Hancock Fabrics, Inc. 2001 Annual Report to Shareholders – Five-Year Financial Summary and Management Discussion

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Summary

This document is a section of Hancock Fabrics, Inc.'s 2001 Annual Report to Shareholders, providing a five-year summary of key financial data and management's discussion of financial results. It outlines the company's sales, earnings, assets, and other financial metrics from 1997 to 2001, as well as quarterly financial data for 2000 and 2001. The report discusses factors affecting performance, such as store openings and closings, product mix changes, and advertising strategies. It is intended to inform shareholders and the public about the company's financial condition and operational results.

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EX-10.13 5 g75814ex10-13.txt PORTIONS OF THE 2001 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 FIVE-YEAR SUMMARY OF SIGNIFICANT FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AND STORE AMOUNTS) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Sales $411,857 $385,245 $381,572 $392,303 $381,910 Earnings before income taxes 23,016 17,053 10,650 5,590 24,842 Net earnings 14,659 10,867 6,816 3,556 15,324 Earnings per common share Basic .87 .65 .38 .18 .74 Diluted .85 .65 .38 .18 .72 Total assets 195,549 192,729 195,562 192,404 195,558 Capital expenditures 10,478 4,041 8,017 8,839 2,712 Long-and short-term indebtedness -- 16,000 31,000 29,000 10,000 Common shareholders' equity 100,603 82,552 76,867 77,152 106,691 - ----------------------------------------------------------------------------------------------------------------------------- Common shares outstanding, net 18,236 17,285 18,652 18,595 21,114 Stores in operation 439 443 453 462 481
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 3, 2002 AND JANUARY 28, 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PER COMMON SHARE -------------------------------------------- NET EARNINGS GROSS NET -------------------------- CASH SALES PROFIT EARNINGS BASIC DILUTED(*) DIVIDEND - ---------------------------------------------------------------------------------------------------------------------------------- 2001 First Quarter $ 97,616 $ 48,419 $ 2,488 $ .15 $ .15 $ .04 Second Quarter 86,815 43,723 590 .04 .03 .04 Third Quarter 103,753 52,074 3,728 .22 .22 .04 Fourth Quarter 123,673 66,326 7,853 .46 .44 .04 - ---------------------------------------------------------------------------------------------------------------------------------- $411,857 $210,542 $14,659 $ .87 $ .85 $ .16 ================================================================================================================================== 2000 First Quarter $ 98,123 $ 47,965 $ 2,183 $ .12 $ .12 $ .025 Second Quarter 86,046 43,486 582 .03 .03 .025 Third Quarter 99,864 50,527 3,066 .19 .19 .025 Fourth Quarter 101,212 53,856 5,036 .31 .31 .025 - ---------------------------------------------------------------------------------------------------------------------------------- $385,245 $195,834 $10,867 $ .65 $ .65 $ .10 ==================================================================================================================================
(*) Per share amounts are based on average shares outstanding during each quarter and may not add to the total for the year. 8 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 Income:
PERCENT CHANGE PERCENT OF NET SALES FROM PRIOR YEAR ---------------------------------------- -------------------------------------- 2001 2000 1999 2001 2000 1999 ------ ------ ------- ------ ------- -------- Sales 100.0% 100.0% 100.0% 6.9% 1.0% (2.7%) Comparable store sales 6.3% 2.0% 0.0% Gross margin 51.1% 50.8% 48.7% Selling, general and administrative expenses 43.9% 44.5% 44.0% 5.5% 1.9% (6.5%) Pretax earnings 5.6% 4.4% 2.8% 35.0% 60.1% 90.5% Net earnings 3.6% 2.8% 1.8% 34.9% 59.4% 91.7%
2001 VS 2000 Sales in 2001 increased $26.6 million from 2000, primarily due to a 6.3% increase in comparable store sales and an extra week during the 53-week fiscal year which added $8.2 million of sales. These increases were partially offset by a reduction in sales of $4.9 million from net store opening and closing activity. Hancock closed 32 stores and opened 28 in 2001, resulting in a total of 439 stores at year end. Comparable store sales benefited from the continuing efforts to reposition Hancock's store base and to remerchandise its product mix to attract a broader group of consumers, while better serving the existing customer base. The store-within-a-store home decorating concept was first introduced in Hancock's stores in late 2000 and was rapidly expanded in 2001, growing from 37 units to 161 at year end. In addition, a home accents product line added in 1999 has continued to grow steadily as a logical extension of the home decorating business. During 2001, home decorating sales increased to 24% of total sales from 22% in 2000 as a result of the merchandising enhancements. Improvements in the productivity of advertising also contributed to higher comparable store sales in 2001. Despite spending $1.0 million less in advertising, sales increased $26.6 million over the previous year. Hancock's gross margin improved in 2001 due to growth in the higher-margin home decorating categories, together with changes in advertising promotions which stressed value more than price. The effect of adjustments to the LIFO (last-in, first-out) reserve, reflecting inflation in inventories, was to reduce pretax earnings by $125 thousand in 2001 and by $650 thousand in 2000. Selling, general and administrative expenses decreased as a percentage of sales in 2001 as a result of more efficient advertising and the leverage of fixed expenses created by the comparable store sales increase. Advertising expense decreased to 3.7% of sales in 2001 from 4.2% in 2000. Interest expense decreased by $1.1 million in 2001 due to a declining interest rate environment and a reduction in average outstanding borrowings from $25 million to $18 million. At year end, no borrowings were outstanding under the Company's unsecured credit facility. Income tax expense increased by $2.2 million in 2001 due to the improvement in pretax earnings over 2000. The effective tax rate was 36.3% in both years. 2000 VS 1999 Sales in 2000 increased $3.7 million from 1999, primarily due to a 2.0% increase in comparable store sales. The increase was partially offset by a reduction in sales of $3.4 million from net store opening and closing activity. Hancock closed 19 stores and opened 9 in 2000 resulting in a total of 443 stores at year end. Comparable store sales benefited from the continuing store repositioning strategy, new product additions in the home decorating and accessories category, and the positive impact of store remodels, including a store-within-a-store home decorating concept. Hancock's gross margin increased due to additions of new, higher-margin products, ongoing reallocation of the mix of merchandise and continued close attention to routine obsolescence. The effect of adjustments to the LIFO reserve, reflecting inflation in inventories, was to reduce pretax earnings by $650 thousand in 2000 and to increase pretax earnings by $475 thousand in 1999. Selling, general and administrative expenses increased as a percentage of sales in 2000 as a result of wage pressures during a period of low unemployment, higher costs in health and property/casualty insurance and increased utilities expense. More efficient use of advertising helped to offset a portion of the expense increases. 9 Interest expense decreased by $200 thousand in 2000 due to a decline in average outstanding borrowings from $34 million to $25 million, somewhat offset by a rising interest rate environment. Income tax expense increased by $2.4 million due to the improvement in pretax earnings over 1999. The effective tax rate was 36.3% in 2000 and 36.0% in 1999. Financial Position Hancock traditionally maintains a strong financial position as evidenced by the following information as of the end of fiscal years 2001, 2000 and 1999 (dollars in thousands):
2001 2000 1999 -------- -------- -------- Cash and cash equivalents $ 6,914 $ 3,891 $ 6,904 Net cash flows provided (used): Operating activities $ 27,984 $ 22,848 $ 17,077 Investing activities $(10,395) $ (3,635) $(10,732) Financing activities $(14,566) $(22,226) $ (6,400) Working Capital $ 79,368 $ 79,877 $ 92,911 Long-term indebtedness to total capitalization 0.0% 16.2% 28.7%
Historically, Hancock has financed its operations with internally generated cash flow. Over the past three years, cash flows from operations were sufficient to allow Hancock to repay $29 million of debt, purchase $22.5 million of property and equipment, pay $10.8 million of dividends and repurchase $8.4 million of treasury stock. In prior years and continuing in 2001, the Company has repurchased over 12 million shares, or almost 40% of its outstanding stock. Hancock plans to use future cash in excess of operating needs and capital investment for the payment of cash dividends and the purchase of treasury stock as market and financial conditions dictate. As of February 3, 2002, 1,461,036 shares were available for repurchase under the Company's most recent authorization. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates and assumptions, are presented in the Notes to Consolidated Financial Statements. Management bases its estimates on its historical experience, together with other relevant factors, in order to form the basis for making judgments which will affect the carrying values of assets and liabilities. On an ongoing basis, management evaluates its estimates and makes changes to carrying values as deemed necessary and appropriate. The Company believes that estimates related to the following areas involve a higher degree of judgment and/or complexity: Inventories are valued at the lower of cost or market; cost is determined by the LIFO method. As with other retailers, it is not practical to perform physical inventory counts for all stores on the last day of a period; therefore, certain assumptions must be made in order to record cost of sales and the related change in inventory for the period of time from each store's most recent physical count to the end of the period. Although, under certain circumstances, actual results could prove to be materially different from the estimates used, Hancock has consistently used the same methodology throughout its existence with dependable results, and management believes that it provides an inventory valuation which results in carrying inventory at the lower of cost or market. Workers' compensation, general liability and employee medical insurance programs are largely self-insured. It is the Company's policy to record its self-insurance liabilities using estimates of claims incurred but not yet reported or paid, based on historical trends and other relevant factors. Actual results can vary from estimates for many reasons including, among others, future inflation rates, claim settlement patterns, litigation trends and legal interpretations. Store closing reserves are based on estimates of net lease obligations and other store closing costs, including assumptions about anticipated future subleases of properties. If real estate leasing markets change, the reserves will have to be adjusted. LIQUIDITY AND CAPITAL RESOURCES 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 $10.5 million in 2001, $4.0 million in 2000 and $8.0 million in 1999. The capital costs associated with remodeling 235 stores and opening 80 new stores during the three-year period (including the Mae's Fabrics' stores acquired in 1999), purchasing and implementing a new merchandise management system, normal capital maintenance for stores and the distribution center and the purchase of the land and buildings for two new stores accounted for the majority of these expenditures. Hancock estimates that capital expenditures for 2002 will approximate $8 to $10 million. Anticipated expenditures include the costs for approximately 40 planned new stores, the remodeling of approximately 100 stores and maintenance capital expenditures in the existing retail stores and distribution center. Internally generated funds are expected to be sufficient to finance anticipated capital requirements in the near term. In addition to its operating cash flows, Hancock has two revolving credit facilities available with three banks which provide a total of $50 million of borrowing capacity under agreements signed on March 26, 2002. Management believes the total of $50 million is adequate for Hancock's foreseeable needs in the near term. As of February 3, 2002, the Company had no debt outstanding under its revolving credit agreements. 10 OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet financing arrangements. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS As disclosed in Note 6 to the Consolidated Financial Statements, the Company has arrangements with two banks that provide for up to $10 million in letters of credit. At February 3, 2002, Hancock had commitments under these arrangements of $3,520,000 to guarantee payment of potential future workers' compensation claims and $1,718,000 on issued letters of credit which support purchase orders for merchandise to be imported. Also, as discussed further in Note 7, Hancock leases its retail fabric store locations under operating leases expiring at various dates through 2022. The Company has no standby repurchase obligations or guarantees of other entities' debt. RELATED PARTY TRANSACTIONS Hancock has no balances with any related parties, nor has it had any material transactions with related parties during the three-year period reflected in the Consolidated Statement of Income. EFFECTS OF INFLATION The impact of inflation on labor and occupancy costs can significantly affect Hancock's operations. Many of Hancock's employees are paid hourly rates related to Federal and State minimum wage requirements; accordingly, any increases will affect Hancock. In addition, payroll taxes, employee benefits and other employee costs continue to increase. Health insurance costs, in particular, continue to rise at an unsettling rate in the United States each year, and higher employer contributions to the Company's pension plan have been necessary recently in light of weaker investment returns. Costs of leases for new store locations remain stable, but renewal costs of older leases continue to increase. Property and casualty insurance premiums are now increasing substantially after several years of soft pricing in the insurance industry. Hancock believes the practice of maintaining adequate operating margins through a combination of price adjustments and cost controls, careful evaluation of occupancy needs and efficient purchasing practices are the most effective tools for coping with increased costs and expenses. Inflation is one of the key factors used in the calculation of the LIFO charge or credit to Cost of Sales. A deflationary trend in product costs in 1999, combined with inventory reductions, caused a LIFO credit. In 2000 and 2001, an increase in the PPI indices, which more than offset the effect of inventory reductions, resulted in a LIFO charge in both years. 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. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, financial items and results, plans for future expansion, store closures and other business development activities, capital spending or financing sources, capital structure and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, 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, disruption in the Company's data processing services, and competitive changes, including, but not limited to, liquidations of inventory in Hancock's markets in connection with a competitor's store closings or need to dispose of old inventory. RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements include Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", issued in July 2001 by the Financial Accounting Standards Board ("FASB"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. This statement had no effect on the Company's consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and other indefinite-lived intangible assets from an amortization method to an impairment-only approach. Amortization of goodwill and other indefinite-lived intangible assets will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on February 4, 2002. Therefore, goodwill amortization expense of $383,000 will not recur in future years; however, if the value of such goodwill is deemed impaired, a charge to earnings will be recorded for the impairment. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective for years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed of", but retains the fundamental provision of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be held for sale. The statement requires that whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable, the asset should be tested for recoverability. The statement also requires that a long-lived asset classified as held for sale should be carried at the lower of its carrying value or fair value, less cost to sell. The Company has considered the provisions of SFAS 144 and believes it will not have a material effect on the financial statements upon adoption. 11
CONSOLIDATED STATEMENT OF INCOME - ----------------------------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 3, 2002, JANUARY 28, 2001 AND JANUARY 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Sales $ 411,857 $ 385,245 $ 381,572 Cost of goods sold 201,315 189,411 195,701 - ----------------------------------------------------------------------------------------------------- Gross profit 210,542 195,834 185,871 - ----------------------------------------------------------------------------------------------------- Expenses (income) Selling, general and administrative 180,731 171,269 168,041 Depreciation and amortization 5,628 5,289 4,800 Interest expense 1,283 2,410 2,618 Interest income (116) (187) (238) - ----------------------------------------------------------------------------------------------------- Total operating and interest expenses 187,526 178,781 175,221 - ----------------------------------------------------------------------------------------------------- Earnings before taxes 23,016 17,053 10,650 Income taxes 8,357 6,186 3,834 - ----------------------------------------------------------------------------------------------------- Net earnings and comprehensive income $ 14,659 $ 10,867 $ 6,816 ===================================================================================================== Earnings per share Basic $ .87 $ .65 $ .38 Diluted $ .85 $ .65 $ .38 ===================================================================================================== Weighted average shares outstanding Basic 16,763 16,810 18,056 Diluted 17,187 16,815 18,056 =====================================================================================================
See accompanying notes to consolidated financial statements. 12
CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------- FEBRUARY 3, 2002 AND JANUARY 28, 2001 (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) 2001 2000 - ------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,914 $ 3,891 Receivables, less allowance for doubtful accounts of $70 in 2001 and 2000 1,339 589 Inventories 135,672 138,657 Prepaid expenses 1,317 1,677 - ------------------------------------------------------------------------------------------- Total current assets 145,242 144,814 Property and equipment, at depreciated cost 30,607 25,616 Deferred tax assets 7,654 10,486 Pension payment in excess of required contribution 3,424 3,078 Other assets 8,622 8,735 - ------------------------------------------------------------------------------------------- Total assets $ 195,549 $ 192,729 - ------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 40,147 $ 38,665 Accrued liabilities 18,395 15,367 Deferred tax liabilities 2,969 4,726 Income taxes 4,363 6,179 - ------------------------------------------------------------------------------------------- Total current liabilities 65,874 64,937 Long-term debt obligations -- 16,000 Postretirement benefits other than pensions 21,871 21,278 Reserve for store closings 2,056 3,012 Other liabilities 5,145 4,950 - ------------------------------------------------------------------------------------------- Total liabilities 94,946 110,177 - ------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 7 and 12) Shareholders' equity: Common stock, $.01 par value; 80,000,000 shares authorized; 30,246,101 and 29,190,335 issued and outstanding, respectively 302 292 Additional paid-in capital 47,487 39,094 Retained earnings 195,738 183,917 Treasury stock, at cost, 12,010,594 and 11,905,738 shares held, respectively (136,311) (135,583) Deferred compensation on restricted stock incentive plan (6,613) (5,168) - ------------------------------------------------------------------------------------------- Total shareholders' equity 100,603 82,552 - ------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 195,549 $ 192,729 ===========================================================================================
See accompanying notes to consolidated financial statements. 13
CONSOLIDATED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 3, 2002, JANUARY 28, 2001 AND JANUARY 30, 2000 (IN THOUSANDS) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 14,659 $ 10,867 $ 6,816 Adjustments to reconcile net earnings to cash provided by operating activities Depreciation and amortization 5,628 5,289 4,800 LIFO 125 650 (475) Deferred income taxes 1,075 893 1,488 Amortization of deferred compensation on restricted stock incentive plan 2,006 2,173 1,390 Reserve for closed stores 128 -- -- Loss on disposal of fixed assets 159 60 295 Interest expense on closed store accrual 198 253 346 Issuance of shares as compensation for professional services 15 95 -- (Increase) decrease in assets Receivables and prepaid expenses (390) 1,677 303 Inventory at current cost 2,860 1,443 1,974 Change in pension payment in excess of required contribution (346) (3,078) -- Other noncurrent assets (270) (2,191) 10 Increase (decrease) in liabilities Accounts payable 1,482 (407) 2,191 Accrued liabilities 3,265 3,350 (210) Current income tax obligations (1,879) 3,123 430 Postretirement benefits other than pensions 593 383 561 Payments against closed store accrual (1,518) (2,729) (2,816) Other liabilities 194 997 (26) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 27,984 22,848 17,077 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (10,478) (4,041) (8,017) Proceeds from disposition of property and equipment 83 138 67 Acquisition of Mae's stores -- 268 (2,782) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (10,395) (3,635) (10,732) - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (payments) on revolving credit agreement (16,000) (15,000) 2,000 Purchase of treasury stock (728) (5,497) (2,219) Proceeds from exercise of stock options 4,829 -- -- Issuance of shares under directors' stock plan 171 36 -- Cash dividends paid (2,838) (1,765) (6,181) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (14,566) (22,226) (6,400) - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 3,023 (3,013) (55) Cash and cash equivalents: Beginning of year 3,891 6,904 6,959 - -------------------------------------------------------------------------------------------------------------------------- End of year $ 6,914 $ 3,891 $ 6,904 ========================================================================================================================== Supplemental disclosures Cash paid during the year for: Interest $ 1,293 $ 2,407 $ 2,608 Income taxes $ 8,112 $ 3,029 $ 2,543 ==========================================================================================================================
See accompanying notes to consolidated financial statements. 14
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 3, 2002, JANUARY 28, 2001 AND JANUARY 30, 2000 (IN THOUSANDS, EXCEPT NUMBER OF SHARES) - --------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL COMMON STOCK PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS - --------------------------------------------------------------------------------------------------------------------------------- Balance January 31, 1999 28,547,826 $ 285 $ 35,133 $ 174,180 Net earnings and comprehensive income 6,816 Cash dividends ($.325 per share) (6,181) Issuance of restricted stock 595,600 6 4,126 Cancellation of restricted stock (3,700) (26) Amortization and vesting of deferred compensation on restricted stock incentive plan (91) Purchase of treasury stock - --------------------------------------------------------------------------------------------------------------------------------- Balance January 30, 2000 29,139,726 291 39,142 174,815 Net earnings and comprehensive income 10,867 Cash dividends ($.10 per share) (1,765) Issuance of restricted stock 21,500 64 Cancellation of restricted stock (2,700) (18) Amortization and vesting of deferred compensation on restricted stock incentive plan (224) Issuance of shares under directors' stock plan 9,521 36 Issuance of shares as compensation for professional services 22,288 1 94 Purchase of treasury stock - --------------------------------------------------------------------------------------------------------------------------------- Balance January 28, 2001 29,190,335 292 39,094 183,917 Net earnings and comprehensive income 14,659 Cash dividends ($.16 per share) (2,838) Issuance of restricted stock 459,100 5 3,477 Cancellation of restricted stock (4,100) (31) Amortization and vesting of deferred compensation on restricted stock incentive plan (63) Issuance of shares under director's stock plan 20,189 171 Issuance of shares as compensation for professional services 1,527 15 Purchase of treasury stock Stock options exercised 579,050 5 4,824 - --------------------------------------------------------------------------------------------------------------------------------- Balance February 3, 2002 30,246,101 $ 302 $ 47,487 $ 195,738 ================================================================================================================================= TOTAL TREASURY STOCK DEFERRED SHAREHOLDERS' SHARES AMOUNT COMPENSATION EQUITY Balance January 31, 1999 (9,952,881) $(127,867) $ (4,579) $ 77,152 Net earnings and comprehensive income 6,816 Cash dividends ($.325 per share) (6,181) Issuance of restricted stock (4,132) Cancellation of restricted stock 26 Amortization and vesting of deferred compensation on restricted stock incentive plan 1,390 1,299 Purchase of treasury stock (534,857) (2,219) (2,219) - --------------------------------------------------------------------------------------------------------------------------------- Balance January 30, 2000 (10,487,738) (130,086) (7,295) 76,867 Net earnings and comprehensive income 10,867 Cash dividends ($.10 per share) (1,765) Issuance of restricted stock (64) Cancellation of restricted stock 18 Amortization and vesting of deferred compensation on restricted stock incentive plan 2,173 1,949 Issuance of shares under directors' stock plan 36 Issuance of shares as compensation for professional services 95 Purchase of treasury stock (1,418,000) (5,497) (5,497) - --------------------------------------------------------------------------------------------------------------------------------- Balance January 28, 2001 (11,905,738) (135,583) (5,168) 82,552 Net earnings and comprehensive income 14,659 Cash dividends ($.16 per share) (2,838) Issuance of restricted stock (3,482) Cancellation of restricted stock 31 Amortization and vesting of deferred compensation on restricted stock incentive plan 2,006 1,943 Issuance of shares under director's stock plan 171 Issuance of shares as compensation for professional services 15 Purchase of treasury stock (104,856) (728) (728) Stock options exercised - --------------------------------------------------------------------------------------------------------------------------------- Balance February 3, 2002 (12,010,594) $(136,311) $ (6,613) $ 100,603 =================================================================================================================================
See accompanying notes to consolidated financial statements. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS Hancock Fabrics, Inc. ("Hancock") is a retail and wholesale merchant of fabric and related home sewing and decorating accessories. Hancock operates 439 stores in 42 states, supplies various independent wholesale customers and operates an internet store under its two domain names, hancockfabrics.com and homedecoratingaccents.com. The Company conducts business 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 2001, 2000 and 1999, as used herein, refer to the years ended February 3, 2002, January 28, 2001 and January 30, 2000, respectively. Fiscal year 2001 contained 53 weeks and fiscal years 2000 and 1999 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 finan- cial statements in accordance with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. REVENUE RECOGNITION occurs at the time of sale of merchandise to the Company's customers. Sales include the sale of merchandise from Company owned stores, net of returns and exclusive of sales taxes. Sales to independent wholesale customers are recorded when merchandise is shipped. CASH AND CASH EQUIVALENTS include cash on hand and amounts due from banks 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 related accessories 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 February 3, 2002, January 28, 2001, and January 30, 2000. 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 2001, 2000 and 1999, was $15.2 million, $16.2 million and $18.0 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 ("SFAS") 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 SFAS No. 123, Accounting for Stock-Based Compensation, is presented in Note 10. COMPREHENSIVE INCOME is reported in accordance with SFAS No. 130, Reporting Comprehensive Income. The Company did not have any comprehensive income items as defined by SFAS 130 in any of the three years in the period ended February 3, 2002. TREASURY STOCK is repurchased periodically by the Company. These treasury stock transactions are recorded using the cost method. RECENT ACCOUNTING PRONOUNCEMENTS include SFAS No. 141, Business Combinations, issued in July 2001 by the Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. This statement had no effect on the Company's consolidated financial position or results of operations. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 changes the accounting for goodwill and other indefinite- lived intangible assets from an amortization method to an impairment-only approach. Amortization of goodwill and other indefinite-lived intangible assets will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on February 4, 2002. Therefore, goodwill amortization expense of $383,000 will not recur in future years; however, if the value of such goodwill is deemed impaired, a charge to earnings will be recorded for the impairment. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed of, but retains the fundamental provision of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be held for sale. The statement requires that whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable, the asset should be tested for recoverability. The statement also requires that a long-lived asset classified as held for sale should be carried at the lower of its carrying value or fair value, less cost to sell. The Company has considered the provisions of SFAS 144 and believes it will not have a material effect on the financial statements upon adoption. 16 NOTE 3 - ACQUISITIONS OF MAE'S FABRICS' AND HEILIG-MEYERS' LEASES Effective April 27, 1999, the Company agreed to acquire certain operating leases of Mae's Fabrics' stores for a cash payment of approximately $2,800,000. During fiscal year 2000 the company received $268,000 in connection with the escrow settlement associated with this acquisition resulting in a total purchase price of $2,500,000. 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 $170,000, $170,000 and $46,000 for 2001, 2000, and 1999 respectively. Operating results for Mae's Fabrics' stores have been included with those of the Company as Hancock opened those stores during 1999. Beginning in 2000 and continuing through 2001, the Company acquired certain operating leases of Heilig-Meyers' stores for cash payments of approximately $1,200,000. Fourteen lease assignments have been made for stores operating across the United States. These acquisitions are accounted for as purchases. As no tangible assets were acquired, the entire purchase price was assigned to intangible assets and is being amortized on a straight-line basis over the life of the leases. Amortization expense for this intangible asset was $30,000 for 2001. Operating results for former Heilig-Meyers' locations have been included with those of the Company as Hancock opened those stores during 2000 and 2001.
NOTE 4 - PROPERTY AND EQUIPMENT (in thousands) 2001 2000 Buildings and improvements $ 13,145 $ 12,416 Leasehold improvements 7,872 5,445 Fixtures and equipment 50,850 48,450 Transportation equipment 1,743 1,700 Construction in progress 2,547 165 -------- -------- 76,157 68,176 Accumulated depreciation and amortization (48,770) (45,473) -------- -------- 27,387 22,703 Land 3,220 2,913 -------- -------- $ 30,607 $ 25,616 ======== ======== NOTE 5 - ACCRUED LIABILITIES (in thousands) 2001 2000 -------- -------- Payroll and benefits $ 6,516 $ 4,734 Property taxes 3,987 3,787 Sales taxes 2,709 1,796 Current portion of reserve for closed stores (Note 13) 828 1,064 Other 4,355 3,986 -------- -------- $ 18,395 $ 15,367 ======== ========
NOTE 6 - LONG-TERM DEBT OBLIGATIONS (in thousands) 2001 2000 -------- -------- Revolving credit agreement $ -- $ 16,000 ======== ========
As of April 16, 1999, Hancock entered into a three-year, $60 million uncollateralized revolving credit arrangement with a group of banks. This agreement provides for an annual facility fee, which was .20% of the total facility amount as of February 3, 2002. 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. At February 3, 2002, there were no outstanding borrowings. 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. Subsequent to February 3, 2002, Hancock negotiated an amendment of the credit agreement with two of the banks, which are parties to the arrangement described above, and entered into a new credit agreement with another of the banks. Under the provisions of the amended agreement and the new agreement, the expiration date of the uncollaterized revolving credit arrangements is extended until March 26, 2005 and the total amount available under the facilities is reduced from $60 million to $50 million. All other provisions of the original facility remain unchanged. Hancock also has arrangements that provide for up to $10 million in letters of credit. At February 3, 2002, Hancock had commitments under these arrangements of $3.5 million to guarantee payment of potential future workers compensation claims and $1.7 million on issued letters of credit which support purchase orders for merchandise to be imported. NOTE 7 - LONG-TERM LEASES Hancock leases its retail fabric store locations under noncancelable operating leases expiring at various dates through 2022. Certain of the leases for store locations provide for additional rent based on sales volume.
Rent expense consists of the following (in thousands): 2001 2000 1999 ------- ------- ------- Minimum rent $31,070 $30,780 $30,535 Additional rent based on sales 342 222 208 ------- ------- ------- $31,412 $31,002 $30,743 ======= ======= =======
17 Minimum rental payments as of February 3, 2002 are as follows (in thousands): Fiscal Year 2002 $ 28 ###-###-#### 24 ###-###-#### 21 ###-###-#### 18 ###-###-#### 14,790 Thereafter 32,132 ---------- Total minimum lease payments $ 139,130 ==========
NOTE 8 - INCOME TAXES The components of income tax expense (benefit) are as follows (in thousands):
Currently Payable 2001 2000 1999 ------- ------- ------ Federal $ 6,877 $ 4,965 $2,346 State 405 328 -- ------- ------- ------ 7,282 5,293 2,346 ------- ------- ------ Deferred Current (1,757) 1,288 876 Noncurrent 2,832 (395) 612 ------- ------- ------ 1,075 893 1,488 ------- ------- ------ $ 8,357 $ 6,186 $3,834 ======= ======= ======
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):
2001 2000 ------- ------- Current deferred tax assets Inventory valuation methods $ 1,225 $(1,299) Accrual for medical insurance 727 732 Accrual for workers' compensation 359 280 Other items 807 1,109 ------- ------- Gross current deferred tax assets 3,118 822 Current deferred tax liabilities Inventory markup (6,087) (5,548) ------- ------- $(2,969) $(4,726) ======= =======
The net noncurrent deferred tax assets (liabilities) are comprised of the following (in thousands):
2001 2000 -------- -------- Noncurrent deferred tax assets Postretirement benefits other than pensions $ 7,939 $ 7,724 Accrual for store closing costs 436 748 Accrual for pension liability -- 550 Difference in recognition of restricted stock expense 1,047 705 Deferred compensation liability 994 899 Other deferred deduction items 47 202 -------- -------- Gross noncurrent deferred tax assets 10,463 10,828 Noncurrent deferred tax liabilities Depreciation (670) (342) Pension payment in excess of required contribution (2,139) -- -------- -------- $ 7,654 $ 10,486 ======== ========
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:
2001 2000 1999 ------ ------ ------ Statutory Federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of Federal income tax effect 1.3 1.5 .5 Other -- (.2) .5 ------ ------ ------ Effective tax rate 36.3% 36.3% 36.0% ====== ====== ======
18 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 Hancock's 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 Hancock's shares. STOCK REPURCHASE PLAN. In prior years and continuing in fiscal 2001, Hancock has used excess cash to repurchase over 12,000,000 shares of its common stock. As of February 3, 2002, 1,461,036 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 all options granted under this Plan have equaled the fair market value on the grant date. The 1996 Plan expired on September 30, 2001 and a preceding plan, the 1987 Stock Option Plan (the "1987 Plan") expired on March 22, 1997. Both plans prohibit grants after the expiration date, however, options granted under the 1987 Plan and 1996 Plan extend beyond their termination dates. In 2001, Hancock adopted the 2001 Stock Incentive Plan (the "2001 Plan") which authorizes the granting of options or restricted stock to key employees for up to 2,800,000 shares of common stock in total with no more than 1,000,000 of those shares being allocated to restricted stock. The Plan also provides for the granting of options to directors as specified in the plan document. The options granted under the 2001 Plan can have an exercise price of no less than 100% of fair market value on the date the options are granted and vesting generally cannot occur any more rapidly than 25% per year beginning at the first anniversary of the grant date. As of the current fiscal year end, 2,000,750 shares remain available for grant under the 2001 Plan, including 547,750 shares which can be issued as restricted stock. A summary of activity in the plans for the years ended February 3, 2002, January 28, 2001 and January 30, 2000 follows:
2001 2000 1999 ---------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- ---------- --------- ---------- Outstanding at beginning of year 3,121,500 $ 8.83 2,669,500 $ 9.84 2,307,000 $ 10.76 Granted 488,200 7.50 588,100 4.25 523,600 5.81 Canceled (104,200) 8.13 (136,100) 8.91 (161,100) 9.88 Exercised (579,050) 6.53 -- -- --------- --------- --------- Outstanding at end of year 2,926,450 $ 9.07 3,121,500 $ 8.83 2,669,500 $ 9.84 ========= ========= ========= Exercisable at end of year 2,182,600 $ 10.00 2,317,150 $ 10.25 1,984,800 $ 10.58 ========= ========= =========
The options outstanding at February 3, 2002 are exercisable at prices ranging from $4.25 to $14.25 per share. The weighted average remaining contractual life of all outstanding options was 6.18 years at February 3, 2002. 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 2001, 2000, and 1999 consistent with the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings for 2001, 2000 and 1999 would have been reduced by approximately $515,000, $629,000 and $950,000, respectively. Diluted earnings per share would have been reduced by $.03, $.04 and $.06 for 2001, 2000 and 1999, respectively. The weighted average grant-date fair value of options granted during 2001, 2000 and 1999 was $2.85, $1.50 and $2.09, 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 2001, 2000 and 1999, respectively: dividend yields of 1.37%, 1.82% and .94%; average expected volatility of .48, .43 and .37; risk-free interest rates of 4.19%, 4.68% and 5.88%; and an average expected life of 4.0 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. In 2001, Hancock adopted the 2001 Stock Incentive Plan which authorized the granting of up to 1,000,000 shares of restricted stock (see STOCK OPTIONS). During 2001, 2000 and 1999, restricted shares of 459,100, 21,500 and 595,600, respectively, were issued to officers and key employees under the Plans. As of February 3, 2002, 1,094,200 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 $2,006,000, $2,173,000 and $1,390,000 in 2001, 2000 and 1999, 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 contri- butions to the trust. 19 The following table sets forth changes in the projected benefit obligation and changes in the fair value of plan assets (in thousands):
CHANGE IN PROJECTED BENEFIT OBLIGATION 2001 2000 -------- -------- Benefit obligation at beginning of year $ 43,745 $ 41,133 Service costs 1,955 1,898 Interest costs 3,238 2,985 Benefits paid (2,263) (1,811) Actuarial adjustments 1,760 (460) -------- -------- Benefit obligation at end of year $ 48,435 $ 43,745 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 48,503 $ 48,551 Actual return on plan assets (2,664) (997) Employer contributions 1,216 2,760 Benefits paid (2,263) (1,811) -------- -------- Fair value of plan assets at end of year $ 44,792 $ 48,503 ======== ========
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, 2001 and 2000 are as follows (in thousands):
2001 2000 ------- ------- Funded status $(3,643) $ 4,758 Prior service cost 403 511 Actuarial adjustment 6,664 (2,191) ------- ------- Prepaid benefit cost $ 3,424 $ 3,078 ======= =======
Plan assets include fixed income and equity funds, comprising corporate and government debt securities as well as common stock. The unrecognized net tran- sition asset was amortized over 15 years beginning in 1986. Net periodic pension costs include the following components (in thousands):
2001 2000 1999 ------- ------- ------- Service cost $ 1,955 $ 1,898 $ 2,083 Interest cost 3,238 2,985 2,799 Expected return on plan assets (4,430) (4,485) (3,869) Amortization and deferrals 107 (399) (139) ------- ------- ------- Net periodic pension cost $ 870 $ (1) $ 874 ======= ======= =======
Actuarial assumptions used in the period-end valuations were as follows:
2001 2000 1999 ------ ------ ------ Discount rate 7.25% 7.50% 7.50% Rate of increase in compensation levels 4.00% 4.25% 4.25% Expected long-term rate of return on assets 9.25% 9.25% 9.25%
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 while insured under the Company's insurance program. The following table sets forth the changes in the projected benefit obligation (in thousands):
CHANGE IN PROJECTED BENEFIT OBLIGATION 2001 2000 -------- -------- Benefit obligation at beginning of year $ 13,792 $ 13,045 Service costs 635 598 Interest costs 1,027 940 Benefits paid (549) (568) Actuarial adjustments (3,031) (223) -------- -------- Benefit obligation at end of year $ 11,874 $ 13,792 ======== ========
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, 2001 and 2000 are as follows (in thousands):
2001 2000 -------- -------- Funded status $(11,874) $(13,792) Prior service cost (2,423) (1,799) Actuarial adjustments (7,574) (5,687) -------- -------- Prepaid (accrued) benefit cost $(21,871) $(21,278) ======== ========
The medical care cost trend rate used in determining this obligation for employees before age 65 is 8.25%, decreasing by .50% annually before leveling at 4.75%. For individuals 65 and over, the rate is 10.50%, decreasing by .75% annually before leveling at 4.75%. This trend rate assumption has a significant effect on the amounts reported. To illustrate, decreasing or increasing the combined health care cost trend by 1% would change the accumulated postretire- ment benefit obligation by $1.2 million and $1.6 million, respectively. The discount and the salary scale rates used in calculating the obligations are 7.25% and 4.00%, and 7.50% and 4.25%, respectively, at December 31, 2001 and 2000. 20 Net periodic postretirement benefit costs included the following (in thousands):
2001 2000 1999 -------- ----- ------- Service cost $ 635 $ 598 $ 679 Interest cost 1,027 940 888 Amortization and deferrals (520) (551) (483) -------- ----- ------- Net periodic postretirement benefit costs $ 1,142 $ 987 $ 1,084 ======== ===== =======
Hancock's policy is to fund claims as incurred. Claims paid in 2001, 2000 and 1999 totaled $549,000, $568,000 and $523,000, respectively. NOTE 11 - EARNINGS PER SHARE A reconciliation of basic earnings per share to diluted earnings per share follows (in thousands, except per share data):
YEARS ENDED ------------------------------------------------------------------------------- FEBRUARY 3, 2002 JANUARY 28, 2001 ------------------------------------ --------------------------------------- NET PER SHARE NET PER SHARE EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT ---------- ----------- --------- ---------- ---------- ------------ BASIC EPS Earnings available to common shareholders $14,659 16,763 $ .87 $10,867 16,810 $ .65 EFFECT OF DILUTIVE SECURITIES Stock options 354 5 Restricted stock 70 -- ------- ------- DILUTED EPS Earnings available to common ------- ------- ------- ------- ------- ------- shareholders plus conversions $14,659 17,187 $ .85 $10,867 16,815 $ .65 ======= ======= ======= ======= ======= === === YEARS ENDED -------------------------------------- JANUARY 30,2000 -------------------------------------- NET PER SHARE EARNINGS SHARES AMOUNT --------- ---------- --------- BASIC EPS Earnings available to common shareholders $6,816 18,056 $ . 38 EFFECT OF DILUTIVE SECURITIES Stock options -- Restricted stock -- ------- DILUTED EPS Earnings available to common ------ ------- -------- shareholders plus conversions $6,816 18,056 $ .38 ====== ======= ========
Certain options to purchase shares of the Company's common stock totaling 1,291,988 and 2,740,396 were outstanding during the years ending February 3, 2002 and January 28, 2001, respectively, but were not included in the computation of diluted EPS because the exercise price was greater than the average price of common shares. 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 various insured depository institutions which 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. During the fourth quarter of 2001, the Company recorded an addition to the reserve of $128,000 for the remaining cost of net lease obligations for stores closed during fiscal 2001. This charge, when combined with the already existing reserve resulted in a total reserve of $2,884,000 at February 3, 2002. The 2001 activity in the reserve is as follows (in thousands):
ADDITION PAYMENTS JANUARY 28, TO IMPUTED ON FEBRUARY 3, 2001 RESERVE INTEREST RESERVE 2002 ----------- -------- -------- --------- ----------- Lease obligations $4,076 128 198 (1,518) $2,884 =========== ======== ======== ========= ===========
REPORT OF INDEPENDENT ACCOUNTANTS 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 February 3, 2002 and January 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America 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 our opinion. PRICEWATERHOUSECOOPERS LLP March 8, 2002 Memphis, TN 21 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 three 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 indepen- dent 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) EARNINGS BEFORE LIFO INTEREST NET NUMBER GROSS CREDIT AND INTEREST NET OF YEAR SALES PROFIT (CHARGE) TAXES EXPENSE EARNINGS STORES - ------------------------------------------------------------------------------------------------------------------------------- 2001 $411,857 $210,542 $ (125) $24,183 $1,167 $14 ###-###-#### 385,245 195,834 (650) 19,276 2,223 10 ###-###-#### 381,572 185,871 475 13,030 2,380 6 ###-###-#### 392,303 190,782 300 6,863 1,273 3 ###-###-#### 381,910 186,764 700 25,004 162 15 ###-###-#### 378,218 183,325 (2,505) 21,239 957 12 ###-###-#### 364,192 172,169 (3,016) 16,658 1,937 8 ###-###-#### 366,816 171,387 (500) 19,056 2,230 10 ###-###-#### 367,745 161,491 (6,600) 10,741 2,076 5 ###-###-#### 380,375 173,075 (6,998) 21,472 2,367 12 ###-###-#### 388,001 184,104 (4,280) 38,668 2,078 17,307 459
(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 LOCATIONS BY STATE ALABAMA Rome MASSACHUSETTS Rock Hill Haltom City Anniston Roswell Fitchburg Rocky Mount Houston (6) Birmingham (3) Savannah Springfield Statesville Humble Decatur Snellville Winston-Salem (2) Hurst Dothan Warner Robins MICHIGAN Irving Huntsville (2) Ann Arbor NORTH DAKOTA Lewisville Jasper IDAHO Dearborn Bismarck Longview Mobile Boise Flint Fargo Lubbock Montgomery Idaho Falls Grand Rapids Grand Forks Lufkin Twin Falls Kentwood Minot McAllen ARIZONA Livonia (2) Mesquite Flagstaff ILLINOIS Rochester OHIO Midland Glendale Arlington Heights Saginaw Cincinnati (4) Nacogdoches Mesa Bedford Park Southfield Columbus Odessa Phoenix (2) Belleville Southgate Dayton (2) Pasadena Scottsdale Bloomington Sterling Heights Maple Heights Plano Tempe Champaign Warren (2) Miamisburg Richardson (2) Tucson (2) Chicago (3) Westland Middleburg Heights San Angelo Yuma Downers Grove Ypsilanti Middleton San Antonio (7) Joliet North Olmsted Temple ARKANSAS Lincolnwood MINNESOTA Poland Tyler Conway Matteson Burnsville Reynoldsburg Victoria Jonesboro Moline Coon Rapids Sylvania Waco Little Rock (2) Niles Crystal Toledo Wichita Falls North Little Rock North Riverside Duluth Westerville Pine Bluff Northbrook Maplewood UTAH Searcy Peoria Mankato OKLAHOMA Layton Rockford Minneapolis (3) Enid Orem CALIFORNIA Schaumburg Rochester Lawton Riverdale Bakersfield Tinley Park Roseville Midwest City Salt Lake City Chico Villa Park St. Cloud Muskogee Sandy Chino Hills Wheaton West St. Paul Norman West Valley City Citrus Heights Woodbury Oklahoma City (4) Clovis INDIANA Shawnee VIRGINIA Cypress Carmel MISSISSIPPI Tulsa (3) Alexandria Fair Oaks Clarksville Biloxi Baileys Crossroads Fresno Evansville Hattiesburg OREGON Chesapeake (2) Garden Grove Ft. Wayne Jackson Salem Danville Hayward Indianapolis (2) Meridian Fairfax Lancaster Kokomo Pearl PENNSYLVANIA Fredericksburg Napa Mishawaka Ridgeland Bensalem Hampton Newark Valparaiso Southaven Bethlehem Leesburg Oceanside Tupelo Harrisburg Manassas Rancho Cucamonga IOWA Penn Hills Midlothian Redlands Cedar Rapids (2) MISSOURI Richmond Riverside Clinton Blue Springs RHODE ISLAND Roanoke Sacramento (2) Council Bluffs Cape Girardeau East Providence Sterling San Jose (3) Davenport Gladstone Vienna Stockton Des Moines (2) Grandview SOUTH CAROLINA Virgina Beach Vacaville Ft. Dodge Hazelwood Anderson Williamsburg Vallejo Sioux City Independence Charleston Woodbridge Waterloo Kirkwood Columbia COLORADO West Des Moines Manchester Columbus WASHINGTON Arvada Poplar Bluff Greenville Bremerton Aurora KANSAS Springfield North Charleston Kennewick Colorado Springs Lawrence St. Charles Spartanburg Kirkland Denver Overland Park St. Louis (2) Lynnwood Ft. Collins Wichita (2) SOUTH DAKOTA Renton Longmont MONTANA Rapid City Seattle (2) Thornton KENTUCKY Billings Sioux Falls Spokane (2) Wheat Ridge Bowling Green Great Falls Tacoma Elizabethtown TENNESSEE Vancouver CONNECTICUT Florence NEBRASKA Alcoa Yakima Manchester Lexington (2) Lincoln Chattanooga Meriden Louisville (3) Omaha (3) Clarksville WISCONSIN Newport Cleveland Appleton FLORIDA Owensboro NEVADA Hixson Eau Claire Bradenton Las Vegas (3) Jackson Glendale Casselberry LOUISIANA Sparks Johnson City Green Bay Clearwater Alexandria Kingsport Janesville Lakeland Baton Rouge (3) NEWMEXICO Knoxville (2) Madison (2) Merritt Island Hammond Albuquerque Madison Marshfield Naples Houma Memphis (4) Milwaukee Orlando (2) Kenner NEWYORK Murfreesboro Onalaska Pensacola Lafayette Tonawanda Nashville Racine Port Orange Lake Charles Tullahoma Schofield Tampa (3) Metairie NORTH CAROLINA Stevens Point Monroe Cary TEXAS Waukesha GEORGIA New Iberia Charlotte Abilene West Allis Alpharetta New Orleans Durham Amarillo Athens Shreveport (2) Fayetteville Arlington (2) WYOMING Atlanta (2) Slidell Florence Austin (3) Casper Augusta Greensboro Baytown Cheyenne Chamblee MARYLAND Greenville Beaumont Columbus Forestville Greenwood Bellaire Dalton Gaithersburg Hickory Carrollton Decatur Langley Park High Point College Station Douglasville Laurel Huntersville Conroe Duluth Pasadena Jacksonville Corpus Christi Lawrenceville Randallstown Kannapolis Dallas Macon Waldorf Matthews Denton Marietta (2) Morganton Fort Worth (2) Morrow Raleigh Groves
23
BOARD OF DIRECTORS OFFICERS Jack W. Busby, Jr. Larry G. Kirk David A. Lancaster President and Chairman and Vice President, Regional Operations Manager Chief Operating Officer Chief Executive Officer Age 48; with the Company 29 years Hancock Fabrics, Inc. Age 55; with the Company 30 years Tupelo, Mississippi Phillip L. Munie Jack W. Busby, Jr. Vice President, Regional Operations Manager Don L. Fruge President and Age 50; with the Company 31 years Chief Executive Officer and Chief Operating Officer President of Age 59; with the Company 36 years James A. Nolting University of Mississippi Foundation Vice President, Regional Operations Manager University, Mississippi James A. Austin Age 55; with the Company 31 years Executive Vice President, Operations Larry G. Kirk Age 48; with the Company 10 months Chairman and Bruce E. Rockstad Chief Executive Officer Bruce D. Smith Vice President, Human Resources Hancock Fabrics, Inc. Senior Vice President and Age 47; with the Company 25 years Tupelo, Mississippi Chief Financial Officer Age 43; with the Company 5 years Clayton E. Stallings Roger T. Knox Vice President, Regional Operations Manager President and Dean W. Abraham Age 44; with the Company 27 years Chief Executive Officer Senior Vice President, Store Operations Memphis Zoo Age 54; with the Company 32 years Carl W. Zander Former Chairman and Vice President, Head Fabric Buyer Chief Executive Officer Billy M. Morgan Age 57; with the Company 31 years Goldsmith's Department Stores Senior Vice President, Merchandising Memphis, Tennessee Age 57; with the Company 32 years Donna L. Weaver William A. Sheffield Retired, Former Chairman Senior Vice President, Distribution Weaver, Field & London Age 55; with the Company 27 years Investor Relations and Corporate Communications William D. Smothers San Francisco, California Senior Vice President, Real Estate Age 54; with the Company 35 years Bradley A. Berg Vice President, Fabric Buyer Age 52; with the Company 30 years Larry D. Fair Vice President, Finance Age 44; with the Company 16 years Jeffie L. Gatlin Vice President, MIS Age 63; with the Company 32 years James A. Gilmore Vice President, Marketing and Advertising Age 53; with the Company 30 years Ellen J. Kennedy Corporate Secretary Age 52; with the Company 33 years
24 SHAREHOLDER INFORMATION Corporate Headquarters Hancock Fabrics, Inc. 3406 West Main Street Post Office Box 2400 Tupelo, Mississippi ###-###-#### Telephone: (662) 842-2834 Web site: http://www.hancockfabrics.com Transfer Agent and Registrar Continental Stock Transfer & Trust Co. 17 Battery Place New York, New York 10004 Telephone: (212) 509-4000 Web site: http://continentalstock.com Independent Accountants PricewaterhouseCoopers LLP 1000 Morgan Keegan Tower 50 North Front Street Memphis, Tennessee 38103 Form 10-K and Investor Contact A copy of the Company's Form 10-K annual report as filed with the Securities and Exchange Commission is available to shareholders without charge upon written request. These requests and other investor inquiries should be directed to Mr. Bruce D. Smith, Chief Financial Officer, Hancock Fabrics, Inc., Post Office Box 2400, Tupelo, Mississippi ###-###-####. Quarterly Financial Information Quarterly results and management's comments will be available to shareholders on the Company's Web site at http://www.hancockfabrics.com Market Information Hancock's shares are listed for trading on the New York Stock Exchange under the symbol HKF. The following table shows the high and low closing prices for Hancock's common stock for the fiscal quarters indicated:
High Low - ----------------------------------------------------------- 2001 First Quarter $ 8.32 $ 3.96 Second Quarter 11.85 7.50 Third Quarter 11.45 7.10 Fourth Quarter 14.98 10.50 - ----------------------------------------------------------- Year Ended February 3, 2002 $14.98 $ 3.96 =========================================================== 2000 First Quarter $ 4.00 $ 2.56 Second Quarter 4.69 3.56 Third Quarter 5.63 3.63 Fourth Quarter 4.75 3.38 - ----------------------------------------------------------- Year Ended January 28, 2001 $ 5.63 $ 2.56 ===========================================================
As of April 15, 2002, there were 5,526 record holders of Hancock's common stock. 25