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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9482
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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 ST., TUPELO, MS 38801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(662) 842-2834
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($.01 par value) New York Stock Exchange
Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of April 17, 2000, there were 17,759,917 shares of Hancock Fabrics, Inc. $.01
par value common stock held by non-affiliates with an aggregate market value of
$59,939,720. As of April 17, 2000, there were 18,250,636 shares of Hancock
Fabrics, Inc. $.01 par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report
to Shareholders Parts I, II, and IV
Portions of the Proxy Statement
for the 2000 Annual meeting of
shareholders Part III
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1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I
Item 1. Business....................................................... 4
Item 2. Properties..................................................... 6
Item 3. Legal Proceedings.............................................. 7
Item 4. Submission of Matters to a Vote
of Security Holders........................................... 7
Executive Officers of Registrant........................................ 8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters................................... 9
Item 6. Selected Financial Data........................................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 7a. Other Matters.................................................. 9
Item 8. Financial Statements and Supplementary Data.................... 10
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 10
PART III
Item 10. Directors and Executive Officers of Registrant................. 11
Item 11. Executive Compensation......................................... 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 11
Item 13. Certain Relationships and Related Transactions................. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 12
Signatures.............................................................. 18
</TABLE>
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PART I
ITEM 1. BUSINESS
Hancock Fabrics, Inc.,(the Company, which may be referred to as we, us, or our)
was incorporated in 1987 as a successor to the retail and wholesale fabric
business of Hancock Textile Co., Inc., a Mississippi corporation and a wholly
owned subsidiary of Lucky Stores, Inc., a Delaware corporation ("Lucky").
Founded in 1957, we operated as a private company until 1972 when we were
acquired by Lucky. We became a publicly owned company as a result of the
distribution of shares of common stock to the shareholders of Lucky on May 4,
1987.
The Company is engaged in the retail and wholesale fabric business, selling
fabrics and related accessories to the home sewing and home decorating market
and at wholesale to independent retailers. We are one of the largest fabric
retailers in the United States. At January 30, 2000, we operated 453 fabric
stores in 42 states. As a wholesaler of fabrics and related items, we sell to
independent retail fabric stores through the wholesale distribution facility in
Tupelo, Mississippi.
OPERATIONS
Our stores offer a wide selection of apparel fabrics, home decorating products
(which include drapery and upholstery fabrics), notions (which include sewing
aids and accessories such as zippers, buttons, threads and ornamentation),
patterns, quilting materials and supplies, craft items and related supplies.
Each of our retail stores maintains an inventory that includes cotton, woolen
and synthetic staple fabrics such as broadcloth, poplin, gaberdine, unbleached
muslin and corduroy, as well as seasonal and current fashion fabrics.
Our stores are primarily located in neighborhood shopping centers. The number of
stores decreased by 9 in 1999.
As a wholesaler, we sell to over 100 independent retailers in markets in which
the Company has elected not to open our own stores. These wholesale customers
accounted for approximately 1% of our total sales for the fiscal year ended
January 30, 2000.
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MARKETING
We principally serve the home sewing and home decorating markets, which largely
consist of women who make clothing for their families and decorations for their
homes or who hire professional home seamstresses to sew for them. Quilters,
crafters and hobbyists also comprise a portion of the base of customers, as do
consumers of bridal, party, prom and special occasion merchandise.
We offer our customers a wide selection of products at prices that we believe
are generally lower than the prices charged by our competitors. In addition to
staple fabrics and notions for clothing and home decoration, we provide a
variety of seasonal and current fashion apparel merchandise.
We use promotional advertising, primarily through newspapers, direct mail and
television, to reach target customers. We mail six to ten direct mail promotions
each year to approximately 1.2 million households, including the "Directions"
magazine which contains discount coupons, sewing instructions, fashion ideas and
product advertisements. In addition to local television advertising, we
advertise on the HGTV network that reaches approximately 60 million households.
DISTRIBUTION AND SUPPLY
Our retail stores and wholesale customers are served by our 525,000 square foot
warehouse, distribution and headquarters facility in Tupelo, Mississippi. This
facility is adequate for the near term and we have no major expansion plans for
2000.
Contract trucking firms, common carriers and parcel delivery are used to deliver
merchandise from our warehouse and vendors to our retail stores and wholesale
customers.
Bulk quantities of fabric are purchased from domestic and foreign mills, fabric
jobbers and importers. We have no long-term contracts for the purchase of
merchandise and did not purchase more than 5% of our merchandise from any one
supplier during the fiscal year ended January 30, 2000. We have experienced no
difficulty in maintaining satisfactory sources of supply.
COMPETITION
We are among the largest fabric retailers in the United States. We principally
compete with other national and regional fabric store chains on the basis of
price, selection, quality, service and location.
Our competition has changed significantly in recent years due to rapid expansion
that began in the fabric industry in the late 1980's which ultimately led to
financial difficulties for many of our competitors and to significant industry
consolidation. Store closings and associated
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inventory liquidations by competitors continued during the first half of 1999,
as the piece goods retail capacity adjusted more closely to customer demand.
SEASONALITY
Our 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.
EMPLOYEES
At January 30, 2000, we employed approximately 6,500 people on a full-time and
part-time basis, approximately 6,200 of whom work in our retail stores. The
remainder work in the Tupelo warehouse, distribution and headquarters facility.
GOVERNMENT REGULATION
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wages, overtime and other working conditions. A significant
number of our employees are paid at rates related to Federal and state minimum
wages and, accordingly, any increase in the minimum wage would affect our labor
cost.
ITEM 2. PROPERTIES
The Company's 453 retail stores average approximately 12,700 square feet and are
located principally in neighborhood shopping centers.
With the exception of four (4) owned locations, our retail stores are leased.
The original lease terms generally range from 10 to 20 years and most leases
contain one or more renewal options, usually of five years in length. At January
30, 2000, the remaining terms of the leases for stores in operation, including
renewal options, averaged approximately 12 years. During 2000, 64 store leases
will expire. We are currently negotiating renewals on certain of these leases.
The 525,000 square foot warehouse, distribution and headquarters facility in
Tupelo, Mississippi is owned by the Company and is not subject to any mortgage
or similar encumbrance. We also own approximately 59 acres of land adjacent to
our Tupelo facility, providing room for future expansion.
Reference is made to the information contained in Note 7 to the Consolidated
Financial Statements included in the accompanying 1999 Annual Report to
Shareholders for information concerning our long-term obligations under leases.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several legal proceedings and claims. Although the
outcome of such proceedings and claims cannot be determined with certainty, we
are of the opinion that it is unlikely that these proceedings and claims will
have a material effect on the financial condition or operating results of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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Executive Officers of the Company
<TABLE>
<CAPTION>
Office Presently Held and Business
Name Age Experience During Past Five Years
- ---- --- ----------------------------------
<S> <C> <C>
Larry G. Kirk 53 Chairman of the Board and Chief
Executive Officer from June 1997,
Chief Executive Officer and President
from June 1996, President and Chief
Financial Officer prior thereto,
Director from December 1990.
Jack W. Busby, Jr. 57 President, Chief Operating Officer
and Director from June 1997.
Executive Vice President and Chief
Operating Officer from June 1996;
Executive Vice President and Director
of Retail Operations prior thereto.
Bruce D. Smith 41 Senior Vice President, Chief
Financial Officer and Treasurer from
March 1997, Senior Vice President
from November 1996. Prior thereto,
Executive Vice President and Chief
Financial Officer with Fred's, Inc.
</TABLE>
The term of each of the officers expires June 15, 2000.
There are no family relationships among the executive officers.
There are no arrangements or understandings pursuant to which any person was
selected as an officer.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock and the associated common stock purchase rights are
listed on the New York Stock Exchange and trade under the symbol HKF. Additional
information required by this item is incorporated by reference from the table
"Quarterly Financial Data" on page 8 and the table "Market Information" on page
25 of the 1999 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Historical financial information is incorporated by reference from the table
"Five-Year Summary of Significant Financial Information" on page 8 of the 1999
Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is incorporated by reference from pages 9 to 11 of the 1999 Annual
Report to Shareholders.
ITEM 7A. OTHER MATTERS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has no holding of derivative financial or commodity instruments at
January 30, 2000. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Company's Revolving Credit
Agreement bear interest at a negotiated rate, a floating rate (the higher of the
federal funds rate plus 1/2% or the prime rate), a rate derived from the money
market rate, or a rate derived from the London Interbank Offered Rate. An
increase in interest rates of 100 basis points would not significantly affect
the Company's income. All of the Company's business is transacted in U.S.
dollars and, accordingly, foreign exchange rate fluctuations have never had a
significant impact on the Company, and they are not expected to in the
foreseeable future.
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OTHER MATTERS
On March 13, 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 98-9,
Accounting for Contingent Rent. The EITF indicated that with respect to lessees'
accounting for contingent rent, that a lessee should recognize contingent rental
expense (in annual periods as well as in interim periods) prior to the
achievement of the specified target that triggers the contingent rental expense,
provided that achievement of that target is considered probable. Previously
recorded rental expense should be reversed into income at such time that it is
probable that the specified target will not be met. The Company is already in
compliance with EITF 98-9.
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance as to the appropriate timing for
recognition of revenue. The company recognizes revenue upon delivery of the
product to a customer. Management does not believe that SAB 101 will have any
impact on its financial statements.
On March 4, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, ("SOP 98-1") which became effective for
the Company at the beginning of the current fiscal year. SOP 98-1 defines stages
of projects for software developed or obtained for internal use. The SOP
requires costs associated with certain stages, as defined, to be either
capitalized or expensed. The Company has fully adopted SOP 98-1, which resulted
in no material impact on the financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated by reference from the "Report
of Independent Accountants" found on page 21 and from the consolidated financial
statements on pages 12-21 of the 1999 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Directors of the Company is incorporated by reference from
the discussion under Item 1 of our Proxy Statement for the 2000 Annual Meeting
of Shareholders. The balance of the response to this item is contained in the
discussion entitled "Executive Officers of the Company" in Part I of this
report.
ITEM 11: EXECUTIVE COMPENSATION
Information about executive compensation is incorporated by reference from the
discussion under the heading "Compensation of Executive Officers and Directors"
in our Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about security ownership of certain beneficial owners and management
is incorporated by reference from the table on page 2 and 3 of the Proxy
Statement for the 2000 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information about certain relationships and related transactions concerning
"Executive Officers of the Registrant" is included in Part I.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in the 1999
Annual Report to
14 (a) (1) Financial Statements Shareholders
-----------------
Report of Independent Accountants................ 21
Consolidated Statement of Earnings............... 12
Consolidated Balance Sheet ...................... 13
Consolidated Statement of Cash Flows ............ 14
Consolidated Statement of Shareholders' Equity... 15
Notes to Consolidated Financial Statements.... 16-21
14 (a) (2) Consolidated Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements.
Supplementary data:
Selected Quarterly Financial Data............... 8
14 (a) (3)
3.1 e Certificate of Incorporation of Registrant.
3.2 g By-Laws of Registrant.
4.1 c Certificate of Incorporation of Registrant.
4.2 g By-Laws of Registrant.
4.3 b Rights Agreement between Registrant and
C & S/Sovran Trust Company (Georgia), N.A.,
as amended March 14, 1991 and restated as of
April 2, 1991.
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4.4 e Amendment to Rights Agreement between Registrant and NationsBank
of Georgia, N.A.(formerly C & S/ Sovran Trust Company (Georgia),
N.A.) dated June 25, 1992.
4.5 e Agreement between Registrant and Continental Stock Transfer &
Trust Company (as Rights Agent) dated as of July 16, 1992.
4.6 j Credit Agreement among Registrant and Wachovia Bank as Agent
and Lenders as Signatories Hereto ("Wachovia Credit Agreement")
dated as of April 16, 1999.
10.1 j Wachovia Credit Agreement dated as of April 16, 1999.
10.2 g Form of Indemnification Agreements dated June 8, 1995 between
Registrant and each of Jack W. Busby, Jr., R. Randolph Devening,
Don L. Fruge, Larry G. Kirk and Donna L. Weaver.
10.3 g Form of Indemnification Agreements dated June 8, 1995 between
Registrant and each of Dean W. Abraham, Bradley A. Berg, Larry D.
Fair, James A. Gilmore, David A. Lancaster, Billy M. Morgan,
James A. Nolting, William D. Smothers, and Carl W. Zander.
10.4 h Form of Indemnification Agreement dated June 13, 1996 between
the Registrant and each of Tom R. Collins, Jeffie L. Gatlin,
Ellen J. Kennedy, Bruce E. Rockstad and William A. Sheffield, Jr.
10.5 h Indemnification Agreement between Registrant and Bruce D. Smith
dated as of December 10, 1996.
10.6 i Indemnification Agreement between Registrant and Phil L. Munie
dated as of March 13, 1997
10.7 b - Agreement between Registrant and Jack W. Busby, Jr. dated as of
June 9, 1988.
10.8 b - Agreement to Secure Certain Contingent Payments between
Registrant and Jack W. Busby, Jr. dated as of June 9, 1988.
10.9 a - Agreement between Registrant and Larry G. Kirk dated as of
June 9, 1988.
10.10 a - Agreement to Secure Certain Contingent Payments between
Registrant and Larry G. Kirk dated as of June 9, 1988.
10.11 g - Form of Amendment, Extension and Restatement of Severance
Agreement between Registrant and
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each of Jack W. Busby, Jr. and Larry G. Kirk dated as of
March 14, 1996.
10.12 h - Amendment to Deferred Compensation Agreement, Severance
Agreement, and Agreement to Secure Certain Contingent Payments
between Registrant and Larry G. Kirk dated as of June 13, 1996.
10.13 h - Amendment to Deferred Compensation, and Agreement to Secure
Certain Contingent Payments between Registrant and Jack W. Busby,
Jr., dated as of June 13, 1996.
10.14 h - Agreement between Registrant and Bruce D. Smith dated as of
December 10, 1996.
10.15 h - Severance Agreement between Registrant and Bruce D. Smith dated
as of December 10, 1996.
10.16 h - Agreement to Secure Certain Contingent Payments between
Registrant and Bruce D. Smith dated as of December 10, 1996.
10.17 f - Supplemental Retirement Plan, as amended.
10.18 d - 1987 Stock Option Plan, as amended.
10.19 h - 1996 Stock Option Plan.
10.20 c - Extra Compensation Plan.
10.21 h - 1995 Restricted Stock Plan.
10.22 g - 1991 Stock Compensation Plan for Nonemployee Directors, as
amended.
10.23 j - Officer Incentive Compensation Plan.
10.24 Indemnification Agreement between Registrant and Roger T. Knox
dated as of June 21, 1999.
10.25 Indemnification Agreement between Registrant and Clayton E.
Stallings dated as of March 15, 2000.
10.26 Form of Amendment and Renewal of Severance Agreement between
Registrant and each of Larry G. Kirk, Jack W. Busby and
Bruce D. Smith.
13 Portions of the Hancock Fabrics, Inc. 1999 Annual Report to
Shareholders (for the fiscal year ended January 30, 2000)
incorporated by reference in this filing.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule (only submitted to SEC in electronic
format).
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a Incorporated by reference from Registrant's Form 10-K dated April
26, 1990 as filed with the Securities and Exchange Commission.
b Incorporated by reference from Registrant's Form 10-K dated April
26, 1991 as filed with the Securities and Exchange Commission.
c Incorporated by reference from Registrant's Form 10-K dated April
27, 1992 as filed with the Securities and Exchange Commission.
d Incorporated by reference from Registrant's Form 10-Q dated June 12,
1992 as filed with the Securities and Exchange Commission.
e Incorporated by reference from Registrant's Form 10-K dated April
26, 1993 as filed with the Securities and Exchange Commission.
f Incorporated by reference from Registrant's Form 10-K dated
April 24, 1995 as filed with the Securities and Exchange Commission.
g Incorporated by reference from Registrant's Form 10-K dated April
22, 1996 as filed with the Securities and Exchange Commission.
h Incorporated by reference from Registrant's Form 10-K dated April
22, 1997 as filed with the Securities and Exchange Commission.
I Incorporated by reference from Registrant's Form 10-K dated April
27, 1998 as filed with the Securities and Exchange Commission.
j Incorporated by reference from Registrant's Form 10-K dated April
30, 1999 as filed with the Securities and Exchange Commission
- Denotes management contract or compensatory plan or arrangement.
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(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the last quarter of
the period covered by this report.
Shareholders may obtain copies of any of these exhibits by writing to the
Secretary at the executive offices of the Company. Please include payment in the
amount of $1.00 for each document, plus $.25 for each page ordered, to cover
copying, handling and mailing charges.
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UNDERTAKING IN CONNECTION WITH
REGISTRATION STATEMENTS ON FORM S-8
For purposes of complying with the amendments to the rules governing Form S-8
(effective July 13, 1990) under the Securities Act of 1933 (the "Act"), the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-17215 (filed September 15, 1987), 33-29138 (filed June 12, 1989),
333-32295 (filed July 28, 1997) and 333-32229 (filed July 28, 1997):
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 512 (h) of Regulation S-K, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of April,
2000.
HANCOCK FABRICS, INC
By /s/ Larry G. Kirk
-------------------------
Larry G. Kirk
Chairman of the Board and
Chief Executive Officer
By /s/ Bruce D. Smith
-------------------------
Bruce D. Smith
Senior Vice President
And Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on this 27th day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Larry G. Kirk Chairman of the Board, Chief Executive
- ---------------------------- Officer and Director
(Larry G. Kirk)
/s/ Jack W. Busby, Jr. President, Chief Operating Officer and
- ---------------------------- Director
(Jack W. Busby, Jr.)
/s/ R. Randolph Devening Director
- ----------------------------
(R. Randolph Devening)
/s/ Don L. Fruge Director
- ----------------------------
(Don L. Fruge)
/s/ Roger T. Knox Director
- ----------------------------
(Roger T. Knox)
/s/ Donna L. Weaver Director
- ----------------------------
(Donna L. Weaver)
</TABLE>
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Exhibit 10.24
INDEMNIFICATION AGREEMENT
This Agreement is made as of June 21, 1999, by and between Hancock
Fabrics, Inc., a Delaware corporation (the "Company"), and Roger T. Knox
("Director").
W I T N E S S E T H :
WHEREAS, the Company understands that there can be no assurance that
directors' and officers' liability insurance will continue to be available to
the Company and Director, and believes that it is possible that the cost of such
insurance, if obtainable, may not be acceptable to the Company or the coverage
of such insurance, if obtainable, may be reduced below what has historically
been afforded; and
WHEREAS, Director is unwilling to serve, or continue to serve, the
Company as a director without assurances that adequate liability insurance,
indemnification or a combination thereof will be provided; and
WHEREAS, the Company, in order to induce Director to continue to serve
the Company, has agreed to provide Director with the benefits contemplated by
this Agreement, which benefits are intended to supplement or, if necessary,
replace directors' and officers' liability insurance; and
WHEREAS, as a result of the provision of such benefits Director has
agreed to serve or to continue to serve as a director of the Company;
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including Director's service to
the Company, the Company and Director hereby agree as follows:
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1. Definitions. The following terms, as used herein, shall have the
following respective meanings:
"Covered Amount" means Loss and Expenses which, in type or amount, are
not insured under directors' and officers' liability insurance maintained by the
Company from time to time.
"Covered Act" means any breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or wrongfully attempted by
Director or any of the foregoing alleged by any claimant or any claim against
Director by reason of Director's serving as or being a director, officer,
employee, or agent of the Company, or by reason of Director's serving at the
request of the Company as a director, officer, partner, member, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
"D&O Insurance" means a policy or policies of the directors' and
officers' liability insurance issued to the Company and its directors and
officers.
"Determination" means a determination, based on the facts known at the
time, made by:
(i) A majority of the directors who are not parties to the action,
suit or proceeding for which indemnification is considered or being considered,
even though less than a quorum; or
(ii) Independent legal counsel in a written opinion if there be no
such directors, or if such directors so direct; or
(iii) A majority of the shareholders of the Company; or
(iv) A final adjudication by a court of competent jurisdiction.
"Determined" shall have a correlative meaning.
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"Excluded Claim" means any payment for Losses or Expenses in connection
with any claim:
(i) Based upon or attributable to Director gaining in fact any
personal profit or advantage to which Director is not entitled; or
(ii) For the return by Director of any remuneration, for which prior
approval of the shareholders of the Company was required but not obtained; or
(iii) For an accounting of profits in fact made from the purchase or
sale by Director of securities of the Company within the meaning of Section 16
of the Securities Exchange Act of 1934 as amended, or similar provisions of any
state law; or
(iv) Resulting from Director's knowingly fraudulent, dishonest or
willful misconduct; or
(v) The payment of which by the Company under this Agreement is not
permitted by applicable law; or
(vi) Which are not within the Covered Amount.
"Expenses" means any reasonable expenses incurred by Director as a
result of a claim or claims made against Director for Covered Acts including,
without limitation, counsel fees and costs of investigative, judicial or
administrative proceedings or appeals, but, where prohibited by law or public
policy, shall not include fines.
"Loss" means any amount which Director is legally obligated to pay as a
result of a claim or claims made against Director for Covered Acts including,
without limitation, damages and judgments and sums paid in settlement of a claim
or claims, but, where prohibited by law or public policy, shall not include
fines.
2. Maintenance of D&O Insurance.
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(a) The Company represents that it presently has in force and effect
policies of D&O Insurance. The Company hereby covenants that it will use its
best efforts to maintain a policy or policies no less beneficial to the Company
and Director than the policies in effect on the date hereof. The Company shall
not be required, however, to maintain such policy or policies if such insurance
is not reasonably available or if, in the reasonable business judgment of the
then directors of the Company, either (i) the premium cost for such insurance is
disproportionate to the amount of coverage, or (ii) the coverage provided by
such insurance is so limited by exclusions that there is insufficient benefit
from such insurance.
(b) In all policies of D&O Insurance, Director shall be named as an
insured in such a manner as to provide Director the same rights and benefits,
subject to the same limitations, as are accorded to the Company's directors or
officers most favorably insured by such policy.
3. Indemnification. The Company shall indemnify Director against, and
hold Director harmless from, the Covered Amount of any and all Losses and
Expenses subject, in each case, to the further provisions of this Agreement.
4. Excluded Coverage.
(a) The Company shall have no obligation to indemnify Director against,
and hold Director harmless from, any Loss or Expense which has been Determined
to constitute an Excluded Claim.
(b) The Company shall have no obligation to indemnify Director against,
and hold Director harmless from, any Loss or Expenses to the extent that
Director is indemnified by the Company pursuant to the provisions of the
Company's Certificate of Incorporation or is otherwise in fact indemnified.
5. Indemnification Procedures.
(a) Promptly after receipt by Director of notice of the commencement or
the threat of commencement of any action, suit or proceeding, Director shall
notify the Company of the commencement thereof if indemnification with respect
thereto may be sought from the Company under this Agreement; but the
-4-
<PAGE> 5
omission so to notify the Company shall not relieve it from any liability that
it may have to Director otherwise than under this Agreement. Such notice may be
given by mailing the same by United States mail, registered or certified, return
receipt requested, postage prepaid, addressed to the Company at: P.O. Box 2400,
Tupelo, Mississippi 38803-2400, Attention: Secretary (or to such other address
as the Company may from time to time designate by written notice to Officer).
(b) If, at the time of the receipt of such notice, the Company has D&O
Insurance in effect, the Company shall give prompt notice of the commencement of
such action, suit or proceeding to the insurers in accordance with the
procedures set forth in the respective policies in favor of Director. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of Director, all Losses and Expenses payable as a
result of such action, suit or proceeding in accordance with the terms of such
policies.
(c) To the extent the Company does not, at the time of the commencement
or the threat of commencement of such action, suit or proceeding, have
applicable D&O Insurance, or if a Determination is made that any Expenses
arising out of such action, suit or proceeding will not be payable under the D&O
Insurance then in effect, or if for any reason a D&O insurer does not timely pay
such Expenses, the Company shall be obligated to pay the Expenses of any such
action, suit or proceeding in advance of the final disposition thereof and the
Company, if appropriate, shall be entitled to assume the defense of such action,
suit or proceeding, with counsel satisfactory to Director, upon the delivery to
Director of written notice of its election so to do. After delivery of such
notice, the Company will not be liable to Director under this Agreement for any
legal or other Expenses subsequently incurred by Director in connection with
such defense other than reasonable Expenses incurred at the request of the
Company provided that Director shall have the right to employ its counsel in any
such action, suit or proceeding but the fees and expenses of such counsel
incurred after delivery of notice from the Company of its assumption of such
defense shall be at Director's expense, provided further that if (i) the
employment of counsel by Director has been previously authorized by the Company,
(ii) Director shall have reasonably concluded that there may be a conflict of
interest between the Company and Director in the conduct of any such defense or
(iii) the Company shall not, in fact, have employed counsel to assume
-5-
<PAGE> 6
the defense of such action, the fees and expenses of counsel shall be at the
expense of the Company.
(d) All payments on account of the Company's indemnification obligations
under this Agreement shall be made within thirty (30) days of Director's written
request therefor unless a Determination is made that the claims giving rise to
Director's request are Excluded Claims or otherwise not payable under this
Agreement, provided that all payments on account of the Company's obligations
under Paragraph 5(c) of this Agreement prior to the final disposition of any
action, suit or proceeding shall be made within twenty (20) days of Director's
written request therefor and such obligation shall not be subject to any such
Determination but shall be subject to Paragraph 5(e) of this Agreement.
(e) Director agrees to reimburse the Company for all Losses and Expenses
paid by the Company in connection with any action, suit or proceeding against
Director in the event and only to the extent that a Determination shall have
been made that Director is not entitled to be indemnified by the Company because
the claim is an Excluded Claim or because Director is otherwise not entitled to
payment under this Agreement.
6. Settlement. The Company shall have no obligation to indemnify Director
under this Agreement for any amounts paid in settlement of any action, suit or
proceeding effected without the Company's prior written consent. The Company
shall not settle any claim in any manner which would impose any fine or any
obligation on Director without Director's written consent. Neither the Company
nor Director shall unreasonably withhold consent to any proposed settlement.
7. Subrogation. To the extent of any payment under this Agreement, the
Company shall be subrogated to all of the rights of recovery of Director.
Director shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents as
are necessary to enable the Company effectively to bring suit to enforce such
rights.
8. Rights Not Exclusive. The rights provided hereunder shall not be deemed
exclusive of any other rights to which Director may be entitled under any
provision of the Delaware General Corporation Law or any other provisions of
-6-
<PAGE> 7
law, the Company's Certificate of Incorporation, its by-laws, or any agreement,
vote of shareholders or of disinterested directors or otherwise, both as to
action in an official capacity and as to action in any other capacity by holding
such office, and shall continue after Director ceases to serve the Company as a
director.
9. Enforcement.
(a) An adverse Determination shall not foreclose an action to enforce
Director's rights under this Agreement to the extent allowed by law. If a prior
adverse Determination has been made, the burden of proving that indemnification
is required under this Agreement shall be on Director. The Company shall have
the burden of proving that indemnification is not required under this Agreement
if no prior adverse Determination shall have been made.
(b) In the event that any action is instituted by Director under this
Agreement, or to enforce or interpret any of the terms of this Agreement,
Director shall be entitled to be paid all court costs and expenses, including
reasonable counsel fees, incurred by Director with respect to such action,
unless the court determines that each of the material assertions made by
Director as a basis for such action was not made in good faith or was frivolous.
10. Continuation of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Director is a
director, officer, employee or agent of the Company (or serving at the request
of the Company as a director, officer, partner, member, trustee, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise) and shall continue thereafter so long as Director shall be subject
to any possible demand, claim or threatened, pending or completed proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that Director was a director of the Company or serving in any other capacity
referred to in this paragraph.
11. Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable law, such provision shall be limited or modified
in its application to the minimum extent necessary to avoid a violation of law,
and such
-7-
<PAGE> 8
provision, as so limited or modified, and the balance of this Agreement
shall be enforceable in accordance with their terms.
12. Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.
13. Consent to Jurisdiction. The Company and Director each hereby
irrevocably consents to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agrees that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
14. Successor and Assigns. This Agreement shall be (i) binding upon all
successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by, merger or otherwise by
operation of law) and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of Director.
15. Amendment. No amendment, modification, termination or cancellation
of this Agreement shall be effective unless made in a writing signed by each of
the parties hereto.
IN WITNESS WHEREOF, the Company and Director have executed this agreement
as of the day and year first above written.
HANCOCK FABRICS, INC.,
a Delaware corporation
By:
--------------------------------
Its:
--------------------------------
"Company"
--------------------------------
"Director"
-8-
<PAGE> 1
Exhibit 10.25
INDEMNIFICATION AGREEMENT
This Agreement is made as of March 15, 2000, by and between Hancock
Fabrics, Inc., a Delaware corporation (the "Company"), and Clayton E. Stallings
("Officer").
W I T N E S S E T H :
WHEREAS, the Company understands that there can be no assurance that
directors' and officers' liability insurance will continue to be available to
the Company and Officer, and believes that it is possible that the cost of such
insurance, if obtainable, may not be acceptable to the Company or the coverage
of such insurance, if obtainable, may be reduced below what has historically
been afforded; and
WHEREAS, Officer is unwilling to serve, or continue to serve, the
Company as a director without assurances that adequate liability insurance,
indemnification or a combination thereof will be provided; and
WHEREAS, the Company, in order to induce Officer to continue to serve
the Company, has agreed to provide Officer with the benefits contemplated by
this Agreement, which benefits are intended to supplement or, if necessary,
replace directors' and officers' liability insurance; and
WHEREAS, as a result of the provision of such benefits Officer has
agreed to serve or to continue to serve as a director of the Company;
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including Officer's service to
the Company, the Company and Officer hereby agree as follows:
-1-
<PAGE> 2
1. Definitions. The following terms, as used herein, shall have the
following respective meanings:
"Covered Amount" means Loss and Expenses which, in type or amount, are
not insured under directors' and officers' liability insurance maintained by the
Company from time to time.
"Covered Act" means any breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or wrongfully attempted by
Officer or any of the foregoing alleged by any claimant or any claim against
Officer by reason of Officer's serving as or being a director, officer,
employee, or agent of the Company, or by reason of Officer's serving at the
request of the Company as a director, officer, partner, member, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
"D&O Insurance" means a policy or policies of the directors' and
officers' liability insurance issued to the Company and its directors and
officers.
"Determination" means a determination, based on the facts known at the
time, made by:
(i) A majority of the directors who are not parties to the action,
suit or proceeding for which indemnification is considered or being considered,
even though less than a quorum; or
(ii) Independent legal counsel in a written opinion if there be no
such directors, or if such directors so direct; or
(iii) A majority of the shareholders of the Company; or
(iv) A final adjudication by a court of competent jurisdiction.
"Determined" shall have a correlative meaning.
-2-
<PAGE> 3
"Excluded Claim" means any payment for Losses or Expenses in connection
with any claim:
(i) Based upon or attributable to Officer gaining in fact any
personal profit or advantage to which Officer is not entitled; or
(ii) For the return by Officer of any remuneration, for which prior
approval of the shareholders of the Company was required but not obtained; or
(iii) For an accounting of profits in fact made from the purchase or
sale by Officer of securities of the Company within the meaning of Section 16 of
the Securities Exchange Act of 1934 as amended, or similar provisions of any
state law; or
(iv) Resulting from Officer's knowingly fraudulent, dishonest or
willful misconduct; or
(v) The payment of which by the Company under this Agreement is not
permitted by applicable law; or
(vi) Which are not within the Covered Amount.
"Expenses" means any reasonable expenses incurred by Officer as a result
of a claim or claims made against Officer for Covered Acts including, without
limitation, counsel fees and costs of investigative, judicial or administrative
proceedings or appeals, but, where prohibited by law or public policy, shall not
include fines.
"Loss" means any amount which Officer is legally obligated to pay as a
result of a claim or claims made against Officer for Covered Acts including,
without limitation, damages and judgments and sums paid in settlement of a claim
or claims, but, where prohibited by law or public policy, shall not include
fines.
2. Maintenance of D&O Insurance.
-3-
<PAGE> 4
(a) The Company represents that it presently has in force and effect
policies of D&O Insurance. The Company hereby covenants that it will use its
best efforts to maintain a policy or policies no less beneficial to the Company
and Officer than the policies in effect on the date hereof. The Company shall
not be required, however, to maintain such policy or policies if such insurance
is not reasonably available or if, in the reasonable business judgment of the
then directors of the Company, either (i) the premium cost for such insurance is
disproportionate to the amount of coverage, or (ii) the coverage provided by
such insurance is so limited by exclusions that there is insufficient benefit
from such insurance.
(b) In all policies of D&O Insurance, Officer shall be named as an
insured in such a manner as to provide Officer the same rights and benefits,
subject to the same limitations, as are accorded to the Company's directors or
officers most favorably insured by such policy.
3. Indemnification. The Company shall indemnify Officer against, and hold
Officer harmless from, the Covered Amount of any and all Losses and Expenses
subject, in each case, to the further provisions of this Agreement.
4. Excluded Coverage.
(a) The Company shall have no obligation to indemnify Officer against,
and hold Officer harmless from, any Loss or Expense which has been Determined to
constitute an Excluded Claim.
(b) The Company shall have no obligation to indemnify Officer against,
and hold Officer harmless from, any Loss or Expenses to the extent that Officer
is indemnified by the Company pursuant to the provisions of the Company's
Certificate of Incorporation or is otherwise in fact indemnified.
5. Indemnification Procedures.
(a) Promptly after receipt by Officer of notice of the commencement or
the threat of commencement of any action, suit or proceeding, Officer shall
notify the Company of the commencement thereof if indemnification with respect
thereto may be sought from the Company under this Agreement; but the
-4-
<PAGE> 5
omission so to notify the Company shall not relieve it from any liability
that it may have to Officer otherwise than under this Agreement. Such notice may
be given by mailing the same by United States mail, registered or certified,
return receipt requested, postage prepaid, addressed to the Company at: P.O. Box
2400, Tupelo, Mississippi 38803-2400, Attention: Secretary (or to such other
address as the Company may from time to time designate by written notice to
Officer).
(b) If, at the time of the receipt of such notice, the Company has D&O
Insurance in effect, the Company shall give prompt notice of the commencement of
such action, suit or proceeding to the insurers in accordance with the
procedures set forth in the respective policies in favor of Officer. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Officer, all Losses and Expenses payable as a result of
such action, suit or proceeding in accordance with the terms of such policies.
(c) To the extent the Company does not, at the time of the commencement
or the threat of commencement of such action, suit or proceeding, have
applicable D&O Insurance, or if a Determination is made that any Expenses
arising out of such action, suit or proceeding will not be payable under the D&O
Insurance then in effect, or if for any reason a D&O insurer does not timely pay
such Expenses, the Company shall be obligated to pay the Expenses of any such
action, suit or proceeding in advance of the final disposition thereof and the
Company, if appropriate, shall be entitled to assume the defense of such action,
suit or proceeding, with counsel satisfactory to Officer, upon the delivery to
Officer of written notice of its election so to do. After delivery of such
notice, the Company will not be liable to Officer under this Agreement for any
legal or other Expenses subsequently incurred by Officer in connection with such
defense other than reasonable Expenses incurred at the request of the Company
provided that Officer shall have the right to employ its counsel in any such
action, suit or proceeding but the fees and expenses of such counsel incurred
after delivery of notice from the Company of its assumption of such defense
shall be at Officer's expense, provided further that if (i) the employment of
counsel by Officer has been previously authorized by the Company, (ii) Officer
shall have reasonably concluded that there may be a conflict of interest between
the Company and Officer in the conduct of any such defense or (iii) the Company
shall not, in fact, have employed counsel to assume
-5-
<PAGE> 6
the defense of such action, the fees and expenses of counsel shall be at the
expense of the Company.
(d) All payments on account of the Company's indemnification obligations
under this Agreement shall be made within thirty (30) days of Officer's written
request therefor unless a Determination is made that the claims giving rise to
Officer's request are Excluded Claims or otherwise not payable under this
Agreement, provided that all payments on account of the Company's obligations
under Paragraph 5(c) of this Agreement prior to the final disposition of any
action, suit or proceeding shall be made within twenty (20) days of Officer's
written request therefor and such obligation shall not be subject to any such
Determination but shall be subject to Paragraph 5(e) of this Agreement.
(e) Officer agrees to reimburse the Company for all Losses and Expenses
paid by the Company in connection with any action, suit or proceeding against
Officer in the event and only to the extent that a Determination shall have been
made that Officer is not entitled to be indemnified by the Company because the
claim is an Excluded Claim or because Officer is otherwise not entitled to
payment under this Agreement.
6. Settlement. The Company shall have no obligation to indemnify Officer
under this Agreement for any amounts paid in settlement of any action, suit or
proceeding effected without the Company's prior written consent. The Company
shall not settle any claim in any manner which would impose any fine or any
obligation on Officer without Officer's written consent. Neither the Company nor
Officer shall unreasonably withhold consent to any proposed settlement.
7. Subrogation. To the extent of any payment under this Agreement, the
Company shall be subrogated to all of the rights of recovery of Officer. Officer
shall execute all papers required and shall do everything that may be necessary
to secure such rights, including the execution of such documents as are
necessary to enable the Company effectively to bring suit to enforce such
rights.
8. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which Officer may be entitled under any
provision of the Delaware General Corporation Law or any other provisions of
-6-
<PAGE> 7
law, the Company's Certificate of Incorporation, its by-laws, or any agreement,
vote of shareholders or of disinterested directors or otherwise, both as to
action in an official capacity and as to action in any other capacity by holding
such office, and shall continue after Officer ceases to serve the Company as a
director.
9. Enforcement.
(a) An adverse Determination shall not foreclose an action to enforce
Officer's rights under this Agreement to the extent allowed by law. If a prior
adverse Determination has been made, the burden of proving that indemnification
is required under this Agreement shall be on Officer. The Company shall have the
burden of proving that indemnification is not required under this Agreement if
no prior adverse Determination shall have been made.
(b) In the event that any action is instituted by Officer under this
Agreement, or to enforce or interpret any of the terms of this Agreement,
Officer shall be entitled to be paid all court costs and expenses, including
reasonable counsel fees, incurred by Officer with respect to such action, unless
the court determines that each of the material assertions made by Officer as a
basis for such action was not made in good faith or was frivolous.
10. Continuation of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Officer is a director,
officer, employee or agent of the Company (or serving at the request of the
Company as a director, officer, partner, member, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Officer shall be subject to any possible
demand, claim or threatened, pending or completed proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that Officer
was a director of the Company or serving in any other capacity referred to in
this paragraph.
11. Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable law, such provision shall be limited or modified
in its application to the minimum extent necessary to avoid a violation of law,
and such provision, as so limited or modified, and the balance of this Agreement
shall be enforceable in accordance with their terms.
-7-
<PAGE> 8
12. Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.
13. Consent to Jurisdiction. The Company and Officer each hereby irrevocably
consents to the jurisdiction of the courts of the State of Delaware for all
purposes in connection with any action or proceeding which arises out of or
relates to this Agreement and agrees that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
14. Successor and Assigns. This Agreement shall be (i) binding upon all
successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by, merger or otherwise by
operation of law) and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of Officer.
15. Amendment. No amendment, modification, termination or cancellation of
this Agreement shall be effective unless made in a writing signed by each of the
parties hereto.
IN WITNESS WHEREOF, the Company and Officer have executed this agreement as
of the day and year first above written.
HANCOCK FABRICS, INC.,
a Delaware corporation
By:
---------------------------------
Its:
---------------------------------
"Company"
-------------------------------------
"Officer"
-8-
<PAGE> 1
Exhibit 10.26
AMENDMENT AND RENEWAL OF SEVERANCE AGREEMENT
THIS AMENDMENT AND RENEWAL OF SEVERANCE AGREEMENT between Hancock
Fabrics, Inc., a Delaware corporation (the "Corporation"), and _________________
(the "Executive"), dated as of the 4th day of May, 1999.
W I T N E S S E T H:
WHEREAS, the Corporation has entered into a Severance Agreement with the
Executive dated ___________ which has subsequently been amended (as so amended,
the "Severance Agreement"); and
WHEREAS, the Severance Agreement will expire on May 4, 1999; and
WHEREAS, the Corporation, for the reasons recited in the Severance
Agreement, wishes to renew the Severance Agreement for a period of three years,
until May 4, 2002 ("the Expiration Date"), and to automatically renew the
Severance Agreement for an additional three year period on the Expiration Date
and each subsequent expiration, unless the Incumbent Board elects to cancel the
agreement as of the next Expiration Date; and
WHEREAS, the Corporation and the Executive desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and contained in the Severance Agreement, it is hereby agreed
by and between the Corporation and the Executive as follows:
1
<PAGE> 2
1. Section 3 of the Severance Agreement is hereby amended to read as
follows:
3. Change of Control Period. The "Change of Control Period" is the
period commencing on the date of this Agreement and ending on the
earlier to occur of (i) the Expiration Date, or (ii) the first day of
the month coinciding with or next following the Executive's 65th
birthday. The expiration of the Change of Control Period shall not
limit the Corporation's obligation to provide, or the Executive's
right to collect, payments and benefits pursuant to Section 5 and
Section 10 hereof.
2. Section 5.(a)(I)(B) of the Severance Agreement is hereby amended by
deleting the words
"(y) an amount equal to the highest bonus paid or payable to the
Executive pursuant to the Extra Compensation Plan or any successor
plan thereto (or any predecessor plan maintained by Hancock Textile)
within five fiscal years prior to the Effective Date, provided,
however, that in no event shall the Executive be entitled to receive
under this clause (B) more than the product obtained by multiplying
the amount determined as hereinabove provided in this clause"
and substituting therefor the words
"(y) an amount equal to the highest bonus paid or payable to the
Executive pursuant to the applicable cash incentive compensation
plan(s) within five fiscal years prior to the Effective Date,
provided, however, that in no event shall the Executive be entitled
to receive under this clause (B) more than the product obtained by
multiplying the amount determined as hereinabove provided in this
clause".
2
<PAGE> 3
3. Section 4.(c)(ii) of the Severance Agreement is hereby amended by
deleting the words
(ii) any failure by the Corporation to furnish the Executive and/or,
where applicable, his family with compensation (including annual
bonus) and benefits at a level equal to or exceeding those received
(on an annual basis) by the Executive from the Corporation during the
90-day period preceding the Effective Date, including a failure by
the Corporation to maintain the Corporation's extra compensation plan
("Extra Compensation Plan") (including the right to defer the receipt
of payments thereunder) and the Corporation's supplemental retirement
benefit plan ("SERP"), other than an insubstantial and inadvertent
failuire remedied by the Corporation promptly after receipt of notice
thereof given by the Executive;
and substituting therefor the words
(ii) any failure by the Corporation to furnish the Executive and/or,
where applicable, his family with compensation (including annual
bonus) and benefits at a level equal to or exceeding those received
(on an annual basis) by the Executive from the Corporation during the
90-day period preceding the Effective Date, including a failure by
the Corporation to maintain the Corporation's extra compensation
plan(s) ("Extra Compensation Plan" and "Officers Incentive
Compensation Plan" or any subsequent plans) (including the right to
defer the receipt of payments thereunder) and the Corporation's
supplemental retirement benefit plan ("SERP"), other than an
insubstantial and inadvertent failuire remedied by the Corporation
promptly after receipt of notice thereof given by the Executive;
3
<PAGE> 4
4. Except as so amended, the Severance Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed, all as of the day and the year first
above written.
------------------------------------
"Executive"
HANCOCK FABRICS, INC.
By:
--------------------------------
Its
-----------------------------
4
<PAGE> 1
EXHIBIT 13
FIVE-YEAR SUMMARY OF SIGNIFICANT FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER
SHARE AND STORE AMOUNTS) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $381,572 $392,303 $381,910 $378,218 $364,192
Earnings before income taxes 10,650 5,590 24,842 20,282 14,721
Net earnings 6,816 3,556 15,324 12,481 8,951
Earnings per common share
Basic .38 .18 .74 .59 .43
Diluted .38 .18 .72 .58 .42
Total assets 195,562 192,404 195,558 187,843 201,835
Capital expenditures 8,017 8,839 2,712 2,314 1,890
Long-and short-term indebtedness 31,000 29,000 10,000 3,000 30,000
Common shareholders' equity 76,867 77,152 106,691 105,273 100,421
- ----------------------------------------------------------------------------------------------
Common shares outstanding, net 18,652 18,595 21,114 21,315 21,508
Stores in operation 453 462 481 462 498
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PER COMMON SHARE
----------------------------------
NET NET EARNINGS (LOSS)
EARNINGS --------------------- CASH
SALES PROFIT (LOSS) BASIC (1) DILUTED(1) DIVIDEND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
First Quarter $ 96,365 $ 45,296 $ 1,104 $ .06 $ .06 $ .10
Second Quarter 82,848 40,067 (759) (.04) (.04) .10
Third Quarter 98,962 49,576 2,499 .14 .14 .10
Fourth Quarter 103,397 50,932 3,972 .22 .22 .025
- ---------------------------------------------------------------------------------------------------
$ 381,572 $ 185,871 $ 6,816 $ .38 $ .38 $ .325
===================================================================================================
1998
First Quarter $ 97,796 $ 47,157 $ 2,107 $ .10 $ .10 $ .10
Second Quarter 85,372 41,722 442 .02 .02 .10
Third Quarter 103,058 51,112 3,555 .18 .18 .10
Fourth Quarter 106,077 50,791 (2,548) (.14) (.14) .10
- ---------------------------------------------------------------------------------------------------
$ 392,303 $ 190,782 $ 3,556 $ .18 $ .18 $ .40
===================================================================================================
</TABLE>
(1) Per share amounts are based on average shares outstanding during each
quarter and may not add to the total for the year.
8
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the percentage of sales for the periods indicated
and percentage changes from period to period of certain items included in the
Consolidated Statement of Earnings:
<TABLE>
<CAPTION>
PERCENT CHANGE
PERCENT OF NET SALES FROM PRIOR YEAR
-------------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% (2.7%) 2.7% 1.0%
Comparable store sales 0.0% (2.9%) 4.6%
Gross margin 48.7% 48.6% 48.9%
Selling, general and
administrative expenses* 44.0% 45.8% 41.5% (6.5%) 13.5% 0.1%
Pretax earnings* 2.8% 1.4% 6.5% 90.5% (77.5%) 22.5%
Net earnings* 1.8% 0.9% 4.0% 91.7% (76.8%) 22.8%
</TABLE>
*1998 expenses and pretax earnings include the effect of an unusual charge
totaling $10.0 million (2.5% of sales), as discussed further below. The impact
of the charge on net earnings was $6.3 million (1.6% of sales).
1999 vs. 1998
Sales for 1999 decreased $10.7 million from 1998, primarily due to a reduction
in sales of $10.9 million from net store opening and closing activity. The
decrease in sales was partially offset by a marginal increase in comparable
store sales. Hancock closed 52 stores and opened 43 in 1999, resulting in a
total of 453 stores at year end.
Comparable store sales gains came from expansion in the home decorating category
and the positive impact of store remodels. These gains were offset by deflation
in product prices, which continued into the first half of 1999, and by the
adverse impact from competitor liquidations.
Hancock's gross margin increased slightly due to changes in the merchandise mix,
which offset promotional pricing designed to make up the sales shortfall created
by deflation and competitor liquidations. The reduction in the LIFO (last-in,
first-out) reserve was $475 thousand in 1999 compared with $300 thousand in
1998.
Selling, general and administrative expenses increased as a percentage of sales
in 1999 before the effect of a $10.0 million charge in 1998. Competition for
labor drove up payroll costs. Moreover, startup costs associated with the
acquisition of 29 Mae's Fabrics stores, which were acquired too late in the year
to make a significant sales contribution, resulted in higher selling, general
and administrative expenses. In addition, expenses as a percentage of sales were
higher due to the deleveraging of the expense base caused by the absence of
comparable store sales gains.
Interest expense increased by $1.1 million in 1999 due to higher interest rates
on the outstanding borrowings. Income tax expense increased by $1.8 million due
to the improvement in pretax earnings over 1998.
1998 vs. 1997
Sales for 1998 increased $10.4 million from 1997, benefiting by $31.6 million
from the Northwest Fabrics and Crafts stores acquired in the fourth quarter of
1997. The increase was partially offset by a 2.9% decrease in comparable store
sales and a reduction of $11.2 million in sales from net store opening and
closing activity. Hancock closed 40 stores and opened 21 in 1998, resulting in a
total of 462 stores at year end.
Several factors influenced the negative comparable store sales results in 1998.
A weak spring fashion trend and numerous competitor liquidations adversely
affected comparable store sales in the first part of the year. An unseasonably
warm fall and deflation in prices for several key fall and winter items
contributed to the comparable store sales decreases in the last half of the
year.
9
<PAGE> 3
Hancock's gross margin declined slightly due to markdowns necessary to sell
slow-moving seasonal goods and a reduction in the LIFO (last-in, first-out)
reserve of $300 thousand in 1998 compared with a $700 thousand reduction in
1997.
Selling, general and administrative expenses increased as a percentage of sales
in 1998 as the result of a $10.0 million charge consisting of $8.6 million
related to net lease obligations for stores closed at the end of 1998 and stores
committed to closing in fiscal 1999 and $1.4 million related to the write-off of
an investment. In addition, costs associated with the remodeling of over 120
stores, the change in signage in almost 200 Minnesota Fabrics, Fabric Warehouse
and Northwest Fabrics and Crafts stores to the Hancock Fabrics tradename, and an
advertising test program all contributed to the higher selling, general and
administrative expenses. Expenses as a percentage of sales were also higher due
to the deleveraging of the expense base caused by the decrease in comparable
store sales.
Interest expense increased by $1.1 million in 1998 due to a higher level of
average outstanding borrowings, primarily as a result of repurchases of treasury
stock. Income tax expense decreased by $7.5 million due to the decrease in
pretax earnings.
FINANCIAL POSITION
Hancock traditionally maintains a strong financial position as evidenced by the
following information as of the end of fiscal years 1999, 1998 and 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents $ 6,904 $ 6,959 $ 7,057
Net cash flows provided by (used in):
Operating activities $ 17,077 $ 24,954 $ 17,357
Investing activities $(10,732) $ (9,516) $ (7,436)
Financing activities $ (6,400) $(15,536) $ (9,734)
Working Capital $ 94,035 $ 98,718 $ 108,848
Long-term indebtedness to total
capitalization 28.7% 27.3% 8.6%
</TABLE>
Historically, Hancock has financed its operations with internally generated cash
flow. During 1999, cash flows from operations, supplemented by $2 million in
borrowings, were used to purchase property and equipment, pay dividends,
repurchase stock and acquire the leases of Mae's Fabrics. During 1998, cash
flows from operations, supplemented by $19 million in borrowings, were used to
purchase property and equipment, pay dividends and repurchase treasury stock
Hancock purchased treasury stock of $2.2 million, $28.8 million and $14.2
million in 1999, 1998 and 1997, respectively. Hancock plans to use future cash
in excess of capital improvement needs for the retirement of debt and the
purchase of treasury stock as market and financial conditions dictate.
CAPITAL REQUIREMENTS
Hancock's primary 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.
Capital expenditures amounted to $8.0 million in 1999, $8.8 million in 1998 and
$2.7 million in 1997. The capital costs associated with remodeling 120 stores in
each of the last two years, opening 78 new stores during the three-year period
(including the Mae's Fabrics stores acquired in 1999), purchasing and designing
a new merchandise management system and normal capital maintenance for stores
and the distribution center, accounted for the majority of these expenditures.
Hancock estimates that capital expenditures for 2000 will approximate $8
million. Anticipated expenditures include the costs for 30 to 35 planned new
stores, the remodeling of approximately 75 stores, the final implementation of
the merchandise management system and capital maintenance in the existing retail
stores and distribution center. Internally generated funds are expected to be
sufficient to finance these capital requirements.
In addition to operating cash flows, Hancock has available credit of $29 million
as of January 30, 2000 under Hancock's $60 million revolving credit facility.
Hancock believes the total of $60 million is adequate for Hancock's foreseeable
needs in the near term.
10
<PAGE> 4
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 the Federal minimum wage; accordingly, any increases will affect Hancock. In
addition, payroll taxes, employee benefits and other employee costs continue to
increase. Costs of new leases for new store locations remain stable, but renewal
costs of older leases continue to increase. Utilities, bank fees and insurance
costs have also risen. Hancock believes the practice of maintaining adequate
operating margins through a combination of price adjustments and costs controls,
careful evaluation of occupancy needs and efficient purchasing practices are the
most effective tools for coping with increased costs and expenses.
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.
YEAR 2000 IMPACT
Hancock recognized the potential impact that the year-2000 issue could have
relative to its computer systems and implemented an action plan to ensure that
all systems would be fully year-2000 compliant. The action plan included a
combination of modifications that were completed internally or through software
upgrades from Hancock's software vendors.
The Company completed the remediation and testing of its systems well in advance
of January 1, 2000 and experienced no impact on the Company's systems. The total
cost associated with the year-2000 issue was less than $100,000, all of which
was expensed as incurred.
Hancock also communicated with all of its significant merchandise suppliers and
service providers to determine the extent to which Hancock would be vulnerable
to those third parties' remediation efforts. Hancock has not been impacted by
any year-2000 problems experienced by any of its merchandise suppliers or
service providers.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor"
for certain qualifying forward-looking statements. Certain information included
herein contains statements that are forward-looking, such as statements related
to financial items and results, plans for future expansion, store closure and
other business development activities, capital spending or financing sources,
capital structure, stability of interest rates during periods of borrowings and
the effects of regulation, general economic trends, changes in consumer demand
or purchase patterns, delays or interruptions in the flow of merchandise between
the Company's suppliers and/or its distribution center and its stores, a
disruption in the Company's data processing services and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future. Accordingly, such
results may differ materially from those expressed in any forward-looking
statements by or on behalf of Hancock. These risks and uncertainties include,
but are not limited to those, described above.
11
<PAGE> 5
CONSOLIDATED STATEMENT OF EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 30, 2000, JANUARY 31, 1999 AND
FEBRUARY 1, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $381,572 $392,303 $381,910
Cost of goods sold 195,701 201,521 195,146
- -------------------------------------------------------------------------------------
Gross profit 185,871 190,782 186,764
- -------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 168,041 179,818 158,497
Depreciation and amortization 4,800 4,101 3,263
Interest expense 2,618 1,472 407
Interest income (238) (199) (245)
- -------------------------------------------------------------------------------------
Total operating and interest expenses 175,221 185,192 161,922
- -------------------------------------------------------------------------------------
Earnings before taxes 10,650 5,590 24,842
Income taxes 3,834 2,034 9,518
- -------------------------------------------------------------------------------------
Net earnings and comprehensive income $ 6,816 $ 3,556 $ 15,324
=====================================================================================
Earnings per share
Basic $ .38 $ .18 $ .74
Diluted $ .38 $ .18 $ .72
=====================================================================================
Weighted average shares outstanding
Basic 18,056 19,741 20,834
Diluted 18,056 19,997 21,317
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 6
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 30, 2000 AND JANUARY 31, 1999
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,904 $ 6,959
Receivables, less allowance for doubtful
accounts of $70 in 1999 and 1998 2,347 1,595
Inventories 140,750 142,249
Prepaid expenses 2,720 3,775
- -----------------------------------------------------------------------------------
Total current assets 152,721 154,578
Property and equipment, at depreciated cost 26,947 23,833
Deferred tax assets 10,091 10,703
Other assets 5,803 3,290
- -----------------------------------------------------------------------------------
Total assets $195,562 $192,404
- -----------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,072 $ 36,881
Accrued liabilities 13,344 14,104
Deferred tax liabilities 3,438 2,562
Income taxes 2,832 2,313
- -----------------------------------------------------------------------------------
Total current liabilities 58,686 55,860
Long-term debt obligations 31,000 29,000
Postretirement benefits other than pensions 20,895 20,334
Reserve for store closings 4,161 6,079
Other liabilities 3,953 3,979
- ---------------------------------------------------------------------------------
Total liabilities 118,695 115,252
- -----------------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 12)
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares
authorized; 29,139,726 and 28,547,826
issued and outstanding, respectively 291 285
Additional paid-in capital 39,142 35,133
Retained earnings 174,815 174,180
Treasury stock, at cost, 10,487,738 and
9,952,881 shares held, respectively (130,086) (127,867)
Deferred compensation on restricted
stock incentive plan (7,295) (4,579)
- ---------------------------------------------------------------------------------
Total shareholders' equity 76,867 77,152
- -----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $195,562 $192,404
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 30, 2000, JANUARY 31, 1999 AND
FEBRUARY 1, 1998 (IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,816 $ 3,556 $ 15,324
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation and amortization 4,800 4,101 3,263
LIFO credit (475) (300) (700)
Deferred income taxes 1,488 4,236 (845)
Amortization of deferred compensation on
restricted stock incentive plan 1,390 1,310 1,282
Loss on disposal of fixed assets 295 230 634
Reserve for closed stores 8,604
Write-off of investment 1,363
Interest expense on closed store accrual 346
(Increase) decrease in assets
Receivables and prepaid expenses 303 (428) (1,760)
Inventory at current cost 1,974 5,919 (813)
Other noncurrent assets 10 13 129
Increase (decrease) in liabilities
Accounts payable 2,191 1,390 498
Accrued liabilities (210) (4,839) (115)
Current income tax obligations 430 (1,596) (716)
Postretirement benefits other than pension 561 588 583
Payments against closed store accrual (2,816)
Other liabilities (26) 807 593
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,077 24,954 17,357
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (8,017) (8,839) (2,712)
Proceeds from disposition of property and
equipment 67 27 71
Acquisition of Northwest stores (3,986)
Acquisition of Mae's stores (2,782)
Other (704) (809)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (10,732) (9,516) (7,436)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on revolving credit agreement 2,000 19,000 7,000
Purchase of treasury stock (2,219) (28,820) (14,227)
Proceeds from exercise of stock options 2,235 5,069
Issuance of shares under directors= stock plan 68 78
Cash dividends paid (6,181) (8,019) (7,654)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (6,400) (15,536) (9,734)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (55) (98) 187
Cash and cash equivalents:
Beginning of year 6,959 7,057 6,870
- ------------------------------------------------------------------------------------------------
End of year $ 6,904 $ 6,959 $ 7,057
- ------------------------------------------------------------------------------------------------
Supplemental disclosures
Cash paid during the year for:
Interest $ 2,608 $ 1,452 $ 405
Income taxes $ 2,543 $ 4,852 $ 11,127
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 8
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
YEARS ENDED JANUARY 30, 2000, JANUARY 31, 1999 AND FEBRUARY 1, 1998
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------ PAID-IN RETAINED ------------------- DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT COMPENSATION EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance February 2, 1997 27,342,472 $273 $21,369 $170,973 (6,027,503) $(84,820) $(2,522) $105,273
Net earnings and comprehensive
income 15,324 15,324
Cash dividends ($.36 per share) (7,654) (7,654)
Exercise of stock options 640,120 7 5,062 5,069
Issuance of restricted stock 264,600 3 3,337 (3,340)
Cancellation of restricted stock (800) (10) 10
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 1,546 1,282 2,828
Issuance of shares under directors'
stock plan 6,621 78 78
Purchase of treasury stock (1,111,571) (14,227) (14,227)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance February 1, 1998 28,253,013 283 31,382 178,643 (7,139,074) (99,047) (4,570) 106,691
Net earnings and comprehensive
income 3,556 3,556
Cash dividends ($.40 per share) (8,019) (8,019)
Exercise of stock options 202,250 2 2,233 2,235
Issuance of restricted stock 89,950 1,349 (1,349)
Cancellation of restricted stock (2,400) (30) 30
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 131 1,310 1,441
Issuance of shares under directors'
stock plan 5,013 68 68
Purchase of treasury stock (2,813,807) (28,820) (28,820)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1999 28,547,826 285 35,133 174,180 (9,952,881) (127,867) (4,579) 77,152
Net earnings and comprehensive
income 6,816 6,816
Cash dividends ($.325 per share) (6,181) (6,181)
Issuance of restricted stock 595,600 6 4,126 (4,132)
Cancellation of restricted stock (3,700) (26) 26
Amortization and vesting of
deferred compensation on
restricted stock incentive plan (91) 1,390 1,299
Purchase of treasury stock (534,857) (2,219) (2,219)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 2000 29,139,726 $291 $39,142 $174,815 (10,487,738) $(130,086) $(7,295) $ 76,867
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Hancock Fabrics, Inc. ("Hancock") is a retail and wholesale merchant of fabrics,
crafts, and related home sewing and home decorating accessories. Hancock
operates 453 stores in 42 states and also supplies over 100 independent
wholesale customers. The Company is in one business segment and follows the
requirements of Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of Hancock and its
wholly-owned subsidiaries. All intercompany accounts and transactions are
eliminated. Hancock maintains its financial records on a 52-53 week fiscal year
ending on the Sunday closest to January 31. Fiscal years 1999, 1998 and 1997, as
used herein, refer to the years ended January 30, 2000, January 31, 1999 and
February 1, 1998, respectively. Fiscal years 1999, 1998 and 1997 each contained
52 weeks.
USE OF ESTIMATES AND ASSUMPTIONS that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period is required by management in the preparation of the
financial statements in accordance with generally accepted accounting
principles. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS include cash on hand, amounts due from banks and
repurchase agreements having original maturities of three months or less and are
reflected as such for purposes of reporting cash flows.
INVENTORIES consist of fabrics, sewing notions and crafts held for resale and
are valued at the lower of cost or market; cost is determined by the last-in,
first-out ("LIFO") method. The current cost of inventories exceeded the LIFO
cost by approximately $40 million at January 30, 2000, January 31, 1999 and
February 1, 1998.
DEPRECIATION is computed by use of the straight-line method over the estimated
useful lives of buildings, fixtures and equipment. Leasehold costs and
improvements are amortized over the lesser of their estimated useful lives or
the remaining lease term. Average depreciable lives are as follows: buildings
and improvements 15-20 years; fixtures and equipment 3-8 years; and
transportation equipment 3-5 years.
MAINTENANCE AND REPAIRS are charged to expense as incurred, and major
improvements are capitalized.
ADVERTISING, including production costs, is charged to expense the first day of
the advertising period. Advertising expense for 1999, 1998 and 1997, was $18.0
million, $19.0 million and $16.4 million, respectively.
PREOPENING COSTS of new stores are charged to expense as incurred in accordance
with Statement of Position 98-5, Reporting on the Costs of Start-up Activities.
LONG-TERM INVESTMENTS are recorded using the equity method of accounting.
EARNINGS PER SHARE is presented for basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company (see Note 11).
FINANCIAL INSTRUMENTS are evaluated pursuant to Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instrument: cash and receivables - the
carrying amounts approximate fair value because of the short maturity of those
instruments; long-term debt - the fair value of Hancock's long-term debt is
estimated based on the current borrowing rates available to Hancock for bank
loans with similar terms and average maturities. The carrying amounts
approximate fair value because the interest rates reflect current market rates.
Throughout all years presented, Hancock did not have any financial derivative
instruments outstanding.
DEFERRED TAX LIABILITIES AND ASSETS are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
STOCK OPTIONS are accounted for using the methods prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Pro forma information regarding net
income and earnings per share as calculated under the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is presented in Note 10.
COMPREHENSIVE INCOME is reported in accordance with Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The Company did
not have any comprehensive income items as defined by SFAS 130 in 1999 or 1998.
TREASURY STOCK is repurchased periodically by the Company. These treasury stock
transactions are recorded using the cost method.
NOTE 3 - ACQUISITION OF NORTHWEST FABRICS AND CRAFTS, AND MAE'S FABRICS STORE
LEASES
Effective November 1, 1997, the Company purchased the assets of Northwest
Fabrics and Crafts ("Northwest") from Silas Creek Retail, L.P., pursuant to an
assignment of rights agreement between the Company and Carolina Sales, Inc. The
total consideration paid for these assets was approximately $20.9 million. This
acquisition was accounted for as a purchase; accordingly, the acquired assets
and liabilities were recorded at their estimated fair values at the date of
acquisition. The value of goodwill assigned to this acquisition was
approximately $3.1 million including approximately $1.6 million recorded during
1998 as a result of a reallocation of the purchase price representing a noncash
transfer from inventory. The goodwill is being amortized on a straight-line
basis over 15 years. Amortization expense for each of the years ended January
30, 2000 and January 31, 1999 was $213,000. Operating results for Northwest have
been included with those of the Company beginning November 1, 1997.
Effective April 27, 1999, the Company agreed to acquire certain operating leases
of Mae's Fabrics stores for a cash payment of approximately $2.8 million.
Twenty-nine lease assignments were made for stores operating in the Mid-Atlantic
States. This acquisition was accounted for as a purchase. As no tangible assets
were acquired, the entire purchase price was assigned to goodwill which is being
amortized on a straight-line basis over 15 years. Amortization expense for this
goodwill was $46,000 for the year ended January 30, 2000. Operating results for
Mae's Fabrics stores have been included with those of the Company as Hancock
opened those stores during 1999.
16
<PAGE> 10
<TABLE>
<CAPTION>
NOTE 4 - PROPERTY AND EQUIPMENT (in thousands) 1999 1998
---- ----
<S> <C> <C>
Buildings and improvements $ 12,416 $ 12,096
Leasehold improvements 5,259 7,178
Fixtures and equipment 43,823 42,933
Transportation equipment 1,732 1,709
Construction in progress 2,677 776
-------- --------
65,907 64,692
Accumulated depreciation and amortization (41,881) (43,737)
-------- --------
24,026 20,955
Land 2,921 2,878
-------- --------
$ 26,947 $ 23,833
======== ========
<CAPTION>
NOTE 5 - ACCRUED LIABILITIES (in thousands) 1999 1998
---- ----
<S> <C> <C>
Payroll and benefits $ 2,138 $ 3,114
Property taxes 3,532 3,687
Sales taxes 1,753 1,751
Current portion of reserve for closed stores (Note 13) 2,391 2,943
Other 3,530 2,609
-------- --------
$ 13,344 $ 14,104
======== ========
<CAPTION>
NOTE 6 - LONG-TERM DEBT OBLIGATIONS (in thousands) 1999 1998
---- ----
<S> <C> <C>
Revolving credit agreement $ 31,000 $ 29,000
======== ========
</TABLE>
As of April 16, 1999, Hancock entered into a three-year, $60 million revolving
credit arrangement with a group of banks. This agreement provides for an annual
facility fee, which was 0.30% of the total facility amount as of January 30,
2000. Borrowings under the 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. This agreement replaced a similar
agreement that had been in place since 1993. Hancock also has an arrangement to
provide for $10 million in letters of credit.
At January 30, 2000, the effective interest rate on the outstanding borrowings
was 6.76%. Under the most restrictive covenants of these agreements, Hancock is
required to maintain a specified consolidated tangible net worth, a debt to cash
flow ratio and a fixed charge coverage ratio.
NOTE 7 - LONG-TERM LEASES
Hancock leases its retail fabric store locations under noncancelable operating
leases expiring at various dates through 2020. Certain of the leases for store
locations provide for additional rent based on sales volume.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rent expense consists of the following
(in thousands):
Minimum rent $30,535 $30,489 $27,714
Additional rent based on sales 208 229 189
------- ------- -------
$30,743 $30,718 $27,903
======= ======= =======
</TABLE>
Minimum rental payments as of January 30, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year
2000 $ 29,080
2001 25,809
2002 21,931
2003 18,185
2004 14,988
Thereafter 43,297
--------
Total minimum lease payments $153,290
========
</TABLE>
NOTE 8 - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently payable (receivable)
Federal $ 2,346 $ (2,080) $ 8,680
State -- (122) 1,683
------- -------- -------
2,346 (2,202) 10,363
------- -------- -------
Deferred
Current 876 5,875 (551)
Noncurrent 612 (1,639) (294)
------- -------- -------
1,488 4,236 (845)
------- -------- -------
$ 3,834 $ 2,034 $ 9,518
======= ======== =======
</TABLE>
17
<PAGE> 11
The 1998 current income tax benefit relates primarily to a $14,150,000 deduction
for changes in the Company's intercompany markup on merchandise for tax
purposes. Deferred income taxes are provided in recognition of temporary
differences in reporting certain revenues and expenses for financial statement
and income tax purposes.
The current deferred tax assets (liabilities) are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current deferred tax assets
Inventory valuation methods $ $ 540
Accrual for medical insurance 534 462
Accrual for workers' compensation 377 278
Other items 1,327 1,292
-------- --------
Gross current deferred tax assets 2,238 2,572
Current deferred tax liabilities
Inventory markup (5,044) (5,134)
Inventory valuation methods (632)
-------- --------
$ (3,438) $ (2,562)
======== ========
</TABLE>
The net noncurrent deferred tax assets are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Noncurrent deferred tax assets
Postretirement benefits other than pensions $ 7,251 $ 7,047
Accrual for store closing costs 1,310 2,207
Accrual for pension liability 394
Difference in recognition of restricted stock expense 505 290
Deferred compensation liability 810 753
Other deferred deduction items 589 627
-------- --------
Gross noncurrent deferred tax assets 10,465 11,318
Noncurrent deferred tax liabilities
Depreciation (200) (615)
Accrual for pension liability (174)
-------- --------
$ 10,091 $ 10,703
======== ========
</TABLE>
The ultimate realization of a significant portion of this asset is dependent
upon the generation of future taxable income sufficient to offset the related
deductions.
A reconciliation of the statutory Federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax effect .5 1.3 3.9
Effect of change in state rates (.9)
Other .5 1.0 (.6)
----- ----- -----
Effective tax rate 36.0% 36.4% 38.3%
===== ===== =====
</TABLE>
NOTE 9 - SHAREHOLDERS' INTEREST
AUTHORIZED CAPITAL. Hancock's authorized capital includes five million shares of
$.01 par value preferred stock, none of which have been issued.
COMMON STOCK PURCHASE RIGHTS. Hancock has entered into a Common Stock Purchase
Rights Agreement, as amended, (the "Rights Agreement"), with Continental Stock
Transfer & Trust Company as Rights Agent. The Rights Agreement, in certain
circumstances, would permit shareholders to purchase common stock at prices
which would be substantially below market value. These circumstances include the
earlier of (i) the tenth day after an announcement that a person or group has
acquired beneficial ownership of 20% or more of the Hancock shares, with certain
exceptions such as a tender offer that is approved by a majority of Hancock's
Board of Directors, or (ii) the tenth day, or such later date as set by
Hancock's Board of Directors, after a person or group commences, or announces
its intention to commence, a tender or exchange offer, the consummation of which
would result in beneficial ownership of 30% or more of the Hancock shares.
STOCK REPURCHASE PLAN. In prior years and continuing in fiscal 1999, repurchases
of over 10,000,000 shares have been made. As of January 30, 2000, 983,892 shares
are available for repurchase under the most recent authorization.
NOTE 10 - EMPLOYEE BENEFIT PLANS
STOCK OPTIONS. In 1996, Hancock adopted the 1996 Stock Option Plan (the "1996
Plan") which authorized the granting of options to employees for up to two
million shares of common stock at an exercise price of no less than 50% of fair
market value on the date the options are granted. The exercise price of options
granted under this Plan have equaled the fair market value on the grant date. As
of January 30, 2000, 569,200 options remain to be granted under the 1996 Plan.
The 1996 Plan was established to provide for the continued issuance of stock
options to employees when the shares available for grants under a preceding
plan, the 1987 Stock Option Plan (the "1987 Plan"), were depleted. As
promulgated in the plan prospectus, the 1987 Plan expired on March 22, 1997;
however, options granted under the 1987 Plan extend beyond the termination date.
18
<PAGE> 12
A summary of activity in the plans follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,307,000 $10.76 2,174,050 $10.20 2,212,770 $ 8.65
Granted 523,600 5.81 426,200 12.63 651,200 13.17
Canceled (161,100) 9.88 (91,000) 11.85 (49,800) 10.34
Exercised 0 -- (202,250) 8.31 (640,120) 7.85
--------- --------- ---------
Outstanding at end of year 2,669,500 9.84 2,307,000 10.76 2,174,050 10.20
--------- --------- ---------
Exercisable at end of year 1,984,800 $10.58 1,592,200 $ 9.85 1,291,150 $ 8.62
========= ========= =========
</TABLE>
The options outstanding at January 30, 2000 are exercisable at prices ranging
from $5.81 to $14.25 per share. The weighted average remaining contractual life
of all outstanding options was 7.10 years at January 30, 2000.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1999, 1998 and 1997 consistent
with the method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net earnings for 1999, 1998 and 1997 would have been
reduced by approximately $950,000, $1.3 million and $1.1 million, respectively.
Diluted earnings per share would have been reduced by $.06, $.07 and $.05 for
1999, 1998 and 1997, respectively. These pro forma results will not be
representative of the impact on future years because only grants made in 1999,
1998 and 1997 were considered. The weighted average grant-date fair value of
options granted during 1999, 1998 and 1997 was $2.09, $3.71 and $4.14,
respectively. The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, 1998 and 1997, respectively: dividend
yields of .94%, 2.10% and 1.72%; average expected volatility of .37, .33 and
.34; risk-free interest rates of 5.88%, 4.75% and 5.71%; and an average expected
life of 4.1 years.
RESTRICTED STOCK. On December 6, 1995, Hancock adopted the 1995 Restricted Stock
Plan to provide for the issuance of restricted stock awards to employees. The
aggregate number of shares that may be issued or reserved for issuance pursuant
to the 1995 Restricted Stock Plan shall not exceed one million shares (subject
to adjustment as provided in the Plan). During 1999, 1998 and 1997, restricted
shares of 595,600, 89,950 and 264,600, respectively, were issued to officers and
key employees under the Plan. As of January 30, 2000, 934,600 shares are
outstanding for which restrictions have not been lifted. Compensation expense
related to restricted shares issued is recognized over the period for which
restrictions apply. This expense totaled $1,390,000, $1,310,000 and $1,282,000
in 1999, 1998 and 1997, respectively.
RETIREMENT PLANS. Substantially all full-time employees are covered by a
trusteed, noncontributory defined benefit retirement plan maintained by Hancock.
The retirement benefits provided by this plan are primarily based on years of
service and employee compensation. Pension costs are funded by annual
contributions to the trust.
The following table sets forth changes in the projected benefit obligation and
changes in the fair value of plan assets (in thousands):
<TABLE>
<CAPTION>
CHANGE IN PROJECTED BENEFIT OBLIGATION 1999 1998
----- -----
<S> <C> <C>
Benefit obligation at beginning of year $ 40,093 $ 34,759
Service costs 2,083 2,010
Interest costs 2,799 2,538
Benefits paid (1,828) (1,701)
Actuarial adjustments (2,014) 2,487
-------- --------
Benefit obligation at end of year $ 41,133 $ 40,093
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 41,970 $ 36,869
Actual return on plan assets 6,044 4,322
Employer contributions 2,365 2,480
Benefits paid (1,828) (1,701)
-------- --------
Fair value of plan assets at end of year $ 48,551 $ 41,970
======== ========
</TABLE>
19
<PAGE> 13
The funded status and the amounts recognized in Hancock's consolidated balance
sheet for defined benefit plans based on an actuarial valuation as of the
measurement dates of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funded status $ 7,418 $ 1,877
Transition obligation (asset) (254) (508)
Prior service cost 624 738
Actuarial adjustments (7,309) (3,193)
-------- --------
Prepaid (accrued) benefit cost $ 479 $ (1,086)
======== ========
</TABLE>
Plan assets include fixed income and equity funds, comprising corporate and
government debt securities as well as common stock. The unrecognized net
transition asset is being amortized over 15 years beginning in 1986.
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 2,083 $ 2,010 $ 1,713
Interest cost 2,799 2,538 2,286
Expected return on plan assets (3,860) (3,404) (2,840)
Amortization and deferrals (139) (148) (139)
------- ------- -------
Net periodic pension cost $ 874 $ 996 $ 1,020
======= ======= =======
</TABLE>
Actuarial assumptions used in the period-end valuations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.50% 7.00% 7.25%
Rate of increase in compensation levels 4.25% 4.25% 4.25%
Expected long-term rate of return on assets 9.25% 9.25% 9.25%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. Certain health care benefits are
provided by Hancock to substantially all retired employees with more than 15
years of credited service. The following table sets forth the changes in the
projected benefit obligation and changes in the fair value of plan assets (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of year $13,565 $12,040
Service costs 679 652
Interest costs 888 825
Benefits paid (523) (379)
Actuarial adjustments (1,564) 427
------- -------
Benefit obligation at end of year $13,045 $13,565
======= =======
</TABLE>
The Company currently contributes to the plan as benefits are paid. The funded
status and the amounts recognized in Hancock's consolidated balance sheet for
other postretirement benefits based on an actuarial valuation as of the
measurement dates of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funded status $(13,045) $(13,565)
Prior service cost (1,979) (2,161)
Actuarial adjustments (5,871) (4,608)
-------- --------
Prepaid (accrued) benefit cost $(20,895) $(20,334)
======== ========
</TABLE>
The medical care cost trend rate used in determining this obligation for
employees before age 65 is 7.71%, decreasing by .68% annually before leveling at
5.00%. For individuals 65 and over, the rate is 5.19%, decreasing by .69%
annually before leveling at 4.50%. This trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the combined health
care cost trend by 1% would increase the accumulated postretirement benefit
obligation by $2.1 million.
The discount and the salary scale rates used in calculating the obligations are
7.50% and 4.25%, respectively, at December 31, 1999 and 7.00% and 4.25%,
respectively, at December 31, 1998. Net periodic postretirement benefit costs
included the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 679 $ 652 $ 672
Interest cost 888 825 769
Amortization and deferrals (483) (510) (548)
------ ------ -------
Net periodic postretirement benefit costs $1,084 $ 967 $ 893
====== ====== =======
</TABLE>
Hancock's policy is to fund claims as incurred. Claims paid in 1999, 1998 and
1997 totaled $523,000, $379,000 and $310,000, respectively.
20
<PAGE> 14
NOTE 11 - EARNINGS PER SHARE
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------- ------------------------------ -----------------------------
NET PER SHARE NET PER SHARE NET PER SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Earnings available to
common shareholders $6,816 18,056 $.38 $3,556 19,741 $.18 $15,324 20,834 $.74
EFFECT OF DILUTIVE SECURITIES
Stock options -- 192 391
Restricted stock -- 64 92
------ ------ ------
DILUTED EPS
Earnings available to common ------ ------ ---- ------ ------ ---- ------- ------ ----
shareholders plus conversions $6,816 18,056 $.38 $3,556 19,997 $.18 $15,324 21,317 $.72
====== ====== ==== ====== ====== ==== ======= ====== ====
</TABLE>
Certain options to purchase shares of the Company's common stock were
outstanding during the years ending January 30, 2000 and January 31, 1999 but
were not included in the computation of diluted EPS because the exercise price
was greater than the average price of common shares. These options were still
outstanding as of January 30, 2000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject
Hancock to concentrations of risk are primarily cash and cash equivalents.
Hancock places its cash and cash equivalents in insured depository institutions
and limits the amount of credit exposure to any one institution.
LITIGATION. Hancock is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined with
certainty, Hancock's management is of the opinion that it is unlikely that these
proceedings and claims will have a material effect on the financial condition or
operating results of Hancock.
NOTE 13 - STORE CLOSING RESERVES
Store closing reserves are established based on estimates of net lease
obligations and other store closing costs. During the fourth quarter of 1998,
the Company recorded a charge of $8,604,000 for revised estimates of net lease
obligations for stores closed at January 31, 1999 and stores committed to be
closed in fiscal 1999. This charge, when combined with an already existing
reserve, resulted in a total reserve of $9,022,000 at January 31, 1999.
At January 30, 2000 the balance in this restructuring reserve was $6,552,000
which represents the present value of the future net lease obligations required
for the locations which have been closed. The 1999 activity in the reserve is as
follows:
<TABLE>
<CAPTION>
PAYMENTS
JANUARY 31, IMPUTED ON JANUARY 30,
1999 INTEREST RESERVE 2000
---- -------- ------- ----
<S> <C> <C> <C> <C>
Lease obligations $9,022 346 (2,816) $6,552
====== === ====== ======
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
(PRICEWATERHOUSECOOPERS LOGO)
To the Board of Directors and
Shareholders of Hancock Fabrics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Hancock Fabrics,
Inc. and its subsidiaries at January 30, 2000 and January 31, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statement based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 7, 2000
Memphis, TN
21
<PAGE> 15
MANAGEMENT'S REPORT ON THE
FINANCIAL STATEMENTS OF HANCOCK FABRICS, INC.
Hancock's financial statements and related information appearing in this report
were prepared by management. Management believes that the financial statements
present fairly the financial position, the results of operations and the cash
flows of the Company in conformity with generally accepted accounting
principles. In preparing the financial statements, management must include
certain amounts based on estimates and judgements which it believes are
reasonable under the circumstances.
Hancock maintains accounting and other internal control systems designed to
provide reasonable assurance that financial records are reliable for purposes of
preparing financial statements and that assets are properly accounted for and
safeguarded. In connection with the annual audit, our independent accountants
report recommendations for improvement in the systems and controls to management
and the Audit Committee. Compliance with these systems and controls is monitored
through a program of audits by an internal auditing staff. Management recognizes
that limitations exist in any internal control system in that the system's cost
should not exceed the benefits derived.
The Audit Committee of the Board of Directors is composed of four independent
directors. The Audit Committee is responsible for recommending the engaging of
Hancock's independent accountants, reviewing their independence, reviewing
Hancock's procedures for internal auditing and the adequacy of its internal
control systems. The Audit Committee meets from time to time with the
independent accountants, management and the internal audit manager. The
independent accountants have direct access to the Audit Committee with and
without the presence of management.
/s/ Bruce D. Smith
Bruce D. Smith
Senior Vice President,
Chief Financial Officer
ELEVEN-YEAR SUMMARY
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EARNINGS
BEFORE
LIFO INTEREST NET NUMBER
GROSS CREDIT AND INTEREST NET OF
YEAR SALES PROFIT (CHARGE) TAXES EXPENSE EARNINGS STORES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $381,572 $185,871 $ 475 $13,030 $2,380 $ 6,816 453
1998 392,303 190,782 300 6,863 1,273 3,556(1) 462
1997 381,910 186,764 700 25,004 162 15,324 481
1996 378,218 183,325 (2,505) 21,239 957 12,481 462
1995 364,192 172,169 (3,016) 16,658 1,937 8,951 498
1994 366,816 171,387 (500) 19,056 2,230 10,139 500
1993 367,745 161,491 (6,600) 10,741 2,076 5,438 500
1992 380,375 173,075 (6,998) 21,472 2,367 12,118 482
1991 388,001 184,104 (4,280) 38,668 2,078 17,307(2) 459
1990 386,882 183,838 (5,598) 47,409 2,889 28,105 437
1989 345,819 165,923 (3,820) 42,838 1,489 25,957 402
</TABLE>
(1) Net earnings in 1998 included a net charge of $6,349,000 related
principally to net lease obligations for stores closed at January 31, 1999
and stores committed to closing in fiscal 1999.
(2) Net earnings in 1991 included a net charge of $5,657,000 representing the
cumulative effect on prior years of changes in accounting methods
($6,526,000 decrease in net earnings for SFAS No. 106 - Employers'
Accounting for Postretirement Benefits Other Than Pensions and $869,000
increase in net earnings for SFAS No. 109 - Accounting for Income Taxes).
22
<PAGE> 1
EXHIBIT 21
Subsidiaries of Hancock Fabrics, Inc.
<TABLE>
<CAPTION>
Names Under Which
State of Subsidiary
Name Incorporation Does Business
---- ------------- -----------------
<S> <C> <C>
HF Enterprises, Inc. Delaware HF Enterprises
HF Resources, Inc. Delaware HF Resources
HF Merchandising, Inc. Delaware HF Merchandising
Hancock Fabrics of
MI, Inc. Delaware Hancock Fabrics of MI
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-17215, 33-29138, 33-55419, 333-32295 and
333-32229) of Hancock Fabrics, Inc. of our report dated March 7, 2000 appearing
on page 21 of the Annual Report to Shareholders, which is incorporated in this
Annual Report of Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
April 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999
FORM 10-K OF HANCOCK FABRICS, INC. FOR THE YEAR ENDED JANUARY 30, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-30-2000
<CASH> 6,904
<SECURITIES> 0
<RECEIVABLES> 2,347
<ALLOWANCES> 0
<INVENTORY> 140,750
<CURRENT-ASSETS> 152,721
<PP&E> 26,947
<DEPRECIATION> 0
<TOTAL-ASSETS> 195,562
<CURRENT-LIABILITIES> 58,686
<BONDS> 0
0
0
<COMMON> 291
<OTHER-SE> 76,576
<TOTAL-LIABILITY-AND-EQUITY> 195,562
<SALES> 381,572
<TOTAL-REVENUES> 381,572
<CGS> 195,701
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 182,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,618
<INCOME-PRETAX> 10,650
<INCOME-TAX> 3,834
<INCOME-CONTINUING> 6,816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,816
<EPS-BASIC> .38
<EPS-DILUTED> .38
</TABLE>
