<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Hancock Fabrics, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(HANCOCK FABRICS LOGO)
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 15, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Hancock
Fabrics, Inc. will be held at the Stennis Center, 3400 West Main Street, Tupelo,
Mississippi (adjacent to the Company's headquarters) on Thursday, June 15, 2000
at 10:00 a.m. CDT, or as soon thereafter as a quorum shall be present, for the
following purposes:
1. To elect three directors; and
2. To consider and vote upon such other matters as may properly come
before the meeting or any adjournment thereof.
Only shareholders of record on the books of the Company at the close of
business on April 17, 2000 will be entitled to vote at the meeting.
Shareholders are cordially invited to attend the meeting.
PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
Dated: April 27, 2000
By order of the Board of Directors,
Ellen J. Kennedy
Secretary
<PAGE> 3
PROXY STATEMENT
OF
HANCOCK FABRICS, INC.
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of Shareholders of Hancock Fabrics, Inc.
and at any adjournment thereof. The meeting will be held on June 15, 2000 at
10:00 a.m. CDT at the Stennis Center, 3400 West Main Street, Tupelo, Mississippi
(adjacent to the Company's headquarters) for the purposes set forth in the
preceding Notice of the Meeting dated April 27, 2000. This solicitation is made
by the Company.
Only shareholders of record at the close of business on April 17, 2000 will
be entitled to vote at the meeting. On that date, the outstanding stock of the
Company consisted of 18,250,636 shares of common stock.
The mailing address of the principal executive offices of the Company is
P.O. Box 2400, Tupelo, Mississippi 38803-2400. The approximate date on which
this Proxy Statement, the accompanying form of proxy and the 1999 Annual Report
are first sent to shareholders is April 27, 2000.
VOTING
Each shareholder is entitled to one vote per share respecting each Board
seat to be filled and on each other matter voted on at the meeting. A proxy,
when executed and not revoked, will be voted in accordance with the
specifications it contains. Unless the accompanying form of proxy contains
instructions to the contrary, it will be voted for the election of the nominee
named below to serve until 2001, nominees named below to serve until 2003 (see
"ELECTION OF DIRECTORS") and in the discretion of the proxyholders upon such
other matters as may properly come before the meeting.
The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of common stock issued and outstanding on the record
date. Abstentions and broker non-votes are counted for purposes of determining
the presence or absence of a quorum for the transaction of business.
REVOCABILITY OF PROXIES
A shareholder who executes a proxy may revoke it at any time before it is
voted. Proxies may be revoked by (i) filing with the Secretary of the Company,
at or before the meeting, a written notice of revocation relating to the proxy,
(ii) duly executing a subsequent proxy bearing a later date relating to the same
shares and delivering it to the Secretary at or before the meeting, or (iii)
voting in person at the meeting. Any written notice revoking a proxy should be
sent to Hancock Fabrics, Inc., P.O. Box 2400, Tupelo, Mississippi 38803-2400,
Attention: Secretary.
SOLICITATION
The Company will bear the cost of soliciting these proxies. Brokers,
nominees, fiduciaries and other custodians will be reimbursed for their
reasonable expenses incurred in sending proxy material to principals and
obtaining their instructions. The Company's transfer agent will assist the
Company in its communications. In addition, directors, officers and employees
may solicit proxies in person, by telephone or in writing.
<PAGE> 4
The following table provides information about the persons known to the
Company to be the beneficial owners of more than 5% of any class of the
Company's securities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) CLASS(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock T. Rowe Price 1,852,800 10.152%
Associates, Inc.
100 E. Pratt Street
Baltimore, MD 21202
- -----------------------------------------------------------------------------------------------------------
Common Stock Arnhold and 1,435,000 7.863%
S. Bleichroeder, Inc.
1345 Ave. Of Americas
New York, NY 10105
- -----------------------------------------------------------------------------------------------------------
Common Stock Lincluden Management 1,389,850 7.615%
Limited
1275 N. Service Rd. W.
Suite 607
Oakville, Ontario, Canada
L6M 3G4
- -----------------------------------------------------------------------------------------------------------
Common Stock Dimensional Fund 1,002,800 5.495%
Advisors, Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Information concerning beneficial ownership and the number of
shares beneficially owned is based on reports filed by the
shareholders with the Securities and Exchange Commission.
(2) As of April 17, 2000.
2
<PAGE> 5
The following table provides information, as of April 17, 2000, about the
beneficial ownership of the Company's common stock by each of the Company's
directors, named executive officers and all directors and executive officers as
a group:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Larry G. Kirk 432,357(1) 2.340%
- ----------------------------------------------------------------------------
Jack W. Busby, Jr. 312,818(1) 1.696%
- ----------------------------------------------------------------------------
Bruce D. Smith 94,957(1) .519%
- ----------------------------------------------------------------------------
Donna L. Weaver 80,858 .443%
- ----------------------------------------------------------------------------
Don L. Fruge 19,277 .106%
- ----------------------------------------------------------------------------
R. Randolph Devening 2,852 .016%
- ----------------------------------------------------------------------------
Roger T. Knox -0- .000%
- ----------------------------------------------------------------------------
All Directors and Executive
Officers as a Group 943,119(1) 5.043%
- ----------------------------------------------------------------------------
</TABLE>
(1) Includes 228,600, 190,800 and 33,000 shares
with respect to which Mr. Kirk, Mr. Busby
and Mr. Smith, respectively, have the right
to acquire beneficial ownership on or before
June 16, 2000.
ITEM 1 -- ELECTION OF DIRECTORS
The By-Laws of the Company provide that the number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors the Company
would have if there were no vacancies (the "Whole Board"). The Whole Board has
increased that number from five to six, as of June 21, 1999. Roger T. Knox was
elected by the Whole Board to fill the vacancy created by the increase, to serve
until the 2000 Annual Meeting of Shareholders.
The directors have been classified, with respect to the time for which they
severally hold office, into three classes of two. One nominee will be elected to
hold office until the annual meeting of shareholders in 2001 and two nominees
will be elected to hold office until the annual meeting of shareholders in 2003
or until election and qualification of a successor. The shares represented by
proxies will be voted for the election of the nominees named below, but if a
nominee should be unable to serve, those shares will be voted for such
replacement as the Board may designate. The Company has no reason to expect that
the nominees will be unable to serve.
3
<PAGE> 6
The following table provides information about each nominee and each
continuing director, including the business experience of each during at least
the past five years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NAME DIRECTOR
(AGE) PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE SINCE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
NOMINEE TO SERVE UNTIL 2001
- -----------------------------------------------------------------------------------------------------
Roger T. Knox Chief Executive Officer and President, Memphis 1999
(62) Zoo, Memphis, Tennessee. Director of Fred's Inc.
(retailer), Memphis, Tennessee.
Formerly Chairman and Chief Executive Officer,
Goldsmith's (retailer), a division of Federated
Department Stores, Inc., Memphis, Tennessee
- -----------------------------------------------------------------------------------------------------
NOMINEES TO SERVE UNTIL 2003
- -----------------------------------------------------------------------------------------------------
Don L. Fruge Chief Executive Officer and President, University 1987
(54) of Mississippi Foundation, and Professor of Law,
University of Mississippi, University,
Mississippi, and Attorney at Law, Oxford,
Mississippi.
Formerly Vice Chancellor for University Affairs,
University of Mississippi, University, Mississippi
- -----------------------------------------------------------------------------------------------------
Larry G. Kirk Chairman and Chief Executive Officer. 1990
(53) Formerly President and Chief Financial Officer.
Director of BancorpSouth Bank, Tupelo, Mississippi
- -----------------------------------------------------------------------------------------------------
DIRECTOR TO SERVE UNTIL 2001
- -----------------------------------------------------------------------------------------------------
R. Randolph Devening Chairman of the Board, Chief Executive Officer and 1995
(58) President, Foodbrands America, Inc., Oklahoma
City, Oklahoma.
Formerly Vice Chairman and Chief Financial Officer,
Fleming Companies, Inc., Oklahoma City, Oklahoma
- -----------------------------------------------------------------------------------------------------
DIRECTORS TO SERVE UNTIL 2002
- -----------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. President and Chief Operating Officer. 1997
(57) Formerly Executive Vice President
- -----------------------------------------------------------------------------------------------------
Donna L. Weaver Chairman of Weaver, Field & London, Inc. 1987
(56) Investor Relations and Corporate Communications,
San Francisco, California. Director of Ross
Stores, Inc.
(retailer), Newark, California, and Crown Vantage,
Inc., Oakland, California
- -----------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
The Audit Committee of the Board of Directors, which met twice during the
Company's latest fiscal year, is charged with recommending the engaging of the
Company's independent accountants, reviewing their reports, authorizing their
services and fees, reviewing their independence, reviewing the Company's
procedures for internal auditing and the adequacy of its system of internal
accounting controls, and reporting to the Board with respect thereto. The Audit
Committee Charter, which was adopted by the Board of Directors, is attached as
APPENDIX A. The Audit Committee is composed of Don L. Fruge (Chair), R. Randolph
Devening, Roger T. Knox and Donna L. Weaver, all of whom are independent
directors.
The Management Review and Compensation Committee of the Board of Directors,
which met four times during the Company's latest fiscal year, is charged with
determining the base salaries of all executive officers of the Company,
administering the Retirement Plans, Stock Option Plan, Restricted Stock Plan,
Extra Compensation Plan, Officer Incentive Compensation Plan and the 1997 Bonus
Plan for Store Management, and making recommendations to the Board respecting
policies of the Board dealing with such Plans. The Management Review and
Compensation Committee is composed of Donna L. Weaver (Chair), R. Randolph
Devening, Don L. Fruge and Roger T. Knox.
The Nominating Committee of the Board of Directors, which met one time
during the Company's latest fiscal year, is charged with making recommendations
to the Board concerning the number of members, qualifications for membership,
directing any search for candidates and administering the retirement policy for
the Board. The Nominating Committee is composed of Roger T. Knox (Chair), Don L.
Fruge and Donna L. Weaver.
When the Board is not in session, the Executive Committee of the Board may
exercise the powers vested in the Board (except certain enumerated major powers
such as the power to declare dividends, amend the By-Laws and fill vacancies on
the Board and certain powers reserved to the Board under Delaware law). In
practice, the function of the Executive Committee is to act on matters arising
between Board meetings that have special time value but do not appear to warrant
a special Board meeting. The Executive Committee is composed of Larry G. Kirk
(Chair), Jack W. Busby, Jr. and Don L. Fruge. The Executive Committee did not
meet during the Company's latest fiscal year.
The Board met eight times during the Company's latest fiscal year. All of
the directors attended at least 75% of the meetings of the Board and of all
committees on which he or she served, except that R. Randolph Devening was
unable to attend four of the fourteen Board and committee meetings, due to
illness.
5
<PAGE> 8
BOARD COMPENSATION COMMITTEE REPORT
The Management Review and Compensation Committee of the Board of Directors
(the "Committee") is composed of four independent directors. The Committee
considers the performance of the executive officers, determines their salaries,
administers the cash incentive compensation plans and is responsible for
granting stock options and awarding restricted stock under the provisions of the
respective plans.
COMPENSATION POLICIES
The goals of the Company's compensation program are to align compensation
with business performance and the interest of shareholders, and to enable the
Company to attract, motivate and retain management that can contribute to the
Company's long-term success. Therefore, the executive compensation program
includes base salary, annual cash incentive bonus (the Extra Compensation Plan
and the Officer Incentive Compensation Plan) and long-term incentives in the
form of stock options and restricted stock. The Chief Executive Officer's
compensation is determined in the same manner as that of the other corporate
officers.
SECTION 162(M) OF THE INTERNAL REVENUE CODE -- DEDUCTIBILITY LIMITATION
Section 162(m) of the Internal Revenue Code of 1986 imposes a limit, with
certain exceptions, on the amount that a publicly held corporation may deduct
for federal income tax purposes in any year for the compensation paid or accrued
with respect to its executive officers. It is the Committee's policy to seek to
preserve the tax deductibility of all executive compensation under Section
162(m) to the extent consistent with the overall objectives of the executive
compensation program in attracting, motivating and retaining its executives. The
Committee believes that it is unlikely that Section 162(m) will affect the
deductibility of the executive compensation of any of the executive officers in
the Company's current fiscal year.
BASE SALARY
The Committee annually reviews the base salaries of the Chief Executive
Officer and the other executive officers and members of corporate management.
When reviewing base salary and possible adjustments to base salary, the
Committee subjectively considers individual performance, Company performance
(which is not defined as any specific financial measure or measures), the
expected impact of long-term decisions, employee retention, changes in level of
responsibility and economic conditions in the retail fabric industry. In
determining the adjustments made in 1999 to the base salaries of the executive
officers, including the Chief Executive Officer, the Committee considered all of
the above criteria.
INCENTIVE COMPENSATION
The Committee believes that executive compensation should be linked to
business performance. In order to link annual cash compensation to Company
performance, the Committee allocates funds to bonus programs based on the
Company's operating earnings before interest and taxes. The total of bonuses
paid under the Extra Compensation Plan to eligible participants will increase or
decrease each year based on the percentage increase or decrease in the Company's
operating earnings compared to the prior year. The Officer Incentive
Compensation Plan provides for bonuses based on a percentage of an officer's
base salary if operating earnings reach a predetermined level of improvement. No
payments were made to any officer for 1999 under the Officer Incentive
Compensation Plan. If the Company's operating earnings reach the minimum level
required to provide for officers to be paid under the Officer Incentive
Compensation Plan, officer participation in the Extra Compensation Plan is
capped.
6
<PAGE> 9
The methodology used in calculating bonuses for 1999 was the same for all
eligible employees. The aggregate bonus payments to executive officers for
fiscal year 1999, including the Chief Executive Officer (whose compensation is
discussed below), declined from fiscal year 1998 due to the decrease in
operating earnings compared to the prior year.
LONG-TERM INCENTIVES
To more closely align the interest of the Company's shareholders and the
executive officers, and to focus management's attention on long-term strategic
objectives which will enhance shareholder value, the Committee grants stock
options and awards restricted stock. All grants and awards contain vesting
provisions of one to five years to encourage continued employment with the
Company and continued attention to long-term objectives and share appreciation.
The exercise price for the stock options granted is equal to the fair market
value of the underlying stock on the date of grant. Currently, all of the
outstanding options are exercisable at prices above the market price. Therefore,
the ultimate value of these equity incentives to the executive officers and
other recipients is directly related to the market value of the common stock and
to the common stock dividend yield. The Committee has established a policy which
generally grants stock options and awards restricted stock annually to the
executive officers in amounts based on the recipient's level of responsibility.
Based on these Committee guidelines, the Chief Executive Officer and other
executive officers received stock option grants and restricted stock awards as
detailed in the summary compensation table (see the SUMMARY COMPENSATION TABLE).
COMPANY PERFORMANCE AND COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer's base salary, incentive compensation and
long-term incentives in the form of stock options and restricted stock were
determined in the same manner as the compensation of the other executive
officers and members of corporate management. The Chief Executive Officer's
bonus for fiscal year 1999, based on the Company's operating earnings before
interest and taxes, was $41,491. During the latest fiscal year, Mr. Kirk was
granted options for 30,000 shares. Mr. Kirk was also awarded 64,200 shares of
restricted stock.
Management Review and
Compensation Committee
Donna L. Weaver, Chair
R. Randolph Devening
Don L. Fruge
Roger T. Knox
7
<PAGE> 10
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of the Company's Chief Executive Officer and each of the Company's other
executive officers (determined as of the end of the latest fiscal year) for the
fiscal years ended January 30, 2000, January 31, 1999 and February 1, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
- -----------------------------------------------------------------------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
SALARY BONUS(1) AWARDS(2) OPTIONS/SARS(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Larry G. Kirk 1999 253,807 41,491 445,420 30,000
Chairman of the Board and 1998 240,769 54,627 249,000 30,000
Chief Executive Officer 1997 228,808 87,225 151,500 60,000
- -----------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 1999 197,960 31,118 338,574 20,000
President and 1998 187,500 40,970 153,000 20,000
Chief Operating Officer 1997 177,962 65,418 113,625 40,000
- -----------------------------------------------------------------------------------------------------
Bruce D. Smith 1999 137,327 16,596 231,035 6,000
Senior Vice President, 1998 126,346 21,850 78,000 6,000
Chief Financial Officer and Treasurer 1997 117,115 34,889 378,750 12,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Bonuses were paid under the Extra Compensation Plan, which awards bonuses to
participants based on an allocation of the Company's operating profit. The
bonus payments made to each of the named executive officers have been
adjusted year over year in proportion to the change in earnings before
interest and taxes. No bonuses were paid under the Officer Incentive
Compensation Plan which requires that certain levels of improvement to
operating profit be reached.
(2) Restricted stock awards generally vest five years and one day following the
date of award. The award made to Mr. Smith in 1997 will vest as to 20% of
the shares awarded in one year and one day from the date of award and as to
20% of the shares on each anniversary of the vesting date. Prior to vesting,
restricted shares are not negotiable or otherwise transferable and are
subject to forfeiture if employment terminates. Dividends are paid on shares
subject to restrictions. See "EMPLOYMENT CONTRACTS AND TERMINATION OF
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS" for a description of
circumstances under which the vesting schedule may be accelerated.
The amounts shown represent the market value of the restricted shares on the
date of award. As of the end of the latest fiscal year (specifically,
January 28, 2000, the last trading day prior to fiscal year end), the
executive officers held the following number of restricted shares, with the
following market values: Mr. Kirk, 109,900 shares, $336,569; Mr. Busby,
85,100 shares, $260,619; and Mr. Smith, 56,500 shares, $173,031.
(3) All of the outstanding stock options are exercisable at prices above the
current market price of the stock, therefore the options are of no immediate
value to the holder.
8
<PAGE> 11
STOCK OPTIONS
The following table contains information about the grant of stock options
during the Company's latest fiscal year to the executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR THE OPTION TERM
INDIVIDUAL GRANTS(1) (10 YEARS)
- --------------------------------------------------------------------------------------------------------------------------------
5% 10%
--------------------------------------------
% OF
TOTAL
# OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO
OPTIONS/SARS EMPLOYEES EXERCISE OR
GRANTED(2) IN FISCAL BASE PRICE EXPIRATION STOCK PRICE STOCK PRICE
NAME (#) YEAR (PER SHARE) DATE (PER SHARE)(3) GAIN(4) (PER SHARE)(3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry G. Kirk 30,000 5.73 $5.8125 June 7, 2009 $9.47 $109,664 $15.08
- --------------------------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 20,000 3.82 5.8125 June 7, 2009 9.47 73,109 15.08
- --------------------------------------------------------------------------------------------------------------------------------
Bruce D. Smith 6,000 1.15 5.8125 June 7, 2009 9.47 21,933 15.08
- --------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR THE OPTION TERM
(10 YEARS)
- -----------------------------------------------------
NAME GAIN(4)
- -----------------------------------------------------
Larry G. Kirk $277,909
- -----------------------------------------------------
Jack W. Busby, Jr. 185,273
- -----------------------------------------------------
Bruce D. Smith 55,582
- -----------------------------------------------------
</TABLE>
(1) All options shown here were granted under the Company's 1996 Stock Option
Plan.
(2) All options shown here as granted to Mr. Kirk, Mr. Busby and Mr. Smith were
granted on June 7, 1999 (the "Grant Date"), and become exercisable as to 50%
of the shares subject to the options one year and one day following the
Grant Date and as to the remaining shares two years and one day following
the Grant Date. See "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE OF CONTROL ARRANGEMENTS" for a description of circumstances under
which the vesting schedule may be accelerated. The Company does not grant
SARs.
(3) The stock price (per share) is computed based on 10 years of appreciation in
the option exercise price, $5.81, at a 5% annual rate ($9.47) and a 10%
annual rate ($15.08), as prescribed by the Securities and Exchange
Commission rules.
(4) No gain to the optionee is possible without an increase in the stock price,
which will benefit all shareholders.
9
<PAGE> 12
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the executive
officers, concerning the exercise of options during the latest fiscal year and
unexercised options held as of the end of the latest fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
VALUE REALIZED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
(MARKET PRICE AT OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
SHARES ACQUIRED EXERCISE LESS (#) ($)
ON EXERCISE EXERCISE PRICE) -----------------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Kirk 0 0 198,600 45,000 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 0 0 170,800 30,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------
Bruce D. Smith 0 0 27,000 17,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PENSION PLANS
The Company maintains a noncontributory retirement program under which
retirement benefits are provided by a qualified defined benefit pension plan
supplemented by a nonqualified unfunded plan affording certain benefits that
cannot be provided by the qualified plan. In this description, the qualified and
nonqualified plans are treated as one "Plan." Each of the named executive
officers participates in the Plan.
For each year of credited service, a Plan participant accrues a retirement
benefit calculated under a formula based on covered compensation for that year.
Covered compensation is defined in the Plan documents. It includes, generally,
all wages, salary and bonus actually received, plus contributions that the
participant elects to be made on his or her behalf pursuant to a "cafeteria
plan" (under Internal Revenue Code section 125) or to a "qualified cash or
deferred arrangement" (under Internal Revenue Code section 401(k)).
Under the Plan formula applicable to the executive officers, the annual
retirement benefit payable at normal retirement age (age 65) as a straight life
annuity is the sum of: (1) for years of credited service through 1992, 1% of
average annual compensation during the five years ending December 31, 1992,
multiplied by years of credited service through 1992, plus 0.33% of such average
annual compensation in excess of $50,640 multiplied by years of credited service
through 1992 up to a maximum of 30 years, and (2) for each year of credited
service following 1992, 1% of annual compensation for that year, plus (for years
of credited service up to a maximum of 30 years) 0.33% of such annual
compensation in excess of the Social Security maximum wage base for that year.
If Mr. Kirk, Mr. Busby and Mr. Smith continue in their present positions,
the estimated annual retirement benefit payable to them under the Plan upon the
normal retirement age of 65 in the form of a straight life annuity would be
$89,849, $84,151 and $48,414, respectively. These estimates are computed using,
for all future years of credited service, the compensation levels in effect for
calendar year 1999 (the most recent Plan year) and the Social Security maximum
wage base in effect for calendar year 2000.
10
<PAGE> 13
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company has entered into deferred compensation agreements (the
"Deferred Agreements") with each of the continuing executive officers to ensure
that their services remain available to the Company and that they are not
attracted by other employers seeking their services. Under the Deferred
Agreement with Mr. Kirk (the "Kirk Deferred Agreement"), the right to payment is
conditioned on Mr. Kirk's full-time employment until age 55 or earlier death,
his availability as a consultant to the Company and his not engaging in
activities competitive with the business of the Company. Provided such
conditions are satisfied, payments of $50,000 a year for 15 years will begin
upon cessation of his employment. Upon his death, the payments may be made to a
designated beneficiary. If neither a change of control of the Company has
occurred nor Mr. Kirk's right to payments under the Kirk Deferred Agreement has
vested, Mr. Kirk may elect that, upon such occurrence and vesting, he (or, in
certain cases, his designated beneficiary) will receive in a cash lump sum the
present value of all payments that would become payable, regardless of the fact
that the Kirk Deferred Agreement provides for payment at some later date or
requires some future performance. If a change of control of the Company occurs
and the right to payments under the Kirk Deferred Agreement either is or becomes
vested, as explained below (and if Mr. Kirk has not elected to receive a lump
sum payment as described in the preceding sentence), the Company is required to
establish an irrevocable letter of credit in an amount equal to the largest sum
of all payments to be paid under the Kirk Deferred Agreement, to serve as
security for those payments. Unless the letter of credit is established and
renewed on a timely basis, Mr. Kirk (or, in certain cases, his designated
beneficiary) will then receive in a cash lump sum the total of those payments,
regardless of the fact that the Kirk Deferred Agreement provides for payment at
some later date or requires some future performance. The Deferred Agreements
with Mr. Busby and Mr. Smith are substantially similar to the Kirk Deferred
Agreement except that (i) employment for Mr. Busby and Mr. Smith is required
until age 60 and (ii) the annual payments for the 15-year period are $40,000 for
Mr. Busby and $25,000 for Mr. Smith.
The Company has entered into contingent severance arrangements with each of
the continuing executive officers (collectively the "Severance Agreements").
Each Severance Agreement is effective until May 4, 2002 and provides that, if
during the three years following a change of control of the Company (as defined
in the Severance Agreement), the employment of the individual is terminated by
the employer other than for cause, disability or death or the individual
terminates employment for good reason (as defined in the Severance Agreement),
the individual will receive a lump sum payment equal to the sum of (i) the
individual's annual base salary through the termination date (to the extent not
yet paid) and (ii) two times (except that the Severance Agreement with Mr. Smith
provides that the multiplier is one rather than two) the sum of (a) the
individual's annual base salary at the rate in effect when employment was
terminated or, if higher, at the highest rate in effect within 90 days preceding
the change of control and (b) the highest bonus paid or payable to the
individual within the five years preceding the change of control. The individual
is also entitled to a continuation of health and insurance benefits for two
years and to certain supplemental retirement benefits in respect of that
continuation period (except that the Severance Agreement with Mr. Smith provides
a continuation period of one rather than two years). The Severance Agreements
further provide, in the event that the individual is entitled to payment
thereunder, that he will be deemed to have satisfied the service requirement
under his Deferred Agreement. The Severance Agreements with Mr. Kirk and Mr.
Busby also provide that if the individual remains in the employ of the Company
for the 12-month period following the change of control and voluntarily
terminates employment for any reason (other than for good reason, in which case
the formula set out above will be applicable) during the 30-day period following
that 12-month period, he will receive a lump sum payment equal to the sum of (i)
his annual base salary through the termination date (to the extent not yet paid)
and (ii) the sum of (a) his annual base salary at the rate in effect when
11
<PAGE> 14
employment was terminated or, if higher, at the highest rate in effect within 90
days preceding the change of control and (b) the highest bonus paid or payable
to him within the five years preceding the change of control; and he will be
entitled to a continuation of health and insurance benefits for one year and to
certain supplemental retirement benefits in respect of that continuation period.
The Severance Agreements also provide that if any tax under Section 4999 of the
Internal Revenue Code of 1986, as amended, or any comparable provision (a
"Penalty Tax") is imposed on any payment made or benefit provided to the
individual, then the amount of such payment or benefit will be increased to the
extent necessary to compensate the individual fully for the imposition of such
Penalty Tax.
The Company has entered into Agreements to Secure Certain Contingent
Payments with each of the executive officers (the "Contingent Agreements"). Upon
a change of control of the Company, the Contingent Agreements require the
Company to establish an irrevocable letter of credit in favor of such
individuals securing certain benefits payable under the Severance Agreements and
any lump sum payment elected under the Deferred Agreements. The amount of the
letters of credit will be calculated initially and recalculated quarterly by an
independent accounting firm. Failure to establish and renew the letters of
credit prior to expiration will cause the amounts intended to be secured by the
letters of credit to become immediately payable to the individuals.
With respect to the Company's 1987 and 1996 Stock Option Plans, upon a
change of control of the Company (as defined in the plans), options become fully
exercisable and, with certain exceptions, remain exercisable by the optionee,
including each of the executive officers, for a period of 90 days following
termination of the optionee's employment if such termination occurs within one
year of the change of control. See footnotes to the SUMMARY COMPENSATION TABLE
and the table OPTION/SAR GRANTS IN LAST FISCAL YEAR.
With respect to the Company's 1989 Restricted Stock and 1995 Restricted
Stock Plans, restrictions on stock awarded under the plans, including stock
awarded to executive officers, lapse upon the occurrence of certain events
related to a change of control of the Company (as defined in the plans) and the
stock is not thereafter forfeitable. See footnotes to the SUMMARY COMPENSATION
TABLE.
With respect to the Company's noncontributory retirement program, under
certain circumstances related to a change of control of the Company (as defined
in the program documents), part of the benefit to a participant will be paid in
a lump sum. See "PENSION PLANS."
COMPENSATION OF DIRECTORS
Each nonemployee director receives quarterly fees of $12,000 with no
additional fees for meetings attended or chaired. Directors who are employees of
the Company receive no fees.
12
<PAGE> 15
STOCK PRICE PERFORMANCE GRAPH
The following graph sets forth the Company's cumulative total shareholder
return (assuming reinvestment of dividends) as compared to the S&P 500, the
Russell 2000, and a peer group consisting of Jo-Ann Stores, Inc. ("JAS.A") and
Rag Shops, Inc. ("RAGS"). The graph assumes $100 invested on January 30, 1995.
Note: The historical stock price performance shown on the graph below is
not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
S&P RUSSELL PEER HANCOCK
--- ------- ---- -------
<S> <C> <C> <C> <C>
1995 100 100 100 100
1996 139 128 158 95
1997 175 150 187 134
1998 222 174 280 167
1999 294 173 179 88
2000 325 201 125 36
</TABLE>
13
<PAGE> 16
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
If a shareholder desires to present a proposal at next year's annual
meeting of shareholders and to have that proposal included in the proxy
statement and proxy for that meeting, that proposal must be received by the
Company at its principal executive offices by December 29, 2000.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Company with respect to its most recent fiscal year, and
written representations from reporting persons, the Company believes that during
its latest fiscal year, all filing requirements applicable to its directors and
executive officers were met.
OTHER MATTERS
The Board of Directors has selected PricewaterhouseCoopers LLP as the
independent accountants of the Company for the current fiscal year. At the
Annual Meeting of Shareholders, representatives of PricewaterhouseCoopers LLP
will be present, may make statements if they desire to do so and will be
available to respond to appropriate questions. The Board is not aware that any
matters not specified above will be presented at the meeting. If other business
should properly come before the meeting, the persons named in the proxy will
vote thereon in their discretion to the extent that authority to do so is
granted in the proxy.
PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
By order of the Board of Directors,
Ellen J. Kennedy
Secretary
14
<PAGE> 17
APPENDIX A
HANCOCK FABRICS, INC.
CHARTER OF THE AUDIT COMMITTEE
PURPOSE
The Audit Committee is responsible for protecting the interests of the
shareholders by ensuring that the interim and audited annual financial
statements of Hancock Fabrics, Inc. (the "Company") are accurate and in
conformity with Generally Accepted Accounting Principles ("GAAP"). It must also
ensure, through reviews with management, the independent public accountants and
the Internal Audit Manager, that adequate systems of internal financial and
operational controls exist and are being followed.
MEMBERSHIP
The Audit Committee shall be composed of three or more independent members
of the Board of Directors of the Company. At least one member shall have
accounting or related financial management expertise and all other members shall
be financially literate.
MEETINGS
The Audit Committee shall meet at least twice annually, but it may be
appropriate to meet more frequently. A portion of each meeting may be set aside
for a private session with the independent public accountants.
A meeting of the Audit Committee may be called at any time by its Chairman,
without notice to or the consent of the Board of Directors or management, for
the purpose of discussing or reviewing matters under its authority.
RESPONSIBILITIES
1. Make recommendations to the Board of Directors concerning the
appointment or termination of independent public accountants whose duty
it shall be to audit the books and records of the Company in accordance
with Generally Accepted Auditing Standards ("GAAS").
2. Assess the independence of the public accountants engaged to perform
audit work for the Company.
3. Review the Company's accounting policies and internal financial controls
through discussions with management, the independent public accountants
and the Internal Audit Manager.
4. Meet annually with the independent public accountants to:
- Review and approve the scope of audit work and fees charged by the
independent public accountants.
- Review the financial statements and results of the external audit.
- Require and review a formal written statement from the independent
public accountants delineating all relationships between the
auditors and the Company for the purpose of assessing the impact of
such relationships on the objectivity and independence of the
auditors.
A-1
<PAGE> 18
- Review the quality and adequacy of accounting policies, procedures
and controls.
- Review any changes in accounting regulations or pronouncements.
- Discuss items which could provide a material risk to the Company in
the future.
5. Require the independent public accountants to review interim financial
information, in accordance with applicable standards, prior to the
public disclosure of such information. The independent public accountant
shall discuss with the Audit Committee, or at least its Chairman, and
Senior Management, prior to the public disclosure of the interim
financial information, any significant adjustments, management
judgements and accounting estimates, significant new accounting policies
and disagreements with management.
6. Require Senior Management or the Internal Audit Manager to report to the
Committee on matters of Company governance and any significant findings
including, but not limited to:
- A risk assessment of major businesses, systems or processes.
- The state of internal controls.
- Internal audit reports.
7. Meet with Company Senior Management periodically to review:
- Material legal issues.
- Plans for disaster recovery.
- Risk Management activities.
- Business issues which may affect financial results.
- Ethical standards and conduct.
8. Ensure there is cooperation of management in promoting the use of the
internal audit concept as a constructive process.
9. Direct any special investigations deemed necessary or appropriate by the
Board of Directors or any of its Committees.
A-2
<PAGE> 19
HANCOCK FABRICS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JUNE 15, 2000
The undersigned acknowledges receipt of the Notice and Proxy Statement dated
April 27, 2000 and hereby appoints Larry D. Fair and Bruce D. Smith, with full
power of substitution, the proxies of the undersigned to represent and vote the
shares of the undersigned as indicated on this card at the Annual Meeting of
Shareholders of Hancock Fabrics, Inc. to be held on Thursday, June 15, 2000 at
10:00 a.m. CDT and at any adjournment thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. IT WILL BE VOTED IN
ACCORDANCE WITH THE SPECIFICATIONS INDICATED.
UNLESS OTHERWISE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
NOMINEES LISTED, AND DISCRETIONARY AUTHORITY UNDER ITEM 2 WILL BE DEEMED TO HAVE
BEEN GRANTED.
1. Election of director Roger T. Knox to serve until 2001 and directors Don L.
Fruge and Larry G. Kirk to serve until 2003. A VOTE FOR THE NOMINEES IS
RECOMMENDED BY THE BOARD OF DIRECTORS.
FOR NOMINEES [ ] WITHHOLD VOTE [ ]
(If you wish to withhold your vote from one or more of the named nominees,
please list the nominee(s) in this space:______________________________________)
2. The proxies are authorized to vote, in their discretion, upon such other
matters as may properly come before the meeting and any adjournment thereof.
A VOTE TO GRANT AUTHORITY IS RECOMMENDED BY THE BOARD OF DIRECTORS.
AUTHORITY GRANTED [ ] AUTHORITY WITHHELD [ ]
Continued and to be signed on reverse side.
UNLESS OTHERWISE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
NOMINEES LISTED, AND DISCRETIONARY AUTHORITY UNDER ITEM 2 WILL BE DEEMED TO HAVE
BEEN GRANTED.
Signature(s) should correspond
exactly with the name(s) in
which your certificate is
issued. Executors,
conservators, trustees, etc.,
should so indicate when
signing.
------------------------------
------------------------------
Date , 2000
--------------------
PLEASE DATE AND SIGN YOUR
PROXY AND RETURN PROMPTLY IN
THE ACCOMPANYING ENVELOPE.
