<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to______________
COMMISSION FILE NUMBER 1-9482
------
HANCOCK FABRICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0740905
(State of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3406 WEST MAIN STREET, TUPELO, MS 38803
(Address of principal executive offices)
(Zip Code)
(662) 842-2834
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of July 30, 2000, the registrant had outstanding an aggregate of 17,361,838
shares of common stock, $.01 par value.
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HANCOCK FABRICS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Page Numbers
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of July 30, 2000 and January 30, 2000 3
Consolidated Statement of Earnings for the Thirteen Weeks and Twenty-six
Weeks Ended July 30, 2000 and August 1, 1999 4
Consolidated Statement of Shareholders' Equity for the Twenty-six Weeks
Ended July 30, 2000 5
Consolidated Statement of Cash Flows for the Twenty-six Weeks Ended
July 30, 2000 and August 1, 1999 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
PART II. OTHER INFORMATION:
Item 2. Recent Issuances of Unregistered Securities 10
Item 3. Quantitative and Qualitative Disclosures about Market Risks 10
Item 4. Submission of Matter to a Vote of Securityholders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 11
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(in thousands, except for July 30, January 30,
share and per share amounts) 2000 2000
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,192 $ 6,904
Receivables, less allowance for doubtful accounts 875 2,347
Inventories 131,262 140,750
Prepaid expenses 1,979 2,720
------------------------------------------------------------------------------------------
Total current assets 138,308 152,721
Property and equipment, at depreciated cost 26,740 26,947
Deferred tax asset 10,693 10,091
Other assets 7,512 5,803
------------------------------------------------------------------------------------------
Total assets $ 183,253 $ 195,562
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,286 $ 39,072
Accrued liabilities 14,771 13,344
Deferred tax liabilities 5,112 3,438
Income taxes 1,335 2,832
------------------------------------------------------------------------------------------
Total current liabilities 53,504 58,686
Long-term debt obligations 27,000 31,000
Postretirement benefits other than pensions 21,147 20,895
Reserve for store closings 2,764 4,161
Other liabilities 4,408 3,953
------------------------------------------------------------------------------------------
Total liabilities 108,823 118,695
------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
29,173,715 and 29,139,726 issued and outstanding, respectively 291 291
Additional paid-in capital 39,011 39,142
Retained earnings 176,680 174,815
Treasury stock, at cost, 11,811,877 and 10,487,738
shares held, respectively (135,141) (130,086)
Deferred compensation on restricted stock
incentive plan (6,411) (7,295)
------------------------------------------------------------------------------------------
Total shareholders' equity 74,430 76,867
------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 183,253 $ 195,562
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(in thousands, except
per share amounts) Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------- -----------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 86,046 $ 82,848 $ 184,169 $ 179,213
Cost of goods sold 42,560 42,781 92,718 93,850
-------------------------------------------------------------------------------------------------
Gross profit 43,486 40,067 91,451 85,363
-------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 40,615 39,542 83,239 81,459
Depreciation and amortization 1,332 1,162 2,601 2,318
Interest expense 689 629 1,380 1,164
Interest income (62) (76) (101) (117)
-------------------------------------------------------------------------------------------------
Total operating and interest expenses 42,574 41,257 87,119 84,824
-------------------------------------------------------------------------------------------------
Earnings (loss) before taxes 912 (1,190) 4,332 539
Income taxes 330 (431) 1,567 194
-------------------------------------------------------------------------------------------------
Net earnings (loss) and comprehensive income $ 582 ($ 759) $ 2,765 $ 345
=================================================================================================
Earnings (loss) per share
Basic $ 0.03 ($ 0.04) $ 0.16 $ 0.02
Diluted $ 0.03 ($ 0.04) $ 0.16 $ 0.02
=================================================================================================
Weighted average shares outstanding
Basic 16,889 18,119 17,191 18,134
Diluted 16,889 18,119 17,191 18,134
=================================================================================================
Dividends per share $ 0.025 $ 0.10 $ 0.05 $ 0.20
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
number of shares) Common Stock Additional Treasury Stock Total
------------------- Paid-in Retained ------------------------ Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
------------------------------------------------------------------------------------------------------------------------------------
Twenty-six weeks ended July 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 30, 2000 29,139,726 $ 291 $ 39,142 $174,815 (10,487,738) $(130,086) $(7,295) $ 76,867
Net earnings 2,765 0 2,765
Cash dividend - $.025 per
share on a quarterly basis (900) (900)
Issuance of restricted stock 21,500 64 (64)
Cancellation of restricted stock (1,800) (12) 12
Amortization and vesting of deferred
compensation on restricted stock
incentive plan (239) 936 697
Purchase of treasury stock (1,324,139) (5,055) (5,055)
Stock issuances as compensation for
professional services 14,289 56 56
----------------------------------------------------------------------------------------------------------------------------------
Balance July 30, 2000 29,173,715 $ 291 $ 39,011 $176,680 (11,811,877) ($135,141) ($6,411) $ 74,430
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
(in thousands)
Twenty-six Weeks Ended
-----------------------
July 30, August 1,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,765 $ 345
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 2,601 2,318
LIFO charge (credit) 150 (600)
Deferred income taxes 1,072 252
Amortization of deferred compensation on
restricted stock incentive plan 936 684
Stock issuance as compensation for professional services 56
(Increase) decrease in assets
Receivables and prepaid expenses 2,213 (536)
Inventory at current cost 9,338 4,209
Other noncurrent assets (1,977) (2,511)
Increase (decrease) in liabilities
Accounts payable (6,786) (800)
Accrued liabilities 1,427 1,829
Current income tax obligations (1,736) (1,534)
Postretirement benefits other than pensions 252 264
Payments against closed store accrual (1,397) (1,258)
Other liabilities 455 (246)
---------------------------------------------------------------------------------------
Net cash provided by operating activities 9,369 2,416
---------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (2,394) (4,725)
Other 268
---------------------------------------------------------------------------------------
Net cash used in investing activities (2,126) (4,725)
---------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement (4,000) 8,000
Purchase of treasury stock (5,055) (1,060)
Cash dividends paid (900) (3,813)
---------------------------------------------------------------------------------------
Net cash used in financing activities (9,955) 3,127
---------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,712) 818
Cash and cash equivalents:
Beginning of period 6,904 6,959
---------------------------------------------------------------------------------------
End of period $ 4,192 $ 7,777
=======================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,184 $ 766
Income taxes $ 1,788 $ 2,331
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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HANCOCK FABRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hancock Fabrics,
Inc. ("Hancock" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. The statements do reflect all adjustments (consisting of only normal
recurring accruals) which are, in the opinion of management, necessary for a
fair presentation of financial position in conformity with generally accepted
accounting principles. The statements should be read in conjunction with the
Notes to the Consolidated Financial Statements for the fiscal year ended January
30, 2000 incorporated into the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week period are not necessarily
indicative of the results to be expected for the full fiscal year.
NOTE 2: 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. Per share amounts
are based on average shares outstanding during each quarter and may not add to
the year-to-date amount.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
(dollars in thousands, except for Thirteen Weeks Ended Twenty-six Weeks Ended
per share amounts) ---------------------------- ---------------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share
Net earnings $ 582 $ (759) $ 2,765 $ 345
=========== ============ =========== ===========
Weighted average number of common shares
outstanding during period 16,888,684 18,119,391 17,190,547 18,134,410
=========== ============ =========== ===========
Basic earnings per share $ 0.03 $ (0.04) $ 0.16 $ 0.02
=========== ============ =========== ===========
Diluted earnings per share
Net earnings $ 582 $ (759) $ 2,765 $ 345
=========== ============ =========== ===========
Weighted average number of common shares
outstanding during period 16,888,684 18,119,391 17,190,547 18,134,410
Common stock equivalents 691 0 0 0
Contingently issuable shares 0 0 0 0
----------- ------------ ----------- -----------
16,889,375 18,119,391 17,190,547 18,134,410
=========== ============ =========== ===========
Diluted earnings per share $ 0.03 $ (0.04) $ 0.16 $ 0.02
=========== ============ =========== ===========
</TABLE>
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<PAGE> 8
NOTE 3: RESERVE FOR STORE CLOSINGS
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. The
remaining reserve for store closings at July 30, 2000 represents the present
value of future net lease obligations required for the locations which have been
closed.
The 2000 activity in this reserve is as follows:
<TABLE>
<CAPTION>
January 30, Imputed Payments on July 30,
(in thousands) 2000 Interest Reserve 2000
------ ---- ------- ------
<S> <C> <C> <C> <C>
Lease obligations $6,552 $135 ($1,532) $5,155
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Historically, cash flow from operations has been sufficient to finance the
expansion and operation of Hancock's business. Hancock's principal capital
requirements are for the financing of inventories and to a lesser extent for
capital expenditures relating to store locations and its warehouse and
distribution facility. Funds for such purposes are generated from Hancock's
operations and, if necessary, supplemented by borrowings from commercial
lenders. In addition to cash dividends, Hancock has historically used excess
cash and, if necessary, borrowings from commercial lenders to purchase treasury
stock as market and financial conditions dictate. Hancock opened 2 stores and
closed 6 stores during the thirteen weeks ended July 30, 2000 resulting in a
total of 448 stores at period end.
During the twenty-six weeks ended July 30, 2000, net earnings of $2.8 million
and an inventory decrease of $9.3 million were used to fund additions to
property and equipment of $2.4 million, a decrease in accounts payable of $6.7
million, $5.5 million of treasury stock repurchases and debt repayments totaling
$4.0 million. At July 30, 2000, the Company had $27 million in outstanding debt,
or about 27% of total capitalization, compared to $37 million in outstanding
debt at the end of last year's second quarter.
RESULTS OF OPERATIONS
Thirteen weeks ended July 30, 2000 compared to thirteen weeks ended August 1,
1999
Net earnings were $582 thousand, or $.03 per share, compared with a net loss of
$759 thousand, or $.04 a share in the same period of the prior year. The
increase in earnings resulted from higher comparable store sales and a higher
gross margin.
Sales increased to $86.0 million from $82.8 million in last year's second
quarter, as the result of an increase of 4.8% in comparable store sales,
partially offset by a $400 thousand decrease in sales from net store opening and
closing activity. Sales benefited from the store repositioning strategy,
aggressive store remodeling and product mix changes that the Company has
implemented.
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<PAGE> 9
Gross margins improved to 50.5% from 48.4% last year, recovering from the
promotional activity in 1999 that was necessary to offset the effects of apparel
price deflation.
In the second quarter of 2000, total selling, general and administrative
expenses as a percentage of sales decreased to 47.2% from 47.7% due to leverage
from positive comparable store sales.
Interest expense was higher due to an increase in interest rates by the Federal
Reserve Bank, partially offset by a lower debt level.
Twenty-six weeks ended July 30, 2000 compared to twenty-six weeks ended August
1, 1999
Net earnings were $2.8 million, or $.16 per share, compared with $345 thousand,
or $.02 a share in the same period of the prior year. The increase in earnings
resulted from higher comparable store sales and a higher gross margin.
Sales increased to $184.2 million from $179.2 million as the result of an
increase of 4.1% in comparable store sales, partially offset by a $1.7 million
decrease in sales from net store opening and closing activity. Sales benefited
from the store repositioning strategy, aggressive store remodeling and product
mix changes that the Company has implemented.
Gross margins improved to 49.7% from 47.6% last year, recovering from the
promotional activity in 1999 that was necessary to offset the effects of apparel
price deflation.
In the first twenty-six weeks of 2000, total selling, general and administrative
expenses as a percentage of sales decreased to 45.2% from 45.5% due to leverage
from positive comparable store sales.
Interest expense was higher due to an increase in interest rates by the Federal
Reserve Bank, partially offset by a lower debt level.
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 related costs
continue to increase. Costs of leases for new store locations remain stable, but
renewal costs of older leases continue to increase. Taxes, maintenance and
insurance costs have also risen. Hancock believes the practice of maintaining
adequate operating margins through a combination of price adjustments and cost
controls, careful evaluation of occupancy needs and efficient purchasing
practices is the most effective tool for coping with increasing costs and
expenses.
Inflation is one of the key factors used in the calculation of the LIFO charge
to Cost of Sales. A deflationary trend in product costs in recent years,
combined with inventory reductions, has caused LIFO credits. However in the last
quarter, an increase in the PPI indices caused a LIFO charge.
SEASONALITY
The Company's business is slightly seasonal. Peak sales periods occur in the
fall and pre-Easter weeks, while the lowest sales periods occur during the
summer and the month of January.
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RECENT ACCOUNTING PRONOUNCEMENTS
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 the delivery of the
product to a customer. Management does not believe that SAB 101 will have any
impact on its financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. The company is not holding any derivative financial or
commodity instruments at July 30, 2000, and therefore FAS 133 would not have any
financial statement impact.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain qualifying forward-looking statements. Certain information included
in this Form 10-Q 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.
PART II. OTHER INFORMATION:
ITEM 2: RECENT ISSUANCES OF UNREGISTERED SECURITIES
During the twenty-six weeks ended July 30, 2000, the Company issued 13,766
shares of Common Stock valued at $54,443 to Creative Network Studios for
advertising and marketing services. The Company also issued 523 shares of Common
Stock valued at $2,059 to Vinalrae H. M. Garmon for marketing services. These
issuances were exempt from registration pursuant to Section 4 (2) of the
Securities Act of 1933, as amended, as they did not involve a public offering of
securities.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not holding any derivative financial or commodity instruments at
July 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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<PAGE> 11
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
(a) Registrant's Annual Meeting of Shareholders was held on June
15, 2000.
(b) Proxies for the meeting were solicited pursuant to Regulation
14 under the Securities Act of 1934, there was no solicitation
in opposition to the management's nominees as listed in the
proxy statement, and such nominees were elected.
(c) The vote in the uncontested election of such nominees was as
follows: 14,751,898 votes cast for and 166,567 votes withheld
for Mr. Roger T. Knox; 14,762,927 votes cast for and 15,538
withheld for Mr. Don Fruge; and 14,791,899 votes cast for and
126,566 withheld for Mr. Larry G. Kirk.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (only submitted to SEC in
electronic format).
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANCOCK FABRICS, INC.
(Registrant)
By: /s/ Bruce D. Smith
----------------------------------------
Bruce D. Smith
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
September 13, 2000
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