for issuance. Compensation expense related to restricted shares issued
is recognized over the period for which restrictions apply. This expense totaled
$2,173,000, $1,390,000 and $1,310,000 in 2000, 1999 and 1998, respectively.
Retirement Plans. Substantially all full-time employees are covered by a
trusteed, noncontributory defined benefit retirement plan maintained by Hancock.
The retirement benefits provided by this plan are primarily based on years of
service and employee compensation. Pension costs are funded by annual
contributions to the trust.
The following table sets forth changes in the projected benefit obligation and
changes in the fair value of plan assets (in thousands):
2000 1999
---- ----
Change in projected benefit obligation
Benefit obligation at beginning of year $ 41,133 $40,093
Service costs 1,898 2,083
Interest costs 2,985 2,799
Benefits paid (1,811) (1,828)
Actuarial adjustments (460) (2,014)
------------ ------------
Benefit obligation at end of year $ 43,745 $ 41,133
============ ============
Change in plan assets
Fair value of plan assets at beginning of year $ 48,551 $41,970
Actual return on plan assets (997) 6,044
Employer contributions 2,760 2,365
Benefits paid (1,811) (1,828)
------------ -------------
Fair value of plan assets at end of year $ 48,503 $ 48,551
============ =============
-19-
The funded status and the amounts recognized in Hancock's consolidated balance
sheet for defined benefit plans based on an actuarial valuation as of the
measurement dates of December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
---- ----
Funded status $ 4,759 $ 7,418
Transition obligation (asset) (254)
Prior service cost 510 624
Actuarial adjustment (2,191) (7,309)
----------- -------------
Prepaid (accrued) benefit cost $ 3,078 $ 479
=========== =============
Plan assets include fixed income and equity funds, comprising corporate and
government debt securities as well as common stock. The unrecognized net
transition asset has been amortized over 15 years beginning in 1986.
Net periodic pension costs include the following components:
2000 1999 1998
----- ---- ----
Service cost $ 1,898 $ 2,083 $ 2,010
Interest cost 2,985 2,799 2,538
Expected return on plan assets (4,485) (3,869) (3,404)
Amortization and deferrals (399) (139) (148)
-------------- -------------- --------------
Net periodic pension cost $ (1) $ 874 $ 996
=============== ============== ===============
Actuarial assumptions used in the period-end valuations were as follows:
2000 1999 1998
---- ---- ----
Discount rate 7.50% 7.50% 7.00%
Rate of increase in compensation levels 4.25% 4.25% 4.25%
Expected long-term rate of return on assets 9.25% 9.25% 9.25%
Postretirement Benefits Other Than Pensions. Certain health care benefits are
provided by Hancock to substantially all retired employees with more than 15
years of credited service. The following table sets forth the changes in the
projected benefit obligation and changes in the fair value of plan assets (in
thousands):
2000 1999
---- ----
Change in projected benefit obligation
Benefit obligation at beginning of year $ 13,045 $ 13,565
Service costs 598 679
Interest costs 940 888
Benefits paid (568) (523)
Actuarial adjustments (223) (1,564)
------------ ------------
Benefit obligation at end of year $ 13,792 $ 13,045
============ ============
The Company currently contributes to the plan as benefits are paid. The funded
status and the amounts recognized in Hancock's consolidated balance sheet for
other postretirement benefits based on an actuarial valuation as of the
measurement dates of December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
---- ----
Funded status $ (13,792) $ (13,045)
Prior service cost (1,799) (1,979)
Actuarial adjustments (5,687) (5,871)
----------- ------------
Prepaid (accrued) benefit cost $ (21,278) $ (20,895)
============ ============
The medical care cost trend rate used in determining this obligation for
employees before age 65 is 7.03%, decreasing by .68% annually before leveling at
5.00%. For individuals 65 and over, the rate is 4.50%. This trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the combined health care cost trend by 1% would increase the
accumulated postretirement benefit obligation by $2.1 million.
The discount and the salary scale rates used in calculating the obligations are
7.50% and 4.25%, respectively, at December 31, 2000 and December 31, 1999.
Net periodic postretirement benefit costs included the following (in thousands):
2000 1999 1998
---- ---- ----
Service cost $ 598 $ 679 $ 652
Interest cost 940 888 825
Amortization and deferrals (551) (483) (510)
-------------- -------------- --------------
Net periodic postretirement benefit costs $ 987 $ 1,084 $ 967
============== ============== ==============
Hancock's policy is to fund claims as incurred. Claims paid in 2000, 1999 and
1998 totaled $568,000, $523,000, and $379,000, respectively.
-20-
Note 11 - Earnings per Share
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
Years Ended
---------------------------------------------------------------------------------------------------
January 28, 2001 January 30, 2000 January 31, 1999
-------------------------------- --------------------------------- --------------------------------
Net Per Share Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
----------- -------- ---------- ----------- --------- ----------- ----------- ---------- ---------
Basic EPS
Earnings available
to common shareholders $10,867 16,810 $.65 $6,816 18,056 $.38 $3,556 19,741 $ .18
Effect of Dilutive
Securities
Stock options 5 192
Restricted stock 64
--------- --------- ---------
Diluted EPS
Earnings available
to common shareholders
plus conversions $10,867 16,815 $.65 $6,816 18,056 $.38 $ 3,556 19,997 $ .18
======= ====== ==== ====== ====== ==== ======= ====== ========
Certain options to purchase shares of the Company's common stock were
outstanding during the years ending January 28, 2001, January 30, 2000 and
January 31, 1999 but were not included in the computation of diluted EPS because
the exercise price was greater than the average price of common shares. These
options were still outstanding as of January 28, 2001.
Note 12 - Commitments and Contingencies
Concentration of Credit Risk. Financial instruments which potentially subject
Hancock to concentrations of risk are primarily cash and cash equivalents.
Hancock places its cash and cash equivalents in insured depository institutions
and limits the amount of credit exposure to any one institution.
Litigation. Hancock is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined with
certainty, Hancock's management is of the opinion that it is unlikely that these
proceedings and claims will have a material effect on the financial condition or
operating results of Hancock.
Note 13 - Store Closing Reserves
Store closing reserves are established based on estimates of net lease
obligations and other store closing costs. During the fourth quarter of 1998,
the Company recorded a charge of $8,604,000 for revised estimates of net lease
obligations for stores closed at January 31, 1999 and stores committed to be
closed in fiscal 1999. This charge, when combined with an already existing
reserve, resulted in a total reserve of $9,022,000 at January 31, 1999.
At January 28, 2001 the balance in this restructuring reserve was $4,076,000
which represents the present value of the future net lease obligations required
for the locations which have been closed. The 2000 activity in the reserve is as
follows:
January 30, Imputed Lease January 28,
2000 Interest Payments 2001
---- -------- -------- ----
Lease obligations $6,552 253 (2,729) $4,076
====== === ======= ======
Report of Independent Accountants (logo)
- ----------------------------------
To the Board of Directors and
Shareholders of Hancock Fabrics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Hancock Fabrics,
Inc. and its subsidiaries at January 28, 2001 and January 30, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended January 28, 2001, in conformity with accounting principles
generally accepted in the United States of America. These 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 of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
March 2, 2001
Memphis, TN
-21-
EXHIBIT 21
Subsidiaries of Hancock Fabrics, Inc.
-------------------------------------
Names Under Which
State of Subsidiary
Name Incorporation Does Business
- ---- ------------- -------------
HF Enterprises, Inc. Delaware HF Enterprises
HF Resources, Inc. Delaware HF Resources
HF Merchandising, Inc. Delaware HF Merchandising
Hancock Fabrics of MI,
Inc. Delaware Hancock Fabrics of MI
EXHIBIT 23
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-17215, 33-29138, 33-55419, 333-32295, 333-32229,
and 333-52788) of Hancock Fabrics, Inc. of our report dated March 2, 2001
appearing on page 21 of the Annual Report to Shareholders, which is incorporated
in this Annual Report of Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
April 27, 2001