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 May 4, 2003
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 Exchange Act Rule 12b-2). 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 May 4, 2003, the registrant had outstanding an aggregate of 18,417,425
shares of common stock, $.01 par value.
INDEX
Part I. Financial Information:
Page Numbers
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of May 4, 2003 and
February 2, 2003 3
Consolidated Statement of Earnings for the Thirteen
Weeks Ended May 4, 2003 and May 5, 2002 4
Consolidated Statement of Shareholder's Equity for
the Thirteen Weeks May 4, 2003 5
Consolidated Statement of Cash Flows for the Thirteen
Weeks Ended May 4, 2003 and May 5, 2002 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risks 14
Item 4. Controls and Procedures 14
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Securityholders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Certification of the Chief Executive Officer 16
Certification of the Chief Financial Officer 17
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(unaudited)
- --------------------------------------------------------------------------------
(in thousands, except for share and per share amounts) May 4, February 2,
2003 2003
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $3,928 $4,589
Receivables, less allowance for doubtful accounts 1,040 1,100
Inventories 146,106 144,061
Prepaid expenses 1,389 2,570
- -------------------------------------------------------------------------------
Total current assets 152,463 152,320
Property and equipment, at depreciated cost 43,976 41,853
Deferred tax asset 4,465 4,465
Pension payment in excess of required contribution 18,049 18,829
Goodwill 4,480 4,480
Other assets 3,479 3,563
- -------------------------------------------------------------------------------
Total assets $226,912 $225,510
===============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $40,460 $44,357
Accrued liabilities 16,300 21,039
Deferred tax liabilities 3,078 3,078
Income taxes 4,269 5,089
- -------------------------------------------------------------------------------
Total current liabilities 64,107 73,563
Long-term debt obligations 17,000 0
Postretirement benefits other than pensions 22,077 21,976
Reserve for store closings 740 878
Other liabilities 4,676 4,862
- -------------------------------------------------------------------------------
Total liabilities 108,600 101,279
- -------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares
authorized; 31,501,476 and 31,481,715 issued and
outstanding, respectively 315 315
Additional paid-in capital 64,181 63,805
Retained earnings 210,846 208,659
Treasury stock, at cost, 13,084,051 and 12,431,937
shares held, respectively (151,747) (142,545)
Deferred compensation on restricted stock
incentive plan (5,283) (6,003)
- -------------------------------------------------------------------------------
Total shareholders' equity 118,312 124,231
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $226,912 $225,510
===============================================================================
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
- --------------------------------------------------------------------------------
--------------------------------
(in thousands, except Thirteen Weeks Ended
--------------------------------
per share amounts) May 4, May 5,
2003 2002
- --------------------------------------------------------------------------------
Sales $107,636 $104,054
Cost of goods sold 52,897 51,519
- --------------------------------------------------------------------------------
Gross profit 54,739 52,535
- --------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 46,820 45,379
Depreciation and amortization 1,452 1,332
Interest expense 94 60
Interest income (17) (31)
- --------------------------------------------------------------------------------
Total operating and interest expenses 48,349 46,740
- --------------------------------------------------------------------------------
Earnings before income taxes 6,390 5,795
Income taxes 2,319 2,104
- ------------------------------------------------------------------------------
Net earnings and comprehensive income $4,071 $3,691
================================================================================
Earnings per share
Basic $0.23 $0.21
Diluted $0.22 $0.20
================================================================================
Weighted average shares outstanding
Basic 17,790 17,594
Diluted 18,684 18,828
================================================================================
Dividends per share $0.10 0.08
================================================================================
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
number of shares) Common Stock Additional Treasury Stock Total
----------------------- Paid-in Retained ------------------ Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- --------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks ended May 4, 2003
- --------------------------------------------------------------------------------------------------------------------------------
Balance February 2, 2003 31,481,715 $315 $63,805 $208,659 (12,431,937) ($142,545) ($6,003) $124,231
Net earnings 4,071 4,071
Cash dividend - $.10 per
share on a quarterly basis (1,884) (1,884)
Cancellation of restricted stock (26,100) (216) 216
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 30 504 534
Purchase of treasury stock (652,114) (9,202) (9,202)
Issurance of shares as compensation
for professional services 497 7 7
Issuance of shares under directors'
stock plan 3,114 45 45
Exercise of stock options 42,250 510 510
- --------------------------------------------------------------------------------------------------------------------------------
Balance May 4, 2003 31,501,476 $315 $64,181 $210,846 (13,084,051) ($151,747) ($5,283) $118,312
================================================================================================================================
5
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------
(in thousands)
Thirteen Weeks Ended
----------------------------
May 4, May 5,
2003 2002
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $4,071 $3,691
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities
Depreciation and amortization 1,452 1,332
Amortization of deferred compensation on
restricted stock incentive plan 504 515
Interest expense on closed store accrual 34 43
(Increase) decrease in assets
Receivables and prepaid expenses 1,241 (84)
Inventory at current cost (2,045) 3,087
Pension payment in excess of required contribution 780 437
Other noncurrent assets 84 75
Increase (decrease) in liabilities
Accounts payable (3,897) (6,852)
Accrued liabilities (4,739) (4,028)
Current income tax obligations (790) (3,294)
Postretirement benefits other than pensions 101 (5)
Payments against closed store accrual (172) (217)
Issuance of shares as compensation for professional
services 7 8
Other liabilities (186) (30)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,555) (5,322)
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (3,575) (2,083)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,575) (2,083)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement 17,000
Purchase of treasury stock (9,202) (728)
Issuance of shares under directors' stock plan 45 44
Exercise of stock options 510 9,930
Cash dividends paid (1,884) (1,500)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,469 7,746
- -------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (661) 341
Cash and cash equivalents:
Beginning of period 4,589 6,914
- -------------------------------------------------------------------------------------
End of period $3,928 $7,255
=====================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $34 $16
Income taxes $3,109 $3,105
=====================================================================================
6
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2, 2003 incorporated into the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week period is not necessarily
indicative of the results to be expected for the full fiscal year.
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 Hancock'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 SFAS No.
123, Accounting for Stock-Based Compensation, is presented below:
May 4, May 5,
2003 2002
---------- ----------
Net earnings, as reported $ 4,071 $ 3,691
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (162) (110)
---------- ----------
Pro forma net earnings $ 3,909 $ 3,581
========== ==========
Earnings per share:
Basic - as reported $ .23 $ .21
========== ==========
Basic - pro forma $ .22 $ .20
========== ==========
Diluted - as reported $ .22 $ .20
========== ==========
Diluted - pro forma $ .21 $ .19
========== ==========
7
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
-----------------------
per share amounts) May 4, May 5,
2003 2002
- --------------------------------------------------------------------------
Basic earnings per share:
Net earnings $4,071 $3,691
=========== ===========
Weighted average number of common shares
outstanding during period 17,790,199 17,594,178
=========== ===========
Basic earnings per share $0.23 $0.21
=========== ===========
Diluted earnings per share:
Net earnings $4,071 $3,691
=========== ===========
Weighted average number of common shares
outstanding during period 17,790,199 17,594,178
Stock options 443,548 769,788
Restricted stock 450,234 464,400
----------- -----------
18,683,981 18,828,366
=========== ===========
Diluted earnings per share $0.22 $0.20
=========== ===========
Weighted average common stock equivalents
not included in EPS because the effect
would be anti-dilutive 444,168 464,400
=========== ===========
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 May 4, 2003, the total reserve balance included in current and noncurrent
liabilities was $1,611,000, which represents the present value of the future net
lease obligations required for the locations which have been closed. The 2003
activity in the reserve is as follows (in thousands):
February 2, Additions to Imputed Payments May 4,
2003 Reserve Interest on Reserve 2003
----------- ------------ -------- ---------- -------
Lease Obligations 1,749 0 34 (172) 1,611
=========== ============ ======== ========== =======
8
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
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. Hancock
adopted SFAS 143 as of February 3, 2003, and there was no material impact on its
financial statements.
In May 2002, the FASB issued SFAS No. 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. Hancock adopted SFAS 145 as of
February 3, 2003, and there was no material impact on its financial statements.
In July 2002, the FASB issued SFAS No. 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. Hancock does not believe adoption of the
provisions of this statement will have a material impact on its financial
statements.
During January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN 46 provides guidance for companies having ownership of
variable interest entities, typically referred to as special purpose entities,
in determining whether to consolidate such variable interest entities. FIN 46
has immediate applicability for variable interest entities created after January
31, 2003 or interests in variable interest entities obtained after that date.
For interests in variable interest entities obtained prior to February 1, 2003,
FIN 46 becomes effective on July 1, 2003. Because Hancock does not hold an
interest in an entity governed by the pronouncement, Hancock does not believe
the adoption will have a significant effect on its consolidated financial
position or results of operations.
During 2002, the EITF released EITF Issue 02-16, "Accounting by a Customer
(Including a Reseller) for Cash Consideration Received From a Vendor." The issue
addresses the accounting treatment of vendor allowances. We are in the process
of evaluating the impact of EITF Issue 02-16. However, the application of EITF
Issue 02-16 is not expected to have a material impact on our 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 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 6 stores during the thirteen weeks ended May 4, 2003, resulting in a
total of 431 stores at quarter end.
During the thirteen weeks ended May 4, 2003, net earnings of $4.1 million and
borrowings of $17.0 million were used to fund a $2.0 million increase in
inventory, $9.2 million of treasury stock repurchased, $1.9 million in cash
dividends, an $8.6 million decrease in accounts payable and accrued liabilities
and $3.6 million in additions to property and equipment. At May 4, 2003, the
Company had outstanding debt of $17 million, or 12.6% of total capitalization at
May 4, 2003, compared to no debt outstanding at May 5, 2002.
RESULTS OF OPERATIONS
Thirteen weeks ended May 4, 2003 compared to thirteen weeks ended May 5, 2002
Net earnings were $4.1 million, or $.22 per diluted share, compared with $3.7
million, or $.20 per diluted share, in the same period of the prior year.
Earnings were influenced by higher sales and a higher gross margin as a
percentage of sales than last year.
Sales increased to $107.6 million from $104.0 million in the first quarter of
last year, as the result of an increase of 4.2% in comparable store sales.
Comparable store sales benefited from the continued repositioning of the store
base, the remerchandising of Hancock's product mix and efforts to appeal to a
more diverse customer base. Gross margins increased to 50.9% from 50.5% last
year as a result of the shift in the merchandise mix more towards higher-margin
home decorating products.
Selling, general and administrative expenses as a percentage of sales were 43.5%
compared to 43.6% in the first quarter of 2002. Expense leverage from comparable
store sales increases was offset partially by higher costs resulting from the
start-up of certain activities at the new distribution center. As Hancock
continues to transfer its warehousing and distribution activities to the new
facility over the next year, costs will tend to be higher than the prior
comparable periods due to some duplication of expenses. In addition, employee
health insurance, general business insurance and pension costs were higher in
this year's first quarter.
Interest expense was higher due to average debt totaling $7 million during this
year's first quarter versus no debt outstanding in the first quarter of 2002.
10
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
duzring the period. Significant accounting policies employed by Hancock,
including the use of estimates and assumptions, are presented in the Notes to
Consolidated Financial Statements. 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. Hancock believes that
estimates related to the following areas involve a higher degree of judgment
and/or complexity:
Inventories. 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 provides an inventory valuation which results
in carrying inventory at the lower of cost or market.
Insurance Reserves. Workers' compensation, general liability and employee
medical insurance programs are largely self-insured. It is Hancock's policy
to record its self-insurance liabilities using estimates of claims incurred
but not yet 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, claim settlement patterns, litigation
trends and legal interpretations.
Store Closing Reserves. 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.
Pension and Postretirement Benefit Obligations. The value of assets and
liabilities associated with pension and postretirement benefits is
determined on an actuarial basis. These values are affected by the market
value of plan assets, estimates of the expected return on plan assets and
the discount rates. Hancock determines the discount rates using changes in
the rates of high quality, fixed income investments. Actual changes in the
fair market value of plan assets, differences between the actual return and
the expected return on plan assets and changes in the discount rate used
affect the amount of pension expense recognized.
Valuation of Long-Lived Assets. Hancock periodically reviews the net
realizable value of long-lived assets whenever events and circumstances
indicate impairment has occurred. In the event that the carrying values of
long-lived assets are in excess of estimated gross future cash flows for
those assets, the values of the assets are written down to a level
commensurate with a discounted cash flow analysis of the estimated future
cash flows.
Goodwill. Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired. In accordance with the provisions of
SFAS 142, Hancock ceased amortizing goodwill effective February 4, 2002. On
an annual basis, the fair value of Hancock's reporting units are compared
with their carrying values. If the carrying value of a reporting unit
exceeds its fair value, Hancock would recognize the difference as an
impairment charge. The fair value of the reporting unit is estimated using
the discounted present value of future cash flows.
11
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet financing arrangements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has an arrangement to secure up to $5 million in letters of credit.
At May 4, 2003, Hancock had commitments of $5.1 million on issued letters of
credit which support purchase orders for merchandise to be imported. Hancock
also has a $3.5 million standby letter of credit to guarantee payment of
potential future workers' compensation claims. 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 Hancock. 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 Hancock'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. In the first quarter of 2002, increases in the PPI,
which offset the effect of inventory reductions, resulted in no LIFO charge. A
flat trend in product costs in the first quarter of 2003 resulted in no changes
in the LIFO reserve.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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. Hancock
does not believe that the adoption of this statement will have a material impact
on its financial statements.
12
In May 2002, the FASB issued SFAS No. 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. Hancock does not believe that
adoption of this statement will have a material impact on its financial
statements.
In July 2002, the FASB issued SFAS No. 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. Hancock does not believe adoption of the
provisions of this statement will have a material impact on its financial
statements.
During January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN 46 provides guidance for companies having ownership of
variable interest entities, typically referred to as special purpose entities,
in determining whether to consolidate such variable interest entities. FIN 46
has immediate applicability for variable interest entities created after January
31, 2003 or interests in variable interest entities obtained after that date.
For interests in variable interest entities obtained prior to February 1, 2003,
FIN 46 becomes effective on July 1, 2003. Because Hancock does not hold an
interest in an entity governed by the pronouncement, Hancock does not believe
the adoption will have a significant effect on its consolidated financial
position or results of operations.
FORWARD-LOOKING STATEMENTS
From time to time, Hancock 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, Hancock notes that a variety of factors could cause Hancock's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in Hancock's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of Hancock'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 Hancock's suppliers and/or
its distribution center and its stores, disruption in Hancock'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 need to dispose of old inventory.
13
Item 3: Quantitative and Qualitative Disclosures about Market Risks
Hancock does not hold derivative financial or commodity instruments at May 4,
2003. Hancock is exposed to financial market risks, including changes in
interest rates. All borrowings under the Hancock'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 Hancock's
results. All of the Hancock's business is transacted in U. S. dollars and,
accordingly, foreign exchange rate fluctuations have never had a significant
impact on the Hancock, and they are not expected to in the foreseeable future.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, Hancock carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of Hancock's
disclosure controls and procedures (as defined in Rules 13a-14((c) and 15d-1(c)
under the Securities Exchange Act of 1934). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the date of
their evaluation, Hancock's disclosure controls and procedures are effective in
timely alerting them to material information required to be included in
Hancock's periodic SEC reports. There have been no significant changes in
Hancock's internal controls, or in factors that could significantly affect these
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
PART II. OTHER INFORMATION:
Item 4: Submission of Matters to a Vote of Securityholders
(a) Registrant's Annual Meeting of Shareholders was held on June 12, 2003.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Act of 1934; there was no solicitation in opposition to the
management's nominees as listed in the proxy statement, and such nominees
were elected.
(c) The vote in the uncontested election of the nominees for the Board of
Directors elected to serve until 2006 was as follows: 16,554,364 votes cast
for and 201,004 votes withheld for Don L. Fruge' and 16,492,542 votes cast
for and 262,826 votes withheld for Larry G. Kirk.
The vote in the proposal to approve the cash compensation plans, as to the
named executive officers was as follows: 16,328,249 votes cast for, 363,664
votes withheld and 63,455 votes abstain.
(d) Not applicable.
14
Item 6: Exhibits and Reports on Form 8-K
(a)
10.1 Amended and Restated 1995 Restricted and Deferred Stock Unit Plan.
99.1 Certification of the Chief Executive Officer.
99.2 Certification of the Chief Financial Officer.
(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 Smith
-----------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
June 18, 2003
15
Certification of Chief Executive Officer
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 officer and I am 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 officer 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.
6. The registrant's other certifying officer 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: June 18, 2003
/s/ Larry G. Kirk
- ------------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer
16
Certification of Chief Financial Officer
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 annual 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 officer and I am 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 officer 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.
6. The registrant's other certifying officer and I have indicated in this
annual 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: June 18, 2003
/s/ Bruce D. Smith
- ------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
17
Exhibit 99.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1850
I, Larry G. Kirk, certify pursuant to 18 U.S.C. Section 1850, that: (1) The
quarterly report on Form 10-Q of Hancock Fabrics, Inc. ("Hancock") for the
quarter ended May 4, 2003 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 the quarterly report fairly presents, in all material respects, the
financial condition and results of operations of Hancock.
Date: June 18, 2003
/s/ Larry G. Kirk
---------------------------
Larry G. Kirk
Chairman of the Board
and Chief Executive Officer
18
Exhibit 99.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1850
I, Bruce D. Smith, certify pursuant to 18 U.S.C. Section 1850, that: (1)
The quarterly report on Form 10-Q of Hancock Fabrics, Inc. ("Hancock") for the
quarter ended May 4, 2003 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 the quarterly report fairly presents, in all material respects, the
financial condition and results of operations of Hancock.
Date: June 18, 2003
/s/ Bruce D. Smith
---------------------------
Bruce D. Smith
Senior Vice President
and Chief Financial Officer
19
Exhibit 10.1
HANCOCK FABRICS, INC.
AMENDED AND RESTATED
1995 RESTRICTED STOCK
AND
DEFERRED STOCK UNIT
PLAN
TABLE OF CONTENTS
Article Page
- ------- ----
ARTICLE I
INTRODUCTION...................................................................1
1.1 Name of Plan.......................................................1
1.2 Purpose of Plan....................................................1
1.3 "Top Hat" Pension Benefit Plan.....................................1
1.4 Funding............................................................1
1.5 Effective Date.....................................................2
1.6 Administration.....................................................2
1.7 SCOPE AND DURATION OF THE PLAN.....................................3
ARTICLE II
DEFINITIONS AND CONSTRUCTION...................................................3
2.1 Definitions........................................................3
2.2 Number and Gender..................................................5
2.3 Headings...........................................................5
ARTICLE III
PARTICIPATION AND ELIGIBILITY..................................................6
3.1 Participation......................................................6
3.2 Commencement of Participation......................................6
3.3 Cessation of Active Participation..................................6
ARTICLE IV
RESTRICTED STOCK...............................................................6
4.1 Restrictions.......................................................6
4.2 Removal of Restrictions............................................7
4.3 Participant's Service..............................................7
4.4 Nontransferability.................................................7
4.5 Stock Certificates.................................................7
4.6 Termination of Employment..........................................7
4.7 Retirement or Death of Participant.................................8
4.8 Adjustments........................................................8
4.9 Approval of Shareholders...........................................8
4.10 Effectiveness of Awards............................................8
4.11 Listing and Registration of Shares.................................9
4.12 Change of Control..................................................9
ARTICLE V
DEFERRALS ...................................................................9
5.1 Deferrals by Participants..........................................9
5.2 Effective Date of Deferral Agreement...............................9
5.3 Deferral Periods...................................................9
ARTICLE VI
ACCOUNTS ..................................................................10
6.1 Establishment of Bookkeeping Accounts.............................10
6.2 Subaccounts.......................................................10
6.3 Hypothetical Nature of Accounts...................................10
6.4 Vesting...........................................................10
6.5 Dividends.........................................................11
ARTICLE VII
PAYMENT OF ACCOUNT............................................................11
7.1 Timing of Distribution of Benefits................................11
7.2 Form of Payment...................................................11
7.3 Change of Control.................................................11
7.4 Designation of Beneficiaries......................................11
7.5 Unclaimed Benefits................................................11
ARTICLE VIII
DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION................12
8.1 Claims............................................................12
8.2 Claim Decision....................................................12
ARTICLE IX
MISCELLANEOUS.................................................................12
9.1 Not Contract of Employment........................................12
9.2 Non-Assignability of Benefits.....................................12
9.3 Withholding Tax...................................................13
9.4 Amendment and Termination.........................................13
9.5 No Trust Created..................................................13
9.6 Unsecured General Creditor Status of Employee.....................13
9.7 Severability......................................................14
9.8 Governing Laws....................................................14
9.9 Binding Effect....................................................14
9.10 Entire Agreement..................................................14
9.11 Funding Upon Change In Control....................................14
Hancock Fabrics, Inc.
Amended and Restated
1995 Restricted Stock and Deferred Stock Unit Plan
ARTICLE I
INTRODUCTION
1.1 Name of Plan.
Hancock Fabrics, Inc. (the "Company") hereby amends the 1995 Restricted
Stock Plan (the "Plan") by changing the name of the Plan to the Hancock
Fabrics, Inc. Amended and Restated 1995 Restricted Stock and Deferred Stock
Unit Plan.
1.2 Purpose of Plan.
The Hancock Fabrics, Inc. 1995 Restricted Stock Plan ("Plan") is intended
to provide an incentive for key employees to contribute to the growth of
the Company's business by providing opportunities for their ownership of
shares of the Company's common stock and to retain them in the employ of
the Company or its Subsidiaries. The provisions of this Plan and all
actions and transactions under and pursuant to this Plan are intended to
comply with all applicable conditions of Rule l6(b)-3 promulgated under
Section 16 of the Securities Exchange Act of 1934 ("Exchange Act") , or its
successors, with respect to persons subject to such Section ("Section 16
reporting persons") . To the extent any provision of, or action or
transaction pursuant to, this Plan fails to so comply, it shall be deemed
null and void to the extent permitted by law and deemed advisable by the
Plan administrators.
Additional purposes of the Plan are to provide certain eligible employees
of the Company the opportunity to defer elements of their compensation
which might not otherwise be deferrable under the other Company plans.
1.3 "Top Hat" Pension Benefit Plan.
The deferred stock unit portion of the Plan is an "employee pension benefit
plan" within the meaning of ERISA. The plan is maintained, however, for a
select group of management or highly-compensated employees and therefore,
it is intended that the Plan is exempt from Parts 2, 3 and 4 of Title 1 of
ERISA. The Plan is not intended to qualify under Code section 401 (k).
1.4 Funding.
The Plan is unfunded.
1.5 Effective Date.
The Plan as herein amended is effective as of the date of execution hereof.
1.6 Administration.
The Board shall appoint a Restricted Stock and Deferred Stock Unit
Committee, which shall consist of two or more members of the Board who are
not eligible to receive awards under the Plan and who shall otherwise be
"disinterested" as defined in the regulations promulgated under Section 16
of the Exchange Act. The Committee may be the Board's Management Review and
Compensation Committee. The Committee shall be responsible for the general
operation and administration of the Plan and for carrying out the
provisions thereof. The Committee may delegate to others certain aspects of
the management and operational responsibilities of the Plan including the
employment of advisors and the delegation of ministerial duties to
qualified individuals, provided that such delegation is in writing. The
Committee shall have full authority in its discretion, but subject to the
express provisions of the Plan: to determine the key employees to whom, and
the time or times at which, Shares shall be awarded; to determine the
number of Shares to be covered by each award; to determine the terms,
conditions and restrictions of the respective award agreements (which need
not be identical), of any legend on any certificate representing Shares
awarded pursuant to the Plan, and of any other instrument or document
relating to the Plan, except that each such document respecting awards to
Section 16 reporting persons shall be written so as to comply with Section
16 of the Exchange Act; to determine whether and to what extent adjustments
shall be made pursuant to the provisions of Paragraph 12; to interpret the
Plan; to prescribe, amend and rescind rules and regulations relating to the
Plan; and to make any other determinations, deemed necessary to or
advisable for the administration of the Plan. The Committee may delegate
all or any part of such authority to members of the Board who are not
"disinterested" as defined in the regulations promulgated under Section 16
of the Exchange Act in the case of awards to persons who are not Section 16
reporting persons. All determinations, decisions, interpretations and other
actions of the Committee and the Board shall be conclusive and binding upon
all persons. No member of the Committee or of the Board shall have any
liability in respect of anything done or omitted to be done by such member
or any other member, except for a member's own willful misconduct or as
expressly provided for by law. The Company shall indemnify, hold harmless,
and defend the members of the Committee against any and all claims, losses,
damages, expenses, including attorney's fees, incurred by them, and any
liability, including any amounts paid in settlement with their approval,
arising from their action or failure to act, except when the same is
judicially determined to be attributable to their gross negligence or
willful misconduct.
2
1.7 SCOPE AND DURATION OF THE PLAN.
Shares may be awarded from time to time during the life of the Plan. Unless
sooner terminated pursuant to Section 9.4, the Plan shall terminate on
December 5, 2005 and thereafter no Shares shall be awarded under the Plan.
Termination of the Plan shall have no effect on awards then outstanding.
The aggregate number of Shares that may be issued or reserved for issuance
pursuant to awards under the Plan (including awards to Section 16 reporting
persons) shall not exceed 1,000,000 Shares (subject to adjustment as
provided in the Plan) . Awards may consist, in whole or in part, of
authorized but unissued Shares or Shares reacquired by the Company and not
reserved for any other purpose and Shares subject to any previous awards
under the Plan that are forfeited.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions.
For purposes of the Plan, the following words and phrases shall have the
respective meanings set forth below, unless their context clearly requires
a different meaning:
(a) "Account" means the bookkeeping account maintained by the Company on
behalf of each Participant pursuant to Article VI. As of any Valuation
Date, a Participant's benefit under the Plan shall be equal to the
amount credited to his Account as of such date.
(b) "Committee" means the Restricted Stock and Deferred Stock Unit
Committee as may be established by the Board, which shall administer
the Plan in accordance with Section 1.6.
(c) "Beneficiary" means the person or persons designated by the
Participant in accordance with Section 7.4.
(d) "Board" means the Board of Directors of the Company.
(e) "Change in Control" means a change of control of the Company of a
nature that would be required to be reported in response to Item 1(a)
of the Current Report on Form 8-K, as in effect on the effective date
of the Plan, pursuant to Section 13 or 15(d) of the Exchange Act;
provided that, without limitation a change of control shall be deemed
to have occurred if: (i) a third person, including a "group" as
defined in Section 13(d) (3) of the Exchange Act, becomes the
beneficial owner, directly or indirectly, of 20% or more of the
combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of
the Company; or (ii) individuals who constitute the Board as of the
effective date of the Plan ("incumbent Board") cease for any reason to
3
constitute at least two-thirds thereof, provided that any person
becoming a director subsequent to the effective date of the Plan whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least three-quarters of (or if less, all
but one of) the directors constituting the incumbent Board (other than
an election or nomination in connection with an actual or threatened
election contest relating to the election of directors of the Company,
as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) shall be, for purposes of the Plan, considered
as though such person were a member of the incumbent Board.
As used in this subsection (e), the term "person" means natural person,
corporation, partnership, joint venture, trust, government, or
instrumentality of a government.
(f) "Code" means the U.S. Internal Revenue Code of 1986, as amended.
(g) "Company" means Hancock Fabrics, Inc., a Delaware corporation, and its
successors and assigns.
(h) "Shares" means the common stock of the Company.
(i) "Deferral Agreement" means the written agreement, in the form attached
hereto as Attachment 1, entered into between the Company and a
Participant pursuant to which the Participant elects the amount of his
Deferred Stock Unit to be deferred into the Plan and the Deferral
Period, and the time of payment for such amounts.
(j) "Deferral Period" means the period of time for which a Participant
elects to defer receipt of the Deferred Stock Unit Deferrals credited
to such Participant's Account. Deferral Periods shall be measured on
the basis of whole Plan Years, beginning with the Plan Year that
commences immediately following the Plan Year for which the applicable
Deferred Stock Unit Deferrals are credited to the Participant's
Account
(k) "Deferred Stock Unit" means a unit representing the Company's
obligation to deliver or issue to a Participant one Share in
accordance with the Terms of the Plan. The Deferred Stock Unit shall
be evidenced by a certificate containing such rights, restrictions and
limitations as may be determined by the Committee.
(l) "Early Retirement" means termination of employment after having
attained age 55 and under circumstances entitling the participant to
elect immediate payment of retirement benefits under the Hancock
Fabrics, Inc. Consolidated Retirement Plan or any successor plan
thereto ("Hancock Retirement Plan").
(m) "Effective Date" means the Effective Date of this Amended and Restated
Plan: March 24, 2003.
(n) "Employee" means a person employed by the Company or any of its
subsidiaries.
4
(o) "Employment" means employment by the Company or any of its
subsidiaries.
(p) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(q) "Normal Retirement" means termination of employment after having
attained age 65 and under circumstances entitling the participant to
elect immediate payment of retirement benefits under the Hancock
Fabrics, Inc. Consolidated Retirement Plan or any successor plan
thereto ("Hancock Retirement Plan")
(r) "Participant" means an employee to whom Shares have been awarded
pursuant to the Plan.
(s) "Plan Year" means the twelve-consecutive month period commencing
January 1 of each year ending on December 31.
(t) "Retirement Date" means the date the Participant is eligible for and
retires under any qualified retirement plan maintained by the Company.
(u) "Shares" means the Company's Common Stock.
(v) "Subsidiary" means a corporation of which the Company owns stock
having fifty percent (50%) or more of the total voting power.
(w) "Valuation Date" means the last business day of each calendar month
and each special valuation date designated by the Administrative
Committee.
2.2 Number and Gender.
Wherever appropriate herein, words used in the singular shall be considered
to include the plural and words used in the plural shall be considered to
include the singular. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender.
2.3 Headings.
The headings of Articles and Sections herein are included solely for
convenience, and if there is any conflict between such headings and the
text of the Plan, the text shall control.
5
ARTICLE III
PARTICIPATION AND ELIGIBILITY
3.1 Participation.
Shares may be awarded only to full-time key Employees (including officers)
of the Company or any of its subsidiaries, who are responsible for, and
shall be considered by the Committee to be contributing significantly to,
the growth of the Company's business. A director of the Company who is not
also an Employee shall not be eligible to receive an award. In determining
the Employees to whom Shares shall be awarded, the number of Shares to be
covered by each award, and the terms, conditions and restrictions of each
award, the Committee may take into account any factors it may deem relevant
in connection with accomplishing the purpose of the Plan. An award of
Shares under the Plan to an employee shall not disqualify that employee for
a further award or awards.
Participants in the Plan who shall be eligible to exchange Shares pursuant
to Article V shall be limited to those employees who are (a) subject to the
income tax laws of the United States, (b) determined by the Company to be
members of a select group of highly compensated or management Employees of
the Company, and (c) selected by the Committee, in its sole discretion, as
Participants. The Administrative Committee shall notify each Participant of
eligibility under this paragraph. Subject to the provisions of Section 3.3,
a Participant shall remain eligible to continue participation in the Plan
for each Plan Year following his initial year of participation in the Plan,
provided the Participant continues to satisfy the requirements of this
Section 3.1.
3.2 Commencement of Participation.
An Employee shall become a Participant effective as of the date the
Administrative Committee determines.
3.3 Cessation of Active Participation.
Notwithstanding any provision herein to the contrary, an individual who has
become a Participant in the Plan shall cease to be a Participant hereunder
effective as of any date determined by the Administrative Committee.
ARTICLE IV
RESTRICTED STOCK
4.1 Restrictions.
The Committee may impose such restrictions on any award or any Shares
awarded pursuant to the Plan as it deems advisable (including restrictions
on transferability).
6
4.2 Removal of Restrictions.
Except as provided in Sections 4.7 and 4.12, the restrictions imposed by
the Committee on any award or any Shares awarded pursuant to the Plan shall
lapse as the Committee shall determine at the time of the award. Shares as
to which restrictions have lapsed shall not thereafter be forfeitable under
any circumstances.
4.3 Participant's Service.
Awards under the Plan shall not be affected by any change of duties or
position so long as the Participant continues to be a key Employee of the
Company or any of its subsidiaries. The agreement respecting each award may
contain such provisions as the Committee shall approve with reference to
the effect of approved leaves of absence. Nothing in the Plan or any
agreement pursuant to the Plan (whether written or unwritten) shall confer
upon any Employee any right to continue in the employment of the Company or
any of its Subsidiaries, shall interfere in any way with the right of the
Company or any of its Subsidiaries to terminate that Employment at any
time, or shall affect in any way the terms or conditions of employment.
4.4 Nontransferability.
Shares subject to restrictions shall not be transferable other than by will
or the laws of descent and distribution. In no event shall a Section 16
reporting person be entitled to sell or otherwise dispose of Shares awarded
under the Plan for period of six (6) months from the time of award without
the written consent of the Committee.
4.5 Stock Certificates.
The Committee may at any time require the placement of appropriate legends
on any certificate or certificates representing the Shares subject to
restrictions. The Committee may also require the retention by the Company
or the placement in escrow of any such certificate or certificates until
such certificate or certificates shall become deliverable following the
lapse of the restrictions. The Committee may require, as a condition of any
award, that the participant deliver to the Company a stock power relating
to Shares subject to an award, endorsed in blank and in all other ways
satisfactory to the Company (including, without limitation, as to a valid
and appropriate signature guaranty ensuring transferability of the Shares).
4.6 Termination of Employment.
Except as provided in Sections 4.7 and 4.12, effective as of the date of
termination of a Participant's Employment, for whatever reason, all or any
portion of an award for Shares still subject to restrictions (including
restrictions on transferability) shall automatically be forfeited. A
Participant shall have no rights or privileges as a shareholder or
otherwise with respect to Shares that have been forfeited. Shares no longer
7
subject to restrictions (including restrictions on transferability) shall
be fully vested and nonforfeitable.
4.7 Retirement or Death of Participant.
(a) In the event that Employment shall be terminated by the Normal
Retirement or death of a participant, the restrictions imposed by the
Committee on any Shares awarded pursuant to the Plan shall lapse upon
such termination.
(b) In the event that employment shall be terminated by the Early
Retirement of a Participant, the Committee may, but shall not be
obligated to, determine that the restrictions imposed by the Committee
on any Shares awarded pursuant to the Plan shall lapse upon such
termination.
4.8 Adjustments.
The Committee may make such adjustment, as the Committee determines to be
appropriate, in the number of Shares subject to outstanding awards and in
the number of Shares available for awards in order to compensate for the
effect of any change in the Company's capitalization or structure or in the
Shares or outstanding awards (including without limitation any change
arising through the declaration of a stock dividend or stock split or
through a spin-off, spin-out or other distribution of assets of the Company
or any of its subsidiaries to shareholders, whether payable in Shares or
other shares of stock of the Company or any of its subsidiaries, or through
reorganization, recapitalization, partial liquidation, merger,
consolidation or similar event, or through the sale or exchange of all or
substantially all of the Company's assets, or through stock splitups or
combinations or exchanges of Shares or other shares of stock of the Company
or any of its subsidiaries) or of any stock purchase pursuant to a tender
offer by the Company or any other party.
4.9 Approval of Shareholders.
No award may be made hereunder to any Section 16 reporting person prior to
the approval of the Plan by the Company's shareholders in accordance with
the Exchange Act.
4.10 Effectiveness of Awards.
Subject to Section 4.9, the date of the Committee's approval of the
awarding of Shares shall constitute the date of the award; provided that
the effectiveness of any award hereunder shall also be subject to the
execution of a restricted stock agreement and such other documentation as
the Committee may require.
8
4.11 Listing and Registration of Shares.
The Plan shall be subject to the requirement that if at any time the
Committee shall determine in its discretion that the listing, registration
or qualification of the Shares upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of or in
connection with the issuance or delivery of the Shares or related
certificate pursuant to the Plan, no Shares may be issued and no
certificate representing any Shares may be delivered unless and until the
listing, registration, qualification, consent or approval shall have been
effected or obtained, and maintained, free of any conditions not acceptable
to the Committee.
4.12 Change in Control.
Immediately upon the occurrence of a Change in Control, the restrictions
imposed by the Committee on any Shares previously awarded pursuant to the
Plan shall lapse.
ARTICLE V
DEFERRALS
5.1 Deferrals by Participants.
Subject to the Agreement of the Committee, before the December 31
immediately preceding the first day of the Plan Year in which the
restrictions on Shares previously awarded lapse, a Participant may file
with the Committee one or more Deferral Agreements pursuant to which such
Participant elects to exchange Shares previously awarded for an equal
number of Deferred Stock Units, and defer payment of such Deferred Stock
Units for the Deferral Period(s) elected pursuant to Section 5.2. Deferred
Stock Units will be credited to the Account of each Participant as of the
day determined by the Committee.
5.2 Effective Date of Deferral Agreement.
Each Deferral Agreement shall become effective no later than the last day
of the Plan Year preceding the Plan Year in which the restrictions on
Shares deferred shall lapse.
5.3 Deferral Periods.
A Participant may elect on his Deferral Agreement, a Deferral Period of any
period of one (1) Plan Year or more. The Deferral Period must end no sooner
than the Participant's completion of at least one (1) year of
Participation. The Deferral Period shall in any event end upon termination
9
of employment, death, and disability. A Participant must specify, on the
Deferral Agreement, the Deferral Period for the Deferred Stock Units to
which the Deferral Agreement relates, subject to such rules as may be
established by the Administrative Committee from time to time. A
Participant may change an election of a Deferral Period, to either extend,
or shorten (subject to the second sentence of this Section 5.3) the
Deferral Period, at any time prior to the first day of the calendar year in
which the Deferral Period would otherwise end. The Deferral Period may not
be shortened to end in the then current taxable year of the Participant, or
the subsequent taxable year.
ARTICLE VI
ACCOUNTS
6.1 Establishment of Bookkeeping Accounts.
A separate bookkeeping account shall be maintained for each Participant's
Account. Such account shall be credited with the Deferred Stock Units made
by the Participant pursuant to Section 5.1.
6.2 Subaccounts.
Within each Participant's bookkeeping account, separate subaccounts shall
be maintained to the extent necessary for the administration of the Plan.
For example, it may be necessary to maintain separate subaccounts where the
Participant has specified different Deferral Periods, methods of payment
for different Plan Years.
6.3 Hypothetical Nature of Accounts.
The account established under this Article VI shall be hypothetical in
nature and shall be maintained for bookkeeping purposes only so that the
number and value of Deferred Stock Units can be determined. Neither the
Plan nor any of the accounts (or subaccounts) established hereunder shall
hold any actual funds or assets. The right of any person to receive one or
more payments under the Plan shall be only an unsecured claim against the
general assets of the Company. Any liability of the Company to any
Participant, former Participant, or Beneficiary with respect to a right to
payment shall be based solely upon contractual obligations created by the
Plan. Neither the Company, the Board, nor any other person shall be deemed
to be a trustee of any amounts to be paid under the Plan. Nothing contained
in the Plan, and no action taken pursuant to its provisions, shall create
or be construed to create a trust of any kind, or a fiduciary relationship,
between the Company and a Participant or any other person.
6.4 Vesting.
A Participant's Account shall become 100% vested and nonforfeitable upon
the maturity of the Deferred Stock Units credited to the Account, provided
the Participant's employment with the Company has not then terminated for
reasons other than stated in Section 4.7.
10
6.5 Dividend Equivalents
The Company shall pay to each Participant with respect to each Deferred
Stock Unit an amount equivalent to the dividends paid on each share of
Company Stock.
ARTICLE VII
PAYMENT OF ACCOUNT
7.1 Timing of Distribution of Benefits.
Distribution of Accounts to a Participant shall be made or commence
following the date the Deferral Period for such amounts ends, in accordance
with the Participant's election on his Deferral Agreement.
7.2 Form of Payment.
Accounts shall be distributed in accordance with the form of Shares.
7.3 Change in Control.
Upon termination of a Participant's employment following a Change in
Control, a Participant's Account shall be distributed in a single lump sum
distribution of shares.
7.4 Designation of Beneficiaries.
Each Participant shall have the right to designate the beneficiary or
beneficiaries to receive payment of his benefit in the event of his death.
A beneficiary designation shall be made by executing a beneficiary
designation form in the form attached hereto as Attachment 2, and filing
the same with the Committee. Any such designation may be changed at any
time by execution of a new designation in accordance with this Section. If
no such designation is on file with the Committee at the time of the death
of the Participant, or for any reason such designation is not effective, as
determined by the Committee, then the designated beneficiary or
beneficiaries to receive such benefit shall be the Participant's surviving
spouse, if any, or if none, the Participant's executor or administrator, or
his heirs at law if there is no administration of such Participant's
estate.
7.5 Unclaimed Benefits.
In the case of a benefit payable on behalf of such Participant, if the
Committee is unable to locate the Participant or beneficiary to whom such
benefit is payable, such benefit may be forfeited to the Company, upon the
Committee's determination. Notwithstanding the foregoing, if subsequent to
any such forfeiture but no later than six (6) years following such
forfeiture, the Participant or beneficiary to whom such benefit is payable
makes a valid claim for such benefit, such forfeited benefit shall be paid
by the Company or restored to the Plan by the Company.
11
ARTICLE VIII
DETERMINATION OF BENEFITS, CLAIMS
PROCEDURE AND ADMINISTRATION
8.1 Claims.
A person who believes that he is being denied a benefit to which he is
entitled under the Plan (hereinafter referred to as a "Claimant") may file
a written request for such benefits with the Committee, setting forth his
claim. The request must be addressed to the Committee at the Company at its
then principal place of business.
8.2 Claim Decision.
Upon receipt of a claim, the Committee shall make a determination of the
claim and reply to the claimant within ninety (90) days. The Company may,
however, extend the reply period for an additional ninety (90) days if
special circumstances require. If the claim is denied, the denial shall
explain the reason for the denial with specific reference to the provisions
of the Plan on which the denial is based. The Claimant may within (60) days
request a review of the denial and may submit comments or other material in
writing. The Company shall review the denial and render a decision within
sixty (60) days after receipt of the request for review, unless special
circumstances require an extension of such time to no more than one-hundred
twenty (120) days.
ARTICLE IX
MISCELLANEOUS
9.1 Not Contract of Employment.
The adoption and maintenance of the Plan shall not be deemed to be a
contract between the Company and any person or to be consideration for the
employment of any person. Nothing herein contained shall be deemed to give
any person the right to be retained in the employ of the Company or to
restrict the rights of the Company to discharge any person at any time nor
shall the Plan be deemed to give the Company the right to require any
person to remain in the employ of the Company or to restrict any person's
right to terminate his employment at any time.
9.2 Non-Assignability of Benefits.
No Participant, Beneficiary or distributee of benefits under the Plan shall
have any power or right to transfer, assign, anticipate, hypothecate or
otherwise encumber any part or all of the amounts payable hereunder, which
are expressly declared to be unassignable and nontransferable. Any such
attempted assignment or transfer shall be void. No amount payable hereunder
shall, prior to actual payment thereof, be subject to seizure by any
creditor of any such Participant, Beneficiary or other distributee for the
payment of any debt, judgment or other obligation, by a proceeding at law
or in equity, nor transferable by operation of law in the event of the
bankruptcy, insolvency or death of such Participant, Beneficiary or other
distributee hereunder.
12
9.3 Withholding Tax.
The Committee shall have the right to require, prior to the issuance or
delivery of any Shares or any certificates representing any Shares awarded
pursuant to the Plan, that the participant pay to the Company the amount of
any taxes which the Company is required to withhold with respect to such
Shares in such manner as the Committee shall determine, including without
limitation by requiring the Company to retain a sufficient number of Shares
to cover the amount or any portion thereof required to be withheld.
9.4 Amendment and Termination.
The Company may from time to time, in its discretion, amend , in whole or
in part, any or all of the provisions of the Plan; provided, however, that
no amendment may be made that would impair the rights of a Participant with
respect to Shares, or to Deferred Stock Units or dividends allocated to his
Account, without the Participant's consent. The Company may terminate the
Plan at any time. In the event that the Plan is terminated, any balance in
the Participant's Account shall be paid to such Participant or his
Beneficiary in a single lump sum, in full satisfaction of all such
Participant's or Beneficiary's benefits hereunder.
9.5 No Trust Created.
Nothing contained in this Agreement, and no action taken pursuant to its
provisions by either party hereto, shall create, nor be construed to
create, a trust of any kind or a fiduciary relationship between the Company
and the Participant, his beneficiary, or any other person.
9.6 Unsecured General Creditor Status of Employee.
The payments to Participant, his Beneficiary, or any other distribute
hereunder shall be made from assets which shall continue, for all purposes,
to be a part of the general, unrestricted assets of the Company; no person
shall have nor acquire any interest in any such assets by virtue of the
provisions of this Agreement. The Company's obligation hereunder shall be
an unfunded and unsecured promise to distribute shares in the future. To
the extent that the Participant, Beneficiary, or other distribute acquires
a right to receive share distributions from the Company under the
provisions hereof, such right shall be no greater than the right of any
unsecured general creditor of the Company, no such person shall have nor
require any legal or equitable right, interest or claim in or to any
property or assets of the Company. In the event that, in its discretion,
the Company purchases an insurance policy, or policies, insuring the life
of the Employee (or any other property) to allow the Company to recover the
cost of providing the benefits, in whole, or in part, hereunder, neither
the Participant, Beneficiary or other distributee shall have nor acquire
any rights whatsoever therein or in the proceeds therefrom. The Company
shall be the sole owner and beneficiary of any such policy or policies and,
as such, shall possess and, may exercise all incidents of ownership
therein. No such policy, policies or other property shall be held in any
trust for a Participant, Beneficiary or other distribute or held as
collateral security for any obligation of the Company hereunder.
13
9.7 Severability.
If any provision of this Plan shall be held illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining
provisions hereof; instead, each provision shall be fully severable and the
Plan shall be construed and enforced as if said illegal or invalid
provision had never been included herein.
9.8 Governing Laws.
All provisions of the Plan shall be construed and enforced in accordance
with the laws of the State of Delaware, and in the courts situated in that
State, to the extent not preempted by Federal law, regardless of the law
which might otherwise govern under applicable Delaware conflicts of law
principles.
9.9 Binding Effect.
This Plan shall be binding on each Participant and his heirs and legal
representatives and on the Company and its successors and assigns.
9.10 Entire Agreement.
This document and any amendments contain all the terms and provisions of
the Plan and shall constitute the entire Plan, any other alleged terms or
provisions being of no effect.
9.11 Funding Upon Change In Control.
Upon a Change in Control, the Company shall immediately and fully fund the
value of all Accounts by contribution of such shares as may be necessary to
the Hancock Fabrics, Inc. Deferred Stock Unit Trust.
IN WITNESS WHEREOF, the Company has caused this Plan to be properly
executed on the _______ day of ___________________, 2003.
ATTEST: HANCOCK FABRICS, INC.
By: ---------------------------------
- ---------------------------------
Title: Title: ---------------------------------
---------------------------
14
DEFERRAL AGREEMENT
To the Plan Administrator of the Hancock Fabrics, Inc. Amended and Restated
1995 Restricted Stock and Deferred Stock Unit Plan ("Plan").
In accordance with the Section 5.1 of the Plan, I enter into this Deferral
Agreement ("Agreement) with Hancock Fabrics, Inc. (the "Employer"). I elect
to exchange ____ Shares for ______ Deferred Stock Units.
(1) The Employer will establish a bookkeeping account on my behalf for the
Deferred Stock Units.
(2) This Agreement remains in effect until I revoke the Agreement. I may revoke
this Agreement by filing a new Agreement at any time.
(3) I am not vested in my Deferred Stock Units until they reach their maturity
date or an event described in Section 4.7 of the Plan occurs.
(4) The Deferred Stock Units, or shares converted from such Deferred Stock
Units, will not be paid to me until the date(s) determined in accordance
with the terms of the Plan and no earlier than ________________.
Dated this _____ day of ___________________, 200__, by the Participant and
the Employer.
EMPLOYER: PARTICIPANT:
HANCOCK FABRICS, INC.
----------------------------------
Signature
By: ----------------------------- ----------------------------------
Printed Name
----------------------------------
Social Security Number
Attachment 1
DESIGNATION OF BENEFICIARY
To the Plan Administrator of the Hancock Fabrics, Inc. Amended and Restated 1995
Restricted Stock and Deferred Stock Unit Plan (the "Plan"):
RE:
--------------------------------------------, Participant
Social Security Number:
---------------------
Pursuant to the provisions of the Plan permitting the designation of a
beneficiary or beneficiaries by a participant, I hereby designate the following
person or persons as primary and contingent beneficiaries of my Account under
the Plan payable by reason of my death:
- --------------------------------------------------------------------------------
Primary Beneficiary(ies) [Include address and relationship):
- --------------------------------------------------------------------------------
Contingent Beneficiary(ies) [Include address and relationship]:
I RESERVE THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION. I
HEREBY REVOKE ALL PRIOR DESIGNATIONS (IF ANY) OF PRIMARY BENEFICIARIES AND
CONTINGENT BENEFICIARIES.
The Plan Administrator will pay all sums payable under the Plan by reason
of my death to the primary beneficiary, if he or she survives me, and if no
primary beneficiary survives me, then to the contingent beneficiary, and if no
named beneficiary survives me, then the Plan Administrator shall pay all amounts
in accordance with the terms of the Plan.
- --------------------------------- -------------------------------------
Date of this Designation Signature of Participant
Attachment 2