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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2005
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.)
One Fashion Way, Baldwyn, MS 38824
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(662) 365-6000
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 April 30, 2005, the registrant had outstanding an aggregate of 19,166,661
shares of common stock, $.01 par value.
INDEX
Part I. Financial Information:
Page Numbers
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of April 30, 2005 and January 30, 2005 3
Consolidated Statements of Operations for the Thirteen Weeks Ended
April 30, 2005 and May 2, 2004 4
Consolidated Statements of Cash Flows for the Thirteen Weeks Ended 5
April 30, 2005 and May 2, 2004
Consolidated Statement of Shareholders' Equity for the Thirteen Weeks
Ended April 30, 2005 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 14
Part II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 6. Exhibits 15
Signature 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
---------------------------------------------------------------------------------------------------
April 30, January 30,
(in thousands, except for share and per share amounts) 2005 2005
---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,730 $ 3,794
Receivables, less allowance for doubtful accounts 551 870
Inventories 157,607 155,857
Income taxes refundable 1,200 -
Prepaid expenses 1,479 2,115
---------------------------------------------------------------------------------------------------
Total current assets 164,567 162,636
Property and equipment, at depreciated cost 70,550 71,261
Deferred tax assets 4,338 4,157
Pension payment in excess of required contribution 13,464 13,961
Goodwill 4,480 4,480
Other assets 2,963 3,030
---------------------------------------------------------------------------------------------------
Total assets $ 260,362 $ 259,525
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 38,215 $ 41,681
Accrued liabilities 18,788 20,044
Deferred tax liabilities 4,115 4,192
Income taxes - 463
---------------------------------------------------------------------------------------------------
Total current liabilities 61,118 66,380
Long-term debt obligations 41,000 31,000
Lease financing obligation 803 -
Postretirement benefits other than pensions 22,751 22,661
Reserve for store closings 450 483
Other liabilities 9,519 10,435
---------------------------------------------------------------------------------------------------
Total liabilities 135,641 130,959
---------------------------------------------------------------------------------------------------
Commitments and contingencies
---------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares
authorized; 32,307,137 and 32,328,133 issued and
outstanding, respectively 323 323
Additional paid-in capital 75,226 75,524
Retained earnings 206,576 211,032
Treasury stock, at cost, 13,140,476 and 13,127,250
shares held, respectively (152,838) (152,729)
Deferred compensation on restricted stock incentive plan (4,566) (5,584)
---------------------------------------------------------------------------------------------------
Total shareholders' equity 124,721 128,566
---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 260,362 $ 259,525
===================================================================================================
See accompanying notes to consolidated financial statements.
3
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
April 30, May 2,
(in thousands, except per share amounts) 2005 2004
- ----------------------------------------------------------------------------------------------------------------
Sales $ 97,840 $ 105,089
Cost of goods sold (1) 51,134 52,606
- ----------------------------------------------------------------------------------------------------------------
Gross profit 46,706 52,483
Selling, general and administrative expense 49,325 49,379
Depreciation and amortization 2,234 1,710
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) (4,853) 1,394
Interest expense, net 332 112
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (benefit) (5,185) 1,282
Income taxes (benefit) (1,882) 466
- ----------------------------------------------------------------------------------------------------------------
Net earnings (loss) and comprehensive income $ (3,303) $ 816
================================================================================================================
Earnings (loss) per share
Basic $ (.18) $ .05
Diluted $ (.18) $ .04
================================================================================================================
Weighted average shares outstanding
Basic 18,337 17,994
Diluted 18,337 18,791
================================================================================================================
Dividends per share $ .06 $ .12
==================================================================================================================
(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
April 30, May 2,
2005 2004
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings and comprehensive income $ (3,303) $ 816
Adjustments to reconcile net earnings to cash
flows used in operating activities
Depreciation and amortization 2,234 1,710
LIFO charge (credit) 1,000 (150)
Deferred income taxes (258) 1,116
Amortization of deferred compensation on
restricted stock incentive plan 596 710
Reserve for store closings credits (2) -
Loss on disposition of property and equipment 22 138
Interest expense on closed stores accrual 9 27
Issuance of shares as compensation for professional
services 5 8
Issuance of shares under directors' stock plan 75 45
Tax benefit of stock options exercised 1 483
(Increase) decrease in assets
Receivables and prepaid expenses 955 399
Inventory at current cost (2,750) 4,171
Income tax refundable (1,200) -
Pension payment in excess of required contribution 497 530
Other noncurrent assets 67 83
Increase (decrease) in liabilities
Accounts payable (3,466) (3,862)
Accrued liabilities (1,213) (3,889)
Current income tax obligations (428) (5,056)
Postretirement benefits other than pensions 90 165
Reserve for store closings (83) (220)
Other liabilities (916) (112)
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (8,068) (2,888)
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (1,573) (8,070)
Proceeds from the disposition of property and equipment 28 7
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,545) (8,063)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on revolving credit agreement 10,000 13,000
Proceeds from lease financing 803 -
Purchase of treasury stock (109) (1,732)
Proceeds from exercise of stock options 8 1,105
Cash dividends paid (1,153) (2,256)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,549 10,117
- -----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (64) (834)
Cash and cash equivalents:
Beginning of period 3,794 4,080
- -----------------------------------------------------------------------------------------------------
End of period $ 3,730 $ 3,246
=====================================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 345 $ 95
Income taxes $ 25 $ 3,932
=====================================================================================================
See accompanying notes to consolidated financial statements.
5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for number of shares)
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stock Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 2005 32,328,133 $323 $75,524 $211,032 (13,127,250) ($152,729) ($5,584) $128,566
Net earnings and comprehensive income (3,303) (3,303)
Cash dividends ($.06 per share) (1,153) (1,153)
Issuance of restricted stock 20,000 181 (181)
Cancellation of restricted stock (52,200) (603) 603
Amortization & vesting of deferred
compensation on restricted stock incentive
plan 35 596 631
Issuance of shares under directors' stock
plan 9,225 75 75
Issuance of shares as compensation for
professional services 554 5 5
Purchase of treasury stock (13,226) (109) (109)
Stock options exercised 1,425 8 8
Tax benefit of stock options exercised 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Balance April 30, 2005 32,307,137 $323 $75,226 $206,576 (13,140,476) ($152,838) ($4,566) $124,721
====================================================================================================================================
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 January
30, 2005 incorporated into the Company's Annual Report on Form 10-K.
For fiscal year 2004, Hancock maintained its financial records on a 52-53 week
fiscal year ending on the Sunday closest to January 31. Beginning in fiscal
2005, the Company began maintaining its financial records on a 52-53 week fiscal
year ending on the Saturday closest to January 31.
The results of operations for the thirteen week period 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 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 all periods presented, 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 (loss) and earnings (loss) per
share as if the fair value method had been applied in measuring compensation
expense is presented below (in thousands, except per share amounts):
2005 2004
--------------- --------------
Net earnings (loss), as reported $ (3,303) $ 816
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (355) (448)
--------------- --------------
Pro forma net earnings (loss) $ (3,658) $ 368
=============== ==============
Earnings (loss) per share:
Basic - as reported $ (.18) $ .05
=============== ==============
Basic - pro forma $ (.20) $ .02
=============== ==============
Diluted - as reported $ (.18) $ .04
=============== ==============
Diluted - pro forma $ (.20) $ .02
=============== ==============
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 shares of
common stock, 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 (LOSS) PER SHARE
(unaudited)
- ------------------------------------------------------------------------------------------------
(in thousands, except for share and Thirteen Weeks Ended
----------------------------
per share amounts) April 30, May 2,
2005 2004
- ------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) ($3,303) $816
============ ============
Weighted average number of common shares outstanding during
period 18,337,148 17,993,773
============ ============
Basic earnings (loss) per share $ (.18) $ .05
============ ============
Diluted earnings (loss) per share:
Net earnings (loss) ($3,303) $816
============ ============
Weighted average number of common shares outstanding during
period 18,337,148 17,993,773
Stock options - 346,088
Restricted stock and deferred stock units - 451,441
------------ ------------
Weighted average number of common shares outstanding during
period adjusted for dilutive securities 18,337,148 18,791,302
============ ============
Diluted earnings (loss) per share $ (.18) $ .04
============ ============
Weighted average common stock equivalents not included in EPS
(stock options) because the effect would be anti-dilutive 1,831,600 413,500
============ ============
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 April 30, 2005, the total reserve balance included in current and noncurrent
liabilities was $1,090,000 which represents the present value of the future net
lease obligations for the locations which have been closed. The 2005 activity in
the reserve is as follows (in thousands):
Addition to
January 30, (Reduction in) April 30,
2005 Reserve Interest Payments 2005
---------------- ------------------- --------------- ---------------- ---------------
Lease obligations $ 1,166 $ (2) $ 9 $ (83) $ 1,090
================ =================== =============== ================ ===============
NOTE 5: RETIREMENT BENEFITS
On December 9, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a
prescription drug benefit under Medicare, as well as a federal subsidy to
sponsors of retiree health benefit plans that provide prescription drug benefits
that are at least actuarially equivalent to Medicare's prescription drug
benefits. During the third quarter of 2004, Hancock adopted FASB Staff Position
No. 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, and determined
that the Company's prescription drug coverage for retirees is at least
actuarially equivalent to the Medicare coverage provided under the Act. The
Company elected to adopt the provisions of FSP No. 106-2 prospectively.
The following summarizes the net periodic benefit cost for Hancock's defined
benefit pension retirement plan and its postretirement health care benefit plan
for the thirteen weeks ended April 30, 2005 and May 2, 2004:
Retirement Plan Postretirement Benefit Plan
(Dollars in thousands) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Service costs $ 700 $ 718 $ 168 $ 165
Interest cost 1,000 970 238 248
Expected return on assets (1,413) (1,388)
Amortization of prior service costs (23) 18 (63) (62)
Recognized net actuarial (gain) loss 233 212 (68) (58)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 497 $ 530 $ 275 $ 293
- -----------------------------------------------------------------------------------------------------------------------
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS 151 clarifies that abnormal inventory costs such as
idle facilities, excess freight and handling costs, and waste materials
(spoilage) are required to be recognized as current period charges. The
provisions of SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Hancock does not expect adoption of SFAS
151 to have a material impact on its financial statements.
During December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29. SFAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Hancock does not
expect the adoption of SFAS 153 to have a material impact on its financial
statements.
9
In December 2004, the FASB issued SFAS No. 123(revised 2004),
Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires that all grants of employee stock options and
other similar share-based awards be recognized in the financial statements based
on their grant-date fair values. SFAS 123R is effective for fiscal years
beginning after June 15, 2005. Hancock is in the process of evaluating the
impact SFAS 123R will have on its financial statements and has not yet
determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS 123R.
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.
For the first three months of the year, inventory increased $1.8 million due to
the normal seasonal build-up from year-end, when inventory is typically at a low
level. In 2004, such an increase did not occur in the first quarter because
extra inventory had been purchased in the fourth quarter of 2003 in an attempt
to protect against supply disruptions associated with the transfer of inventory
to the Company's new distribution center. Accounts payable and accrued
liabilities decreased $4.7 million primarily due to the timing of higher
year-end payments associated with the seasonal nature of the Company's business
and the payment in the first quarter of a $1.8 million liability incurred in
connection with the acquisition in 2004's fourth quarter of stores operated by
certain of Hancock's independent wholesale customers. Income taxes payable of
$463 thousand swung to a refund receivable of $1.2 million during the thirteen
week period due to the Company's first quarter loss.
During the thirteen weeks ended April 30, 2005, borrowings of $10 million and
proceeds of $800 thousand from a lease financing transaction were used to fund
capital expenditures of $1.6 million, cash dividends totaling $1.2 million and
working capital requirements. At April 30, 2005, Hancock had outstanding debt of
$41 million, or 24.7% of total capitalization, compared to $31 million, or 19.4%
of total capitalization at January 30, 2005.
During April and May 2005, Hancock entered into separate lease agreements with
two parties to lease a portion of the Company's former distribution center which
is currently being held for sale. The lease agreements are expected to generate
approximately $550 thousand in rental income over the next 12 months beginning
in the second quarter of 2005. The lease which comprises most of the income has
a term of three years, while the other lease has a term of less than one year.
Hancock opened four stores and closed five during the thirteen weeks ended April
30, 2005, resulting in a total of 446 stores at quarter end. In addition, two
stores were relocated. We expect to open and close approximately 25 stores
during the year, resulting in zero net additions.
RESULTS OF OPERATIONS
Thirteen weeks ended April 30, 2005 compared with thirteen weeks ended May 2,
2004
Net losses were $3.3 million, or $.18 per diluted share, compared with net
earnings of $816 thousand, or $.04 per diluted share, in 2004's first quarter.
10
Sales decreased to $97.8 million from $105.1 million in the same quarter of 2004
due to a 6.9% decline in comparable store sales. The comparable store sales
decrease was attributable to incomplete assortments and ineffective
merchandising of the Company's home decorating, quilting and apparel fabric core
categories. Hancock is currently in the process of addressing these matters in
connection with the Company's implementation of a strategic makeover plan that
will involve new/expanded merchandise lines, changes to the advertising strategy
and enhancements to store presentation, all of which are scheduled for
completion prior to the fall selling season. Store selling square footage
increased from 5,062,000 selling square feet at the end of last year's first
quarter to 5,262,000 square feet this year due to the net addition of 16 stores.
Gross margins declined from 49.9% to 47.7%, partially as a result of markdowns
needed to clear seasonal goods in response to decreased sales. In addition, an
increase in the Producer Price Index ("PPI") used to measure inflation resulted
in a LIFO charge of $1 million during the first quarter of 2005, compared with a
LIFO credit of $150,000 in the same period of 2004.
Selling, general and administrative expenses as a percentage of sales increased
to 50.4% in the first quarter of 2005 from 47.0% in the first quarter of 2004.
This increase was the result of the deleveraging impact on the expense ratio
that results from negative comparable store sales, as selling, general and
administrative expense dollars actually decreased slightly, even with the net
opening of 16 new stores since the first quarter of 2004.
Depreciation and amortization expense increased to 2.3% of sales from 1.6% in
the first quarter of 2004 due to completion of construction of the Company's
corporate office facility in Baldwyn, Mississippi and the implementation of a
point-of-sale ("POS") system in Hancock's stores.
Interest expense increased $220 thousand over the prior year due to higher
average outstanding debt levels and a higher interest rate environment. Income
taxes decreased due to the reduction of pre-tax earnings. Hancock's effective
tax rate was 36.3% in both years.
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 2003's
first quarter to 5,062,000 square feet in 2004 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 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 this comparison. In addition, there was approximately $350
thousand of expense associated with completing the distribution center move, a
$350 thousand spike in employee medical claims, $150 thousand of store lease
termination costs and a $150 thousand increase in legal costs associated with
various real estate activity, including a condemnation case for one store.
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 POS systems to our stores. At quarter end, POS had been installed in
224 stores.
11
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.
LIQUIDITY AND CAPITAL RESOURCES
Bank credit facilities
For the quarter ended April 30, 2005, Hancock was in violation of the ratio of
consolidated debt to consolidated EBITA and fixed charges coverage covenants
contained in its revolving credit agreement. However, the Company obtained a
waiver for these covenants from the lending banks for the quarter.
Subsequent to quarter end, Hancock entered into an agreement with Wachovia Bank,
National Association, and Wachovia Capital Markets, LLC (together, "Wachovia"),
whereby Wachovia has committed to use its best efforts to arrange for and
syndicate a secured revolving loan and letter of credit facility for the Company
of up to $110 million. The new facility will replace Hancock's existing
unsecured $50 million credit agreement and contain less restrictive covenants.
In addition, the interest rate will be only slightly higher than Hancock's rate
under the existing facility. The agreement is expected to be finalized during
the second quarter of 2005.
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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Hancock has an arrangement that provides up to $5 million in letters of credit.
At April 30, 2005, Hancock had commitments under this arrangement of $300
thousand on letters of credit which support purchase orders for merchandise to
be imported. Hancock also has a $5.5 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 2025.
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
12
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 Hancock's pension plan could be necessary if investment returns
are weak. 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 three months of 2005, an increase
in the PPI resulted in a LIFO charge of $1 million. During the same period of
2004, the Company recorded a LIFO credit of $150,000.
SEASONALITY
Hancock's business is seasonal. Peak sales periods occur during the fall and
pre-Easter weeks, while the lowest sales periods occur during the summer and the
month of January.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Securities 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 those that are
discussed below.
- 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
nor its management undertakes any obligation to update or revise any
forward-looking statement.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Hancock does not hold derivative financial or commodity instruments at April 30,
2005. 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.
13
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.
PART II. OTHER INFORMATION:
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information with respect to purchases by the Company of
shares of its common stock during the first quarter of 2005:
- ------------------------------------------------------------------------------------------------------------------------
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 (1) Paid Per Share Announced Plans (2) Under the Plans
- ------------------------------------------------------------------------------------------------------------------------
January 31, 2005 through
February 26, 2005 1,929 $8.77 76 244,304
- ------------------------------------------------------------------------------------------------------------------------
February 27, 2005 through
April 2, 2005 11,213 $8.13 92 244,212
- ------------------------------------------------------------------------------------------------------------------------
April 3, 2005 through
April 30, 2005 84 $7.03 84 244,128
- ------------------------------------------------------------------------------------------------------------------------
Total 13,226 $8.22 252
- ------------------------------------------------------------------------------------------------------------------------
(1)The number of shares purchased during the first quarter includes 12,974
shares deemed surrendered to the Company to satisfy tax withholding
obligations arising from the lapse of restrictions on shares.
(2)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 1,755,872 shares purchased
under this authorization through April 30, 2005. The shares discussed in
footnote (1) are excluded from this column.
14
ITEM 6: EXHIBITS
10.1 Letter Agreement Re: Separation and Release and Waiver with James A.
Austin dated April 25, 2005
10.2 Fourth Amendment to Credit Agreement dated May 16, 2005
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 Rule 13a-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
15
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
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
June 8, 2005
16
Exhibit 31.1
Certification of Chief Executive Officer
I, Jane F. Aggers, 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance
with generally accepted accounting principles;
c) 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
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's first 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 8, 2005
/s/ Jane F. Aggers
- -------------------
Jane F. Aggers
President and Chief Executive Officer
17
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance
with generally accepted accounting principles;
c) 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
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's first 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 8, 2005
/s/ Bruce D. Smith
- --------------------
Bruce D. Smith
Executive Vice President and
Chief Financial Officer
18
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350
Each of the undersigned, Jane F. Aggers and Bruce D. Smith, certifies pursuant
to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350 that: (1) this quarterly report on Form 10-Q of Hancock Fabrics,
Inc. ("Hancock") for the quarter ended April 30, 2005 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 8, 2005
/s/ Jane F. Aggers
- ---------------------
Jane F. Aggers
President and Chief Executive Officer
/s/ Bruce D. Smith
- ---------------------
Bruce D. Smith
Executive Vice President and Chief Financial Officer
19