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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 August 3, 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 August 3, 2003, the registrant had outstanding an aggregate of 18,695,682
shares of common stock, $.01 par value.
INDEX
Part I. Financial Information:
Page Numbers
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of August 3, 2003
and February 2, 2003 3
Consolidated Statement of Earnings for the Thirteen
Weeks and Twenty-six Weeks Ended August 3, 2003 and
August 4, 2002 4
Consolidated Statement of Shareholders' Equity for the
Twenty-six Weeks Ended August 3, 2003 5
Consolidated Statement of Cash Flows for the Twenty-six
Weeks Ended August 3, 2003 and August 4, 2002 6
Notes to Consolidated Financial Statements 7 - 10
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 13
Item 4. Controls and Procedures 13
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 14
2
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
- ------------------------------------------------------------------------------------------
(in thousands, except for share and per share amounts) August 3, February 2,
2003 2003
- ------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $3,156 $4,589
Receivables, less allowance for doubtful accounts 978 1,100
Inventories 150,801 144,061
Prepaid expenses 3,295 2,570
- ------------------------------------------------------------------------------------------
Total current assets 158,230 152,320
Property and equipment, at depreciated cost 45,163 41,853
Deferred tax asset 4,465 4,465
Pension payment in excess of required contribution 17,383 18,829
Goodwill 4,480 4,480
Other assets 3,522 3,563
- ------------------------------------------------------------------------------------------
Total assets $233,243 $225,510
==========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $35,164 $44,357
Accrued liabilities 17,074 21,039
Deferred tax liabilities 3,078 3,078
Income taxes 2,034 5,089
- ------------------------------------------------------------------------------------------
Total current liabilities 57,350 73,563
Long-term debt obligations 28,000 0
Postretirement benefits other than pensions 22,204 21,976
Reserve for store closings 628 878
Other liabilities 4,949 4,862
- ------------------------------------------------------------------------------------------
Total liabilities 113,131 101,279
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares
authorized; 31,783,582 and 31,481,715 issued and outstanding,
respectively 318 315
Additional paid-in capital 68,121 63,805
Retained earnings 210,572 208,659
Treasury stock, at cost, 13,087,900 and 12,431,937
shares held, respectively (151,809) (142,545)
Deferred compensation on restricted stock
incentive plan (7,090) (6,003)
- ------------------------------------------------------------------------------------------
Total shareholders' equity 120,112 124,231
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $233,243 $225,510
==========================================================================================
See accompanying notes to consolidated financial statements.
3
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except Thirteen Weeks Ended Twenty-six Weeks Ended
per share amounts) -----------------------------------------------------------------------------
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Sales $96,103 $92,676 $203,739 $196,730
Cost of goods sold 46,334 45,125 99,231 96,644
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 49,769 47,551 104,508 100,086
- ------------------------------------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 45,544 43,800 92,364 89,180
Depreciation and amortization 1,585 1,343 3,037 2,675
Interest expense 180 94 274 154
Interest income (17) (19) (34) (50)
- ------------------------------------------------------------------------------------------------------------------------------
Total operating and interest expenses 47,292 45,218 95,641 91,959
- ------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes 2,477 2,333 8,867 8,127
Income taxes 900 848 3,219 2,951
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings and comprehensive income $1,577 $1,485 $5,648 $5,176
==============================================================================================================================
Earnings per share
Basic $0.09 $0.08 $0.32 $0.29
Diluted $0.09 $0.08 $0.31 $0.27
==============================================================================================================================
Weighted average shares outstanding
Basic 17,515 18,042 17,652 17,818
Diluted 18,345 19,064 18,452 18,907
==============================================================================================================================
Dividends per share $0.10 $0.08 $0.20 $0.16
==============================================================================================================================
See accompanying notes to consolidated financial statements.
4
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for Additional Total
number of shares) Common Stock Paid-in Retained Treasury Stock Deferred Shareholders'
------------------------ ---------------------- Compensation Equity
Shares Amount Capital Earnings Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Twenty-six weeks ended August 3, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Balance February 2, 2003 31,481,715 $315 $63,805 $208,659 (12,431,937)($142,545) ($6,003) $124,231
Net earnings 5,648 5,648
Cash dividend - $.10 per
share on a quarterly basis (3,735) (3,735)
Issuance of restricted stock 149,000 1 2,359 (2,360)
Cancellation of restricted stock (34,600) (307) 307
Amortization and vesting of
deferred compensation on restricted
stock incentive plan 97 966 1,063
Purchase of treasury stock (655,963) (9,264) (9,264)
Issurance of shares as compensation
for professional services 982 15 15
Issuance of shares under directors'
stock plan 5,910 90 90
Exercise of stock options 180,575 2 2,062 2,064
- ----------------------------------------------------------------------------------------------------------------------------------
Balance August 3, 2003 31,783,582 $318 $68,121 $210,572 (13,087,900)($151,809) ($7,090) $120,112
==================================================================================================================================
See accompanying notes to consolidated financial statements.
5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------------
(in thousands)
Twenty-six Weeks Ended
------------------------------
August 3, August 4,
2003 2002
- --------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $5,648 $5,176
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization 3,037 2,675
LIFO (200) (500)
Amortization of deferred compensation on
restricted stock incentive plan 966 1,087
Interest expense on closed store accrual 67 84
Issuance of shares as compensation for 15 10
professional services
(Increase) decrease in assets:
Receivables and prepaid expenses (603) (1,265)
Inventory at current cost (6,540) (5,900)
Pension payment in excess of required contribution 1,446 874
Other noncurrent assets 41 401
Increase (decrease) in liabilities:
Accounts payable (9,193) (636)
Accrued liabilities (3,965) (3,155)
Current income tax obligations (2,958) (3,408)
Postretirement benefits other than pensions 228 35
Reserve for store closings (317) (555)
Other liabilities 87 (217)
- --------------------------------------------------------------------------------------
Net cash used in operating activities (12,241) (5,294)
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (6,347) (12,091)
- --------------------------------------------------------------------------------------
Net cash used in investing activities (6,347) (12,091)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on revolving
credit agreement 28,000 11,000
Purchase of treasury stock (9,264) (6,110)
Issuance of shares under directors' stock plan 90 89
Exercise of stock options 2,064 12,196
Cash dividends paid (3,735) (3,038)
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 17,155 14,137
- --------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,433) (3,248)
Cash and cash equivalents:
Beginning of period 4,589 6,914
- --------------------------------------------------------------------------------------
End of period $3,156 $3,666
======================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $156 $48
Income taxes $5,809 $3,309
======================================================================================
See accompanying notes to consolidated financial statements.
6
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/A.
The results of operations for the thirteen and twenty-six week periods are not
necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2 - STOCK OPTIONS
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:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------- ---------------------------------
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
-------------- ----------------- --------------- ---------------
Net earnings, as reported $1,577 $1,485 $5,648 $5,176
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (262) (149) (424) (259)
-------------- ----------------- --------------- ---------------
Pro forma net earnings $1,315 $1,336 $5,224 $4,917
============== ================= =============== ===============
Earnings per share:
Basic - as reported $0.09 $0.08 $0.32 $0.29
============== ================= =============== ===============
Basic - pro forma $0.08 $0.07 $0.30 $0.28
============== ================= =============== ===============
Diluted - as reported $0.09 $0.08 $0.31 $0.27
============== ================= =============== ===============
Diluted - pro forma $0.07 $0.07 $0.28 $0.26
============== ================= =============== ===============
7
NOTE 3 - 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 Twenty-six Weeks Ended
per share amounts) -----------------------------------------------------------
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings $1,577 $1,485 $5,648 $5,176
============ ============ ================ ===============
Weighted average number of common shares outstanding during 17,514,570 18,042,472 17,652,365 17,818,325
period ============ ============ ================ ===============
Basic earnings per share $0.09 $0.08 $0.32 $0.29
============ ============ ================ ===============
Diluted earnings per share:
Net earnings $1,577 $1,485 $5,648 $5,176
============ ============ ================ ===============
Weighted average number of common shares outstanding during 17,514,570 18,042,472 17,652,365 17,818,325
period
Stock options 468,503 634,845 455,644 701,345
Restricted stock and deferred stock units 361,765 386,646 344,381 387,684
------------ ------------ ---------------- ---------------
18,344,838 19,063,963 18,452,390 18,907,354
============ ============ ================ ===============
Diluted earnings per share $0.09 $0.08 $0.31 $0.27
============ ============ ================ ===============
Weighted average common stock equivalents not included in EPS
(stock options) because the effect would be anti-dilutive 430,559 264,011 436,863 132,006
============ ============ ================ ===============
NOTE 4 - RESERVE FOR STORE CLOSINGS
Reserves for store closings are established based on estimates of net lease
obligations and other store closing costs.
At August 3, 2003, the total reserve balance included in current and noncurrent
liabilities was $1,499,000, 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 August 3,
2003 Reserve Interest Payments 2003
----------- ------------ -------- -------- ---------
Lease Obligations $1,749 $0 $67 ($317) $1,499
=========== ============ ======== ======== =========
8
NOTE 5 - 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 is 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 are
effective for fiscal years beginning after May 15, 2002. The provisions related
to SFAS 13 are effective for transactions occurring after May 15, 2002. All
other provisions of this Statement are effective for financial statements issued
on or after May 15, 2002. Hancock adopted SFAS 145 as of May 15, 2002 and
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 adopted SFAS 146 as of January 1,
2003, and there was no material impact on its financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133. The provisions of this Statement are
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after that date. Hancock adopted SFAS No. 149
as of July 1, 2003, and there was no impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
establishes standards on how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. This Statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise for interim periods beginning after June 15, 2003. The
Company does not believe that this standard will have a significant effect on
its financial position or results of operations.
9
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, adoption of this
pronouncement had no impact on the Company's financial statements.
During 2002, the EITF reached a consensus on Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received From a
Vendor". EITF Issue 02-16 addresses the accounting treatment for vendor
allowances and co-operative advertising programs and is effective for agreements
modified or entered into after January 1, 2003. Hancock adopted EITF Issue 02-16
as of February 3, 2003, and there was no impact on its financial statements.
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 8 stores and
closed 8 stores during the thirteen weeks ended August 3, 2003, resulting in a
total of 431 stores at quarter end.
During the twenty-six weeks ended August 3, 2003, net earnings of $5.6 million,
borrowings of $28 million, proceeds from stock option exercises totaling $2.1
million and existing cash of $1.4 million were used to fund a $6.5 million
seasonal increase in inventory, $9.3 million of treasury stock purchases, $3.7
million in cash dividends, a $13.2 million decrease in accounts payable and
accrued liabilities and $6.3 million in additions to property and equipment. At
August 3, 2003, Hancock had outstanding debt of $28 million, or 18.9% of total
capitalization, compared to $11 million, or 9% of total capitalization at August
4, 2002.
RESULTS OF OPERATIONS
Thirteen weeks ended August 3, 2003 compared to thirteen weeks ended August 4,
2002
Net earnings were $1.6 million, or $.09 per diluted share, compared with $1.5
million, or $.08 per diluted share, in the same period of the prior year.
Earnings were influenced by higher sales and a higher gross margin than last
year.
Sales increased to $96.1 million from $92.7 million in the second quarter of
last year, as the result of an increase of 3.8% in comparable store sales driven
primarily by a higher average ticket. 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. The store repositioning
strategy has consisted of closing smaller, low potential stores that were often
located too close together, while opening or acquiring larger stores spaced
10
farther apart to better support the expanded product offering within Hancock's
core merchandise competency. Gross margins increased to 51.8% from 51.3% last
year as a result of the shift in the merchandise mix towards more higher-margin
home decorating products and Hancock's efforts to control promotional
activities. This increase was partially offset by a decrease in the second
quarter LIFO credit from $500,000 in 2002 to $200,000 this year resulting from
less product cost deflation in 2003.
Selling, general and administrative expenses as a percentage of sales were 47.4%
compared to 47.3% in the second quarter of 2002. Expense leverage from
comparable store sales increases was offset partially by higher costs resulting
from certain start-up activities at the new distribution center. As Hancock
continues to transfer its warehousing and distribution activities to the new
facility over the next three to four quarters, costs will tend to be higher than
the prior comparable periods due to some duplication of expenses. In addition,
insurance and pension costs were higher in this year's second quarter.
Interest expense was higher due to average debt outstanding totaling $25 million
during the second quarter of this year versus $5 million during the same quarter
of 2002.
Twenty-six weeks ended August 3, 2003 compared to twenty-six weeks ended August
4, 2002
Net earnings were $5.6 million, or $.31 per diluted share, compared with $5.2
million, or $.27 per diluted share, in the same period of the prior year.
Earnings were influenced by higher sales and a higher gross margin than last
year.
Sales increased to $203.7 million from $196.7 million in the first half of 2002,
as the result of an increase of 4.0% in comparable store sales driven primarily
by a higher average ticket. 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 51.3% from
50.9% last year as a result of the shift in the merchandise mix towards more
higher-margin home decorating products and Hancock's efforts to control
promotional activities. This increase was partially offset by a decrease in the
second quarter LIFO credit from $500,000 in 2002 to $200,000 this year resulting
from less product cost deflation in 2003.
Selling, general and administrative expenses as a percentage of sales remained
at 45.3% for the first half of the year. Expense leverage from comparable store
sales increases was offset by higher costs resulting from certain start-up
activities at the new distribution center. As Hancock continues to transfer its
warehousing and distribution activities to the new facility over the next three
to four quarters, costs will tend to be higher than the prior comparable periods
due to some duplication of expenses. In addition, insurance and pension costs
were higher in the first half of this year.
Interest expense increased due to a higher level of outstanding debt throughout
the twenty-six weeks of 2003 versus 2002.
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
during 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.
11
OFF-BALANCE SHEET ARRANGEMENTS
Hancock has no off-balance sheet financing arrangements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Hancock has an arrangement to secure up to $5 million in letters of credit. At
August 3, 2003, Hancock had commitments of $1.8 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.
Hancock 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 and workers compensation insurance
costs, in particular, continue to rise at an unsettling rate in the United
States each year, and higher employer contributions to 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. During the first half of 2003 and 2002, decreases in
the PPI resulted in LIFO credits of $200,000 and $500,000, respectively.
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
See Note 5 of Notes to Consolidated Financial Statements, above, for the effect
of recent accounting pronouncements on Hancock.
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
12
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.
Item 3: Quantitative and Qualitative Disclosures about Market Risks
Hancock does not hold derivative financial or commodity instruments at August 3,
2003. Hancock is exposed to financial market risks, including changes in
interest rates. All borrowings under 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 Hancock's results. All
of Hancock's business is transacted in U. S. dollars and, accordingly, foreign
exchange rate fluctuations have never had a significant impact on Hancock, and
they are not expected to in the foreseeable future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Hancock carried out an evaluation of the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report under
the supervision and with the participation of its management, including its
chief executive officer and chief financial officer. Based on that evaluation,
Hancock's chief executive officer and chief financial officer have concluded
that its disclosure controls and procedures are effective to ensure that
material information relating to Hancock, including its consolidated
subsidiaries, is made known to them by others within such entities, particularly
during the period in which this report was prepared, in order to allow timely
decisions regarding required disclosure.
Change in Internal Control Over Financial Reporting
There was no change in Hancock's internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during its most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, its internal control over financial
reporting.
13
PART II. OTHER INFORMATION:
Item 4: Submission of Matters to a Vote of Security Holders
Incorporated by reference to Item 4, Part II of Hancock Fabrics, Inc. Quarterly
Report on Form 10-Q filed June 18, 2003.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
22 Submission of Matters to a Vote of Security Holders*
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Chief Executive Officer and Certification of Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
*Incorporated by reference to Item 4, Part II of Hancock Fabrics, Inc. Quarterly
Report on Form 10-Q filed June 18, 2003.
(b) Reports on Form 8-K
Current Report on Form 8-K filed June 12, 2003 regarding workers
compensation claims.
Current Report on Form 8-K filed May 20, 2003 announcing quarterly
earnings.
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)
September 15, 2003
14
Exhibit 31.1
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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/s/ Larry G. Kirk
- -----------------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer
15
Exhibit 31.2
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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/s/ Bruce D. Smith
- -------------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
16
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Each of the undersigned, Larry G. Kirk and Bruce D. Smith, certifies pursuant 18
U.S.C. Section 1350, that: (1) this quarterly report on Form 10-Q of Hancock
Fabrics, Inc. ("Hancock") for the quarter ended August 3, 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 this quarterly report fairly
presents, in all material respects, the financial condition and results of
operations of Hancock.
Date: September 15, 2003
/s/ Larry G. Kirk
- -----------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer
/s/ Bruce D. Smith
- ------------------
Bruce D. Smith
Senior Vice President and Chief Financial Officer
17