Back to GetFilings.com
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 2, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from_____________to___________.
Commission File Number 1 - 9482
HANCOCK FABRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 64-0740905
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
3406 West Main Street, Tupelo, MS 38801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(662) 842-2834
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of May 2, 2004, the registrant had outstanding an aggregate of 18,888,270
shares of common stock, $.01 par value.
INDEX
Part I. Financial Information:
Page Numbers
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of May 2, 2004 and February 1, 2004 3
Consolidated Statements of Income for the Thirteen Weeks Ended May 2, 4
2004 and May 4, 2003
Consolidated Statements of Cash Flows for the Thirteen Weeks Ended 5
May 2, 2004 and May 4, 2003
Consolidated Statement of Shareholders' Equity for the Thirteen Weeks
Ended May 2, 2004 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks 15
Item 4. Controls and Procedures 15
Part II. Other Information:
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
2
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
- ---------------------------------------------------------------------------------------------------
May 2, February 1,
(in thousands, except for share and per share amounts) 2004 2004
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,246 $ 4,080
Receivables, less allowance for doubtful accounts 1,082 966
Inventories 150,963 154,984
Prepaid expenses 1,789 2,304
- ---------------------------------------------------------------------------------------------------
Total current assets 157,080 162,334
Property and equipment, at depreciated cost 63,357 57,142
Deferred tax assets 5,691 6,207
Pension payment in excess of required contribution 15,406 15,936
Goodwill 4,480 4,480
Other assets 3,241 3,324
- ---------------------------------------------------------------------------------------------------
Total assets $ 249,255 $ 249,423
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 38,842 $ 42,704
Accrued liabilities 18,622 22,574
Deferred tax liabilities 3,713 3,113
Income taxes 1,184 7,299
- ---------------------------------------------------------------------------------------------------
Total current liabilities 62,361 75,690
Long-term debt obligations 23,000 10,000
Postretirement benefits other than pensions 22,533 22,368
Reserve for store closings 462 592
Other liabilities 9,081 9,193
- ---------------------------------------------------------------------------------------------------
Total liabilities 117,437 117,843
- ---------------------------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
32,093,841 and 31,941,582 issued and outstanding,
respectively 321 319
Additional paid-in capital 72,746 70,105
Retained earnings 217,172 218,612
Treasury stock, at cost, 13,205,571 and 13,093,781
shares held, respectively (153,637) (151,905)
Deferred compensation on restricted stock incentive plan (4,784) (5,551)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 131,818 131,580
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 249,255 $ 249,423
===================================================================================================
See accompanying notes to consolidated financial statements.
3
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
May 2, May 4,
(in thousands, except per share amounts) 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Sales $ 105,089 $ 107,636
Cost of goods sold (1) 52,606 52,897
- ---------------------------------------------------------------------------------------------------------------
Gross profit 52,483 54,739
- ---------------------------------------------------------------------------------------------------------------
Selling, general and administrative expense 49,379 46,820
Depreciation and amortization 1,710 1,452
- ---------------------------------------------------------------------------------------------------------------
Operating income 1,394 6,467
Other expense (income)
Interest expense 124 94
Interest income (12) (17)
- ---------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,282 6,390
Income taxes 466 2,319
- ---------------------------------------------------------------------------------------------------------------
Net earnings and comprehensive income $ 816 $ 4,071
===============================================================================================================
Earnings per share
Basic $ .05 $ .23
Diluted $ .04 $ .22
===============================================================================================================
Weighted average shares outstanding
Basic 17,994 17,790
Diluted 18,791 18,684
===============================================================================================================
Dividends per share $0.12 $0.10
===============================================================================================================
(1) Excluding depreciation and amortization
See accompanying notes to consolidated financial statements.
4
Hancock Fabrics, Inc.
Consolidated Statements of Cash Flows
(unaudited)
- -----------------------------------------------------------------------------------------------------
(in thousands)
Thirteen Weeks Ended
May 2, May 4,
2004 2003
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings and comprehensive income $ 816 $ 4,071
Adjustments to reconcile net earnings to cash
flows used in operating activities
Depreciation and amortization 1,710 1,452
LIFO charge (credit) (150) -
Deferred income taxes 1,116 -
Amortization of deferred compensation on
restricted stock incentive plan 710 504
Loss on disposition of property and equipment 138 -
Interest expense on closed stores accrual 27 34
Issuance of shares as compensation for professional
services 8 7
Issuance of shares under directors' stock plan 45 45
(Increase) decrease in assets
Receivables and prepaid expenses 399 1,241
Inventory at current cost 4,171 (2,045)
Pension payment in excess of required contribution 530 780
Other assets 83 84
Increase (decrease) in liabilities
Accounts payable (3,862) (3,897)
Accrued liabilities (3,889) (4,739)
Income taxes (5,056) (790)
Postretirement benefits other than pensions 165 101
Reserve for store closings (220) (172)
Other liabilities (112) (186)
Tax benefit of stock options exercised 483 102
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,888) (3,408)
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (8,070) (3,592)
Proceeds from the disposition of property and equipment 7 17
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,063) (3,575)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on revolving credit agreement 13,000 17,000
Purchase of treasury stock (1,732) (9,202)
Proceeds from exercise of stock options 1,105 408
Cash dividends paid (2,256) (1,884)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,117 6,322
- -----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (834) (661)
Cash and cash equivalents:
Beginning of period 4,080 4,589
- -----------------------------------------------------------------------------------------------------
End of period $ 3,246 $ 3,928
=====================================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 95 $ 34
Income taxes $ 3,932 $ 3,109
=====================================================================================================
5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for number of shares)
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Treasury Stock Total
-------------------- Retained ------------------- Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance February 1, 2004 31,941,582 $319 $70,105 $218,612 (13,093,781) ($151,905) ($5,551) $131,580
Net earnings and comprehensive income 816 816
Cash dividends ($.12 per share) (2,256) (2,256)
Cancellation of restricted stock (5,650) (57) 57
Amortization & vesting of deferred
compensation on restricted stock
incentive plan 1,059 710 1,769
Issuance of shares under directors'
stock plan 2,805 45 45
Issuance of shares as compensation for
professional services 454 8 8
Purchase of treasury stock (111,790) (1,732) (1,732)
Stock options exercised 154,650 2 1,103 1,105
Tax benefit of stock options exercised 483 483
- ------------------------------------------------------------------------------------------------------------------------------------
Balance May 2, 2004 32,093,841 $321 $72,746 $217,172 (13,205,571) ($153,637) ($4,784) $131,818
====================================================================================================================================
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hancock Fabrics,
Inc. ("Hancock" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. The statements do reflect all adjustments (consisting of only normal
recurring entries), which are, in the opinion of management, necessary for a
fair presentation of financial position in conformity with generally accepted
accounting principles. The statements should be read in conjunction with the
Notes to the Consolidated Financial Statements for the fiscal year ended
February 1, 2004 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.
NOTE 2: STOCK OPTIONS
Stock options are accounted for using the intrinsic value method where
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. For the 13 weeks ended May 2, 2004 and
May 4, 2003 the exercise price of all options granted equaled the fair market
value at the date of grant; accordingly, no compensation expense for stock
options has been recorded.
Pro forma information regarding net earnings and earnings per share as if the
fair value method had been applied in measuring compensation expense is
presented below (in thousands, except per share amounts):
2004 2003
-------------- --------------
Net earnings, as reported $ 816 $ 4,071
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (448) (162)
-------------- --------------
Pro forma net earnings $ 368 $ 3,909
============== ==============
Earnings per share:
Basic - as reported $ .05 $ .23
============== ==============
Basic - pro forma $ .02 $ .22
============== ==============
Diluted - as reported $ .04 $ .22
============== ==============
Diluted - pro forma $ .02 $ .21
============== ==============
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, par value $.01 ("Common Stock") 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 2, May 4,
2004 2003
- ------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings $816 $4,071
============ ============
Weighted average number of common shares outstanding
during period 17,993,773 17,790,199
============ ============
Basic earnings per share $0.05 $0.23
============ ============
Diluted earnings per share:
Net earnings $816 $4,071
============ ============
Weighted average number of common shares outstanding
during period 17,993,773 17,790,199
Stock options 346,088 443,548
Restricted stock and deferred stock units 451,441 450,234
------------ ------------
Weighted average number of common shares outstanding
during period adjusted for dilutive securities 18,791,302 18,683,981
============ ============
Diluted earnings per share $0.04 $0.22
============ ============
Weighted average common stock equivalents not included in EPS
(stock options) because the effect would be anti-dilutive 413,500 444,168
============ ============
8
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 May 2, 2004, the total reserve balance included in current and noncurrent
liabilities was $1,368,000 which represents the present value of the future net
lease obligations required for the locations which have been closed. The 2004
activity in the reserve is as follows (in thousands):
Addition to
February 1, (Reduction in) May 2,
2004 Reserve Interest Payments 2004
---------------- ------------------- --------------- ---------------- ---------------
2004
Lease obligations $ 1,561 $ - $ 27 $ (220) $ 1,368
================ =================== =============== ================ ===============
NOTE 5: RETIREMENT BENEFITS
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act expands
Medicare to include coverage for prescription drugs. Hancock sponsors medical
programs, including prescription drug coverage for retirees, and the Company
expects that this legislation will eventually reduce the Company's cost for some
of these programs. On January 12, 2004, the FASB issued FASB Staff Position No.
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, which allows the
deferral of financial recognition of the Act until the FASB issues final
accounting guidance. Hancock elected to defer the recognition of the Act.
Therefore, the Company's net periodic postretirement benefit cost does not
reflect the effects of the Act. The FASB's specific authoritative guidance on
accounting for the federal subsidy is pending, and that guidance, when issued,
could require a change to the amounts recorded in the financial statements and
disclosed in the Notes to the Consolidated Financial Statements.
The following summarizes the net periodic benefit cost for the thirteen weeks
ended May 2, 2004 and May 4, 2003:
Retirement Plan Postretirement Benefit Plan
(Dollars in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Service costs $ 718 $ 620 $ 165 $ 140
Interest cost 970 976 248 233
Expected return on assets (1,388) (1,161)
Amortization of prior service costs 18 20 (62) (63)
Recognized net actuarial (gain) loss 212 325 (58) (90)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 530 $ 780 $ 293 $ 220
- -----------------------------------------------------------------------------------------------------------------------
Hancock's minimum required contribution for 2004 is $0, while the maximum amount
that may be contributed and deducted for income tax purposes is $4,335,000.
Hancock has not yet decided whether it will make a contribution in 2004.
9
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
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. Hancock
adopted SFAS No. 150 as of June 1, 2003 and August 4, 2003, and there was no
impact on its financial statements.
During November 2003, the EITF reached a consensus on Issue 03-10, "Application
of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by
Manufacturers". EITF 03-10 addresses the accounting and disclosure treatment for
consideration received by a reseller from a vendor that is a reimbursement by
the vendor for honoring the vendor's sales incentives offered directly to
consumers. EITF 03-10 is effective for sales incentives tendered to consumers
for fiscal years beginning after December 15, 2003. Hancock adopted EITF Issue
03-10 on February 2, 2004, and there was no impact on its financial statements.
During December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosure about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88, and 106. This Statement revises employers'
disclosures about pension and other postretirement benefit plans and replaces
SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement
Benefits. SFAS No. 132 (revised) requires additional disclosures to those in
SFAS No. 132 about assets, obligations, cash flows, net periodic benefit cost of
defined benefit pension plans and other postretirement plans. SFAS No. 132
(revised) is effective for fiscal years ending after December 15, 2003. Hancock
adopted the disclosure requirements of SFAS No. 132 (revised) as of February 1,
2004.
During December 2003, the FASB issued FIN No. 46 (revised December 2003),
Consolidation of Variable Interest Entities. FIN No. 46 (revised) replaces FIN
No. 46, Consolidation of Variable Interest Entities, and 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 No. 46 (revised) is effective for public entities with
interests in variable interest entities or potential variable interest entities
for periods ending after December 15, 2003. For public entities with interests
in all other types of entities, FIN No. 46 (revised) is effective for financial
statements for periods ending after March 15, 2004, with early adoption
permitted. Hancock adopted FIN No. 46 (revised) as of February 1, 2004 and there
was no impact on its financial statements.
During January 2004, the FASB issued FASB Staff Position No. 106-1, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which allows the deferral of
financial recognition of the Medicare Prescription Drug Improvement and
Modernization Act until the FASB issues final accounting guidance. Refer to Note
5, above, and Note 10 in the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for additional information.
10
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 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 allow.
During the thirteen weeks ended May 2, 2004, net earnings and non-cash charges
and credits, including depreciation and amortization, totaling $4.4 million,
borrowings of $13 million and proceeds from stock option exercises totaling $1.1
million were used to fund a $3.9 million reduction of accrued liabilities, a
$5.1 million reduction of income tax obligations, $2.3 million in cash dividends
and $8.1 million in additions to property and equipment. At May 2, 2004, Hancock
had outstanding debt of $23 million, or 14.9% of total capitalization, compared
to $17 million, or 12.6% of total capitalization at May 4, 2003. Hancock opened
three stores and closed six stores during the thirteen weeks ended May 2, 2004,
resulting in a total of 430 stores at quarter end. We expect to open 10 to 12
stores and close 7 to 10 in the second quarter and plan to have 10 or more net
additions for the year.
RESULTS OF OPERATIONS
Thirteen weeks ended May 2, 2004 compared with thirteen weeks ended May 4, 2003
Net earnings were $816 thousand, or $.04 per diluted share, compared with $4.1
million, or $.22 per diluted share, in 2003's first quarter.
Sales decreased to $105.1 million from $107.6 million in the same quarter of the
previous year primarily as the result of a 3.2% decline in comparable store
sales. Comparable store sales were adversely affected by a weaker offering of
spring merchandise, together with a delay in getting the spring assortments to
our stores on a timely basis as the result of relocating our distribution
operations from our only distribution center to a new facility. Store selling
square footage increased from 4,968,000 selling square feet at the end of last
year's first quarter to 5,062,000 square feet this year due to new stores being
larger in size than the stores that were closed.
Gross margins declined from 50.9% to 49.9% due largely to the need for more
seasonal clearance markdowns resulting from the slower sales.
Selling, general and administrative expenses as a percentage of sales were 47.0%
compared to 43.5% in the first quarter of 2003. The deleveraging impact on the
expense ratio that results from negative comparable store sales was the primary
factor affecting the comparison. In addition, there was approximately $350,000
of expense associated with completing the distribution center move, a $350,000
spike in employee medical claims, $150,000 of store lease termination costs and
a $150,000 increase in legal costs associated with various real estate activity,
including a condemnation case for one store.
11
Depreciation and amortization increased to 1.6% of sales from 1.3% primarily due
to capital expenditures related to the new distribution center and the continued
roll-out of point-of-sale ("POS") systems to our stores. At quarter end, POS had
been installed in 224 stores, and our goal is to complete the roll-out in the
remaining stores by fiscal year end.
Interest expense increased slightly due to higher average outstanding debt
levels incurred in connection with funding construction of the new distribution
center. The effect of higher borrowings was partially offset, however, by lower
interest rates.
Income tax expense decreased almost $1.9 million due to the reduction in pretax
earnings from the same period in 2003. Hancock's effective tax rate was 36.3% in
both years.
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 than in the
first quarter of 2002.
Sales increased to $107.6 million from $104.0 million in the first quarter of
the previous 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% in
the previous 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.
Interest expense was higher due to average debt outstanding totaling $7 million
during this year's first quarter versus no debt outstanding in the first quarter
of 2002.
Income tax expense increased $215 thousand due to the increase in pretax
earnings from the same period in 2002. Hancock's effective tax rate was 36.3% in
both years.
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 contained in the Company's Annual Report on
Form 10-K. Management bases its estimates on its historical experience, together
with other relevant factors, in order to form the basis for making judgments,
which will affect the carrying values of assets and liabilities. On an ongoing
basis, management evaluates its estimates and makes changes to carrying values
as deemed necessary.
OFF-BALANCE SHEET ARRANGEMENTS
Hancock has no off-balance sheet financing arrangements.
12
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Hancock has an arrangement that provides up to $5 million in letters of credit.
At May 2, 2004, Hancock had commitments under this arrangement of $3.7 million
on issued letters of credit which support purchase orders for merchandise to be
imported. Hancock also has a $4.7 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 2024.
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. 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 quarter of 2004, a decrease in the
Producer Price Index resulted in a LIFO credit of $150,000. There was no LIFO
charge or credit in the same period of 2003.
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 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. Hancock
adopted SFAS No. 150 as of June 1, 2003 and August 4, 2003, and there was no
impact on its financial statements.
During November 2003, the EITF reached a consensus on Issue 03-10, "Application
of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by
Manufacturers". EITF 03-10 addresses the accounting and disclosure treatment for
consideration received by a reseller from a vendor that is a reimbursement by
the vendor for honoring the vendor's sales incentives offered directly to
consumers. EITF 03-10 is effective for sales incentives tendered to consumers
for fiscal years beginning after December 15, 2003. Hancock adopted EITF Issued
03-10 on February 2, 2004, and there was no impact on its financial statements.
During December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosure about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88, and 106. This Statement revises employers'
disclosures about pension and other postretirement benefit plans and replaces
SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement
13
Benefits. SFAS No. 132 (revised) requires additional disclosures to those in
SFAS No. 132 about assets, obligations, cash flows, net periodic benefit cost of
defined benefit pension plans and other postretirement plans. SFAS No. 132
(revised) is effective for fiscal years ending after December 15, 2003. Hancock
adopted the disclosure requirements of SFAS No. 132 (revised) as of February 1,
2004.
During December 2003, the FASB issued FIN No. 46 (revised December 2003),
Consolidation of Variable Interest Entities. FIN No. 46 (revised) replaces FIN
No. 46, Consolidation of Variable Interest Entities, and 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 No. 46 (revised) is effective for public entities with
interests in variable interest entities or potential variable interest entities
for periods ending after December 15, 2003. For public entities with interests
in all other types of entities, FIN No. 46 (revised) is effective for financial
statements for periods ending after March 15, 2004, with early adoption
permitted. Hancock adopted FIN No. 46 (revised) as of February 1, 2004 and there
was no impact on its financial statements.
During January 2004, the FASB issued FASB Staff Position No. 106-1, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which allows the deferral of
financial recognition of the Medicare Prescription Drug Improvement and
Modernization Act until the FASB issues final accounting guidance. Refer to Note
10 in the Consolidated Financial Statements for additional information.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Litigation Reform Act of 1995. Such statements are not historical facts
and reflect the Company's current views regarding matters such as operations and
financial performance. In general, forward-looking statements are identified by
such words or phrases as "anticipates", "believes", "approximates", "estimates",
"expects", "intends" or "plans" or the negative of those words or other
terminology. Forward-looking statements involve inherent risks and
uncertainties; the Company's actual results could differ materially from those
expressed in our forward-looking statements. The risks and uncertainties that
could cause our actual results to differ from those expressed in our
forward-looking statements include, but are not limited to:
- Transition of operations to the Company's new corporate offices will
result in higher operating expenses than historically experienced and
may disrupt our operations
- Changes in customer demand or purchase patterns
- Competitive changes, including but not limited to, an increase in
advertising, an increase in promotional pricing activity and
liquidations of inventory in Hancock's markets in connection with a
competitor's store closing or need to dispose of old inventory
- Adverse general economic trends
- Delays or interruptions in the flow of merchandise between Hancock's
suppliers and/or its distribution center and its stores
- Disruption in the Company's data processing services
- The stability of interest rates during periods of borrowing
Forward-looking statements speak only as of the date made, and neither Hancock
Fabrics nor its management undertakes any obligation to update or revise any
forward-looking statement.
14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Hancock does not hold derivative financial or commodity instruments at May 2,
2004. 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.
15
PART II. OTHER INFORMATION:
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
This table provides information with respect to purchases by the Company of
shares of its Common Stock during the first quarter of 2004:
Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------------------------------------------------------
Total Number of Maximum
Shares Purchased as Number of Shares That
Total number of Average Price Part of Publicly May Yet Be Purchased
Period Shares Purchased * Paid Per Share Announced Plans Under the Plans
- ------------------------------------------------------------------------------------------------------------------------
February 2, 2004 through
February 29, 2004 20,111 $16.65 20,111 357,738
- ------------------------------------------------------------------------------------------------------------------------
March 1, 2004 through
April 4, 2004 91,679 $15.24 91,679 266,059
- ------------------------------------------------------------------------------------------------------------------------
April 5, 2004 through
May 2, 2004 - - - 266,059
- ------------------------------------------------------------------------------------------------------------------------
Total 111,790 $15.49 111,790
- ------------------------------------------------------------------------------------------------------------------------
*The number of shares purchased during the quarter includes 111,580 shares
deemed surrendered to the Company to satisfy tax withholding obligations
arising from the lapse of restrictions on shares.
In June of 2000 the Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's Common Stock from time to time when warranted
by market conditions. There have been 1,733,941 shares purchased under this
authorization through May 2, 2004.
16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
- - Current Report on Form 8-K filed February 25, 2004 announcing quarterly
earnings.
- - Current Report on Form 8-K filed May 19, 2004 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)
June 9, 2004
17
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: June 9, 2004
/s/ Larry G. Kirk
- ------------------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer
18
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: June 9, 2004
/s/ Bruce D. Smith
- ------------------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer
19
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 to
18 U.S.C. Section 1350 that: (1) this quarterly report on Form 10-Q of Hancock
Fabrics, Inc. ("Hancock") for the quarter ended May 2, 2004 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: June 9, 2004
/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
20