FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended November 3, 2002
----------------
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from_____________to___________.
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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of November 3, 2002, the registrant had outstanding an aggregate of
18,938,311 shares of common stock, $.01 par value.
1
INDEX
Part I. Financial Information:
Page Numbers
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of November 3, 2002
and February 3, 2002 3
Consolidated Statement of Income for the Thirteen Weeks
and Thirty-nine Weeks Ended November 3, 2002 and
October 28, 2001 4
Consolidated Statement of Shareholders' Equity for the
Thirty-nine Weeks Ended November 3, 2002 5
Consolidated Statement of Cash Flows for the Thirty-nine Weeks
Ended November 3, 2002 and October 28, 2001 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risks 14 - 15
Item 4. Controls and Procedures 15
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Certifications
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 16
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 17
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 18
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 18
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(unaudited)
- -----------------------------------------------------------------------------------------------------
(in thousands, except for November 3, February 3,
share and per share amounts) 2002 2002
- -----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $4,581 $6,914
Receivables, less allowance for doubtful accounts 1,466 1,339
Inventories 149,409 135,672
Prepaid expenses 2,371 1,317
- -----------------------------------------------------------------------------------------------------
Total current assets 157,827 145,242
Property and equipment, at depreciated cost 40,572 30,607
Deferred tax assets 7,654 7,654
Pension payment in excess of required contribution 4,404 3,424
Goodwill, net of accumulated amortization 4,671 4,671
Other assets 3,489 3,951
- -----------------------------------------------------------------------------------------------------
Total assets $218,617 $195,549
=====================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $43,231 $40,147
Accrued liabilities 17,126 18,395
Deferred tax liabilities 2,969 2,969
Income taxes 4,353 4,363
- -----------------------------------------------------------------------------------------------------
Total current liabilities 67,679 65,874
Long-term debt obligations 7,000
Postretirement benefits other than pensions 21,904 21,871
Reserve for store closings 1,462 2,056
Other liabilities 4,691 5,145
- -----------------------------------------------------------------------------------------------------
Total liabilities 102,736 94,946
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
31,369,389 and 30,246,101 issued and outstanding, respectively 314 302
Additional paid-in capital 62,409 47,487
Retained earnings 202,269 195,738
Treasury stock, at cost, 12,431,078 and 12,010,594
shares held, respectively (142,531) (136,311)
Deferred compensation on restricted stock
incentive plan (6,580) (6,613)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 115,881 100,603
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $218,617 $195,549
=====================================================================================================
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
- ---------------------------------------------------------------------------------------------------
(in thousands, except
per share amounts) Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
November 3, October 28, November 3, October 28,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Sales $112,933 $103,753 $309,663 $288,184
Cost of goods sold 55,643 51,679 152,287 143,968
- ---------------------------------------------------------------------------------------------------
Gross profit 57,290 52,074 157,376 144,216
- ---------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 46,678 44,512 135,701 128,348
Depreciation and amortization 1,373 1,383 4,048 4,108
Interest expense 148 354 302 1,168
Interest income (23) (29) (73) (94)
- ---------------------------------------------------------------------------------------------------
Total operating and interest expenses 48,176 46,220 139,978 133,530
- ---------------------------------------------------------------------------------------------------
Earnings before taxes 9,114 5,854 17,398 10,686
Income taxes 3,308 2,126 6,316 3,880
- ---------------------------------------------------------------------------------------------------
Net earnings and comprehensive income $5,806 $3,728 $11,082 $6,806
===================================================================================================
Earnings per share
Basic $0.33 $0.22 $0.62 $0.41
Diluted $0.31 $0.22 $0.59 $0.40
===================================================================================================
Weighted average shares outstanding
Basic 17,843 16,891 17,826 16,676
Diluted 18,773 17,298 18,877 16,951
===================================================================================================
Dividends per share $0.08 $0.04 $0.24 $0.12
===================================================================================================
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for Additional Total
number of shares) Common Stock Paid-in Retained Treasury Stock Deferred Shareholders'
----------------------- -----------------------
Shares Amount Capital Earnings Shares Amount Compensation Equity
- --------------------------------------------------------------------------------------------------------------------------------
Thrity-nine weeks ended November 3, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Balance February 3, 2002 30,246,101 $302 $47,487 $195,738 (12,010,594)($136,311) ($6,613) $100,603
Net earnings 11,082 11,082
Cash dividend - $.08 per
share on a quarterly basis (4,551) (4,551)
Issuance of restricted stock 97,600 1 1,764 (1,765)
Cancellation of restricted stock (16,400) (134) 134
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 338 1,664 2,002
Purchase of treasury stock (420,484) (6,220) (6,220)
Issurance of shares as compensation
for professional services 1,036 17 17
Issuance of shares under directors'
stock plan 7,977 134 134
Exercise of stock options 1,033,075 11 12,803 12,814
- --------------------------------------------------------------------------------------------------------------------------------
Balance November 3, 2002 31,369,389 $314 $62,409 $202,269 (12,431,078)($142,531) ($6,580) $115,881
================================================================================================================================
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- -------------------------------------------------------------------------------------
(in thousands)
Thirty-nine Weeks Ended
----------------------------
November 3, October 28,
2002 2001
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $11,082 $6,806
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities
Depreciation and amortization 4,048 4,108
LIFO (1,000) 300
Deferred income taxes 943
Amortization of deferred compensation on
restricted stock incentive plan 1,664 1,495
Interest expense on closed store accrual 123 153
Gain on the disposition of real property 691
(Increase) decrease in assets
Receivables and prepaid expenses (1,181) (847)
Inventory at current cost (12,737) (2,734)
Pension payment in excess of required contribution (980) (564)
Other noncurrent assets 462 70
Increase (decrease) in liabilities
Accounts payable 3,084 2,488
Accrued liabilities (1,269)
Current income tax obligations 328 (4,067)
Postretirement benefits other than pensions 33 452
Payments against closed store accrual (717) (1,161)
Issuance of shares as compensation for professional services 17 3
Other liabilities (454) (454)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,194 6,898
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (15,697) (6,994)
Proceeds from the disposition of real property 993
- -------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (14,704) (6,994)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement 7,000 1,000
Purchase of treasury stock (6,220) (721)
Issuance of shares under directors' stock plan 134 126
Exercise of stock options 12,814 2,591
Cash dividends paid (4,551) (2,113)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,177 883
- -------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,333) 787
Cash and cash equivalents:
Beginning of period 6,914 3,891
- -------------------------------------------------------------------------------------
End of period $4,581 $4,678
=====================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $136 $887
Income taxes $3,497 $7,450
=====================================================================================
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hancock Fabrics,
Inc. ("Hancock" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. The statements do reflect all adjustments (consisting of only normal
recurring entries), which are, in the opinion of management, necessary for a
fair presentation of financial position in conformity with generally accepted
accounting principles. The statements should be read in conjunction with the
Notes to the Consolidated Financial Statements for the fiscal year ended
February 3, 2002 incorporated into the Company's Annual Report on Form 10-K.
The results of operations for the thirteen and thirty-nine week periods are not
necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2: 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.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
- -----------------------------------------------------------------------------------------------------------------
(in thousands, except for share and Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------------------------
per share amounts) November 3, October 28, November 3, October 28,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings $5,806 $3,728 $11,082 $6,806
=========== =========== =========== ===========
Weighted average number of common shares outstanding
during period 17,842,533 16,891,489 17,826,394 16,676,279
=========== =========== =========== ===========
Basic earnings per share $0.33 $0.22 $0.62 $0.41
=========== =========== =========== ===========
Diluted earnings per share:
Net earnings $5,806 $3,728 $11,082 $6,806
=========== =========== =========== ===========
Weighted average number of common shares outstanding
during period 17,842,533 16,891,489 17,826,394 16,676,279
Common stock equivalents 516,155 306,145 639,166 275,004
Contingently issuable shares 414,347 100,052 411,220 0
----------- ----------- ----------- -----------
18,773,035 17,297,686 18,876,780 16,951,283
=========== =========== =========== ===========
Diluted earnings per share $0.31 $0.22 $0.59 $0.40
=========== =========== =========== ===========
Weighted average common stock equivalents not included in EPS
because the effect would be anti-dilutive 449,964 0 237,965 98,335
=========== =========== =========== ===========
7
NOTE 3: RESERVE FOR STORE CLOSINGS
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 November 3, 2002, the total reserve balance included in current and
noncurrent liabilities was $2,290,000 which represents the present value of the
future net lease obligations required for the locations which have been closed.
The 2002 activity in the reserve is as follows (in thousands):
Imputed Payments on
February 3, 2002 Interest Reserve November 3, 2002
---------------- ------- ----------- -----------------
Lease Obligations $2,884 123 (717) $2,290
================ ======== ============ =================
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets ceases upon adoption of this Statement. The Company
implemented SFAS No. 142 on February 4, 2002. Therefore, annual goodwill
amortization expense of $383,000 will not recur; however, if the value of such
goodwill is deemed impaired, a charge to earnings will be recorded for the
impairment. An impairment test was performed, and no impairment was noted as of
the date of implementation.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------- -------------------------
November 3, October 28, November 3, October 28,
2002 2001 2002 2001
---------------------------------------------------
Reported Net Income $5,806 $3,728 $11,082 $6,806
Add Back: Goodwill Amortization
(net of tax) - 60 - 180
---------------------------------------------------
Adjusted Net Income $5,806 $3,788 $11,082 $6,986
===================================================
Basic Earnings Per Share:
Reported Net Income $0.33 $0.22 $0.62 $0.41
Goodwill Amortization - 0.00 - 0.01
------------------------------------- -------------
Adjusted Basic Earnings Per Share $0.33 $0.22 $0.62 $0.42
========================= =========================
Diluted Earnings Per Share:
Reported Net Income $0.31 $0.22 $0.59 $0.40
Goodwill Amortization - 0.00 - 0.01
------------------------- -------------------------
Adjusted Diluted Earnings Per Share $0.31 $0.22 $0.59 $0.41
8
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of, but retains the
fundamental provision of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The Statement requires that whenever
events or changes in circumstances indicate that a long-lived asset's carrying
value may not be recoverable, the asset should be tested for recoverability. The
Statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost to
sell. The Company adopted SFAS No. 144 on February 4, 2002 and it did not have a
material effect on its financial statements upon adoption.
Pronouncements Not Yet Adopted
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires that obligations associated with the retirement
of a tangible long-lived asset be recorded as a liability when those obligations
are incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an asset retirement obligation
("ARO"), an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Statement will be effective for
financial statements for fiscal years beginning after June 15, 2002. The Company
does not believe that the adoption of this Statement will have a material impact
on its financial statements.
In May 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April
2002. This Statement eliminates an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, and it eliminates the
treatment of early extinguishments of debt as extraordinary items. The
provisions of this Statement related to the rescission of SFAS 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions related to
SFAS 13 shall be effective for transactions occurring after May 15, 2002. All
other provisions of this Statement shall be effective for financial statements
issued on or after May 15, 2002. The Company does not believe that adoption of
this statement will have a material impact on its financial statements.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (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)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment as provided under Issue 94-3. This Statement also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe adoption of
the provisions of this Statement will have a material impact on its financial
statements.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Historically, cash flow from operations has been sufficient to finance the
expansion and operation of Hancock's business. Hancock's principal capital
requirements are for the financing of inventories and, to a lesser extent, for
capital expenditures relating to its store locations and its warehouse and
distribution facility. Funds for such purposes are generated from Hancock's
operations and, if necessary, supplemented by borrowings from commercial
lenders. In addition to cash dividends, Hancock has historically used excess
cash and, if necessary, borrowings from commercial lenders to purchase treasury
stock as market and financial conditions dictate. Hancock opened 7 stores and
closed 10 stores during the thirteen weeks ended November 3, 2002, resulting in
a total of 433 stores at quarter end.
On May 7, 2002, Hancock announced the acquisition of a 473,000 square foot
warehouse/distribution facility on 64 acres north of the Tupelo headquarters for
$7.7 million. Initially, this facility will be utilized to stock, allocate and
distribute merchandise groups that require special handling, such as
foam/batting, seasonal products and home accents, as well as a growing
cross-docking operation.
During the thirty-nine weeks ended November 3, 2002, net earnings of $11.1
million, together with $12.8 million provided through the exercise of stock
options and $7 million in borrowings, were used to fund $14.0 million in
additions to property and equipment, a $12.7 million seasonal build-up of
inventory, treasury stock purchases totaling $6.2 million and cash dividends of
$4.6 million. At November 3, 2002, the Company had $7 million in debt, or 6% of
total capitalization, compared to $17 million, or 16% of total capitalization at
October 28, 2001.
RESULTS OF OPERATIONS
Thirteen weeks ended November 3, 2002 compared with thirteen weeks ended October
28, 2001
Net earnings were $5.8 million, or $.31 per diluted share, compared with $3.7
million, or $.22 per diluted share, in the same period of the prior year.
Increased sales, a higher gross margin and lower expenses as a percentage of
sales contributed to the earnings improvement.
Sales increased to $112.9 million from $103.8 million in last year's third
quarter, as the result of an increase of 6.3% in comparable store sales. Sales
benefited from the continued repositioning of our store base and the
remerchandising of our product mix, which has led to higher sales in the home
decorating segment of our business. The store repositioning strategy has
consisted of closing smaller, low potential stores that were often located too
closely together, while opening or acquiring larger stores spaced farther apart
to better support an expanded product offering within our core merchandise
competency. Gross margins increased to 50.7% from 50.2% last year due to a LIFO
credit resulting from product cost deflation.
In the third quarter of 2002, total selling, general and administrative expenses
as a percentage of sales declined to 41.3% from 42.9% in the third quarter of
2001 due to improved labor controls in stores, expense leverage from comparable
store sales increases and a gain of $691 thousand (pretax) on the sale of real
estate. Such improvements were partially offset by higher pension costs
resulting from the three-year weakness in investment returns and rising health
medical insurance expense.
Interest expense decreased due to a reduced level of outstanding debt and lower
interest rates throughout the quarter.
10
Thirty-nine weeks ended November 3, 2002 compared with thirty-nine weeks ended
October 28, 2001
Net earnings were $11.1 million, or $.59 per diluted share, compared with $6.8
million, or $.40 per diluted share, in the same period of the prior year.
Increased sales, a higher gross margin and lower expenses as a percentage of
sales contributed to the earnings improvement.
Sales increased to $309.7 million from $288.2 million in 2001's first three
quarters as the result of an increase of 6.9% in comparable store sales. Sales
benefited from the continued repositioning of our store base and the
remerchandising of our product mix, which has led to higher sales in the home
decorating segment of our business. The store repositioning strategy has
consisted of closing smaller, low potential stores that were often located too
closely together, while opening or acquiring larger stores spaced farther apart
to better support an expanded product offering within our core merchandise
competency. Gross margins increased to 50.8% from 50.0% last year due to a LIFO
credit resulting from product cost deflation, additions to the merchandise mix
of higher-margin home decorating products and a more effective
marketing/advertising program.
In the first three quarters of 2002, total selling, general and administrative
expenses as a percentage of sales decreased to 43.8% from 44.5% in the same
period of 2001 due to leverage from comparable store sales increases and a gain
of $691 thousand (pretax) on the sale of real estate in the third quarter. Such
improvements were partially offset by higher pension costs resulting from the
three-year weakness in investment returns and rising employee health insurance.
Interest expense decreased due to a reduced level of outstanding debt and lower
interest rates throughout the thirty-nine weeks of 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the recorded amount of assets and liabilities at the
date of the financial statements and revenues and expenses during the period.
Significant accounting policies employed by the Company, including the use of
estimates and assumptions, are presented in the Notes to Consolidated Financial
Statements incorporated into the Company's Annual Report on Form 10-K.
Management bases its estimates on its historical experience, together with other
relevant factors, in order to form the basis for making judgments, which will
affect the carrying values of assets and liabilities. On an ongoing basis,
management evaluates its estimates and makes changes to carrying values as
deemed necessary and appropriate. The Company believes that estimates related to
the following areas involve a higher degree of judgment and/or complexity:
Inventories are valued at the lower of cost or market; cost is determined
by the LIFO method. As with other retailers, it is not practical to perform
physical inventory counts for all stores on the last day of a period;
therefore, certain assumptions must be made in order to record cost of
sales and the related change in inventory for the period of time from each
store's most recent physical count to the end of the period. Although,
under certain circumstances, actual results could prove to be materially
different from the estimates used, Hancock has consistently used the same
methodology throughout its existence with dependable results, and
management believes that it results in inventory valued at the lower of
cost or market.
Worker's compensation, general liability and employee health insurance
programs are largely self-insured. It is the Company's policy to record its
self-insurance liabilities using estimates of claims incurred but not yet
11
reported or paid, based on historical trends and other relevant factors.
Actual results can vary from estimates for many reasons including, among
others, future inflation rates, claims settlement patterns, litigation
trends and legal interpretations.
Store closing reserves are based on estimates of net lease obligations and other
store closing costs, including assumptions about anticipated future subleases of
properties. If real estate leasing markets change, the reserves will have to be
adjusted.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet financing arrangements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has arrangements with two banks that provide for up to $10 million
in letters of credit. At November 3, 2002, Hancock had commitments under these
arrangements of $3,520,000 to guarantee payment of potential workers'
compensation claims and $2,441,000 on issued letters of credit, which support
purchase orders for merchandise to be imported. Also, Hancock leases its retail
fabric store locations under operating leases expiring at various dates through
2022.
The Company has no standby repurchase obligations or guarantees of other
entities' debt.
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 Federal and State minimum wage requirements; accordingly, any increases will
affect the Company. In addition, payroll taxes, employee benefits and other
employee costs continue to increase. Health insurance costs, in particular,
continue to rise at an unsettling rate in the United States each year, and
higher employer contributions to the Company's pension plan have been necessary
recently in light of weaker investment returns. Costs of leases for new store
locations remain stable, but renewal costs of older leases continue to increase.
Property and casualty insurance premiums are now increasing substantially after
several years of soft pricing in the insurance industry. Hancock believes the
practice of maintaining adequate operating margins through a combination of
price adjustments and cost controls, careful evaluation of occupancy needs and
efficient purchasing practices are the most effective tools for coping with
increased costs and expenses.
Inflation is one of the key factors used in the calculation of the LIFO charge
or credit to Cost of Sales. A decrease in the PPI resulted in a LIFO credit in
2002. In 2001, an increase in the producer price indices (PPI) 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.
12
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets ceases upon adoption of this statement. The Company
implemented SFAS No. 142 on February 4, 2002. Therefore, annual goodwill
amortization expense of $383,000 will not recur; however, if the value of such
goodwill is deemed impaired, a charge to earnings will be recorded for the
impairment. An impairment test was performed, and no impairment was noted as of
November 3, 2002.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------- ------------------------
November 3, October 28, November 3, October 28,
2002 2001 2002 2001
--------------------------------------------------
Reported Net Income $5,806 $3,728 $11,082 $6,806
Add Back: Goodwill Amortization
(net of tax) - 60 - 180
------------------------- ------------------------
Adjusted Net Income $5,806 $3,788 $11,082 $6,986
==================================================
Basic Earnings Per Share:
Reported Net Income $0.33 $0.22 $0.62 $0.41
Goodwill Amortization - 0.00 - 0.01
------------------------------------- ------------
Adjusted Basic Earnings Per Share $0.33 $0.22 $0.62 $0.42
==================================================
Diluted Earnings Per Share:
Reported Net Income $0.31 $0.22 $0.59 $0.40
Goodwill Amortization - 0.00 - 0.01
------------------------- ------------------------
Adjusted Diluted Earnings Per Share $0.31 $0.22 $0.59 $0.41
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of, but retains the
fundamental provision of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived asset's carrying
value may not be recoverable, the asset should be tested for recoverability. The
statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost to
sell. The Company adopted SFAS No. 144 on February 4, 2002 and it did not have a
material effect on its financial statements upon adoption.
Pronouncements Not Yet Adopted
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 requires that obligations associated with the retirement of
a tangible long-lived asset be recorded as a liability when those obligations
are incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an asset retirement obligation
("ARO"), an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
13
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Statement will be effective for
financial statements for fiscal years beginning after June 15, 2002. The Company
does not believe that the adoption of this statement will have a material impact
on its financial statements.
In May 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April
2002. This statement eliminates an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, and it eliminates the
treatment of early extinguishments of debt as extraordinary items. The
provisions of this Statement related to the rescission of SFAS 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions related to
SFAS 13 shall be effective for transactions occurring after May 15, 2002. All
other provisions of this Statement shall be effective for financial statements
issued on or after May 15, 2002. The Company does not believe that adoption of
this statement will have a material impact on its financial statements.
In July 2002, the FASB issued SFAS 146 Accounting for Costs Associated with Exit
or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (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)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment as provided under Issue 94-3. This Statement also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe adoption of
the provisions of this statement will have a material impact on its financial
statements.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, financial items and
results, plans for future expansion, store closures and other business
development activities, capital spending or financing sources, capital structure
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, 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, disruption in the Company's data processing services, and
competitive changes, including, but not limited to, liquidations of inventory in
Hancock's markets in connection with a competitor's store closings or mass
liquidations of old inventory.
Item 3: Quantitative and Qualitative Disclosures about Market Risks
The Company does not hold derivative financial or commodity instruments at
November 3, 2002. The Company is exposed to financial market risks, including
14
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 none is expected in the foreseeable
future.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Hancock's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule13a-14(c)) as of
a date within 90 days of the filing date of this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that Hancock's disclosure controls and procedures
are effective to ensure that material information relating to the Company
and it's consolidated subsidiaries is made known to such officers by
others within these entities, particularly during the period this
quarterly report was prepared, in order to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Controls. There have not been any significant
changes in Hancock's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION:
Item 6: Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements 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.
HANCOCK FABRICS, INC.
(Registrant)
By:/s/ Bruce D. Smith
------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
December 17, 2002
15
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Larry G. Kirk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hancock Fabrics,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date December 17, 2002
/s/ Larry G Kirk
- -------------------------------------------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer
16
Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Bruce D. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hancock Fabrics,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date December 17, 2002
/s/ Bruce D. Smith
- -------------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
17
Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Hancock Fabrics, Inc.,
I, Larry G. Kirk, Chief Executive Officer of Hancock Fabrics, Inc., certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Hancock Fabrics, Inc.
Date: December 17, 2002 /s/ Larry G. Kirk
---------------------------
Larry G. Kirk
Chairman of the Board
and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Hancock Fabrics, Inc.
I, Bruce D. Smith, Chief Financial Officer of Hancock Fabrics, Inc., certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Hancock Fabrics, Inc.
Date: December 17, 2002 /s/ Bruce D. Smith
-------------------------------
Bruce D. Smith
Senior Vice President and Chief
Financial Officer
18